- Email: [email protected]
Competition, marginal cost tariffs and spot pricing in the Chilean electric power sector
Competition, marginal cost tariffs and spot pricing in the Chilean electric power sector Sebastian Bernstein
Setting up competitiveness and privatizing the power sector has been an important goal of Chilean energy policy since 1974. The new organization of the electric sector includes deconcentration of generating and distributing companies, a new marginal cost and spot pricing system, coordination of generating companies through an economic load dispatching centre (ELDC) and a scheme for sharing transmission lines. This paper describes why and how those tasks were carried out in Chile. Keywords:Competitiveness; Marginal cost tariffs; Spot pricing The Chilean electric power industry, which dates back to the closing two decades of the last century, was developed entirely by the private sector through the mid-1930s. Thereafter, and as a result of the internal effects of the world economic crisis and of growing state regulations, including the application of political criteria in electricity pricing, the private sector gradually abandoned the electricity business. Early in the 1940s, the state had to take over the development of this activity, through the organization of a large state-owned electric power corporation. Private participation in electric public utilities was reduced to a medium-size g e n e r a t i n g distribution company operating in the SantiagoValparaiso area, and a few distributing companies in central-southern Chile. The nationalization of the Santiago area company in 1970 increased the participation of the state in the Central Interconnected System to 98% in public service generation, 100% in transmission and 80% in distribution. The long tradition of state participation and centralism in the Chilean electric power sector since the 1940s, the successful management of the state-owned Empresa Nacional de Electricidad, and the public service Sebastian Bernstein is
Santiago, Chile.
with the National Energy Commission,
characteristic of this activity, bred the belief that this sector should necessarily be handled by the state in a centralized fashion. Given the natural monopoly characteristics of this activity, the impossibility of establishing competitive conditions, the necessity to regulate it severely, and the reluctance of the private sector to participate in it, there seemed to be no other solution. This paper describes the policies which have been applied in Chile to change this situation and to adapt the electric power sector to the open and competitive market economic system, established by the government at the end of 1973.
CHILEAN ENERGY STRATEGY AND THE NEW ELECTRIC POWER POLICY
The Chilean energy strategy aims at maximizing the welfare of the community by: •
•
establishing conditions of efficiency in the development and operation of the national energy system; and assigning to the state a subsidiary role.
Two keywords stand out here: efficiency and subsidiary. Efficiency is understood here according to the Pareto criterion, ie, optimal allocation of resources. In the Chilean context, efficiency is connected to the recognition of the role of the market as a basic mechanism in the correct allocation of resources. The necessity of deconcentrating, decentralizing and privatizing the activities and property of the energy companies is likewise recognized for the stability of the system. Subsidiarity basically implies state support to the more deprived sectors of the population through direct subsidies, without distorting the prices of goods and services. It also means that the state will
0301-4215/88/040369-09503.00 © 1988 Butterworth & Co (Publishers) Ltd
369
Spot pricing in Chile's eh'ctricity sector
perform entrepreneurial activities only when such activities cannot or will not be carried out by the private sector. Among the various mechanisms used in Chile to implement this energy policy are: •
•
• •
The coordination by the Comisi6n Nacional de Energfa (CNE) of the large investment decisions by the state-owned companies participating in the sector, with the objective of maximizing the benefit to the community. The design and implementation of institutional and legal adjustments in order to allow, first, the efficient management of state-owned companies, forcing them to operate under the same framework and conditions as the private enterprises; and second, the opening of opportunities for the private sector to participate in the activities of the sector, either through the organization of new companies or by acquiring equity in existing state-owned companies. The active participation of the state in evaluating energy resources, and a realistic price policy, which reflects the real opportunity value of energy goods and services.
It is important to point out that the Chilean strategy assigns an important role to pricing as a mechanism to attain the objectives of global efficiency and state subsidiarity. As a consequence, particular emphasis has been placed on establishing the conditions for them to correctly reflect the opportunity value of the various energy products. The Chilean economic system is open to foreign trade, with a low 15% import duty for all goods. Furthermore, it sustains a full importing and exporting freedom. Under these conditions, the prices of liquid and solid fuels have been deregulated since 1977 and the equilibrium prices reflect the opportunity costs to the country: import parity for products where domestic production is insufficient, export parity or internal marginal costs otherwise. Prices are only regulated in areas exhibiting monopolistic characteristics, such as electric power supply to small-size clients. Clearly if economic efficiency is the objective, the regulation criterion must be based on marginal supply costs. This assures full consistency in the price system within the sector, and also between the sector and the rest of the economy. Within this framework, the government, through the CNE developed and implemented a new electric power policy aimed at establishing the appropriate framework for competition and private participation in the sector. Its basic features included: 370
•
• •
•
•
•
• •
Design of a new price system on the basis of marginal supply costs, clearly identifying and separating the marginal costs for generation, transmission and distribution. The system establishes explicit generation to distribution sale prices, transfer prices between generating companies and, finally, rates applicable by distributing companies to small end-users. Freedom of prices for end-clients with power exceeding 2 MW. Explicit separation between the generationtransmission and the distribution activities. Three large (500 to 2 000 MW) and four medium (10 to 50 MW) generating companies, in addition to 21 regional distributing companies of different sizes (1 to 1 000 MW) are currently operating in the Central Interconnected System. Implementation of the large generating project by independent companies, owned by companies already operating in the electrical sector, private investors and direct state participation if necessary. Increased participation of consumers in financing the expansion of the sector, through financial contributions p r o rata to connected kW, reimbursable in shares of the electric companies involved. These contributions represent between 5% and 10% of the development cost of the sector. Design and implementation of an economic load dispatch centre (ELDC) to coordinate the operation of the generating companies with the purposes of; first, obtaining the minimum overall operating cost of the system; and second, assuring equitable conditions in marketing the energy produced by the various generating entities. Adoption of a new generation-transmission planning scheme. Full privatization of state-owned distributing companies and maximum possible sale of the state equity shares in the generating companies.
