Chile: Electricity Projects & Regulation 2016 – Chile

Last Updated: 22 August 2016
Article by Originally published by Latin Lawyer

1. What are the principal power sources in your jurisdiction?

According to the National Energy Commission (CNE), Chile's installed generation capacity as of April 2016 was 20,080MW: 15,852MW (79 per cent) corresponded to the SIC (Central Interconnected System), 4,062MW (20.2 per cent) to the Norte Grande Interconnected System (SING) and 166MW (0.8 per cent) was distributed among the Easter Island, Aysén and Magallanes electricity systems. According to the CNE, the principal power sources in the jurisdiction are thermoelectric generation (56.8 per cent), followed by conventional hydroelectric power (29.9 per cent) and nonconventional renewable energies (NCRE) (13.3 per cent).

2. What are the current trends affecting the energy mix in your jurisdiction?

(i)The increasing interest in NCRE-based small distributed generation units (PMGDs); (ii) crossborder power exchanges; (iii) gas exports to Argentina through the GasAndes pipeline (3 million m3 per day supplied by Enap, Endesa and Metrogas from the LNG Quintero Terminal), and through the NorAndino pipeline (1.5 million m3 per day); and (iv) the growth of the LNG market.

3. What are the current forecasts for electricity demand in your jurisdiction?

According to the 2015–2030 Demand Forecast prepared by the CNE, the energy consumption in SIC will increase from 49.9TWh to 88.2TWh, which means a 72.95 per cent increase in the said period, with an annual growth of 3.72 per cent. On the other hand, according to the same forecast, energy consumption in SING will increase from 16.8TWh to 32.5TWh, meaning a 93.76 per cent increase in the 2015–2030 period, with an annual growth of 4.51 per cent.

4. Is there an open electricity market in your jurisdiction? Are any activities in the electricity market reserved for the government only? Are private entities allowed to build and operate power plants and transmission and distribution lines?

Yes, there is an open electricity market in Chile and there are no activities in the electricity market reserved for the government only, the market-oriented energy sector in Chile is regulated by a legislative framework where only a secondary role of the authority is both present and expected, since activities in all three segments: generation, transmission and distribution, are mainly developed by private companies. Therefore, Chile's electricity market is open, and private entities are allowed to build and operate power plants, transmission and distribution lines without restrictions.

5. What is the role and function of the regulator? Would you describe the regulator as being independent?

There are several regulators involved in the Chilean energy market, being the Ministry of Energy being the highest authority since its creation in 2009. The CNE is a technical-adviser state body, in charge of creating and coordinating the plans and policies for the proper operation and development of the industry. The Commission of Electricity and Combustibles (SEC) supervises the proper operation of the electric power, gas and fuel services, and the compliance of the legal, administrative and regulatory framework. Finally, even though not part of the regulator authority, there are the economic load dispatch centres (CDECs) and the Experts' Panel, a body created exclusively for the electric power industry to resolve controversies specifically listed in the Electric Power Services General Law (LGSE).

The Minister of Energy and the Superintendent of Electricity and Fuels are appointed by the President and stay in office as long as they have the president's trust; whereas the CNE is managed by an executive secretary appointed by the President through a high-ranking civil servants election process. Therefore none of the above may be characterised as totally independent from a political standpoint. Nonetheless, independence is safeguarded through the prohibition of these government officials to engage in private activities related to the energy sector in which they or any of their relatives may have an interest.

6. Is there an open market for off-takers in your jurisdiction or are there restrictions on the sale of electricity?

In Chile, the energy purchase and sale market is structured as a mandatory pool-type market restricted to generators, not allowing brokers or energy traders (ie, power generated and injected to the system is exclusively withdrawn by generators, to be sold in the "spot market" to other generators; or in the "contracts market" to other generators, to distribution companies (DisCos) or to free end consumers).

Therefore, Chile has an open market for both utilities and off-takers. Notwithstanding, the market is perceived as highly concentrated owing to the existence of its longstanding predominant players: according to the CNE's June 2016 installed capacity statistics, Engie, Aes Gener and Endesa represent respectively 37.49 per cent 32.90 per cent and 17.9 per cent of SING's installed capacity, whereas Endesa, Colbun and Aes Gener represent respectively 31.37 per cent 22.40 per cent and 13.62 per cent of the SIC's installed capacity.

7. If the sale of power is to a public utility as off-taker, are such entity's payment obligations backed-up or guaranteed by the government?

