Chile: Electricity Projects & Regulation 2017

Last Updated: 23 August 2017
Article by Juan Francisco Mackenna, José Miguel Bustamante and Diego Ibarrola
Most Read Contributor in Chile, September 2017

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 May 2017 was 22,769MW: 17,346MW (76.18 per cent) corresponded to the Central Interconnected System (SIC), 5,256MW (23.08 per cent) to the Norte Grande Interconnected System (SING) and 167MW (0.73 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 (56.7 per cent), followed by conventional hydroelectric power (27.1 per cent) and non-conventional renewable energies (NCRE) (16.2 per cent).

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

(i) The interest in NCRE-based small distributed generation units (PMGDs); (ii) cross-border power exchanges; (iii) the growth of the LNG market; (iv) the interconnection between the SIC and the SING; and (v) the upcoming delay in the Cardones-Polpaico transmission facility, which strengthen the transmission capacity of existing facilities.

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

According to the 2016–2031 Demand Forecast prepared by the CNE, the energy consumption in SIC will increase from 49.716TWh to 98.096TWh, which means a 97.31 per cent increase in the said period, with an annual growth of 3.46 per cent. On the other hand, according to the same forecast, energy consumption in SING will increase from 16.998TWh to 33.674TWh, meaning a 98.1 per cent increase in the 2016–2031 period, with an annual growth of 3.48 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 government is both present and expected, since activities in all three segments: generation, transmission and distribution, are developed by private companies. Therefore, Chile's electricity market is open, and subject to the relevant regulation 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 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 Superintendency of Electricity and Fuels (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 is the National Electric Coordinator, the (Coordinator) (which during 2016 replaced the Economic Load Dispatch Centres – also known as CDECs – by means of the enactment of Law No. 20,936 (Transmission Law)) and the Experts' Panel, a body created exclusively for the energy industry to resolve controversies specifically listed in, among others, 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.

With regard to the Coordinator, the Transmission Law ensured the independence of this coordinator body considering that the election of its governing board shall be determined by an independent and regulated special committee; contrary to what happened with the CDECs, which were composed of members that were chosen by key players in the market.

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 offtakers. Notwithstanding, the market is perceived as highly concentrated owing to the existence of its long-standing predominant players: according to the Generadoras de Chile's June 2017 installed capacity statistics, Enel Generación, AES Gener, Colbún, and Engie represent respectively 27.89 per cent, 18.15 per cent, 14.43 per cent and 9.01 per cent of the national installed capacity.

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

In Chile, the public utility offtaker 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 provisions 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 abovementioned 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's tasks and duties?

In Chile, the system and market operator is the Coordinator. The Coordinator has the same duties and obligations that old CDECs had: coordinate operations; maintain the global safety of the system; guarantee the most economic operation; ensure the open access to the transmission systems; and determine the marginal costs of electricity and the economic transfers between coordinated members. Furthermore, the Transmission Law also empowered the Coordinator to collaborate with other authorities in monitoring competition in the electricity market.

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

There are two distinct segments.

At the generation level:

  • 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 freely negotiated prices.

At the distribution level, distribution tariffs for regulated costumers 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$8.5 million.

To read this article in full, please click here.

Originally published by Latin Lawyer

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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