Miguel Pelayo Serna
Arteaga & Gorziglia, Santiago
mpelayo@agycia.cl

Introduction

Distributed energy resources in Chile can be classified into two categories. The first includes power plants with an installed capacity of up to 9 MW, connected to the electricity grid via distribution lines within the area served by the distribution company (PMGD, in Spanish) or via transmission lines (PMG, in Spanish). The second category comprises net billing facilities up to 300 kW, which are exclusively connected to the grid through distribution lines within the distribution company’s (DisCos) service area.

As of December 2023, there are 717 power plants operating under the PMG and PMGD categories.^[1] Within this group, the most common configuration is under PMGD, connected to and within distribution zones. According to official figures from Chile’s Independent System Operator (ISO), as of July 2024, the installed capacity stands at 3,621 MW,^[2] reflecting a tenfold increase in just eight years since the regulations were introduced.^[3] Solar power is predominant, representing 79 per cent of the total capacity, followed by thermoelectric generation (12 per cent), hydroelectric power (seven per cent), and a small fraction from wind generation (two per cent).^[4]

According to ACERA, one of the most renowned renewable organisations in the industry, these figures are backed up by investments up to US$3.5bn.^[5]

Part of the success of PMGDs can be attributed to the special economic regime provided by regulation. From the outset, PMGDs have had access to an alternative economic framework when selling energy to the system, allowing them to choose between a ‘stabilised price’ or selling their generation at the marginal price.

It is important to note that Chile’s electricity system operates in a two-tier market: (1) the market among generators, or ‘spot market’, where energy is valued and sold at the marginal price at the specific node where transactions occur; and (2) the contract market, where generators can sell energy to end customers through PPAs.

Although PMGDs can sell energy to end customers via the PPA market, they benefit from this special economic regime when selling energy in the spot market. Under the ‘stabilised price’ regime, PMGDs gain access to a predictable and certain cash flow, reducing the requirement of PPAs for securing financing. It is, therefore, unsurprising that two-thirds of PMGDs operate under the stabilised price regime.

In recent years, this special regulatory treatment has come under scrutiny, leading to significant changes introduced in 2020. The new regime shifted from being based on the average marginal prices in the spot market over a certain period to one where stabilised price is determined by the average marginal costs but with some technical differences, mainly the introduction of time blocks to calculate these costs. This change has made the regime less predictable and, seemingly, less attractive to traditional PMGDs, which are predominantly solar and, therefore, tend to put its energy into the system during sunlight hours when marginal prices are low or near nothing. As a matter of fact, recent data supports this strong preference for the old regime, with less than on per cent (5 out of 717) of power plants now operating under the new stabilised price regime.^[6]

Regulatory changes are not the only challenge for PMGDs. Infrastructure limitations are also affecting their ability to inject and sell energy into the system. Transmission congestion, constraints within distribution lines or networks, security concerns by the operation of a myriad of PMGDs in a concentrated zone (mostly in the central part of Chile), and intense competition for available positions in the relevant infrastructure are making the path for new PMGD projects increasingly arduous and challenging.

Challenges

Despite their initial success, PMGDs are currently experiencing a degree of deceleration. According to data from Chile’s ISO, there were 493 PMGDs in operation in 2022, but by 2023, this number had fallen to 322 connected PMGDs.^[7] Other figures indicate a reduction in growth rate of approximately 11 per cent between 2022 and 2023.^[8]

As mentioned, one of the primary drivers of this slowdown is congestion in transmission lines, which limits PMGDs’ ability to feed energy into the electrical grid and sell it to other generators or end users. Data from Chile’s ISO of May 2024 highlights a significant rise in substation-level congestion, from none in 2020 to 56 substations in 2024. This congestion also affects other infrastructure, including transformers, many of which are experiencing an inversion of electrical flow due to the integration of PMGDs. This, in turn, increases the likelihood of transmission congestion.^[9]

As expected, transmission congestions means that PMGDs face restrictions when attempting to inject energy into the grid. According to current regulations, if transmission congestion is detected during the connection process with the distribution company, the connection can only be authorised to the extent that the transmission lines can physically support it. Therefore, even if a PMGD has additional capacity, its energy output will be limited by the capacity of the relevant transmission lines.

At the system level, transmission constraints result in energy curtailment, which disproportionately affects renewable energy sources. According to Chile’s ISO, by June 2024, curtailment had reached 2,046.77 GWh of wind and solar generation, representing a 243 per cent increase compared to the same period in 2023.^[10]

Although PMGDs are not directly affected by curtailment – since they are not under the centralised control/dispatch of the ISO – the effects of congestion are comparable to an ex-ante curtailment. Moreover, curtailment is considered by authorities when assessing transmission congestion. However, the impact of PMGDs is not factored into the planning of transmission infrastructure expansion. This is an oversight which needs to be addressed by authorities (ISO and the Comisión Nacional de Energía),^[11] as distributed generation could play a crucial role in developing energy grid infrastructure closer to consumption centres.^[12]

In this context, PMGDs, which are predominantly solar, can be seen as indicative of broader challenges within Chile’s generation system, particularly the significant limitations on feeding and selling energy into the market due to infrastructure constraints.

