As Chile unfreezes power prices, focus swings back to mitigation measures

Subsidies and electricity prices are back under the spotlight in Chile as a roughly four-year period of price freezes ends and bigger bills start landing on the doormats of householders and SMEs.

Consensus exists over the need to not only normalize electricity prices so that they reflect the real cost of the service but also to address the impact on vulnerable homes and small and medium-size employers.

Prices were quickly frozen in response to the 2019 social crisis but were never originally meant to be fixed for so long. 

The delay in price normalization drew fire from some sector stakeholders, given this has resulted in sudden stiff price hikes reflecting multiple factors including contract adjustments linked to pressure on the peso seen since end-2019 - as contracts are dollar-denominated - and the need to repay a multibillion-dollar debt pile owed to generators that has amassed.

These factors will, initially at least, offset the favorable impact of lower priced regulated supply contracts linked to wind and solar parks entering force. 

Last half the energy ministry grabbed the political hot potato with both hands, propelling through congress the draft legislation that finally unfroze prices and established a temporary subsidy scheme geared to 1.5 million vulnerable families. 

Legislative, regulatory rumblings

Today, amid political fallout, the focus is back on congress, where energy minister Diego Pardow presented proposed measures to expand subsidy coverage to around 4.7mn homes and reduce the price of electricity charged to end-users. An associated bill – which would also see the subsidy in place until 2027, compared with 2026 currently – is due to be presented in early August.

The proposal also outlines where the US$300-350mn for the subsidy expansion would come from: a temporary increase in the carbon tax (currently US$5/t on fixed emitters), increased tax revenue generated from higher electricity bills, and a temporary increase in the public service charge paid by large industrial consumers.

Nonregulated clients have voiced concern over the impact on industry competitiveness of a hike in the public service charge. 

In terms of technical debate, Claudio Seebach, engineering and science faculty dean of Chile’s Universidad Adolfo Ibáñez and former executive president of industry association Generadoras de Chile, told BNamericas he supported the focus on mitigation measures for homes and SMEs.

A central challenge is the financing aspect, given, for example, that a carbon tax hike on fixed emitters could be bounced back to bill payers.

Alternatives include closing tax loopholes, for example, one that allows some users to avoid paying a one-off green tax on purchases of new vehicles such as heavy-duty pickup trucks, Seebach said.  

In terms of impact on SMEs, several senators suggested permitting them to become non-regulated users, to give them contract-negotiating power.

Last year the energy ministry asked the competition court to issue a report on the feasibility of lowering the capacity threshold to become a non-regulated electricity consumer to 300kW.

Non-regulated clients are companies with a capacity connection between 500kW and 5,000kW and have opted for that classification, or those connected to more than 5MW of capacity. Currently, those below the 500kW threshold have no choice regarding their power provider.

PMGDs

In terms of trimming bills, the ministry has suggested permitting PMGD distributed generation plants, those up to 9MW, to sell output directly to distributors. An associated reform, according to a ministry presentation, would permit a reduction of 7% in the electricity component of end-user bills.

A twin goal of such a move would be reducing so-called side costs, local media outlet La Tercera reported, citing broadcast comments made by Pardow. 

One component of side costs, which have climbed in recent years, is a payment to operate a stabilized price regime that PMGDs benefit from and which is under review.  

Javier Bustos, executive director of Chile’s association of non-regulated electricity customers Acenor, told BNamericas: “Typically, free clients have side payments transferred to them through their contracts with generators, whereas generators with regulated contracts must handle those payments themselves as of today.”

From 2027, regulated customer contracts will incorporate side payments.

Selling directly to distributors, as the stabilized PMGD price tends to be lower than the basket average corresponding to residential users, should put downward pressure on price stabilization payments.

Designed to smooth price fluctuations and help spur investment, the PMGD stabilized price is a mix of spot market and power-purchase agreement prices.

Meanwhile, against this backdrop, pressure is growing for distribution reform, to help modernize the system to support and spur increased penetration of the likes of residential rooftop solar installations.