Renewable energies and electricity prices

MATÍAS NEGRETE PINCETIC, RODRIGO MORENO VIEYRA AND DANIEL OLIVARES QUERO

In recent years, the country has seen a significant integration of renewable technologies, which is clearly positive. An effective energy transition requires enabling conditions in several areas, one of which is the design of electricity markets. In this context, a recent proposal sent to the Ministry of Energy by a group of companies has opened a discussion on the price formation scheme of the electricity spot market.

The proposal to modify prices during periods of plant operation to the technical minimum lacks a solid technical basis, and therefore may end up generating greater costs than benefits for the system. Just to mention a few elements, the idea is in clear contradiction with the definition of the price as the marginal cost, which corresponds to the lowest incremental cost for the system, thus undermining recognized attributes of short-term efficiency.

"The proposal to modify prices during periods of plant operation to the technical minimum lacks a solid technical basis, and therefore may end up generating greater costs than benefits for the system".

Similarly, price differentials during the day that are key for some technologies such as storage, are naturally reduced, impacting the incentive to develop these technologies that are enabling for the transition. A modification of this nature, if sustained over time, could also generate incentives for a development of the electricity system that is not aligned with the reliability and efficiency needs that the system requires.

In addition, arbitrary and unsubstantiated changes, which generate uncertainty in the market design and economic transactions between agents, have a negative impact on investment signals. In this context, the international literature is conclusive in this regard and none of the accepted solutions are in line with the recently proposed solution.

We appreciate that market design is under discussion, as it is a critical issue for the energy transition. However, market design proposals for electricity systems, which are highly complex, must have a solid technical basis. In this context, both from the technical literature and international best practices, there are several solutions to evaluate and adapt to the Chilean context.

Among these are the implementation of bidding market schemes with multiple instances of re-settlement; creation of financial instruments for risk management of market participants; price formation that reflects periods of scarcity and reduces side payments outside the market; a long-term bidding design that also seeks flexibility in the system; green taxes adequately recognized in the dispatch and spot price, among others. All this, in order to have electricity markets adapted to the needs of the energy transition.

Understanding that the implementation of some of these solutions will take time, it is urgently necessary to discuss short-term adjustments to solve conjunctural aspects, without giving up the positive aspects and technical support of our market design.