COMPETITION, DECONCENTRATION AND PRIVATE PARTICIPATION IN GENERATION Does it make sense to decentralize, to make it competitive, and to privatize the electric power generating activity? We believe that this question should be formulated the other way round: why centralize, over-regulate and nationalize this activity, if it is not necessary? The following premises support this approach: ENERGY POLICY August 1988
Spot pricing in Chile's electricity sector
1. In Chile, no economies of scale originate at the generation level, as shown by comparing the investment costs of hydroelectric power projects ranging between 40 through to 600 MW. This is also supported by the successful application of a pricing system based strictly on marginal cost without surplus or deficit in capital return for the generating companies. Without economies of scale at the generating level there is no advantage in having a single company; however, certain problems need solving: coordinating investment decisions (a planning issue); coordinating the operation and determination of an efficient transfer price system between generators; and establishing shared use of transmission lines. The planning issue has been solved by the following scheme: as long as the companies are mostly state-owned, studies and planning decisions regarding the development of large generating power stations and transmission lines are made by the CNE on the basis of minimum discounted investment + operation + electric system failure costs. Potential projects are submitted by the various companies; CNE applies planning models known and acceptable to the companies, and selects the most economical alternatives. Decisions regarding small generating power stations (under 60 MW) are taken independently by the individual companies. To the extent that the generating companies are privatized, the planning function is entrusted to an Inter-Company Planning Committee, regulated by a pre-established set of rules, in which CNE acts as an observer and arbitrator in the event of conflicts. The operating coordination requirements, transfer prices and sharing of transmission systems are discussed in more detail in a later section. 2. As in any activity, private participation in the generating business is always possible if there exists a demand for electricity, profitable projects, investment selection and rational pricing policies based on objective technical and economic criteria, and stable rules of the game. This stability requires, in turn, the diversified ownership of the facilities and the participation of powerful corporate investors, such as pension fund companies and the workers in the electrical companies. 3. Competitiveness at the generation level is exhibited through the different ways and criteria used by the various companies in addressing issues such as:
•
• •
obtained by expanding the range of these options. Ways of project study, financing and implementation: new approaches are obtained in relation to the various ways of implementing generation projects than under the traditional schemes in state-owned companies. Competition is generated likewise in attracting private capital. Power station operation and maintenance methods. Energy marketing: as we will see later, the fact that supply prices to large industrial and mining clients are not regulated opens a wide field to competition.
Furthermore, the deconcentration and privatization, even partial, of the property of the generation companies, has advantages from the point of view of the stability of the rules of the game, since the regulating authorities do not face a single interlocutor and have other references available. This is particularly important for the problem of investment and management control while the state is involved in the property of these companies. 4. The diversity of companies and private participation represent an adequate protection against pressure groups lobbying for arbitrary price reductions. Large state monopolies are more easily victims of such pressures. There are more technological options and diversification of work opportunities. Greater possibilities of attracting private investment in medium-size companies than in extremely large enterprises. This is particularly valid in small countries and in public service sectors with a long tradition of state participation. The indicated factors are precisely the ones that motivated the policy of deconcentration and regionalization of the electric power sector in Chile. As we said, a basic pillar of this policy is the establishment of an efficient and stable pricing system between the various parts of the system: generator-generator, generator-distributor, generator-end-client, and distributor-end-client. This price system must be based necessarily on objective technical and economic criteria and on precise calculation mechanisms, if the target is private participation and long-term stability in the electric power sector, The following section contains a general description of the pricing system.
Preparation of new projects: more alternative projects can be identified and produced by a number of different companies than by one firm alone. Unquestionable advantages can be
ENERGY POLICY August 1988
371
Spot pricing in Chile's electricity sector
CONCEPTUAL BASES OF THE PRICING SYSTEM The electric power pricing system designed by CNE in 1980 comprises first, the determination of the marginal cost of peak power and energy at the generating level (220 kV), in the 'centre of gravity' of the electric system. The marginal costs in the main substations of the system are subsequently determined by adding to (or deducting from, as appropriate) these values the marginal losses in the transmission systems. The energy costs represent the marginal short-term costs (spot prices). The pricing system is used to: directly price transfers between generators (spot prices, which are determined by the ELDC); as a reference for the free-price supplies by the generators to their end-clients exceeding 2 MW; as a regulated rate for the sales by the generators to the distributing companies. The average of the marginal costs projected for the following 36 months is applied to avoid spot price fluctuations. This provides the power and energy prices at each substation in the system, the so-called 'node prices'. Finally, the rates for the end-clients of distributing companies are calculated on the basis of the 'node prices'. These are binomial rates: the peak power price is equal to the power node price plus typical distribution costs, expressed per kW (investment + network operation + losses); the energy price is equal to the energy node price plus energy losses in the distribution network. This scheme does not contemplate different rates by kind of consumer, but only by the voltage at which it is measured and by the measurement system (measurement of energy only, of energy and maximum demand, of energy and maximum demand in and out of peak hours.)
