Chilean Energy Transition Goal

Since 2015, Chile has implemented a long-term energy policy with the primary objective of assuring and maintaining the reliability of the entire energy system, while complying with sustainability and inclusion criteria. Moreover, in 2019, Chile assumed the Presidency of COP25 and, as part of its National Determined Contributions (NDCs), committed to achieving carbon neutrality by 2050.

To define Chile’s energy policy and ensure compliance with its NDCs, the 2022 update to the policy established several key objectives, including:

• achieving 100% zero-emission energy in electricity generation by 2050 and 80% in renewable energy by 2030;
• reducing GHG emissions in the energy sector by 60% by 2050;
• implementing a carbon price of at least USD35 per tonne of CO2 equivalent by 2030;
• ensuring that 100% of new residential and non-residential buildings achieve “net zero energy consumption”;
• ensuring that 100% of new light and medium vehicle sales and new urban public transport additions achieve zero-emission by 2035; and
• deploying 6,000 MW in energy storage systems in the National Electricity System by 2050 with an interim target of 2,000 MW by 2030; these systems may include technologies such as batteries, hydraulic pumping, compressed air and liquid air.

In 2023, the Long-Term Energy Planning (PELP) was updated for the period 2023-2027. This process, established under the General Electricity Services Law aims to project Chile’s energy demand and supply in different scenarios over a horizon of at least 30 years, so that these scenarios are considered in the planning process for the expansion of electricity transmission systems carried out by the National Energy Commission.

In this five-year update process, three long-term energy scenarios were defined:

• first scenario: post-COVID-19 recovery;
• second scenario: carbon neutral by 2050; and
• third scenario: accelerated energy transition.

Finally, the Ministry of Energy has established an accelerated decarbonisation plan, aiming to create the regulatory and technical conditions that will enable this process. The plan sets a target of achieving at least 80% of renewable energy in power generation by 2030.

Market Trends and Developments

As we have pointed out, Chile’s commitment to achieving 100% zero-emission energy in electricity generation by 2050, and 80% in renewable energy by 2030 has significantly influenced market dynamics and regulatory behaviour.

The following section outlines the key trends and developments over the past two years, in the energy market, project development and regulation in Chile.

Market

The Chilean electricity market has undergone significant evolution and growth over the past decade, mainly driven by legal reforms. These reforms include the introduction of renewable energy consumption quota requirements for customers, improvement of the electricity supply bidding system for customers subject to price regulations, reform of the electricity transmission market and establishment of the new National Electrical Coordinator (Coordinador Eléctrico Nacional). These changes have significantly accelerated the entry of new players, particularly in the transmission and generation segment of the electricity sector. As a result, the market has transitioned from being dominated by only a few players to one in which approximately 100 companies participate in the generation segment and 13 in the transmission segment.

In Chile, current regulations classify electricity customers into three categories:

• Regulated customers are end users with a connected capacity of less than or equal to 5,000 kilowatts located in public distribution service concession areas. These customers cannot freely contract their supply and must purchase the energy and power they consume from the local distribution company at fixed prices regulated by the National Energy Commission. Distribution companies, in turn, purchase energy and power through tenders conducted by the National Energy Commission.
• Non-regulated customers are end users with a connected capacity greater than 5,000 kilowatts who are not subject to fixed and regulated prices for the energy and power they consume, and therefore must contract their energy and power supply directly with the generators.
• Opt-in regulated customers are end users with a connected capacity of more than 500 kW and less than 5,000 kW who have the option to choose between the non-regulated or regulated supply regime.

The improvement of the bidding system for the supply of electricity to regulated customers, which resulted in regulated power purchase agreements (PPAs), and the subsequent tenders conducted under this new regulatory framework, facilitated the entry of new generation companies, many of which are renewable energy generation companies.

Moreover, the PPA market, both regulated and non-regulated, was strengthened and now serves as the primary vehicle for energy transactions between generators and customers, generators and energy distribution companies, as well as among generators themselves.

As a result, the energy and power market in Chile today is predominantly a market of contracts, leaving the spot market only for transactions between generators in a surplus or deficit condition.

Non-regulated customer market

Currently, non-regulated customers subscribing to PPAs include not only large mining companies and industries with consumption over 5,000 kWh, but also medium-sized companies and industries, hotels, shopping centres, agricultural companies, many of which did not previously purchase their energy through PPAs. These contracts typically have a duration of five to ten years.

