Electricity sector in Chile

Installed capacity

There are four separate electricity systems in Chile: the Central Interconnected System (SIC, Sistema Interconectado Central), which serves the central part of the country (75.8% of the total installed capacity and 93% of the population); the Norte Grande Interconnected System (SING Sistema Interconectado del Norte Grande), which serves the desert mining regions in the North (23.3% of the total installed capacity); and the Aysén (0.3% of total capacity) and Magallanes (0.6% of total capacity) systems, which serve small areas of the extreme southern part of the country. The long distances existing among the four systems make their integration difficult.

Total installed nominal capacity in April 2010 was 15.94 GW. Of the installed capacity, 64.9% is thermal, 34% hydroelectric and nearly 1% wind power, with nuclear absent. The SING is mostly thermal and suffers from overcapacity, while the hydro-dominated SIC has been subject to rationing in dry years. Total generation in 2008 was 56.3 TW·h, 42% of which was contributed by hydropower sources. The remaining 58% was produced by thermal sources. This figure varies significantly from one year to another, depending upon the hydrology of the particular period. The electricity production grew rapidly since the start of natural gas imports from Argentina in the late 1990s.

Besides the new hydro projects (see Renewables section below), there are several large-scale thermal projects in the development pipeline for Chile. Numerous projects are being built, although other similar plants have been delayed due to opposition from locals and uncertainty about gas supply. It is this uncertainty that has directed new attention to coal-fired facilities, of which Chile already has several plants in operation, with a combined capacity of 2,042 MW. In addition, as of April 2010, there are plans to build new plants for a total of 11,852 MW of new generation capacity.

By company

The main companies involved, in terms of installed capacity, are the following:

A number of other companies account for the remaining 14% (2418 MW)

Imports and exports

In 2003, Chile imported 2 TW·h of electricity (mainly from Argentina) while it did not have any exports.

Demand

In 2007, the country consumed 55.2 TW·h of electricity. This corresponds to 3,326 kWh per capita, which is still low by developed country standards. It grew rapidly (6% per year) until 2006, but since then it has been stagnant.

Demand and supply projections

It is expected that electricity demand will increase at 5% per year in the period up to 2030. In that same period, the share of natural gas in the generation mix will increase to 46%. The installed capacity of natural-gas-fired electricity generation is expected to reach 14 GW in 2030 (this will be achieved by the construction of 10 new combined-cycle gas-fired power plants), while coal-fired and hydroelectricity generation will each account for about 26% of the total electricity generation mix.

Access to electricity

Total electricity coverage in Chile was as high as 99.3% in 2006. Most of the progress in rural areas, where 96.4% of the population now has access to electricity, has happened in the last 15 years, following the establishment of a National Program for Rural Electrification (REP) administered by the National Fund for Regional Development. Under this Fund, there is tripartite funding of the capital costs of rural connections: users pay 10%, companies 20% and the state provides the remaining 70%, with users expected to pay for running costs.

Interruption frequency and duration

In 2002, the average number of interruptions per subscriber was 9.8, while the total duration of interruptions per subscriber was 11.5 hours in 2005. Both numbers are below the weighted averages of 13 interruptions and 14 hours for the LAC region.

Distribution and transmission losses

Distribution losses in 2005 were 6.52%, down from 8% a decade before and well below the 13.5% LAC average.

Policy and regulation

The National Energy Commission (CNE), created in 1978 to advise on long term strategies, is responsible for advising the Minister of Economy on electricity policy and for setting of regulated distribution charges. The Energy Superintendence (SEC) is responsible for supervising compliance with laws, regulations and technical standards for generation, production, storage, transportation and distribution of liquid fuels, gas and electricity. In turn, the Minister of Energy formally imposes the regulated tariffs and retains control over the issuing of rationing decrees during periods of drought when there is a shortage of hydro-electric generation capacity. Further responsibilities in the electricity sector are also held by the Superintendence of Secure Values (SVS), which is in charge of taxation, as well as directly by the regions and municipalities.

Generation, transmission and distribution

Since the privatization of the Chilean electricity sector in 1980, all generation, transmission and distribution activities have been in private hands. There are 26 companies that participate in generation, although three main economic clusters control the sector: Endesa group, AES Gener and Tractevel (Colbún). The situation is similar in the distribution sector, with approximately 25 companies, in which the major companies include CGE Distribución S.A., Chilectra S.A., Chilquinta Energía S.A., and Inversiones Eléctricas del Sur S.A. (Grupo SAESA). In transmission, there are 5 players. In the Central Interconnected System (SIC), the most important player is Transelec, a pure transmission company which controls almost the entire transmission grid that serves the SIC. In the other interconnected systems, the large companies generation or the large clients are the owners of the transmission systems.