In Chile, the public utility off-taker is regarded as a public service, and consequently the distribution sector relies exclusively on a concession system and regulated distribution tariffs to provide such service. However, payment obligations are not backed up or guaranteed by the government. Notwithstanding, through Law 20,220/2007, amended by Law 20,720/2014, several articles were introduced into the LGSE to prevent jeopardising the power systems adequacy, security of supply or economic operation in the case of a bankruptcy of either generation, transmission or DisCos. If the above-mentioned aspects are compromised, according to the SEC and the CNE, the SEC shall appoint a provisional administrator to continue the business purpose of the bankrupted company. Additionally, this law introduced two relevant transitory amendments implementing mitigation measures if supply to regulated customers is endangered.

8. Does the market have an independent system operator? If so, what are the ISO

In Chile, currently the system and market operators are the CDECs. As each large size interconnected system has its own CDEC, there are, respectively, the CDECSIC and CDECSING. CDECs comprise all companies with generation capacity, STT, STx and STA (see question 9), and all customers directly connected to transmission facilities. According to Bill of Law No. 1024008 (New Transmission Law), CDECs will be replaced by a new coordinator, the Independent Electric National System Coordinator (CISEN), as of January 1st, 2018. CISEN will have the same duties and obligations of current CDECs: coordinate operations; maintain the global safety of the system; guarantee the most economic operation; assure open access to the transmission systems; and determine the marginal costs of electricity and the economic transfers between members of the CDEC; and also will collaborate with the authorities monitoring competition in the electricity market and will have a more demanding standard of transparency in the management of information. The New Transmission Law is in the final stages of discussion in Chilean Congress, and its enactment is expected in July 2016.

9. How are electricity rates set and what cost components affect such rates?

There are two distinct segments:

Generation

  • spot market – a wholesale market in which the rates are determined in accordance to short-term marginal costs resulting from the instantaneous balance between supply and demand, and the capacity price (determined by the authority every six months as the cost of development of the cheapest technology to supply electricity during peak hours of demand), and where generators are able to sell their energy output if they have not been able to secure direct sale only to free customers or to DisCos; and
  • contracts market – where you find fixed tariffs or freely negotiated prices.

Transmission

  • tariffs are set by the Ministry of Energy every four years through tariff decrees.

To use and transport electricity through distribution facilities the user must pay the electricity distribution concessionaire a fee equal to the distribution aggregated value (VAD).

For the use and transportation of electric power through trunk transmission facilities (STT) the user must pay the annual value of transmission per section (VATT) minus the expected revenue by segment. The VATT is made up of the annuity of the investment value of the relevant section, plus the annual costs of operation, maintenance and management of such section. The expected revenue by segment is the difference resulting from applying the marginal costs of the expected operation of the system, to the injections and withdrawals in such segment.

For the use and transportation of electrical power through subtransmission facilities (STx) the user must pay the annual value of subtransmission, a value based on facilities economically adapted to a four to 10-year period of forecast demand, which minimises the present value of investments, operation and power failures and is efficiently operated.

Regarding additional transmission (STA), even though the terms and conditions of such service are agreed freely between the parties, the determination of the tariff shall be calculated on the basis of an annual transmission value, equivalent to the present value of the investments minus the residual value, plus the projected operation, maintenance and administration costs; all prorated among the users and technically and economically supported by the owner and available for review by all interested parties.

Distribution tariffs consider node prices at the interconnection point with the distribution facilities, and the VAD, value based in a model or theoretical DisCo and considers, among others, the fixed costs per user (administration, invoicing and customer service), average losses of energy and capacity, standard costs of investment, maintenance and operation associated to distribution per unit of power supplied and a "unique charge".

10. What approvals are required to build and operate a power project? Are these easy to obtain? Please describe the salient features of the relevant licence conditions and the grounds for revocation. What levels of fines can be imposed for failure to comply?

In general terms, to construct and operate a power project in Chile no general electricity or specific governmental authorisations are required (ie, concessions to operate, except for the concession system for public distribution services).

Nevertheless, other sector-specific regulations may oblige the developer to request and obtain the following authorisations: the awarding of an environmental approval resolution (RCA); obtaining a favourable report for construction from the regional office of the Agricultural and Livestock Service; and obtaining a construction permit from the relevant municipal works department. All these approvals are considered easy obtainable if the regulatory requirements of the submission and the procedure are met.

Owing to the infringement of obligations established in the RCAs the following sanctions may be imposed by the Environmental Superintendency: verbal admonishment, fines of up to US$10 million, revocation of the approval and even the closure of facilities. SEC, on the other hand, supervises the proper operation of the electric market, therefore it is able to commence investigation processes and eventually sanction those who breach legal, technical and administrative regulations, through the disconnection of the infringer's facility, revocation of the electric concession and fines ranging from US$70 to US$8 million.

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