Marginal supply costs at the centre of gravity of the system The theoretical bases for marginal cost pricing have been set forth and widely discussed by various authors.~ However, there is a controversial aspect: the coherence between financial equilibrium and marginal cost sales in electric power generating companies, upon minimizing the total production cost, that is to say, when one is on the total long-term cost curve without the presence of noticeable economy of scale effects. Pricing energy at the instantaneous marginal cost produces returns in excess of the mean variable operation costs but that are not sufficient to finance the capital outlays of the
372
generation installations. However, it is possible to show that under optimum conditions, ie when the generating structure is permanently optimized vis-avis demand, the returns obtained from the sale of all the energy at the instantaneous marginal cost, plus returns from the sale of all power at the development cost of the appropriate units to provide peak power, are equivalent to the cost of capital plus the total operation costs of the generating plants. The permanent optimization assumption implies the nonexistence of significant economies or diseconomies of scale since, if they occur, there would be economic losses or profits by pricing at marginal cost. However, in the case of Chile it is possible to show that the indicated assumption is met. This has enabled deregulation of supply prices to large industrial clients. The pricing system developed in Chile is based on the determination of those marginal costs of energy and power supply calculated for an optimum programme of expansion of the electric system. It should be stressed that prices based on marginal costs are efficient from an economic point of view and enable the generating companies to make decentralized operational decisions that tend to a global optimum. In general terms, the procedure adopted is as follows: determination of the optimum electric system expansion programme; determination of the global operation of the system that minimizes the total operational costs; and calculation of the short-term marginal costs of energy corresponding to the optimum operation of the system. Determination of the marginal energy costs Generation in the interconnected system is mainly hydroelectric, supplemented by thermoelectric generation from coal and petroleum power stations. The hydroelectric power stations include run-of-theriver, reservoir with small regulating capacity and those associated with the Lake Laja reservoir, whose interannual regulating capacity exceeds 30% of the current annual consumption. Therefore, the performance of this reservoir conditions the thermoelectric generation and, as a result, the operation cost of the system. Broadly speaking, the operation of the system at minimum cost implies the determination of the volume of Lake Laja which must be generated over a given period of time, considering its incidence on present and future operation costs. Naturally, the foregoing presumes management adapted to the rest of the run-of-the-river power stations, optimum transfers in the reservoir power stations with smaller
ENERGY POLICY August 1988
Spot pricing in Chile's electricity sector
regulating capacity and utilization of the thermoelectric power stations according to growing marginal operation costs. In the case of Chile, hydrology plays a highly significant role and one should consider its stochastic nature. This problem has been approached through the formulation of an optimizing model based on dynamic programming. In addition to explicitly indicating the most convenient operation decision, the model enables the kWh shadow prices implicit in this optimum form of operating to be derived. The model determines an energy price for each quarter in the study period and each Lake Laja level. A typical table of values is obtained; see Table 1. The energy prices so determined are used directly for pricing energy transfers between generating companies: the level of Laka Laja is verified at the beginning of each quarter and the corresponding price remains in effect throughout that quarter. Due to the significant regulating capacity in the reservoir power stations in Chile one must keep in mind that the marginal cost of energy tends to be fairly constant not only during the day but likewise during weeks. Consequently, we can talk as a first approximation, of a single marginal cost for energy in the quarter. In order to provide end-users with more stable energy rates, which do not fluctuate from one quarter to another according to the Laja level, CNE determines every six months an energy price equal to the average of anticipated quarterly marginal costs over the next 36 months. This value is also a function of demand, price of coal, actual hydrology observed, and Laka Laja levels, but it is much more stable than the quarterly values used to price the transfers between generators. Automatic indexation clauses are applied within the six month period that the rates are in force, which are a function of the Lake Laja level, the opportunity price of coal, and the rate of exchange.
reservoir hydroelectric plants or gas turbine power plant, and the expansion development costs of the former are generally similar to the installation cost of the latter. For the pricing scheme in application, the peak power development cost was assimilated to the installation cost of 50 MW gas turbine. Although the identification of peak power with gas turbines is merely an approximation, it provides a good 'standard' reference to calculate the power charge. According to the marginalistic concept, power demands not coinciding with the peak of the system are not subject to power payment.
Determination of marginal power costs As already indicated, the peak power price can be estimated on the basis of the development cost of the units operating on the peak of the load curve of the system. Units operating at the peak are generally
Marginal cost pricing has been applied in Chile for more than seven years without any problems, excepting perhaps the one-year transition from the old to the new system. The main advantages of the new rates are: stimulating efficient electric power consumption; displacing demand to off-peak hours and increasing the load factor of the interconnected system and stimulating efficient electric power production. The scheme simulates a competitive market, with a rate similar to the equilibrium price. Such rate is independent from the particular costs of the individual generating companies, so that the companies bear their own eventual inefficiencies (excessive installed capacity, excessive operating and investment costs, etc); simplifying calculations, not
Table 1. Typical table of values. Price in US$million/kWh in 1980 Elevation Laja Lake in metres above sea level
JanuaryMarch
AprilJune
JulySeptember
OctoberDecember
H/> 1344 1344>H~> 1340 1340>H~> 1336 1336>H~> 1332 1332>H~> 1329
25.6 26.4 27.9 29.5 30.5
27.4 28.5 29.2 31.0 31.5
28.5 29.0 30.5 31.5 32.8
30,5 30.8 32.0 32.8 35.1
ENERGY POLICY August 1988
Marginal supply costs in the main substations of the interconnected system The previous paragraph described the calculation of marginal power and energy costs at the 220 kV level, at a point considered to represent the 'centre of gravity' of the interconnected system. This 'centre of gravity' coincides with the Santiago area. Because of the influence on marginal energy and power costs exhibited by the development of the transmission systems, both to the north (1 000 km) as well as to the south (1 000 km) of Santiago, a geographic modulation was introduced to the energy and power prices. This modulation is made starting from the prices in the Santiago area, considering power and energy flows in the main transmission system. A marginalistic criterion is applied, adding to (when the flow is from Santiago) or deducting from (when the flow is to Santiago) the power and energy base prices, the marginal transmission Josses occurring between Santiago and the main substations located in the main transmission system.
ADVANTAGES OF THE PRICING SYSTEM
373
Spot pricing in Chile's electricity sector
being based on the companies accounting. Immediate rate adjustments vis-a-vis changes in such key variables as rate of exchange, coal and oil prices, reservoir stocks level, etc; promoting competition as a result of free prices to end-users of more than 2 MW, and spot price sales between generators; and, providing adequate profits for the companies in the sector.
above), shall be priced according to the short-term marginal costs of the electric system. These costs shall be calculated by the operation-coordination entity or ELDC. As may be appreciated, the operation of the ELDC is governed by a regulation which complements the law, and whose content is described below.
