The Renewable Energy Paradox: an update on the Chile renewables market
Copyright 350newables 2023: Lanin Volcano seen through some Araucarias (monkey puzzle trees)

The Renewable Energy Paradox: an update on the Chile renewables market

Patricia Darez founder of 350renewables discussed the generation market in Chile and the reasons why many renewable players are fighting to stay afloat. This article is part 1 of a two-part series and describes the problem (it is essential to understand this to get into the exciting analysis that will happen in part 2). Part 2 will deal with the proposed solutions and the schism in the market.


Does it matter how many companies carry out the energy transition?

… Yes and no…

The thing that matters is how quickly and effectively it can be done while:

1.?????Keeping the reliability and security of the electricity supply, and

2.?????Affordability and access for the consumers.

But if you have more companies and more finance supporting them, chances are the transition will be faster, there will be more competition and better prices.

Several renewable firms in Chile are struggling and project finance has become more and more of a challenge.?


Why? Simply because renewable generators need to get paid for the electricity they produce to pay their Capex and Opex.

Chile is a capacity and an energy market. Companies can therefore get paid for being able to supply at peak electricity demand whenever they are requested to do so and they can also get paid for the energy they produce. Unlike other technologies like diesel, coal or gas, variable renewables, have very little capacity recognised so they really need to get paid for their energy.

Why are they not getting paid? The market was designed 41 years ago for hydro and thermal generation and with so many renewables it has slowly become out of balance.

There are 3 factors at play: Curtailment, Marginal Costs of Zero and Location Based Risks.


CURTAILMENT

At certain points of the day there is just not enough transmission capacity to take all the renewable generation to the consumption points. The CEN (Chilean TSO) simply asks the renewable plants not to inject their energy, which is then wasted. The CEN’s mandate is about maintaining the reliability and security of the supply so they have no incentives not to waste this energy and no KPIs to measure their performance towards a more efficient energy transition.

Chile has a VERY open access policy to grid connection. Most markets stop granting connection permissions when the transmission will not be able to cope (in Spain or some parts of the USA, for example, there are several GW of projects just waiting for an option to connect to the grid). Even those markets that have more open access and continue granting permissions, tend to give some protection to the projects that get connected first (they apply the curtailment to the last projects that connected because those knew what was there when they decided to connect and to invest! – the first project that connected could not have made a plan regarding how many projects would connect after them). In Chile the curtailment is shared on an equal basis among all projects (apart from PM(G)Ds which have the ability to self-dispatch, but even some of these are suffering from curtailment). It does not matter if you were first or last in line.

This open access could have been somewhat balanced via the Ley 20.936 (Transmission Law) which was published in July 2016 (the date is relevant, because this was published just before the DisCo tenders and celebrated as an important milestone). This law in article 87d warrantied that the expansion of the national transmission system (which is a task of the state via the CNE) would plan ample transmission capacity (“ample”, however, can be looked at from many angles, one of them is the generation, another is the consumer - who also pay the transmission charges).

The omens looked good at the beginning, towards the end of 2017 the SIC and SING transmission systems interconnected and this reduced curtailment in the north of the country: some PV plants at the time had 40% curtailment. But in less than 7 years, the additional capacity that the interconnection brought, has been lost due to the 3 additional GWs of wind and 7 additional GWs of PV connected from June 2017 to April 2023 .

Some consultancies ( Spec Energy Consulting , April 2023) are saying that during 2023 the curtailment will be three times more significant than what it was in 2022.?

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A total of 5000GWh will be affected, the equivalent of 2 months of the whole regulated market consumption in the country. Even in the distribution networks there have been some curtailment.

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Source, ACERA
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Source CEN: Informe de monitoreo de la competencia 2022
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Source CEN: Informe de monitoreo de la competencia 2022

And the trend will continue until:

  • Transmission arrives (Kimal – Lo Aguirre, connecting Antofagasta with the central area of Chile, 3000MW, 600kV in HVDC, 1500Km of line ): set for 2029
  • or significant storage gets deployed: this process is not going fast enough… until revenue stacking becomes more of a reality – most of the storage in the country has been financed as Corporate Finance (see Figure below, largest projects from AES and Colbun). Project Finance for storage at the moment is an option for PMGDs under the grandfathering of DS88, “articulo transitorio” which allows access to a stabilised price (and self-dispatch of their energy – i.e. they do not need the CEN or Chilean ISO permission) which is the average price of the whole system OR as transmission assets which have very clear lines of revenues as they get the same payments that a transmission line would (this one definitely makes sense to keep doing!)