The Central Interconnected System (SIC) serves principally household consumers, while the "Large North" Interconnected System (SING) mostly serves large industrial customers, primarily mining interests in Chile's northern regions. The largest generating company in the SING is Electroandina, owned by Tractebel and Codelco.

Electricity sector reform of 1982

Chile represents the world's longest running comprehensive electricity reform in the post-World War II period. The reform was led by the 1982 Electricity Act, which is still the most important law regulating the organization of the electricity sector in the country. The reform was similar to the UK's model and started with vertical and horizontal unbundling of generation, transmission and distribution in 1981. According to Cambridge economist Michael Pollitt, the reform is widely regarded as a successful example of electricity reform in a developing country and has been used as a model for other privatizations in Latin America and around the world.

In the period 1970-73, Salvador Allende's government had undertaken a process of nationalization of many large companies, including utilities and banks. By 1974, inflation, high fuel prices and price controls had led to large losses and lack of investment in electric utilities, which were then under public ownership. The subsequent military dictatorship, under Augusto Pinochet, decided to reorganize the sector through the introduction of a different economic discipline. The government returned large state owned companies, including electricity, to their previous owners, an action that was followed by improving rates of return on capital. In addition, the 1985 reform of the Chilean pension fund system, which operated through Pension Fund Management Companies (AFPs), preceded the privatization of utilities, which began in 1986. By the end of the 1990s, foreign firms had gained majority ownership of the Chilean electricity system.

During the initial restructuring of the electricity industry Endesa, a state-owned company since 1944, was divided into 14 companies. Before the division Endesa had extensive generation, transmission and distribution assets throughout the country. The companies generated from Endesa's division included 6 generation companies (including Endesa and Colbun), 6 distribution companies and 2 small isolated generation and distribution companies in the South. Chilectra, privately owned since 1970, was split into 3 firms: a generation company (Gener) and two distribution companies.

The high levels of investment that have been attained since 1982 have enabled the expansion of the Central Interconnected System (SIC) from 2,713 to 6,991 MW (4.1% p.a.) and of the Northern Interconnected System (SING) from 428 up to 3,634 MW between 1982 and 2004.

Recent developments

There have been various attempts to modify the 1982 Electricity Act (Ley General de Servicios Eléctricos) with the purpose of adjusting to developments in the sector over the last 20 years. The first successful attempt happened in 1999, which led to electricity rationing after the drought of 1998-99, the worst one in 40 years, causing blackouts from November 1998 to April 1999 (with a total of 500 GW·h of electricity not being supplied). However, the most important modifications date from 2004, with Law 19,940, known as Ley Corta I (Short Law), and 2005, with Law 20,018, known as Ley Corta II (Short Law II), which sought to address some of the most pressing shortcomings of the current system. However, according to Cambridge economist Michael Pollitt, more comprehensive legislation is still needed. Major problems have resulted from the aftermath of the 2002 Argentine crisis. In Argentina, sharp economic recovery has boosted energy demand and led to power cuts. This led Argentina to unilaterally decide, in 2004, on a reduction of its gas exports to Chile, which had been subject to a 1995 treaty between the two countries. These cuts have had serious implications for Chile, leading to an expensive substitution of fuel oil for gas in the midst of a shortage of hydroelectric capacity. In addition, gas supply shortages fueled the debate for investment in expensive liquid natural gas (LNG) import facilities. Construction of the country's first liquefied natural gas re-gasification plant, at Quintero (Region V), near the capital city of Santiago, started in 2007 under the coordination of the state oil company Enap (National Petroleum Company). The partners are British Gas, with 40% of the shares, while ENAP, ENDESA and METROGAS have 20% each. The project is built under an Engineering, Procurement and Construction Contract by the Chicago Bridge & Iron company, while BG will be the long term supplier of LNG. The plant received project finance for US$1.1 billion from a consortium of international banks and is due to start operating in July 2009.