ELDC operational framework ECONOMIC LOAD DISPATCH CENTRE Another fundamental pillar in the generation deconcentration policy is the operation of the ELDC. The basic objective considered by CNE in organizing the ELDC were to permit the access of any generator 3 to the interconnected system, and to harmonize the existence of a competitive environment at the production level with the safe and economic operation of the system. This required that first, market conditions be established for the sale of electric power by the generating companies, without discriminating among them, and by facilitating their access to the transmission system; and second, operating the interconnected system at minimum cost, which is important in order: to preserve the overall efficiency of the sector; maintain the coherence with the pricing system, based in the marginal operational costs of an electric system optimally sized and operated; guarantee, 'politically', that the coexistence of various generating companies can be accomplished at the same cost which would prevail in the event of only one generating entity operating efficiently; and, finally preserve reliability in the operation of the interconnected system. It can be seen that the basic criteria defining the ELDC are neutral from the point of view of the ownership and number of the generating companies, which may be state-owned, private or mixed.
Institutional framework The general framework in which the ELDC operates is broadly defined in the new General Law on Electric Services (DFL 1) enacted in 1982. In fact, this law states that the operation of interconnected electric power facilities shall be coordinated to attain the three objectives set out above. Such coordination shall comply with the rules and regulations established by CNE. In turn, the law provides that 'transfers of energy between electric power generating companies operating in synchronism with an electric system and resulting from the coordination standards (indicated
374
Essentially, the ELDC comprises a series of rules which must be observed by the generating companies supplying energy to the interconnected system. These rules establish: 1. 2. 3.
4. 5.
The criterion for the operation of the interconnected system. The criterion for pricing the energy transfers between generating companies. The criterion for pricing the power transfers between generating companies and for pricing the reserve installed capacity which make the system reliable. The payment criterion for the shared use of the transmission system. The coordination of the maintenance of the generating units.
The ELDC therefore has the structure of a 'generators" club'. The participation of a state entity (CNE) is minimum and mainly in relation to such aspects as supervising that the ELDC operates under the provisions and regulations of the electricity law and as arbitrator in the conflicts of interest arising between the members. The ELDC has been conceived to concern itself exclusively with the operation of the existing system, without establishing an explicit relation with the planning of generation-transmission works. It operates the system considering only the generating activity of each company, independently from the conditions in which the energy is marketed by each entity. In this respect, the ELDC does not consider the prices set forth in existing contracts with endclients. The generators may join the ELDC under different schemes; both directly as partner, or by establishing a power and energy sale contract with another generator which belongs to the ELDC. In this event, the ELDC considers both as a single generating entity and operates the units regardless of the contactual commercial conditions established between the parties. As previously indicated, the small interconnected generators are not required to join the ELDC. The ELDC is responsible for the medium-term (annual and monthly) as well as the short-term (weekly and
ENERGY POLICY August 1988
Spot pricing in Chile's electricity sector
daily) planning of the operation of the system, but not the exploitation in real-time. In addition, the ELDC controls the operation results and periodically records the prices and energy transfers between generators as well as the payments of the latter to the owners of the transmission system. The ELDC considers the reliability of the system as the first priority and minimizing the global operation cost as the second priority.
PH i(sklWh)QiCIPA P*I-- --"~',Q-A }~- ~
As previously indicated, the criterion adopted for the operation of the power stations - after the reliability of the service has been preserved consists in minimizing the discounted global operating cost of the system. Discounted costs must be considered since the existence of seasonal and interannual regulation reservoirs requires studying the operation over periods of time which may extend up to 10 years. The indicated criterion means that the ELDC acts independently from the particular preferences of each generator and takes its decisions on the basis of parameters which are acceptable to all participants, reservoir levels, prices of coal and of oil, demands, etc. Energy transfers between generators are priced according to the short-term marginal costs of the kWh measured at the substation at which the transfer has been carried out. The simplified example of a single production-consumption node, see Figure 1, depicts the operation of the scheme. Assume that (A), (B) and (C) are three generating companies having energy (GWh) supply contracts with their end-clients, for the following hour, in amounts of QA, QB and O respectively ((C) is a pure generator). The supply curves of each generator are CA, C, and Cc, respectively; in the short term, these curves coincide with the short-term marginal cost curves. Company (A) owns an hydraulic station (nil marginal cost) and three thermal units with increasing costs. Company (B) has an hydraulic station capable of generating G,, and a thermal sation which is very expensive to operate; while (C) has a thermal station capable of generating Gc GWh/hour. The aggregate supply curve of the system is obtained by adding these curves horizontally. Its intersection with the aggregate demand curve (QA + QB) indicates the operation point of the system. The price P* represents the short-term marginal cost of the system and is the equilibrium price which 'clears the market'. Through it one can identify in each chart the optimum generation GA, GB and Gc which balances ENERGY POLICY August 1988
P*l ...... i ..... --,,,~B P.....
'i
Pricing energy transfers between generators
]
QAGA E(GWh) Generator A
Pi .
.
.
.
.
.
.
i
GB QB E Generator B
IP |
"C j BIP Cc .
GC E GeneratorC
CA+CB+Cc .
.
.
J
,
GA+GB+Gc=QA+QB E Electric system A+B+C Figure 1. Operation of a single production - consumption node.
the demand QA -t- QB. As may be appreciated, in this case (C) (pure generator) must operate at full load; (A) generates an amount in excess of its own demand (GA - QA), and (B) generates with the hydro, but since it does not cover its own demand, it receives the amount QB - GB from the producers (A) and (C) (GA -- QA from (A), Gc from (C)). P* is the relevant price for the transfers from (C) to (B) and from (A) to (B). This price is independent from the contracts signed between (A) and (B) and their respective clients, a problem in which the ELDC is not involved. Theoretically, to meet the ELDC objectives, it would be enough for this entity to indicate at each instant the marginal costs of the system, each generator making decentralized operation decisions, generating until its cost is equivalent to P*.4 However, it is considered preferable for the ELDC to operate by instructing each generator as to how it should operate its stations, determining P* and evaluating at this price the amounts of transferred energy. The ELDC plans the medium- and shortterm optimum operation of the interconnected system and calculates the short-term marginal costs P* in the centre of gravity of the system, by applying the same mathematical model developed by CNE to 375
Spot pricing in Chile's electricity sector
calculate the rates at the generation level. The P* values are relatively stable throughout the day and the week; Chile has an important regulating capacity in the various reservoirs, and this tends to level the hourly marginal costs. The marginal costs in the different substations of the system where transfers occur between generators, are subsequently calculated by applying to P* the penalty factors referred to in the description of the pricing system.
