Navigating the energy transition in Latin America and the Caribbean: volatility and price signaling in short-term electricity markets

The observed increase in fossil fuel prices, exacerbated by extreme climate events such as prolonged droughts, has led to significant short-term electricity price volatility across several markets in Latin America and the Caribbean. Simultaneously, the rapid integration of variable renewable energy sources, such as solar and wind power, has introduced new operational challenges for electricity markets. This evolving landscape has intensified the debate on the optimal market design, particularly in terms of economic efficiency and the appropriate price signaling mechanisms during the energy transition. Against this backdrop, key questions arise regarding regulatory adjustments that could improve short-term price signals and ensure an efficient and competitive dispatch. This study examines the fundamental components of short-term electricity markets in Latin America and the Caribbean, identifies international best practices, and assesses the primary drivers of spot price volatility. Additionally, it provides regulatory recommendations aimed at enhancing the integration of variable renewables, strengthening market resilience, and optimizing operational efficiency in electricity markets.