On the other hand, new offtakers have entered the market, such as energy trading companies that, despite not necessarily owning generation assets, sell energy to customers with medium consumption, always above 500 kW. These trading companies purchase energy directly from other generators. In turn, this new contracting modality has made it possible to contract and thus finance medium-sized generation projects.

Although Chilean legislation expressly regulates the figure of the energy trader, there is no regulatory impediment to participating in the market for the purchase and sale of energy and power by fulfilling the requirements to be a coordinated agent of the electricity system.

Notably, this year has seen a significant milestone in the non-regulated contracts market with the signing of two PPAs that guarantee a 24-hour supply, fully backed by renewable power plants with storage capacity.

Consequently, in recent years the market for non-regulated PPAs has experienced substantial growth, accounting for approximately 60% of energy and power sales, establishing itself as a highly competitive market.

Regulated customers market

In the regulated contracts market, an average of 20 companies have participated in the tenders in recent years. This participation reflects the deconcentration and diversification of the Chilean electricity market, leading to more competitive and beneficial offers for customers.

Specifically, the most recent tender was held in April 2024 for 3,600 GWh of energy from renewable energy projects and storage. The bidding conditions of this tender introduced new conditions compared to previous ones, including:

• segmentation of energy blocks into three geographic zones;
• pass-through of systemic costs to the price through the energy price indexation formula; and
• a direct incentive to bids supported by energy storage systems and non-variable renewable energy, consisting of a rebate of 0.15 USD/MWh for each GWh of energy injection in night-time blocks ;this rebate is applied for bid comparison purposes, with the offer, if awarded, being based on the original bid price.

The average price awarded was USD56.6 per MWh, higher than the averages obtained in the previous tenders of 2022 (USD37.4 per MWh) and 2021 (USD23.8 per MWh).

Recent financial difficulties in the electricity market

In recent years, energy curtailment has increased considerably, particularly in northern Chile, mainly due to insufficient transmission infrastructure needed to transport energy from generation sites to consumption centres.

This lack of infrastructure has increased the decoupling of prices between geographic blocks, making it difficult for generation companies to fulfil their supply contracts, specially regulated contracts, as the generation sites are often located in geographic blocks that are different and generally distant from the consumption areas.

These challenges, among other factors, led to insolvency declarations of some generation companies whose bids in the respective tenders were backed by 100% renewable energy-based projects, mainly solar, located in northern Chile.

Consequently, market participants, along with public and private entities, have prioritised the expansion of transmission system capacity and the integration of energy storage systems, together with regulatory measures, which will be detailed in the section on regulation.

Project Trends and Developments

As of June 2024, the installed capacity of the National Electricity System is 33,580 MW, having grown by approximately 4.5% in one year. Of this total installed capacity, 22,121 MW correspond to renewable energy projects, which means that 65% of the Chilean electricity matrix is now based on renewable energy. To date, 8,220 MW of renewable energy projects are under construction, representing 99% of the electricity generation projects currently under construction in Chile.

Applications to connect projects to the electricity system during the first half of this year increased by 86% compared to the same period in 2023, rising from 118 to 219. Furthermore, during the 2023-2024 period, connection applications for a total of 30.1 GW have been approved.

In the following section, we will detail the development trends regarding renewable energy projects, energy storage systems, and hydrogen.

Renewable Energy

Photovoltaic projects

Of the installed capacity mentioned earlier, 27.5% corresponds to photovoltaic projects. As of June 2024, 289 projects with a total capacity of 3,962 MW were under construction, while 116 projects with a total capacity of 9,236 MW are undergoing environmental assessment.

Photovoltaic technology is undeniably the predominant technology in terms of project development and construction in Chile, as well as in the financing and M&A markets.

Most of these projects have historically been installed in the northern part of the country. However, due to the problems of curtailment and price decoupling, the current trend is to install these projects in the central-southern regions of Chile, mainly between the Metropolitan Region and Ñuble Region.

At the same time, the trend is now fully established for new utility-scale PV project developments to include energy storage systems in their design, mainly battery energy storage systems (BESS). Likewise, those projects that are currently operating have gradually incorporated storage systems as a complement to their photovoltaic system.

On the other hand, in Chile there is a project modality called PMGD (Small Means of Distributed Generation) where photovoltaic technology also predominates. These projects, which are connected to the electricity distribution networks, currently represent 3,173 MW of the Chilean installed capacity, with recent years witnessing a surge in their development and construction.