Power transfers between generators It has been considered that power transfers between generators should be priced according to a criterion which meets the following conditions: •
•
•
•
•
Not discriminating between generators. Ensuring that some generators use the power of the other generators without due retribution. Pricing according to the economic merits of the available power, and not according to other merits such as for instance, the commissioning date of the power stations. Tending to attain economic efficiency, encouraging the installation of power only when required, and its adequate maintenance. Tending to produce a certain financial stability in the generating agents, to which effect transfers are defined ex-ante, early in the year, and not under the real operation conditions. Flexibility and simplicity in its application.
Since some of these aspects are mutually contradictory, the application of compromise formulas has been required. Each member of the E L D C is entitled to have contracts with clients for up to its available firm capacity, being required to contract the differences from the other members in the event of deficit. This difference is called 'deficit of firm capacity'. The maximum demand of the producer is defined as the maximum aggregate annual gross demand of all its clients, integrated in a 15-minute period. Such demand may exclude the demand belonging to interruptible contracts. The firm capacity of each producer is the maximum power which its generating units can contribute in the peak period of the system, with a reliability exceeding 95%, The peak period is defined as an important block of high demand hours. The service reliability is defined on a yearly basis and may fluctuate in actual practice between 95% and 98%, in order to balance the total contributions of hydro and thermoelectric energy with the energy demand of the system. The firm capacity of each one
376
of the various generating units is calculated early in the year on the basis of a probabilistic model which considers the mechanical unavailability of the unit and its contribution of guaranteed power in the block of high demand hours, for the pre-established reliability. There are some supplementary provisions which lead to a certain balance between the sum of the firm capacities of the E L D C members and the total maximum demand of the system. Consequently there is no excess firm capacity and this fact avoids instabilities in its marketing. On the other hand, the firm capacity transfer price between generators is fixed and it is equal to the power rate at production level in the corresponding exchange substations,
SHARED USE OF TRANSMISSION SYSTEMS It can be shown that the use of the instantaneous marginal costs of the kWh for pricing transfers of energy between generators covers the cost of transmission losses and moreover, produces a surplus which reimburses the transmission system owner for a fraction F of the investment and exploitation costs in lines and substations. This fraction depends on the economies of scale originating in the development of lines and in the extent to which these lines are used. 5 Therefore, it is necessary to supplement the annual amount received by the owner of the transmission system when his facilities are used by third-party power stations. To this effect, a connection fee is established. This fee is estimated as the proportion of the cost which corresponds to the capacity of the transmission system which had to be developed to enable the power station of the third party to discharge its energy. Payment of this fee enables the owner of the power station to sell, without additional tolls, his energy to end-clients anywhere in the section of the transmission system to whose financing he is contributing; in the event of power station without end-clients, it enables them to market their energy through the E L D C at a price equivalent to the short-term marginal cost at the injecting substations.
RESULTS OBTAINED The implemented mechanisms have permitted the orderly coexistence of the various existing generat-
ENERGY POLICY August 1988
Spot pricing in Chile's electricity sector
ing and distributing companies, and have facilitated the development of a competitive environment and the pursuit of efficiency. The reasonable returns on asset attained by the electric companies, the stability of the rules of the game, as well as the deconcentration and decentralization of the sector have induced private participation; 100% of the distribution is currently private; five small-to-medium-size hydroelectric power stations (up to 40 MW) have been sold to the private sector; the installed capacity has been increased in private power stations; 100% of the shares have been sold in one of the large generating companies and the privatization of 45% of the other larger generating company has been achieved. The pension funds, electric company workers, new clients (by way of contributions reimbursable in shares), insurance companies and the general public have played an important role in this privatization process. The participation of these investors has contributed to dampen pressures directed to regulate the rates politically, therefore providing stability to the entire institutional scheme. This environment has enormously facilitated the obtainment of loans from international credit institutions to develop the sector, as well as the internal financing through previously unused schemes: issue of shares and bonds to be placed among the public and the consumers. Undoubtedly, the decision to deconcentrate and privatize the electric power sector represented a serious challenge to the government, as it had to solve important technical, economic and institutional problems, and had to break down barriers
ENERGY POLICY August 1988
associated with a long tradition of centralism and statism in the area. It must be recognized, however, that the circumstantial opposition to the application of some aspects of these new policies did not prevent the permanent loyal cooperation and significant technical contribution of the companies in the sector. ~Marcel Boiteux, Ralph Turvey, among others. 2In the period 1980-85, this table of prices was regularly calculated by CNE and published in the Official Gazette, therefore having the nature of prices fixed by the authority. Starting 1985, upon the organization of the ELDC, the values came to be directly determined by the ELDC, applying the same methodology. 3power stations exceeding 60 MW. Smaller power stations may have direct contracts with bigger producers, or with end-clients, making the pertinent toll payments when using the transmission systems of third parties. '=This was the scheme established by CNE in 1980, that operated until the formation of the ELDC. The CNE calculated periodically the short-term marginal costs of the system as a function of the reservoir levels and the coal prices, publishing them in the Official Gazette. The generating companies operating their installations independently, generating up to the point in which their own marginal costs were equal to P*. This price was also used for the transfers between companies. Sin fact, upon adding during a given hour block the powers injected by the various generators priced at the marginal costs prevailing at the injection substations, the resulting values exceeds the sum of the power withdrawn by the different end consumers, priced at the marginal costs prevailing at the withdrawal substations. This difference is paid by the ELDC to the owners of the transmission systems; without economies of scale, this surplus would exactly cover the pertinent capital costs. Due to the presence of economies of scale, the surplus pays for only a fraction (about 50%) of the capital costs of existing lines and substations. Furthermore, this fraction is reduced in the event of underutilization of the lines; on the other hand, their overutilization could lead to a fraction > 1.