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Fuente, estadistica de ACERA y el Mercurio.. https://clipper.e-clip.cl/clipper/clip/acera/467533/467549

The Chilean government could be about to announce soon a bid for 2GW – 4 hours of total storage that will be conducted as soon as some required regulatory modification are approved.


Marginal Costs (CMg) of zero

Since 1982 the electricity market in Chile is privatized and it is a marginalist system. Generators are dispatched in order of priority, first dispatching those generation sources that have the smaller variable costs: meaning those for which it costs less to generate an additional kWh. Renewables have priority because generating an additional kWh of wind and solar costs zero as the “fuel” is free. The exact dispatch order is specified in DS 125/2017, paragraph 57

The price of the electricity is determined by the marginal costs. At every moment in time the marginal cost (or CMg) at every point in the system is set by the last generating unit that is dispatched to meet the demand (for example if 99% of the demand is met by renewables but the last kWh needed is Diesel, the CMg price at that node is set by variable costs of diesel BUT if 100% is covered by renewables, the spot price will be 0).

The electrical market was simply not conceived for such a high percentage of renewable generation.

When the system was designed, it worked because the price was set by the last unit that entered the system which always had variable costs; but as more renewables entered the system, marginal costs of zero are more and more common (across all geographical regions): last year 1900 hours of generation were valued at 0 (which is bad news if your plant is merchant or if you are injecting in those nodes and not getting paid).

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LOCATION BASED RISKS

Every month generators are subject to the balance of energy (to work out how much money they will receive from their energy) which is the sum of their performance in the long-term and the short-term market.

  • The short-term market deals with marginal prices (the price of electricity at a point – different geographical areas of the grid may have substantially different prices and the prices also vary throughout the day, more expensive when there is less energy supply and more demand, or zero as explained previously). “Merchant” plants only participate in the short-term market.
  • The long-term market deals with long-term contracts. These can be regulated contracts (like the DisCo tenders), or non-regulated (say a generation company signs a private PPA, a contract to supply them with energy at a given price, with a mining company or a large consumer such as Metro de Santiago or Amazon). ?

DisCos and non-regulated customers expect their energy supply to be available when and where they need it, irrespective of the generation curve of their suppliers so contracts are “supply” and not “generation” contracts, because the emphasis is in SUPPLYING the energy, whether the plant generates it or not, and if the plant does not generate it, they have to buy it!)

For example, imagine that a generator must fulfil a regulated market PPAs and that its plant is not exactly in the same location the distribution company it supplies. The prices across the system should be similar if there were no transmission bottlenecks - but there are. In this case, it is not unlikely that: not only they may not get paid for their energy because where they inject the CMg is low (and even zero) a lot of the time, specially during the solar hours. But they may have to pay money back in the balance because the node where they need to buy energy to supply their contract is not CMg=0. You may have heard about the “desacoples” (decoupling) -?in this note I try to explain this in detail .

After several months like this, it is not surprising that some companies have thought about withdrawing from the regulated market (or even dropping their contracts and having their warranties to be executed).?Maria Elena and Cabo Leones II have dropped their regulated contracts and left the short-term market in October 2022, but as of September 2022 there were 25 additional companies in arrears with their payments.

Firms like Mainstream Renewable Power or ACCIONA Energía were very successful in the national tenders for DisCos (with projects that were technically very good) and are now affected by location-based risks (desacoples). Mainstream has been perhaps the most successful IPP in Chile, with 1.1 GW of projects in operation but they have mostly aimed at the regulated market (DisCos) rather than the unregulated one (private PPAs). This means that currently they are massively exposed to location-based risks (although they have a geographically diversified portfolio of both wind and PV assets which are technically sound). You can read about their struggle (and layoffs) here . In addition they have had delays with the operation of some projects which meant to fulfil their contracts they had even more merchant exposure. Other players, like Acciona, have a lot of exposure to the regulated market but somewhat make up for it via private PPAs (although, it is not all rosy, all players are still exposed to curtailment and CMg=0).


