Cross comparison of price volatility in South American electricity markets

Privatization and deregulation in the electricity sector led to competitive markets (pools and power exchanges) for wholesale trading and retail markets. Deregulation was aimed at improving efficiency and reliability, as well as achieving higher quality and overall lower costs. South America has been one the most progressive regions in the developing world with respect to promoting deregulation in the electricity sector. Chile was the first country to deregulate its electricity system in the 1980s; Argentina, Brazil and Colombia followed the process. Nevertheless, in Paraguay, Uruguay and Venezuela the electricity industry remains state owned and vertically integrated. Several characteristics of electricity spot prices have been described in the literature, these include: mean‐reversion to a long run level, multi‐scale seasonality (intraday, weekly and seasonal), calendar effects, non‐normality and extreme volatility, which can be as high as 50% on the daily scale. Fast–reverting spikes are very common and reflect the fundamental economic or technical nature of pricing electricity as a real‐time and non‐storable commodity, which does not only react to demand and production costs, but is also subject to local market conditions (e.g. number of players and their market share). Countries within South America are similar on several dimensions (e.g. culture, language and generation technology) which are expected to influence local market conditions, thus motivating this comparison of four electricity markets (Argentine, Brazilian, Chilean and Colombian) via an analysis of their price volatilities. The electricity sector in South America is predominantly hydro‐based. Economic crises and weather phenomena have occurred in the period that we study, some of which resulted in market interventions. Economic growth has been uneven. In the table below, we notice some variation with respect to wealth, which however is lower when compared to the whole region, where Bolivia had a GDP per capita of just over one thousand dollars. The correlation between GDP/population and electricity consumption/population was equal to 0.83, thus confirming the close link between electricity consumption and development. Moreover, it can be seen that the electricity mix and market structures also vary between countries in our study. See above See above