377
Setting up competitiveness and privatizing the power sector has been an important goal of Chilean energy policy since 1974. The new organization of the electric sector includes deconcentration of generating and distributing companies, a new marginal cost and spot pricing system, coordination of generating companies through an economic load dispatching centre (ELDC) and a scheme for sharing transmission lines. This paper describes why and how those tasks were carried out in Chile. Keywords:Competitiveness; Marginal cost tariffs; Spot pricing The Chilean electric power industry, which dates back to the closing two decades of the last century, was developed entirely by the private sector through the mid-1930s. Thereafter, and as a result of the internal effects of the world economic crisis and of growing state regulations, including the application of political criteria in electricity pricing, the private sector gradually abandoned the electricity business. Early in the 1940s, the state had to take over the development of this activity, through the organization of a large state-owned electric power corporation. Private participation in electric public utilities was reduced to a medium-size g e n e r a t i n g distribution company operating in the SantiagoValparaiso area, and a few distributing companies in central-southern Chile. The nationalization of the Santiago area company in 1970 increased the participation of the state in the Central Interconnected System to 98% in public service generation, 100% in transmission and 80% in distribution. The long tradition of state participation and centralism in the Chilean electric power sector since the 1940s, the successful management of the state-owned Empresa Nacional de Electricidad, and the public service Sebastian Bernstein is
Santiago, Chile.
with the National Energy Commission,
characteristic of this activity, bred the belief that this sector should necessarily be handled by the state in a centralized fashion. Given the natural monopoly characteristics of this activity, the impossibility of establishing competitive conditions, the necessity to regulate it severely, and the reluctance of the private sector to participate in it, there seemed to be no other solution. This paper describes the policies which have been applied in Chile to change this situation and to adapt the electric power sector to the open and competitive market economic system, established by the government at the end of 1973.
CHILEAN ENERGY STRATEGY AND THE NEW ELECTRIC POWER POLICY
The Chilean energy strategy aims at maximizing the welfare of the community by: •
•
establishing conditions of efficiency in the development and operation of the national energy system; and assigning to the state a subsidiary role.
Two keywords stand out here: efficiency and subsidiary. Efficiency is understood here according to the Pareto criterion, ie, optimal allocation of resources. In the Chilean context, efficiency is connected to the recognition of the role of the market as a basic mechanism in the correct allocation of resources. The necessity of deconcentrating, decentralizing and privatizing the activities and property of the energy companies is likewise recognized for the stability of the system. Subsidiarity basically implies state support to the more deprived sectors of the population through direct subsidies, without distorting the prices of goods and services. It also means that the state will
0301-4215/88/040369-09503.00 © 1988 Butterworth & Co (Publishers) Ltd
369
Spot pricing in Chile's eh'ctricity sector
perform entrepreneurial activities only when such activities cannot or will not be carried out by the private sector. Among the various mechanisms used in Chile to implement this energy policy are: •
•
• •
The coordination by the Comisi6n Nacional de Energfa (CNE) of the large investment decisions by the state-owned companies participating in the sector, with the objective of maximizing the benefit to the community. The design and implementation of institutional and legal adjustments in order to allow, first, the efficient management of state-owned companies, forcing them to operate under the same framework and conditions as the private enterprises; and second, the opening of opportunities for the private sector to participate in the activities of the sector, either through the organization of new companies or by acquiring equity in existing state-owned companies. The active participation of the state in evaluating energy resources, and a realistic price policy, which reflects the real opportunity value of energy goods and services.
It is important to point out that the Chilean strategy assigns an important role to pricing as a mechanism to attain the objectives of global efficiency and state subsidiarity. As a consequence, particular emphasis has been placed on establishing the conditions for them to correctly reflect the opportunity value of the various energy products. The Chilean economic system is open to foreign trade, with a low 15% import duty for all goods. Furthermore, it sustains a full importing and exporting freedom. Under these conditions, the prices of liquid and solid fuels have been deregulated since 1977 and the equilibrium prices reflect the opportunity costs to the country: import parity for products where domestic production is insufficient, export parity or internal marginal costs otherwise. Prices are only regulated in areas exhibiting monopolistic characteristics, such as electric power supply to small-size clients. Clearly if economic efficiency is the objective, the regulation criterion must be based on marginal supply costs. This assures full consistency in the price system within the sector, and also between the sector and the rest of the economy. Within this framework, the government, through the CNE developed and implemented a new electric power policy aimed at establishing the appropriate framework for competition and private participation in the sector. Its basic features included: 370
•
• •
•
•
•
• •
Design of a new price system on the basis of marginal supply costs, clearly identifying and separating the marginal costs for generation, transmission and distribution. The system establishes explicit generation to distribution sale prices, transfer prices between generating companies and, finally, rates applicable by distributing companies to small end-users. Freedom of prices for end-clients with power exceeding 2 MW. Explicit separation between the generationtransmission and the distribution activities. Three large (500 to 2 000 MW) and four medium (10 to 50 MW) generating companies, in addition to 21 regional distributing companies of different sizes (1 to 1 000 MW) are currently operating in the Central Interconnected System. Implementation of the large generating project by independent companies, owned by companies already operating in the electrical sector, private investors and direct state participation if necessary. Increased participation of consumers in financing the expansion of the sector, through financial contributions p r o rata to connected kW, reimbursable in shares of the electric companies involved. These contributions represent between 5% and 10% of the development cost of the sector. Design and implementation of an economic load dispatch centre (ELDC) to coordinate the operation of the generating companies with the purposes of; first, obtaining the minimum overall operating cost of the system; and second, assuring equitable conditions in marketing the energy produced by the various generating entities. Adoption of a new generation-transmission planning scheme. Full privatization of state-owned distributing companies and maximum possible sale of the state equity shares in the generating companies.