OTHER ISSUES

There are little prospects for immediate positive change and there are other extras like:

  • The tariff stabilisation law and the PEC law (this really is CRITICAL): a mechanism to keep the bills for final consumers “stable”, meaning not rising electricity prices. Generally when a government decides to take this kind of action, the state has to fund it…. But it did not happen this way which meant that many renewable generators have had to (retrospectively) foot a bill of several, 1350, million USD over the last 4 years; and which led them to having to refinance some projects as the state artificially set a USD exchange rate at which they would get paid for their electricity but the contracts they had to fulfil and payback were at the real USD rate) . The difference from real to fixed rate of exchange is (supposedly) to be paid starting on 2024, once new variable renewable energy based contracts which offered very competitive prices enter in effect. Reality will be biting back… the PEC will come to an end at some point and the real tariffs need to be paid (meaning, electricity price increases , which are never good news for any government – nor consumer)
  • An increase in systemic costs and lateral payments (among other reasons for the much higher than anticipated costs of fossil fuels and the lack of incentives in place to stop using them – the CEN has KPIs for maintaining grid stability and safety and the most economical operation – BUT, nothing to encourage them to operate a lower emissions grid (which can be done without compromising its reliability and safety).

The government in Chile has so far resisted short-term help for the affected renewable companies (this is aligned with the view of Generadoras, which is the industry association whose members are the main generating companies in Chile, most of them having a mix of thermal and renewable generation). Ibereolica and GPG left Generadoras in April this year (most likely because of tensions arising from this situation)


In summary many renewable generators that won the regulated tenders in Chile are struggling due to location-based risks, curtailment and marginal costs of zero leading to a situation that often makes their revenues negative – they pay for supplying their energy while also having to cover their operational costs and their investment (and receiving no lateral payments and little recognition of their capacity). Lack of transmission lines and lack of storage are aggravating the problem to the point where we could see a number of renewable energy companies fall.

Perhaps there is a bit of movement and a silver lining. What was once (Dec 2022) a “It cannot be done” it is now (May 2023) turning into an “it is obvious it should have been done a long time ago”.

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On 24th Dec 2022, the Minister of Energy discussed that the electricity market needed 3 essential reforms: Transmission, Distribution and Wholesale market; but that they would only be tackling one (the one that would pose the least resistance, i.e probably Transmission and definitely not wholesale market. https://energia.gob.cl/sites/default/files/el_mercurio_24-12-2022.png
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4.5 months later, on 8th May 2023, the tide seems to be turning (a little… at least in the medium to long term): "it should have been done decades ago" https://www.df.cl/empresas/energia/pardow-y-reforma-al-mercado-mayorista-tiene-un-atraso-de-decadas-pero

This is the start of a discussion on how to design and implement an offer-based system (not one based in marginal costs).

The question that remains is whether without any short term measures the renewables market in Chile can continue to be diversified and keep accessing project finance; whether there will be any short-term measures (and when). Or whether we will see a market concentration over the coming months. We might be about to find out whether it matters how many companies carry out the energy transition (which was the initial question of this article).

In my next article I will be covering the new regulated tender rules (published only last week – bear with us while we read through them!) which have significant changes to deal with the market situation and what kind of short-term measures could be needed and what has been proposed to date.


As always, special thanks to all the contributors who read my article in advance and helped me with comments, opinions and corrections (like Carlos Finat or Teresita Vial Villalobos or Mario Acevedo Bilbao for the DNV graphs and Juan Pablo Tapia Rojas for sharing the databases with the hard numbers) and to those that no doubt will help me make it better with their sharp eyes and brains after it is published ;))




George Berczely

Passionate about driving the energy transition

1 年

Great article! Fully agree. At least in the short run, in Chile the push for medium sized distributed generation plants (PMGD) offers an alternative until the network and the market mechanics are updated.

Jorge Luis Gonzalez Rivera

Finance Business Partner en Sierra Gorda SCM

1 年

Muy interesante y contingente publicación estimada Patricia Darez, sobre todo el punto del sistema basado en la oferta, y dejar en el pasado lo del Cmg. ?Que paradigma sustentaría esto?.

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Student at ILMA

1 年

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回复
Patricia Darez

Managing Director

1 年

The government announced the tender for storage on 1st June. This is definitely some good news. It would be even better news if the draft to modify the Reglamento de Calidad y Operacion DS125 was in for public consultation as well as having a clear view of the Reglamento de Potencia (which is yet to be approved). This would make more clear how the revenue lines of these systems would work out: https://www-latercera-com.cdn.ampproject.org/c/s/www.latercera.com/pulso/noticia/boric-anuncia-licitacion-de-sistemas-de-almacenamiento-de-energia-electrica-por-us-2-mil-millones/YCX2AV6LDVEAFMP637NZYYMDPQ/?outputType=amp

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