The Chilean government, as an additional response to secure electricity supply, proposed a new bill to the National Congress in August 2007. The main objective of this bill is to minimize the negative consequences derived from a generator's failure to meet its contracted supply obligations (i.e. due to bankruptcy). In such an event, the new law would mandate the rest of the generators to assume the obligations of the failed company. In addition, the National Energy Commission (CNE) has recently approved Resolution No.386, a new piece of legislation that will allow regulated final consumers to receive economic incentives to reduce their electricity demand.

In 2008, a special law for non conventional renewable energy was approved (Ley 20.257), which requires that, from 2010 onwards, at least a 5% of the energy produced by the medium and large generator sector be from non conventional renewable energy sources. This quota will increase by 0.5% per year from 2015 onward, to reach a 10% requirement in 2024.

Tariffs

In 2005, the average residential tariff was US$0.109/(kWh), while the average industrial tariff was US$0.0805/(kWh). These tariffs are very close to the LAC weighted averages of US$0.115 for residential consumers and 0.107 for industrial customers.

Subsidies

Electricity subsidies in Chile aim to temper the impact of rising electricity tariffs on the poorest sectors of the population. In June 2005, Law 20,040 established an electricity subsidy for poor Chilean families. As mandated by the law, the subsidy will be triggered when electricity tariffs for residential, urban or rural users face an increase equal to or above 5% during a period equal to or below six months. This measure was first applied between June 2005 and March 2006, when it targeted 40% of the total population (about 1,250,000 families). The subsidy was triggered a second time from February to March 2007, when it benefited 32,000 clients in the Second and Third Regions of the country. More recently, the government has announced a new application of the subsidy to benefit an estimated 1,000,000 households between December 2007 and March 2008. The total amount of the subsidy (US$33 million) will triple the resources committed in previous campaigns and is a response to rising electricity prices caused by the increasing use of diesel as a substitute for natural gas and the low precipitations of 2007, which have hindered hydropower generation.

Investment and financing

Investment requirements in electricity generation, transmission and distribution over the period to 2030 are estimated to be between US$38–49 billion.

Summary of private participation in the electricity sector

As a result of the 1982 reform of the electricity sector, 100% of generation, transmission and distribution activities in Chile are in the hands of private companies. Endesa group (5223 MW ; 32,8%), AES Gener (2642 MW 16,6%), Colbún (2591 MW, 16,3%) and Suez Energy (1856 MW ; 11,6%) control the largest part generation sector, in which a total of 26 companies participate. The distribution sector, with about 25 companies, is also dominated by four main groups: CGE Distribución S.A., Chilectra S.A., Chilquinta Energía S.A., and Inversiones Eléctricas del Sur S.A.(Grupo SAESA). As for transmission, Transelec is the largest owner of the transmission grid, followed by CGE transmission. There are some minor exceptions to the 100% private production of electricity, such as the case of the Chilean Air Force providing power for the Chilean installations in Antarctica.

Responsibility for the environment

CONAMA (National Commission for the Environment) was created in 1994 and acts as coordinator of the Government's environmental actions. CONAMA is chaired by a Minister and is integrated by several different Ministries (e.g. Economy, Public Works, Telecommunications, Agriculture, Health, etc.) In July 2007, faced with the need for early installation of new back-up capacity in the National Interconnected System (SIC), the Energy Ministry urged CONAMA to grant maximum priority to the environmental assessment of the projects related with the installation of emergency turbines.

Greenhouse gas emissions

OLADE (Organización Latinoamericana de Energía) estimated that CO₂ emissions from electricity production in 2003 were 13.82 million tons of CO₂, which represents 25% of total emissions for the energy sector. It is estimated that, by 2030, emissions from electricity generation will account for the largest share of emissions from the energy sector, 39% (some 74 million tons) of the total.

CDM projects in electricity

Currently (September 2007), there are eight energy-related registered CDM projects in Chile, with expected total emissions reductions of about 2 million tons of CO2e per year. The breakdown of the projects is as follows:

Source: UNFCCC

Legislation

The main legal framework for the electricity sector in Chile is the "General Law of Electric Services (DFL-4)", a rather liberal framework which enables private investment in generation, transmission and distribution. Generation has been structured as a competitive market, whilst transmission and distribution are regulated. The Chilean model for the electricity market was very innovative in its time and has served as a model for several Latin American countries. It has allowed the Chilean company, Endesa, to expand successfully in the region. See the complete "legal framework for the electricity sector in Chile".