The Ministry of Energy is preparing a revolutionary change in the electricity distribution market. Increase the number of free customers to generate greater competition in this sector. They also want to lower the profitability of the companies, a discussion that is just beginning and will continue throughout 2017.

Government proposal to liberalize the electricity market

(La Tercera) The largest electricity regulation in the history of the country is being evaluated by the Ministry of Energy. More drastic than the recently approved reform of the electricity transmission market, today the government’s focus is on reformulating the distribution market, a discussion in which the Executive wants to start with a “blank sheet of paper”, i.e. from zero, and where one of the main focuses is to liberalize the electricity market. This, in order to provide greater competition in the segment where the authority has not had any interference so far: the free client.

Today, 52% of the electricity market is made up of regulated customers, which are households and SMEs, and whose rates are set by the State, while the remaining 45% are the so-called free customers, who are characterized by having full freedom to negotiate their rates, which they agree directly with the generating companies.

But the authority wants to reach the medium-sized companies, those located within the concession area of the distribution companies and that, therefore, have been supplied by companies such as Chilectra, Chilquinta, CGE Distribución or Saesa, among others.

“We see that there is a market that is quite captured by the distribution companies, and what we would like is to introduce more competition in that market. Basically, we would like the distributors to fight for this new client, but to fight for it together with other generators, so that, effectively, these medium-sized companies can have access to better prices”, explains the executive secretary of the National Energy Commission (CNE), Andrés Romero.

Something of this revolutionary change was advanced by the Enel group in a recent interview given to this media, where the president of Enersis Chile, Herman Chadwick, indicated that “the new distribution law will seek a more liberalized market”.

He added that unlike the current operation of the free market, where a contract is signed with a large consumer for a specific period of time, “we are thinking about the possibility of competing in the near future in residential or urban areas or in smaller companies, so we must be prepared”.
According to CNE estimates, there is room to grow this free market. In fact, in the electricity bidding law, which establishes the basis for the State to auction the energy that will be consumed by regulated customers, the threshold to be classified as a free or regulated customer was modified, where medium-sized companies have the possibility to choose where they want to belong. This threshold increased from 2,000 KW to 5,000 KW.

“As of today, based on the analysis of the validity of the contracts recently reviewed by the CNE, there are a total of 115 free customers of generators and 82 free customers of distributors, totaling 197 free customers. A previous review showed 81 free customers of generators and 124 free customers of distributors, totaling 205 free customers. The above shows a mobility of free customers of distributors to free customers of generators”, explained the CNE.

Romero indicates that the market currently allows this universe to be expanded, given the strong level of competition that took place in the regulated electricity tender, which generated that today there are 70 thousand GWh available in the system to be offered competitively by both regulated and free customers.

How can the government encourage the deepening of the free market if these processes are not regulated? “What we can encourage is that these free clients group together and make bidding processes, or else, they do not group together, but they do make intelligent purchasing processes and deepen competition conditions,” Romero explains.

He adds that this is an issue that they are just studying, although he emphasizes that “it seems to us to be a top priority, because in this way we will keep alive the atmosphere of competition that we have seen this year”.
Regarding prices, Romero is cautious and indicates that they have not set a specific goal of reducing energy prices for free customers, but says that “if the efficient and competitive price is in the order of US$ 50 per MWh, then we will seek to reflect this in the contracts with free customers”.

But this is not the only issue that the authority wants to reformulate in this market. Energía’s work with the CNE and the team headed by Catholic University academic Hugh Rudnick began last August and in mid-August Romero and Rudnick met with the distribution companies in an intense day of work, according to attendees at the event.

On the occasion, the points that the government wants to modify in the current law were explained and it was agreed to discuss the issue in depth, following the formula that the government worked on with the Transmission Law, that is, with a participatory process. For this reason, academics, experts, consumers, NGOs and market players have been summoned to a plenary meeting that will probably take place at the former National Congress next Thursday, September 29.

Although Romero says that a bill will not be sent during this government’s term, he wants to start working on a proposal that achieves a high technical and political consensus, “so that the next government, whatever its color, can take it up and ideally adopt it for itself”, he explains.

This is because the authority’s diagnosis is that it is necessary to modernize the electricity regulation of the distribution segment, which, according to the government, has essentially not been modified since the 1980s.
“The paradigm is changing and moving from a passive consumer, who only received electrons through the wires installed by the distributors, to a model where the customer becomes a “consumer-producer” and has the ability to modulate its demand, to make energy efficiency and has the ability to store energy.

We are talking about an intelligent consumer, and this completely changes the model,” explains Romero.
Therefore, among the changes is also to start thinking about how to regulate distributed generation, which is the energy that homes, thanks to the installation of photovoltaic panels, can inject into the system. In addition, there is how the market will operate when customers begin to manage their electricity demand. And there are also issues such as improving service quality, enhancing energy efficiency and how to manage future electric transport.

It is also among the topics that the current network remuneration system and the sector’s pricing system are to be modified. According to Rudnick, it is necessary to analyze whether it is convenient to continue with the scheme of establishing a model company and weigh the studies carried out by the CNE and the companies to establish the Distribution Added Value (VAD).

“This scheme is no longer seen as convenient, as the process has presented problems over time, because both parties are put on the extremes, generating a conflict between the companies and the distributor,” explains Rudnick.
Another crucial point of concern for the sector is the reduction in the rate of profitability of electricity companies, where the government wants to push for a reduction from the current 10% to 7%, the same parameter by which the rate of profitability of transmission companies was reduced. “A 10% rate is no longer justified. That was a rate that was used in the 1980s,” says Romero.

The market is looking cautiously at this point, due to the impact it may have on the investments they have made over the years.

For this reason, Rudnick anticipates that the conversation with the private companies will be long and complex. “Clearly, the private sector is going to be concerned because they are going to have to adapt their business models. The paradigm that prevails today is that the more energy they sell, the more they earn, and what we are saying is that this will no longer be the only objective. Companies will have to prepare for this,” he says.

Rodrigo Castillo, executive director of Empresas Eléctricas, the association that groups distribution and transmission companies, is ahead of the discussion and indicates that there are no untouchable issues. “The most important thing, more than defending acquired rights, is that any regulatory change makes sense and also maintains incentives for investment,” he says.

He adds that the sector is approaching this discussion with all points open, “because we believe that everything has merit to be discussed. Therefore, we do not think that there are issues that are untouchable”.
Nevertheless, he recognizes that a complex issue will be the modification of the tariff system. “Correcting, modifying or replacing a tariff system is something that has to be done very carefully, since a huge number of factors have to be taken into consideration so that instead of improving, things don’t get worse,” he says.

In any case, Castillo is clear on what is behind the space for debate that the government is opening up. “Here we are talking about rethinking everything and also looking at the business models that are currently associated with electricity distribution. That is the depth of this analysis,” he says.