Spotlight: Arguments for and against lowering the nonregulated market entrance barrier in Chile

Chile’s competition court TDLC heard arguments for and against lowering the threshold to access the nonregulated power market.

The public hearing followed an energy ministry request, issued last year, for an associated report.

This, in turn, followed requests for a lowering of the bar to 300kW from Chilean power trader association Acen. SMEs and cooperatives have made a similar call.

No legal or regulatory change is needed to lower the threshold. Existing law states the ministry may lower it following a report from TDLC, which will now need to conduct an analysis and issue a technical opinion. 

Some lawmakers, during recent discussion surrounding the double-digit hikes in bills facing regulated users, have also supported a lowering, in order to give more SMEs negotiating power.

Industry stakeholders issuing caution, concerning areas such as supply auctions and decarbonization, include renewables and storage association Acera and solar power chamber Acesol.

Nonregulated clients are deemed users that are connected to more than 500kW of capacity and have opted for that classification, or those connected to more than 5MW of capacity. Those below the 500kW threshold have no choice regarding their power provider.

State of play

The court heard, in a national economic prosecution office (FNE) presentation, that the demand volume of electricity associated with potential clients that could migrate to the nonregulated sector, was, as of 2023, 1.08TWh, or 3.5% of total demand of regulated clients and 2.3% of nonregulated demand.

Overall, last year there were 5,703 eligible clients in the 500kW-5MW range, of which 3,786 had opted to be nonregulated. 

The number of regulated clients in the band where they can choose (over 500kW) has fallen “significantly” in recent years, an energy ministry presentation stated.

The number of regulated clients in the 500-600kW range fell to 512 in 2023 from 1,037 in 2020. There were 920 nonregulated clients in that band.

In the 300kW-500kW range, there could be 3,320 new eligible clients, according to the presentation. 

Based on projections in an expert report produced by Universidad Adolfo Ibañez’s energy transition center Centra, used as an input by the ministry, a lowering could result in 2,125 new nonregulated clients, ramping up the headline figure to 5,911 from 3,786 (in the 500kW-500MW range today). 

A mass migration in the 300-500kW range was unlikely, given price differences would not be a major incentive, the court heard. 

Among the biggest players serving the segment are generators Enel Generación, Imelsa Energía, Colbún and local group Copec's energy trading unit Emoac. 

“According to the expert report, given that for clients between 300kW and 500kW it is [would be] an option to change from a regulated regime to nonregulated, there is no risk of abuse of dominant position on the part of the supply side, since clients can stay in the regulated regime,” the energy ministry presentation stated. 

“Therefore, all the negotiation power favors the potential new clients and not the companies.” 

FNE said average market prices for nonregulated clients tended to be lower than for regulated users – but not always. 

Users connected to over 5MW of capacity tend to enjoy lower prices than those connected to less capacity. 

Arguments against 

Among topline arguments against a lowering are that a ministry regulatory impact analysis was not carried out, that there would be risk of information asymmetry – put forward by FNE – and that potentially eligible clients would lack sufficient negotiating power.

Others are that it could impact supply contracts with distributors, generate greater market concentration, dampen interest in future regulated supply auctions due to increased uncertainty, and hamper growth of the distributed generation segment. 

On auctions, Acera put it bluntly. Citing the impact of a potential smaller pool of regulated users, a presentation said: “A reduction in the threshold will make future regulated electricity supply auctions less attractive.”

“It is foreseen a scenario of fewer bidders that cover risk with higher prices. Fewer offers involve fewer generation projects.”

The court heard that uncertainty around the reduction proposal, that is, the risk of migration of clients to the nonregulated sector, was a factor behind the relatively weak interest in Chile’s last regulated supply auction. 

A threshold reduction may also trigger clauses concerning unforeseen regulatory changes in regulated project financing contracts, which may lead to the likes of interest rate hikes or demand for accelerated repayment, the court heard.

The risk to distributed generation growth was also raised in the ministry presentation, as was the impact on future regulated supply auctions. Citing the Centra report, the presentation stated that if the measure is considered the beginning of a series of threshold reductions, the “auction mechanism will lose its function of attracting new investment by not permitting new entrants to project their financial flows on the basis of a long-term supply contract, given there is no assured future demand.”

Acera, meanwhile, said that a client needs to be regulated to access the net-billing framework and that a reduction in the pool of regulated clients would, in turn, reduce the number of eligible net-billing users.

Users with self-supply systems that are not part of the net-billing framework cannot inject excess output back into the grid and obtain remuneration.

Acera said the proposed threshold reduction should be discussed in the context of a deeper reform, namely, of the distribution sector. 

Arguments for  

Among topline arguments of those in favor of a lowering are that this would permit direct negotiation of supply terms and the possibility of accessing rates that are around 20% lower than in the regulated sector, the court heard.

Another benefit heard is that tailor-made contracts for clean power could be drawn up, while those in favor also dismissed concerns over negotiating power, adding that the move would also spur competition in the trading and generation sectors and support the entrance of new players. 

Those making arguments in favor include Acen, Copec, telco Telefónica, water utility Aguas Andinas and industry federation Sofofa.

Acen lawyer Rodrigo Castillo, referring to an original driver behind the 500kW limit – protecting those users who have limited negotiating resources – told the court: “One thing is thinking about protecting clients and another is having captive clients.”

“All the clients ask for freedom of choice and the only ones that oppose this are those that hold them captive.” He added that market conditions had changed since the associated law that established the threshold was published, in 2004.

Copec, which has business units that draw power from both the regulated and nonregulated markets, summed up the situation for those seeking migration.

“Copec as an end-user knows the benefits of supply under the free client regime and the current disadvantages of being a regulated client,” Copec said in a presentation. 

It said that the nonregulated units pay a supply price of 98 pesos (US$0.10) per kWh, compared with the 113 pesos paid by regulated units.

Copec said that, as things stand, its electromobility business Copec Voltex was at a disadvantage since the majority of its charging points pay regulated prices and cannot ensure that power supplied to motorists is from renewable sources. 

As part of its assets, Copec has 637 gasoline stations hooked up to the national grid, of which 603 are regulated clients.

FNE conclusion

The FNE, meanwhile, wrapped up its presentation by stating that “lowering the capacity threshold does not generate significant changes in electricity demand, in none of the segments considered.”

FNE also suggested introducing new price indicators for potential eligible clients, information sharing obligations, and publication of systemic costs.

Other suggestions

Multiple other proposals were also made. 

Among them, Colbún said liberalization processes should be gradual and supported by additional regulation to foment competition between traders, while also calling for mandatory smart meters and the creation of an information management entity to avoid unfair advantages derived from vertical integration. 

Consumer association Conadecus, which calls for a lowering to 0kW, said residential users and SMEs should be allowed to jointly negotiate with generators.