Financing challenges for generation investments in new supply adequacy mechanisms in Latin America

Abstract

The mid 90's wave of generation investment flows in newly created electricity markets for power generation lost momentum in the early years of this century. Factors affecting investment vary from these times reduce in capital flows following the Asian crisis, to poor incentives for generation investment in market design. The difficulty, at least in Latin America, to operate energy-only markets without disruptive prince interventions or market power abuse, has made generation investment a challenge. Markets equipped with variations of capacity payments have performed better with concerns of inefficient investment and high final prices for consumers. The recognition that long-term contracting mechanisms and demand participation in handling supply risk are key to supply adequacy has lead to a new generation of market designs. The paper presents some of the challenges for financing generation in this new type of market designs from development banks perspective, and shows empirical evidence on what has been the investment practices in some selected countries in Latin America, spot market risk and also outside-of the energy market risk factors have play an important role, in order to diminish these risk investors often look for more comfortable traditional long-term contracts in opposition to newly market design paradigms which brings concerns on their effectiveness in developing countries if other institutional and regulatory factors are not in place