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Regulatory Recommendations for the Decarbonization of Chile's Power Generation Mix

Structural reforms to the Chilean wholesale electricity market, prepared as an input for the Ministry of Energy's regulatory design work.

Download the report PDF · 35.8 MB · in Spanish

In June 2022 Chile enacted its Framework Law on Climate Change, setting carbon neutrality by 2050, and the National Energy Policy of that same year committed to 80% renewable generation by 2030. This report answers a concrete question those commitments left open: what has to change in electricity regulation for the system to deliver on them.

It was prepared by the Instituto Sistemas Complejos de Ingeniería together with academics from Universidad de Chile, Pontificia Universidad Católica, Universidad Adolfo Ibáñez and SPEC, as an input for Chile's Ministry of Energy. It does not propose measures for direct implementation: these are structural recommendations on foundational regulation, with long-term effects on the wholesale market.

Four lines of reform

  1. Network planning. Modernize transmission planning methodology: optimize a portfolio of projects instead of assessing candidate by candidate, adopt a multi-value approach that recognizes externalities, represent operation with adequate temporal detail, and incorporate distributed energy resources and uncertainty.
  2. Short-term prices. Modernize the marginal cost calculation, implement a multiple-settlement market, improve auction design and the allocation of ancillary service costs, and introduce a carbon tax mechanism and scarcity pricing.
  3. Operation scheduling, focused on the effective participation of flexible technologies.
  4. Long-term prices. Modernize the capacity mechanism, redesign supply auctions for regulated and free clients, and enable long-term ancillary service contracts.

The transmission knot

The report addresses open access with three pieces that work together: financial transmission rights (FTRs), which in synergy with PPAs give generators more effective financial hedging; beneficiary-based tariffs; and a more flexible investment regime that admits works promoted by market agents themselves.

How it was built

The work was discussed with the National Energy Commission, the National Electrical Coordinator, the Ministry of Energy, and with ACERA, ACENOR, APEMEC, Generadoras de Chile, GPM, Transmisoras and Chile Sustentable. It also drew on advice from Luiz Barroso (PSR Brazil) and Goran Strbac (Imperial College London).