‘Future investment in distribution effectively promises opportunities'

To support increased rates of electrification, Chile – like other nations going through an energy transition – needs to invest in distribution infrastructure. 

The country’s electric vehicle fleet and installed distributed generation capacity is forecast to climb over the coming years, making modernization outlay necessary.

Spending today would bring medium and long-term benefits for consumers, while failing to invest would create fallout further along the road and that is the message politicians and the private sector must communicate, a recent conference, hosted by regional distributor association Adelat and Chilean complex engineering systems institute ISCI, was told.

Against this backdrop, consumers – which would shoulder a large chunk of the cost – must be at the center and carefully designed rate schemes implemented, delegates heard.  

Chile’s energy ministry has a residential sector working group to explore the area and is planning to conduct associated studies that may lead to policy proposals. In parallel, regulatory authorities are making tweaks to existing frameworks.

Adelat has also produced an associated policy paper.

To find out more, BNamericas caught up with Rodrigo Moreno, an academic at Universidad de Chile and an ISCI researcher. Moreno was a panelist at the conference along with ADELAT’s executive director, Ignacio Santelices, who BNamericas interviewed last week.

Comprising academics from multiple universities, ISCI is a scientific research center focused on tackling major and complex issues that impact organizations, companies, institutions and communities. 

BNamericas: Why did Adelat produce the policy paper/what is the ultimate purpose?

Moreno: Adelat, being a distribution company association, is concerned because they understand their role in the decarbonization process, which is a very important role, but on the other hand, they also understand that they are not deemed an important part of the political agenda.

Therefore, this type of paper puts precisely this topic on the agenda in order to demonstrate that distribution is indeed key to the future. When we think about decarbonization from demand in the electrification of consumption and the change, to electricity, of vectors that can currently be supplied by fossil fuels, this is obviously going to require new investment in distribution and that has to be done efficiently. Therefore, we need to have regulations that encourage that.

BNamericas: Regarding investment in distribution networks in the coming years, what kind of opportunities are foreseen in Chile for new players, technology companies, infrastructure, etc?

Moreno: Future investment in distribution effectively promises opportunities for a series of actors and new actors. This is due to the technological boom required for modernizing the distribution networks, so that future investments are efficient and are carried out through consumption management, which is something new, distributed generation management, distributed storage, electric vehicle charging, etc. You can add to this new investment to be able to provide a good service to consumers and general users of the network. 

Therefore, there are a series of new businesses that can be triggered that will involve new actors and that will eventually bring important social benefits, product of the competition that may occur at the level of different actors to deliver different services to the community.

BNamericas: Since demand is going to pay for investments, how important is it to have an adequate, well-structured rate model?

Moreno: Demand effectively pays for the new investments, but there are two mechanisms that are important to materialize in the future. One, that the rate is inspired by a principle that we call the beneficiary rate. This means that whoever benefits from the new investments pays for them. Therefore, it is not necessarily the consumer who is going to pay for the new investments; in reality, it is the entire system that supports the collection for the new investments. They could be new generators that connect to the grid, distributed generation, new businesses related to mobility, electric vehicle charging, etc. They should also be called upon to remunerate the part corresponding to these new investments. 

So, this is the first point, where the rates reflect the benefits, that these costs are allocated based on these benefits. 

Second, these investments are optimized so that those investments that have the most benefits for society are actually made. Although the consumer and users of the electrical system are actually going to pay for the infrastructure, this infrastructure is accompanied by benefits that are greater than the costs; therefore, in the long term that will mean an efficient rate for users. 

Third, rates associated with third parties have to do with subsidies. Any person who is in a vulnerable economic condition should be considered as such. Therefore, the rates, although they have to reflect the costs of the associated service, they also have to reflect this subsidy aspect. Therefore, we believe those vulnerable clients who, by effectively paying for a basic service such as electricity, are left in a very difficult position to face other expenses at home, should have a targeted subsidy. 

This in fact has the advantage that the rate will continue and must reflect the costs of the service, and by creating these targeted subsidies, the need to have other stabilization or rate equity mechanisms that introduce distortion in terms of cost reflection are eliminated, which is necessary in the rates.