Chile's 'inflexible LNG' discussion: Is there a solution on the horizon?
Discussion continues in Chile regarding changes to a controversial regulation that would adjust the standard for dispatch priority of imported liquified natural gas (LNG) in an attempt to limit its impact on electricity prices.
The new rules, which were submitted for public consultation in June and July and are now being mulled over by energy commission CNE before publication later this year, would cap the excess amount LNG generators can declare as “inflexible” (or derived from inflexible take or pay supply contracts) to be dispatched with special priority by grid coordinator CEN, skipping the dispatch priority queue and displacing other power sources.
The rules were originally enacted to avoid situations where shipments must be sent back due to lack of storage capacity. The proposed changes seek to avoid damages to project owners of other technologies while protecting system security by making inflexibility declarations less frequent, albeit still possible.
Asked about the discussion, CEN president Juan Carlos Olmedo told BNamericas the solution to the inflexible LNG problem could be found in establishing a so-called “shadow” price for LNG dispatch, which would become lower as LNG storage capacity approaches its limit.
“You would check an inventory model and estimate whether storage capacity will reach its limit. If you see capacity is going to reach its cap in a given time, the price of gas would go down, which would allow it to [eventually] displace coal generation and give space to natural gas, something that today is not possible,” said Olmedo.
This concept is being incorporated by CNE in an updated version of the regulation, Olmedo said, adding it would “lead to episodes of inflexibility [declarations] becoming minimal.”
As BNamericas reported previously, the share of inflexible gas has steadily increased since the rules came into effect in 2016 and questions have been raised by industry participants whether inflexible LNG unfairly displaces renewable generators, as they are bumped down the dispatch priority queue.
Last year, 60% of the LNG used for generation in Chile’s power grid was declared inflexible by generation companies, according to CNE, meaning it was dispatched at zero marginal cost and at the top of the dispatch priority queue to provide an outlet for excess LNG.
During a webinar hosted by hydroelectric association Apemec on Tuesday, three technical experts presented the findings of several studies that suggested that inflexible LNG declarations lead to lower spot prices, and that those lower prices impact investments in generation by artificially lowering a key price signal that developers consider when planning new projects.
An additional study showed that the international LNG market has become much more flexible than it was half a decade ago, when the inflexible LNG regulation was put in place. And that it would be feasible for LNG importers to use the spot market to adjust their purchases when they either lack enough supply or have contracted more than they can use.
“Coming from this inflexibility in the [international] LNG market, the inflexible LNG dispatch tool was established. But today the market has created lots of new tools to handle LNG dispatch. Argentina, for example, developed its LNG imports based on a spot market model. It buys its entire supply every year in the spot market … and has rarely had a problem with lack of supply,” said energy advisor Marco Porteau.
Another study, by consultant Ignacio Alarcón, focused on potential impacts on renewable investment. Alarcón said energy investors focus on the spot price as a signal that indicates where new generation investments are required and inflexibility declarations lead to spot prices becoming artificially lower, distorting incentives.
According to the study’s simulated scenarios, this effect could lead to generation firms reducing their investments by between 8% than if inflexible LNG was not present over the next decade, and up to 40% less in the most pessimistic scenario given the amount of inflexible LNG that is dispatched.
A large amount of inflexible LNG could also increase the system’s operational cost by between 10% and 31%, according to Alarcón.
Earlier this month, Chile’s main renewables trade groups, Acera, Acesol, Acsp and Apemec, signed a joint letter arguing inflexible gas declarations had “a negative effect on a huge number of renewable energy generation companies.”
“[We] consider that the revision of the technical regulation that has been published by CNE makes a correct diagnosis, although it is lacking determinations that ensure absolute transparency in the processing and approval of inflexible gas requests [and] their exceptionality,” the letter reads.
They added that the regulation should provide a timetable for the full elimination of inflexible gas rules from the system, thus providing incentives for LNG importers to invest in new storage infrastructure - and stop them from relying on inflexibility declarations.
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