Electricity generation: a model in crisis

Rodrigo Castillo

In recent days, we have witnessed a dispute between renewable energy companies and conventional generation companies. This dispute arose in February, when nine renewable generation companies, which together account for some 3,200 MW of installed capacity, sent the Ministry of Energy a letter with a proposal for a regulatory modification to the electricity generation market.

The companies expressed their concern about the large number of hours in which renewable energy is valued at a price equal to zero, while at the same time and place, the generation of energy with fossil fuels is remunerated the totality of its variable operating costs through side payments, which is evidently an inexplicable market distortion in an electricity system that aims to decarbonize and give impetus to "green" hydrogen.

"We must redesign the pricing system for the generation segment in order to achieve the desired transition to clean energy. Regulations and pricing models are not immutable, nor can they be at the service of the incumbents.

On March 6, as reported by this same media, the trade association that groups the main conventional generators sent a letter to the Minister of Energy indicating that the proposal presented by the renewable energy companies would suffer from serious deficiencies, by attacking the fundamentals of market design contained in our current regulation.

From the point of view of regulatory theory, the approach of conventional generators is of difficult logic, since the design fundamentals of the current marginalist market were defined more than 40 years ago, for a generation matrix based on thermal and hydraulic power plants and did not contemplate the high penetration of renewables that is observed today in the Chilean electricity system. Currently, 35% of the electric energy produced in Chile comes from non-conventional renewable sources, while in 2022 for more than 22% of the time renewable energy was valued at a price equal to zero.

Likewise, so far in 2023 alone, more than 35% of renewable energy has been priced at zero. This background shows unequivocally (as the literature and international experience has shown for years) that the current model of electricity generation pricing is in a deep crisis, and that it is not suitable to encourage greater renewable penetration. This requires, as a matter of urgency, the adoption of rapidly implemented measures to maintain competition and avoid the insolvency of renewable companies that bet on Chile.

Likewise, as a society we are obliged to redesign the tariff system of the generation segment, in such a way that it allows us to encourage and achieve the desired transition towards an electricity matrix based on clean energies. Thus, logically, any solution aimed at correcting the problems of a regulatory model in crisis will have the effect of modifying it. Not maintain it.

Finally, we must not lose sight of the fact that regulations and pricing models are not immutable, nor can they be at the service of the incumbents. They are dynamic tools, designed to correct distortions and market failures, and their ultimate objective is the maximization of social welfare and not their own preservation, nor the protection of the interests of the regulated parties that may have benefited from them in the past.