COMPETITION, DECONCENTRATION AND PRIVATE PARTICIPATION IN GENERATION Does it make sense to decentralize, to make it competitive, and to privatize the electric power generating activity? We believe that this question should be formulated the other way round: why centralize, over-regulate and nationalize this activity, if it is not necessary? The following premises support this approach: ENERGY POLICY August 1988
Spot pricing in Chile's electricity sector
1. In Chile, no economies of scale originate at the generation level, as shown by comparing the investment costs of hydroelectric power projects ranging between 40 through to 600 MW. This is also supported by the successful application of a pricing system based strictly on marginal cost without surplus or deficit in capital return for the generating companies. Without economies of scale at the generating level there is no advantage in having a single company; however, certain problems need solving: coordinating investment decisions (a planning issue); coordinating the operation and determination of an efficient transfer price system between generators; and establishing shared use of transmission lines. The planning issue has been solved by the following scheme: as long as the companies are mostly state-owned, studies and planning decisions regarding the development of large generating power stations and transmission lines are made by the CNE on the basis of minimum discounted investment + operation + electric system failure costs. Potential projects are submitted by the various companies; CNE applies planning models known and acceptable to the companies, and selects the most economical alternatives. Decisions regarding small generating power stations (under 60 MW) are taken independently by the individual companies. To the extent that the generating companies are privatized, the planning function is entrusted to an Inter-Company Planning Committee, regulated by a pre-established set of rules, in which CNE acts as an observer and arbitrator in the event of conflicts. The operating coordination requirements, transfer prices and sharing of transmission systems are discussed in more detail in a later section. 2. As in any activity, private participation in the generating business is always possible if there exists a demand for electricity, profitable projects, investment selection and rational pricing policies based on objective technical and economic criteria, and stable rules of the game. This stability requires, in turn, the diversified ownership of the facilities and the participation of powerful corporate investors, such as pension fund companies and the workers in the electrical companies. 3. Competitiveness at the generation level is exhibited through the different ways and criteria used by the various companies in addressing issues such as:
•
• •
obtained by expanding the range of these options. Ways of project study, financing and implementation: new approaches are obtained in relation to the various ways of implementing generation projects than under the traditional schemes in state-owned companies. Competition is generated likewise in attracting private capital. Power station operation and maintenance methods. Energy marketing: as we will see later, the fact that supply prices to large industrial and mining clients are not regulated opens a wide field to competition.
Furthermore, the deconcentration and privatization, even partial, of the property of the generation companies, has advantages from the point of view of the stability of the rules of the game, since the regulating authorities do not face a single interlocutor and have other references available. This is particularly important for the problem of investment and management control while the state is involved in the property of these companies. 4. The diversity of companies and private participation represent an adequate protection against pressure groups lobbying for arbitrary price reductions. Large state monopolies are more easily victims of such pressures. There are more technological options and diversification of work opportunities. Greater possibilities of attracting private investment in medium-size companies than in extremely large enterprises. This is particularly valid in small countries and in public service sectors with a long tradition of state participation. The indicated factors are precisely the ones that motivated the policy of deconcentration and regionalization of the electric power sector in Chile. As we said, a basic pillar of this policy is the establishment of an efficient and stable pricing system between the various parts of the system: generator-generator, generator-distributor, generator-end-client, and distributor-end-client. This price system must be based necessarily on objective technical and economic criteria and on precise calculation mechanisms, if the target is private participation and long-term stability in the electric power sector, The following section contains a general description of the pricing system.
Preparation of new projects: more alternative projects can be identified and produced by a number of different companies than by one firm alone. Unquestionable advantages can be
ENERGY POLICY August 1988
371
Spot pricing in Chile's electricity sector
CONCEPTUAL BASES OF THE PRICING SYSTEM The electric power pricing system designed by CNE in 1980 comprises first, the determination of the marginal cost of peak power and energy at the generating level (220 kV), in the 'centre of gravity' of the electric system. The marginal costs in the main substations of the system are subsequently determined by adding to (or deducting from, as appropriate) these values the marginal losses in the transmission systems. The energy costs represent the marginal short-term costs (spot prices). The pricing system is used to: directly price transfers between generators (spot prices, which are determined by the ELDC); as a reference for the free-price supplies by the generators to their end-clients exceeding 2 MW; as a regulated rate for the sales by the generators to the distributing companies. The average of the marginal costs projected for the following 36 months is applied to avoid spot price fluctuations. This provides the power and energy prices at each substation in the system, the so-called 'node prices'. Finally, the rates for the end-clients of distributing companies are calculated on the basis of the 'node prices'. These are binomial rates: the peak power price is equal to the power node price plus typical distribution costs, expressed per kW (investment + network operation + losses); the energy price is equal to the energy node price plus energy losses in the distribution network. This scheme does not contemplate different rates by kind of consumer, but only by the voltage at which it is measured and by the measurement system (measurement of energy only, of energy and maximum demand, of energy and maximum demand in and out of peak hours.)
