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The effect of bilateral contracting and demand responsiveness on market power in the Mexican electricity system

Proposals for the restructuring of the Mexican electricity system have considered the creation of an electricity market with different structures that range from a pure spot energy market to a predominantly bilateral market. This paper presents an static simulation-based approach to study the effect of bilateral contracting and demand responsiveness on market power on the Mexican electricity system assuming a market is implemented. The study considers different supply/demand growth scenarios and takes into account the potential demand elasticity according the consumption characteristics in different areas of the country. The study concludes that due the tight supply/demand conditions and the weak state of the transmission system, a full, and unregulated, spot market can observe severe market power problems. The study shows that, regulation of the market, demand responsiveness programs and adequate bilateral contracting levels can avoid the problems foreseen in the particular market setup, with the static simulation-based approach to predict such situations.