Spotlight: Chile's energy transition bill

Chilean renewable generators are facing a liquidity crisis that could jeopardize the country's plan for a fast energy transition away from fossil fuels. 

The crisis is mainly due to a lack of transmission and battery storage capacity, although some firms also blame the design of the spot market, based on marginal cost, which they argue has become outdated.

To address these issues, the government submitted an energy transition bill this month to mitigate the power system's current transmission shortfalls in the short and medium term.

The bill, which first is being debated in the senate before going to the lower house, includes a variety of measures aimed at spurring Chile's energy transition, overcoming transmission roadblocks and incentivizing battery storage use.

Regarding transmission, the bill would boost the robustness of Chile's grid planning, making transmission expansion planning happen twice a year instead of annually, and open an avenue for urgent infrastructure to skip some planning requirements. 

It would also mandate the country's regional governments to draft long-term plans for the local grid.

The proposed legislation would also make companies that request grid expansion projects directly responsible for putting them out to tender, a task currently performed by grid coordinator CEN, which would supervise the tenders. The new scheme is supposed to speed up the process.

These measures are expected to help alleviate Chile's current transmission squeeze in the medium and long term, which alongside its spot market model is driving many renewables firms to deep losses and even out of business.

But the bill also includes an unrelated measure directly aimed at easing the short-term pain of companies suffering from the spot market, namely a change to the way so-called tariff-based income is calculated.

Tariff-based income is received by transmission firms as part of the spot market payments made by generation companies in the system. The difference in cost between the spot market's nodes is meant to reflect a part of the cost of moving that energy from a low-cost node (where energy is plentiful) to a high-cost node (where energy is scarce).

The current legislation allows CEN to return part of the tariff-based income if generation companies are facing unusually high spot market costs due to delays in planned transmission projects. The new bill would broaden the definition, allowing this reassignment in any circumstance that creates a high mismatch between injection and withdrawal costs in the system, when compared to a forecast based on past averages. 

In essence, this means that when the system is suffering large congestion issues, generation companies will be paid back the part of the spot market losses that goes to the tariff-based income transmission payment and generates gains above a set rate. The industry has estimated this will mean between 10% and 20% of the losses currently being experienced by generation firms would be returned, providing short-term relief.

The bill would also modify the principles CEN uses to operate the power grid, adding a low emissions pillar to its two traditional principles: preserving the security of supply and ensuring the efficient economic operation of the system. This means the entity would consider the energy transition, in addition to the other two, when making discretional calls.

Lastly, the text establishes an ad hoc tender for a large-scale battery storage project designed to tide Chile over in the current transmission crisis until new large transmission lines can be built, which is expected no sooner than 2030. 

Its capacity would be determined by energy regulator CNE through a new study set to be published within six months of the law's publication in the official gazette.

The investment required is expected to come in at around US$2bn and would therefore be more expensive than the US$1.5bn Kimal-Lo Aguirre line that is expected to lessen the grid's problems from around 2030.

The tender will consider investment and operating costs and reward the lowest bidder. The system would be overseen by CEN and it is expected to be tendered next year and start operating in 2026. Through the system, CEN would have capacity to store energy during high-generation hours and release it when transmission is available, increasing system efficiency and reducing power curtailment.

The storage project will be paid for by all power users through their bills, as is usual for large-scale transmission infrastructure.