Finally, in terms of distributed generation of the Netbilling type, photovoltaic technology is also the predominant technology, with a current installed capacity of 259.5 MW.

Wind projects

Of the total installed capacity in Chile, 7.3% corresponds to wind projects, equivalent to 4,592 MW. To date, 14 projects with a total capacity of 1,882 MW are under construction, and 27 projects with a total capacity of 4,192 MW are undergoing environmental assessment.

Wind projects in operation are mainly concentrated in the northern and southern regions of Chile, with a much smaller presence in the central part of the country. Although wind projects generally require longer development and construction times compared to photovoltaic projects, wind technology represents a very important resource for the electricity matrix, mainly because, among renewable energies, it is less variable and has a better capacity factor than solar energy.

Given their scale, most wind projects are of the utility scale type, with only 53 MW categorised as PMGD in operation.

Other renewable technologies

After photovoltaic and wind, run-of-river mini-hydro is the non-conventional renewable technology with the largest installed capacity in the National Electricity System with a total net power of 662 MW. It is important to note that under Chilean electricity laws, hydroelectric power plants exceeding 20 MW are not classified as non-conventional renewable generation.

Following run-of-river mini-hydro, comes biomass with 597 MW installed capacity and biogas with 60 MW.

Energy Storage

Chile has been a pioneer in regulating the installation and operation of storage systems, as well as their integration into the electricity system. Since 2016, regulations have allowed renewable power plants to be complemented with energy storage systems and to participate in the energy and power market. In the case of energy storage systems, since 2016 they have also been authorised by regulation to participate in the energy transfer market, ancillary services and as a transmission asset. Since 2021, they have also been permitted to participate in the power transfer market.

As a result, 424 MW of storage capacity is currently under operation in the electricity system, with an additional 1,530 MW, equivalent to 19 standalone BESS projects, and 464 MW of PV+BESS, equivalent to three projects, under construction.

In addition, 98 applications for the connection of renewable power plants with storage capacity and energy storage systems have been authorised to date, totalling 10.9 GW. Of these, 5.3 GW correspond to 51 energy storage systems, and 5.6 GW correspond to 47 projects for renewable power plants with storage capacity.

Currently, the project development market is almost entirely focused on the development of this technology, whether as a power plant + BESS or as a standalone BESS, with some developments also based on concentrating solar power and pump storage.

The government has defined as a central priority the installation of a minimum energy storage capacity in the electricity system, which has been defined by the National Electrical Coordinator after an analysis of the need for this technology for the system, particularly in light of the phase-out of thermoelectric power plants and the accelerated entry of renewable energy.

All of this indicates that Chile is now one of the most attractive countries for investing in energy storage systems thanks to its supportive regulations, the system’s needs, and the state’s commitment to prioritising and promoting this technology.

Green Hydrogen

In November 2020, the government announced a strategy to promote a green hydrogen industry in Chile, aimed at producing and exporting hydrogen and its derivatives, in the context of achieving the goal of zero net emissions by 2050.

In May 2024, the Green Hydrogen Action Plan was published. The text includes 81 measures across 18 lines of work, to be implemented in two stages:

The first stage, spanning between 2023 and 2026 includes:

• defining environmental, social and labour standards;
• structuring an efficient permit system;
• promoting scientific research on the industry; and
• making progress on tax and financial incentives.

The second stage, from 2026 until 2030 considers:

• implementing land-use planning instruments;
• developing and implementing the necessary regulations; and
• fostering local development, citizen participation and preparation of human capital for the realisation of green hydrogen development.

Currently, Chile boasts 67 green hydrogen projects in various stages of development, with eight already underway, albeit at a pilot scale. These projects are concentrated in the Antofagasta and Magallanes regions, located in the extreme north and south of Chile respectively. Of these projects, over 20 of them intend to export their production as hydrogen or its derivatives.

Green hydrogen is poised to play a strategic role in Chile’s energy transition, serving both as a domestic energy source and an export commodity. Given Chile’s abundant renewable energy resources, particularly solar and wind, the country is uniquely positioned to produce green hydrogen at a competitive cost. The Green Hydrogen Action Plan, with its detailed roadmap for industry development, underscores the government’s commitment to establishing Chile as a global leader in green hydrogen production. The plan’s focus on infrastructure development, regulatory frameworks, and international partnerships is expected to catalyse significant investment in the sector, positioning green hydrogen as a cornerstone of Chile’s strategy to achieve carbon neutrality by 2050.

