In October, the average marginal cost in the SIC was a historic US$35.9 per MWh, ten times lower than that observed during the peak of the crisis. The big utilities are happy with their accounts, but some renewables face problems.

Marginal costs in the SIC fall to minimums and complicate renewable energy developers

(Pulse) March 2008. In the midst of the Argentine gas crisis, marginal costs in the SIC – at the Quillota 220 kV node – set a historic record, with energy being traded on the spot market at US$325.6 per MWh, a figure never seen before in the country and which placed Chile, by far, among the markets with the most expensive energy in the world.

During those years, the industry spoke of a “perfect storm”: to the gas shortages – caused by the explosive increase in Argentine consumption and the lack of investment in that country to exploit new fields – were added other variables such as the record price reached by oil in international markets, the drought that hit the central zone and the delay in hydroelectric or coal-fired investments, since the industry was confident that the Argentine gas supply was almost infinite and, therefore, the major projects of the dominant players had concentrated on gas. Chile became dependent on diesel, an expensive and inefficient fuel but one that prevented a blackout.

Since then, the cost of energy has become a headache from which the electricity industry is only now recovering. So much so that today it is experiencing the opposite side of the coin: current costs are by far the cheapest of the decade.

During October, according to data provided by CDECSIC, marginal costs at the Quillota 220 kV node averaged US$35.9 per MWh, which is 12.2% lower than in the previous month and 52.9% lower than in the same month of 2014, both variations measured in dollars of each year.

Reasons?

Everything that was happening in 2008, gas shortages, drought and paralysis of investments was reversed, adding a new actor that, at that time, was not taken into account: non-conventional renewable energies (NCRE).

“The combination resulting from the greater contribution constituted by both coal-fired power plants restored to service (such as Bocamina) and hydroelectric plants that this year have had significant water contributions, to which some NCRE contributions such as biogas, biomass, wind and other NCRE present in the central-south zone are also added. All this makes a very efficient combination that has a strong effect in reducing marginal costs of the interconnected system, especially from Santiago to the south”, explains Francisco Aguirre, professor in Energy Economics and partner of Electroconsultores.

The expert states that the current situation is profitable for operators whose production has been sold through long-term contracts, as it is convenient for them to go out to the spot market given the existing gaps between the values paid by customers -whether regulated or free- and the value of energy sales between generators.

Aguirre adds that there are technologies that are adversely affected, such as natural gas plants, since their generation cost is higher than the alternatives, “their production is strongly reduced as they are displaced in the operation”.

In October, for example, their place was taken by hydro plants, which increased their share last month to 56% of the SIC, while natural gas-fired units, with a total installed capacity of 1,794.19 MW in the SIC, contributed only 5.1% of the energy, a far cry from 28.7% in April or 28% in May.

Systep’s general manager, Rodrigo Jiménez, explains that the drop in prices is mainly due to the rains, in addition to the positive outlook for thaws.

“There has been a noticeable improvement in hydrology, more rainfall from the Eighth Region to the south, which means that the reservoirs have been filling up and some run-of-river power plants have been contributing more. These plants displace thermal generation and, as a result, the marginal cost goes down”, he explains.

Role of NCRE

Regarding the role of NCRE plants, Jiménez assures that this energy still generates a limited contribution, between 8% and 10%. “That’s a good percentage and it displaces more expensive plants especially when there is sun or wind, like LNG. That also helps. But in areas where there is transmission congestion, such as in the north of the SIC, local marginal costs are close to zero in hours of maximum coincidence between wind and solar generation. But this is an effect that is localized in one area and is not necessarily related to the marginal costs of the rest of the system”, says the general manager of the consulting firm Systep.

But it’s not all rosy beads for renewable developers. Those operators that did not obtain long-term contracts -either with large free customers or with distributors- and who were betting on selling energy to the spot market, were counting on electricity being traded at around US$100 per MWh, not at the current US$35.9. This could generate complications even to pay for the investment, which could be prolonged if these low prices continue.

Carlos Finat, executive director of the Chilean Renewable Energy Association (Acera), makes an important point: the effects can be different depending on the contract or non-contract position a company may have. “They are part of the rules of the national electricity market,” he points out.

Although Acera does not have figures on how many NCRE companies have a PPA or power sales contract, according to Finat it is a significant amount of energy that is under this figure.

This has been one of the main issues of concern for the renewable industry, as banks have systematically required the industry to have a PPA to finance projects. In spite of this, several people bet on the spot.

Regarding the type of energy that has had greater difficulties to place a PPA, Finat points out that “we do not see that there is one that has greater difficulty in obtaining contracts, especially if we take into account the last bidding process of the distributors, and there are also the decisions of the companies, not all the companies can have a PPA in a certain period of time. We do not see a general rule. Now, the market as a market should evolve towards a market with a contract, that is the way in which the market develops in a more efficient way and with a long-term development”.

Has there been a change in the mentality towards developing projects without PPA?

“We are not referring to particular cases of companies. In general, the vision is that in the medium and long term we should move towards a contracting scheme, and it is also valid for conventional energy and that is the way in which the market works more efficiently”, adds the union representative.