Why Chile’s regulated power supply auction mechanism is ‘dead’

As electric power supply and bill increases dominate the public agenda in Chile – where regulated supply auctions have spurred renewables growth – sector specialists urged lawmakers to exercise prudence and avoid knee-jerk decisions.

Electricity is in the spotlight after a law unfroze end-user regulated rates and following a brutal winter storm last Thursday that took out power lines and transformers and left around 3 million people without power, many still awaiting reconnection.

While acknowledging political pressure being exerted today – particularly to find ways of financing an electricity bill subsidy for 4.7mn homes – experts underscored the importance of addressing root causes and long-term planning.

“What are those structural changes that are going to lead to a system that is more efficient, with lower costs, that is more sustainable and reliable?” said Rodrigo Moreno, an academic at Universidad de Chile and a researcher at Chilean complex engineering systems institute ISCI.

“Our concern in academia is that this discussion is lacking.”

ISCI is among authors of a decarbonization regulatory proposal document, presented recently. 

Overhauling the long-term market was identified as among priorities. 

Moreno’s comments came during a conference, hosted by energy communications agency Polux, to discuss why end-user bills have climbed.

Regulated clients have seen steep rises in bills as legislation unfroze rates after around four years of being held virtually steady, longer than originally planned.   

Increases reflect multiple factors, chiefly contract adjustments linked to hydrocarbons price rises over the period, 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. 

Meanwhile the renewables sector, which tends to drive down average node costs and reduces system exposure to fossil fuel price hikes, has been impacted indirectly – in the form of higher risk aversion – by price stabilization legislation. 

Further headwinds have now been whipped up in congress via a proposal, put forward by the executive branch amid political pressure, to intervene in the PMGD distributed segment to raise subsidy cash.

Referring to this, Andrés Romero, partner at consultancy Valgesta, said signals emerging from the energy ministry were “very, very grave and very damaging.”

Subsidies should be targeted at those who need them and funded from state coffers and not by tapping a particular segment, the event was told. The importance of subsidy targeting was underscored by Latin America energy poverty organization RedPE member Paz Araya, who called for better data to underpin decision-making.

Meanwhile, appetite for participation in regulated supply auctions has already weakened.

Five companies took part in the last auction, corresponding to 2023, with a single party – Enel Chile – sweeping the board.

"The freezing of prices, what it basically did, was killing the mechanism for regulated client auctions that has been a driver of the development of investment in renewables in recent times,” Romero said.

“Probably, after all this noise, who will bid in the next supply auction for regulated clients? A significant reform would be needed to rescue things, but clearly this mechanism is dead.”

A regulated supply auction process, corresponding to 2024, is under way. In parallel, Chile may lower the entrance barrier to the nonregulated market.

Along with price stabilization impacts felt since 2019, generators, particularly pureplay solar PV companies, have experienced financial fallout from curtailment and price decoupling.

A buildout of energy storage is underway, with billions of dollars in projects planned and under construction, and is expected to help ease curtailment. Increased grid flexibility and new transmission capacity is also seen as part of the solution.   

Problems faced by Chile are similar to those by other countries that are working to decarbonize their power generation parks and entering unchartered waters.

Reform of the distribution system, to spur resilience and support higher penetration of distributed assets, is widely urged.

This week the government threatened to strip distributor Enel of its concession contract in Santiago metropolitan region over time taken to restore service to clients.