Transition to Centralized Unit Commitment: An Econometric Analysis of Colombia’s Experience

This paper attempts to shed light on the relative merits of centralized electricity markets with multipart bids and dispatch using an MIP-based unit commitment optimization approach vs. self-committed markets with linear energy supply curves. We conduct an empirical study of data from the Colombian market, which in 2009 transitioned from a self-commitment paradigm to a centralized unit commitment approach where generators offer a linear supply function for energy along with start-up costs while the commitment and dispatch are determined by the system operator using MIP-based optimization. The results indicate that the transition to centralized dispatch has resulted in productive efficiency gains through a decrease in production costs. However, these gains have not translated into wholesale price decreases; in fact, wholesale prices increased after the change in the dispatch approach. These results suggest that productive efficiency gains have been captured by suppliers through the exercise of market power.