One solution is to move power – mainly solar – from periods of the day when it cannot be consumed due to these limitations to times when it is more needed, and alternative sources of generation – primarily renewable energy – are unavailable. In essence, this involves using storage to move the daylight into the night time.

Possible solutions and new developments

Storage capacities are rapidly advancing in Chile. As of July 2024, there are 26 standalone energy storage system projects nationwide under environmental evaluation in the SEIA (Environmental System), equivalent to 2,103 MW of installed storage capacity, 10,639 MWh of stored energy, and an investment of US$2.8bn.^[13]

This is also a current trend with PMGDs. In 2023, the first PMGD plant with storage (oEnergy in alliance with Huawei as BESS provider) inaugurated a solar plan of 3 MW,^[14] and, from our professional experience, almost all developers are now considering storage solutions as part of new PMGD projects.

In this context, recent regulatory changes have been introduced to provide certainties to foster storage solutions to complement traditional PMGDs plants. One of the key innovations is the creation of time blocks throughout the day, enabling PMGDs to charge batteries during daylight hours – when solar generation is at its peak – and discharge the stored energy at night or after peak solar generation has ended. This new rule could also be an incentive to transit into the new stabilised price regime, that differentiates based on the time of the day when energy is injected into the grid.

Similarly, at the time of writing, the regulator is collaborating with the industry to address additional regulatory challenges. In particular, regulators are working on solutions to evaluate potential transmission congestion during the connection phase of PMGDs, with the aim of integrating storage capacity to move capacity from daylight hours to night time into the modulation of future connections. As a result, current constraints due to transmission congestions during the day, could be resolved, enabling new PMGDs to inject energy safely and avoid the financial issues of capacity limitations.

In this context, PMGDs combined with storage will help alleviate transmission congestion, freeing up infrastructure for the injection of utility-scale projects which cannot incorporate storage due to financial, physical, or technological constraints. Additionally, PMGDs with storage could enhance the flexibility and resilience of distribution energy grids, which may prove crucial in addressing potential disruptions to domestic energy services caused by extreme weather conditions, such as droughts or severe storms, as were recently experienced in Santiago.

In summary, the successful implementation of new regulations enabling PMGDs with storage capacity could spur industry growth, reduce transmission congestion, and strengthen the resilience of Chile’s energy grid against future disruptions.

A brief note on net billing and PMGDs

Net billing is still not significant in Chile’s system. Since its introduction in 2014, net billing generation accounts to 259.5 MW of installed capacity, with a total of 24,537 facilities.^[15] This accounts to less than one per cent of the total installed capacity in the country (as of May 2024).^[16]

However, there are some interrelations that regulators are starting to consider when gauging the impact of energy projects within distribution networks. One signal of it are recent changes in PMGDs’ regulations (February 2024), that now consider net billing facilities over 100 kW in the connection process.

Nevertheless, there are potential ways to enhance the process.

Ideally, both connection processes should be subject to substantially similar procedures, particularly concerning when the power is regarded as part of the grid for modulation purposes. Currently, net billing is considered from the beginning, whereas PMGDs are only accounted for after they pass the initial stages. Although net billing projects are usually small, their early consideration may overestimate the impact of these initiatives on the network. Adopting PMGDs’ approach could be more realistic, offering a more optimal solution, as new generation is only considered once a project is more advanced and the likelihood of developers withdrawing is reduced.

Additionally, aggregated impact of net billing facilities should be considered and not only when capacity is over 100 kW. For example, if five or more projects of 20 kW are identified in the same zone, they will not be identified as relevant individually, but would have an aggregated impact equivalent to 100 kW that, under current rules, could be overlooked.

Despite its relative irrelevance today, net billing and PMGDs should be treated in the say way, with connection procedures and technical rules harmonically interplaying, preventing potential effects on distribution grids which could lead to constraints and, in the end, frustration for developers and consumers.

Conclusions

Over the past decade, Chile has seen significant growth in distributed energy resources, particularly PMGDs, which now exceed 3,200 MW in installed capacity as of July 2024. This rapid expansion has been driven mainly by solar projects. However, PMGDs are currently facing challenges due to infrastructure constraints and recent changes in their economic regulatory framework.

The primary issue is congestion in the grid caused by the high concentration of solar generation during the day, which limits the ability of PMGDs to inject energy. Additionally, regulatory adjustments have altered the previously favourable conditions for PMGDs, creating uncertainty in the sector.

Energy storage is emerging as a critical solution to these challenges. By shifting energy from daylight to night time, storage can alleviate grid congestion and enhance flexibility. Market trends reflect this, with a majority of new projects now incorporating storage facilities. In response, regulators are updating the framework to recognise the benefits of storage, enabling PMGDs to navigate transmission limitations and continue contributing to Chile’s energy landscape.