How to make Electric Power Markets

A new regulatory framework was signed in December of 1996 by the Presidents of Central America. The objective of the treaty is the gradual transition to a regional competitive market for electricity. At the same time each country by itself is changing the structure of their local power sector. However, although following the same philosophy of competitive electricity markets, the local structures will not necessarily be the same. Recommendations are given on how to set up a market at the regional level, allowing each country the flexibility of deciding what the local structure will be but grasping most of the potential benefits that can be derived from integration. These take into account the political environment of the region and the issues of sovereignty and unequal benefits that have caused disruptions in the past. The different industry structures and competitive models are analyzed and their suitability for implementation in the Central American region is considered. This thesis contributes to the ongoing research on competitive power markets, by considering a market mechanism (auction) to solve transmission congestion problems in this particular market setting, where generators attach a bid to their contract and access is determined on a merit order of such bids. The mechanism is based on an initiative suggested to be implemented in El Salvador. It is proven that such a mechanism leads to a collusive behavior among generators, leading to an unequal distribution of benefits where consumers are left with the short end of the stick, even though the market is considered efficient in a competitive sense. Thesis Supervisor: Dr. Marija Ilic Title: Senior Research Scientist