Regulatory T&D

Undoubtedly, one of the greatest challenges brought about by the energy transition in Chile, as well as globally, is the need to adapt regulations to this new systemic reality while simultaneously leveraging them as a driving force for the development of the new projects required to achieve the goals set by the Chilean state.

Outlined below are the legal, regulatory and policy proposals and changes that have been approved and implemented in recent years, and those currently under development.

Approved regulations

• Tariff stabilisation laws:
1. Law 21.185 PEC 1 established a mechanism to stabilise the tariffs for regulated customers, which considered a credit system – Stabilisation Fund – financed by the generation companies, which will absorb the difference between the average node price and the real cost of electricity supply.
2. Law 21.472. PEC 2 established a Tariff Stabilisation Fund through the collection of a new additional public service charge on regulated and non-regulated customers.
• Law 21.505, on Storage and Electromobility was published in November 2022. It promotes storage systems by allowing energy storage systems to participate in the energy and power market and in the PMGD segment. This law also established incentives for electromobility by enabling electric vehicles as prosumers.
• Modification of the by-law of power transfers: The most important modifications involve the integration of energy storage systems into the regulation, with the aim of recognising their contribution of sufficient power to the system in monetary terms and perfecting the methodology for calculating the power of renewable plants with storage capacity. Additionally, it establishes a ten-year transitional regime for recognising power from storage systems, with a percentage recognition determined by hours of storage.

Regulation in the pipeline

• Bill to Promote Renewable Energy in the Electricity Matrix: Its purpose is to promote greater penetration of renewable sources in the electricity system, increasing the mandatory quota of renewable energy withdrawals by customers and distribution companies to 40% in each time block throughout the day, which, in the case of non-solar blocks, must be supplied primarily by storage systems. It also encourages actions associated with distributed generation and traceability of renewable energy.
• Energy Transition Bill, which positions electricity transmission as an enabling sector for carbon neutrality: This bill proposes modifications to the process of transmission system expansion to make it faster and more efficient. It also contemplates a proposal to reallocate tariff revenues, that are revenues associated with extraordinary congestions in the electricity system, transferring them, in certain circumstances defined therein, to generators affected by such congestions.
• Amendment of the By-laws of Co-ordination and Operation of the National Electricity System: This includes the improvement of the rules applicable to the operation of storage systems, the co-ordination of the operation in the event of congestion, the process of declaring projects under construction, and the rules applicable to defaults in the payment chain in the short-term market.
• Amendment of the PMGD Co-ordination and Operation By-law: This includes the improvement of the rules applicable to the calculation of the stabilised price without altering the grandfathering regime of Decree No 244, the study of congestion, and the process of connection and operation of PMGD renewable plants with storage systems and storage systems connected to the distribution network.
• Evaluation in the Competition Defence Court on lowering the non-regulated customer threshold to 300 kW: As instructed by the General Law of Electrical Services, the Ministry of Energy has consulted the Competition Defence Court regarding the possibility of lowering the threshold in such a way as to allow consumption from 300 kW to qualify as non-regulated customers.

Finally, in addition to these bills and regulation amendments, the National Energy Commission, the National Electrical Coordinator and academic institutions are currently working on a new wholesale market design. This design will encompass the energy market, ancillary services, and a capacity market, all based on a bidding system. Currently the Chilean energy market operates on a cost-based, auditable short-term market. The new design is expected to be implemented, on a transitional basis, over the next few years.

There is consensus in the industry that this new design will make it possible to guarantee the safe and efficient operation of the electricity system, with the understanding that it will be 100% renewable in the medium term. Additionally, it is expected to provide adequate price signals for the development of new generation and energy storage infrastructure. As Chile continues to advance its ambitious energy transition, the evolving regulatory landscape presents both challenges and opportunities for market participants. Navigating these changes requires not only a deep understanding of the current legal framework but also a proactive approach to anticipating future developments. By staying at the forefront of industry trends and regulatory updates, stakeholders can position themselves to take full advantage of the emerging opportunities in Chile’s dynamic energy sector. This forward-thinking strategy is essential for fostering sustainable growth and achieving long-term success in an increasingly competitive market.