Chile nonregulated market supply contracts: ‘We see that competition has returned’

The electricity component of nonregulated client supply contract prices in Chile has stabilized and even started to inch down after an upswing began to be observed in 2021-22, BNamericas was told.

Chile has around 2,000 nonregulated clients, with around two-thirds of consumption corresponding to the mining sector. 

Nonregulated customers can negotiate their power supply directly with independent producers via power purchase agreements (PPAs)

PPA prices are closely linked to generator marginal cost projections for the contract period, which is typically four years, said Pablo Demarco, CEO of Plataforma Energía, Chile’s biggest and first energy trading platform.

After tumbling amid the start of Chile’s renewables boom, which sparked a migration to the nonregulated segment, PPA prices began to climb after multiple factors conspired: chief among them a drought that impacted order of dispatch and, later, hydrocarbons inflation.

From around 2020, the energy component of contract prices has risen by an average of 40-50%, resulting in increases in the headline price of roughly 20-25%, Demarco said.

“This is quite a problem that we’re seeing, one that’s impacting all nonregulated clients,” said Demarco. “That’s the reality of what free clients are experiencing when renewing their PPAs.”

For nonregulated clients that can switch into the regulated regime, he advised against doing this, given regulated rates are climbing apace after being virtually frozen for four years.

The nonregulated market, however, has recently started to adapt, with uncertainty easing among generators and traders.

“Today, we see that competition has returned,” Demarco said. “The market is becoming more favorable and we’re seeing prices, that while high, are tending to drop, just a little, but this shows that things are adjusting.”

An increase in the number of new or returning supply-side players is reducing price information asymmetry.

On potential factors behind the uptick in supply-side movement, Demarco said: “To me, it seems that now, in some regards, we’re not at such a volatile juncture.

“That today the situation is a little clearer, that this is the new reality of the system… there’s now not so much noise surrounding fuel prices, they’re a little more stable.”  

Demarco urged clients to seek advice, at least a year in advance, when looking for electricity supply, adding that a trend of bespoke contracts continued to be seen. For example, contracts can contain different prices based on time block.

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 or equal to the 500kW threshold have no choice regarding their power provider.

Chile’s competition court TDLC recently heard arguments for and against lowering to 300kW the threshold to access the nonregulated 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 from Chilean power trader association Acen. SMEs and cooperatives have made a similar call.

Chile’s power system

Despite high renewables penetration during daylight hours that can push marginal costs down to zero, Chile still relies heavily on expensive thermoelectric output during the night.

Energy storage penetration – and discharge duration – is still relatively low and development of new hydroelectric power stations has decelerated while demand has grown, diminishing the relative capacity of these plants to displace more costly thermoelectric generation after the sun sets.

“Hydroelectric plants are our natural ‘batteries’ and water in reservoirs can be managed,” said Demarco, whose company also operates in Peru.

“These natural ‘batteries’ are now relatively small and won’t tackle this; they may help in a rainy year. That is the problem, and the duck curve [which shows the difference in electricity demand and the amount of available renewables energy throughout the day] will continue to exist.”

In addition, coal-fired plants dispatch power during the day, given the grid-stabilizing role they play and since they cannot simply be switched on and off. 

In turn, they and other thermoelectric units not only displace some renewables output but also exert upward pressure on systemic costs, which are passed on to nonregulated clients, in turn impacting final contract prices.  

Some thermoelectric plants even run at around half of their installed capacity while the sun is shining.

However, from around 2026, according to energy ministry projections, energy storage systems are expected to trim systemic costs by some 12% and permit an increase of roughly 15% in renewables dispatch.

Chile is expected to have 2GW of batteries installed or in the construction phase in 2026, and a ministry target for 2030 is 6GW.

The country’s installed capacity, including plants in the testing phase, stood at 38.4GW in September, according to a report from local renewables and storage association Acera. Non-conventional renewables accounted for 18.4GW, conventional hydropower 6.97GW, thermal 12.7GW and energy storage 872MW.

During a recent energy storage conference, delegates said storage systems could play a grid stabilizing role, via the ancillary services market, but that greater regulatory clarity was needed surrounding revenue.