Electricity rate subsidy and distributed generation rules take center stage in Chile

When governments arbitrarily and unilaterally change established rules of the game for the business sector, typically to raise revenue, in the long term nothing good tends to come of it – for either party or citizens.

Even proposals surrounding such moves can erode investor trust, sending out damaging signals.

Yes, money is collected, but often at a much higher price over the long term: dented confidence in the country and dampened investment. This, in turn, can impact job creation and tax revenue for social spending.

Government subsidies are a driver for such tactics. Even if deemed temporary, subsidies are also politically difficult to remove, creating long-term distortions.  

Associated debate is ongoing in Chile. The government is mulling ways to finance expanded coverage of an electricity bill subsidy scheme after rates climbed following some four years of being frozen for all regulated users, not just those most vulnerable.

A government bill approved by congress this year unfroze the rates and established a temporary subsidy, targeting 1.5mn vulnerable households, to mitigate the impact. But, despite the legislation getting the green light, political pressure has since built from some lawmakers who now want to expand coverage to around 4.7mn homes. 

An original energy ministry funding proposal was based on a temporary carbon tax increase, increased tax revenue generated from higher electricity bills and a temporary hike in the public service charge paid by large industrial consumers. 

Now, as the executive branch, amid political pressure, looks at ways to raise more money, the distributed generation (PMGD) segment is in its crosshairs in the form of a proposed adjustment to the established remuneration framework. 

While understanding the need to mitigate the impact of price rises – which would have been less drastic if unfrozen earlier – extreme caution and alternatives are being called for by the power industry. 

This comes at a critical time for Chile, which is working to pull in green energy investment and create associated jobs, which, in turn, will require lots of financing. 

While the sums involved in terms of the electricity rate subsidies are not astronomical and bill hikes are hurting households, the core issue at stake is trust in established contracts and rules of the game, as well as precedent-setting. 

Fallout from intervention and non-targeted subsidies is not hard to find in Latin America.