Marginal supply costs at the centre of gravity of the system The theoretical bases for marginal cost pricing have been set forth and widely discussed by various authors.~ However, there is a controversial aspect: the coherence between financial equilibrium and marginal cost sales in electric power generating companies, upon minimizing the total production cost, that is to say, when one is on the total long-term cost curve without the presence of noticeable economy of scale effects. Pricing energy at the instantaneous marginal cost produces returns in excess of the mean variable operation costs but that are not sufficient to finance the capital outlays of the
372
generation installations. However, it is possible to show that under optimum conditions, ie when the generating structure is permanently optimized vis-avis demand, the returns obtained from the sale of all the energy at the instantaneous marginal cost, plus returns from the sale of all power at the development cost of the appropriate units to provide peak power, are equivalent to the cost of capital plus the total operation costs of the generating plants. The permanent optimization assumption implies the nonexistence of significant economies or diseconomies of scale since, if they occur, there would be economic losses or profits by pricing at marginal cost. However, in the case of Chile it is possible to show that the indicated assumption is met. This has enabled deregulation of supply prices to large industrial clients. The pricing system developed in Chile is based on the determination of those marginal costs of energy and power supply calculated for an optimum programme of expansion of the electric system. It should be stressed that prices based on marginal costs are efficient from an economic point of view and enable the generating companies to make decentralized operational decisions that tend to a global optimum. In general terms, the procedure adopted is as follows: determination of the optimum electric system expansion programme; determination of the global operation of the system that minimizes the total operational costs; and calculation of the short-term marginal costs of energy corresponding to the optimum operation of the system. Determination of the marginal energy costs Generation in the interconnected system is mainly hydroelectric, supplemented by thermoelectric generation from coal and petroleum power stations. The hydroelectric power stations include run-of-theriver, reservoir with small regulating capacity and those associated with the Lake Laja reservoir, whose interannual regulating capacity exceeds 30% of the current annual consumption. Therefore, the performance of this reservoir conditions the thermoelectric generation and, as a result, the operation cost of the system. Broadly speaking, the operation of the system at minimum cost implies the determination of the volume of Lake Laja which must be generated over a given period of time, considering its incidence on present and future operation costs. Naturally, the foregoing presumes management adapted to the rest of the run-of-the-river power stations, optimum transfers in the reservoir power stations with smaller
ENERGY POLICY August 1988
Spot pricing in Chile's electricity sector
regulating capacity and utilization of the thermoelectric power stations according to growing marginal operation costs. In the case of Chile, hydrology plays a highly significant role and one should consider its stochastic nature. This problem has been approached through the formulation of an optimizing model based on dynamic programming. In addition to explicitly indicating the most convenient operation decision, the model enables the kWh shadow prices implicit in this optimum form of operating to be derived. The model determines an energy price for each quarter in the study period and each Lake Laja level. A typical table of values is obtained; see Table 1. The energy prices so determined are used directly for pricing energy transfers between generating companies: the level of Laka Laja is verified at the beginning of each quarter and the corresponding price remains in effect throughout that quarter. Due to the significant regulating capacity in the reservoir power stations in Chile one must keep in mind that the marginal cost of energy tends to be fairly constant not only during the day but likewise during weeks. Consequently, we can talk as a first approximation, of a single marginal cost for energy in the quarter. In order to provide end-users with more stable energy rates, which do not fluctuate from one quarter to another according to the Laja level, CNE determines every six months an energy price equal to the average of anticipated quarterly marginal costs over the next 36 months. This value is also a function of demand, price of coal, actual hydrology observed, and Laka Laja levels, but it is much more stable than the quarterly values used to price the transfers between generators. Automatic indexation clauses are applied within the six month period that the rates are in force, which are a function of the Lake Laja level, the opportunity price of coal, and the rate of exchange.
reservoir hydroelectric plants or gas turbine power plant, and the expansion development costs of the former are generally similar to the installation cost of the latter. For the pricing scheme in application, the peak power development cost was assimilated to the installation cost of 50 MW gas turbine. Although the identification of peak power with gas turbines is merely an approximation, it provides a good 'standard' reference to calculate the power charge. According to the marginalistic concept, power demands not coinciding with the peak of the system are not subject to power payment.
Determination of marginal power costs As already indicated, the peak power price can be estimated on the basis of the development cost of the units operating on the peak of the load curve of the system. Units operating at the peak are generally
Marginal cost pricing has been applied in Chile for more than seven years without any problems, excepting perhaps the one-year transition from the old to the new system. The main advantages of the new rates are: stimulating efficient electric power consumption; displacing demand to off-peak hours and increasing the load factor of the interconnected system and stimulating efficient electric power production. The scheme simulates a competitive market, with a rate similar to the equilibrium price. Such rate is independent from the particular costs of the individual generating companies, so that the companies bear their own eventual inefficiencies (excessive installed capacity, excessive operating and investment costs, etc); simplifying calculations, not
Table 1. Typical table of values. Price in US$million/kWh in 1980 Elevation Laja Lake in metres above sea level
JanuaryMarch
AprilJune
JulySeptember
OctoberDecember
H/> 1344 1344>H~> 1340 1340>H~> 1336 1336>H~> 1332 1332>H~> 1329
25.6 26.4 27.9 29.5 30.5
27.4 28.5 29.2 31.0 31.5
28.5 29.0 30.5 31.5 32.8
30,5 30.8 32.0 32.8 35.1
ENERGY POLICY August 1988
Marginal supply costs in the main substations of the interconnected system The previous paragraph described the calculation of marginal power and energy costs at the 220 kV level, at a point considered to represent the 'centre of gravity' of the interconnected system. This 'centre of gravity' coincides with the Santiago area. Because of the influence on marginal energy and power costs exhibited by the development of the transmission systems, both to the north (1 000 km) as well as to the south (1 000 km) of Santiago, a geographic modulation was introduced to the energy and power prices. This modulation is made starting from the prices in the Santiago area, considering power and energy flows in the main transmission system. A marginalistic criterion is applied, adding to (when the flow is from Santiago) or deducting from (when the flow is to Santiago) the power and energy base prices, the marginal transmission Josses occurring between Santiago and the main substations located in the main transmission system.
ADVANTAGES OF THE PRICING SYSTEM
373
Spot pricing in Chile's electricity sector
being based on the companies accounting. Immediate rate adjustments vis-a-vis changes in such key variables as rate of exchange, coal and oil prices, reservoir stocks level, etc; promoting competition as a result of free prices to end-users of more than 2 MW, and spot price sales between generators; and, providing adequate profits for the companies in the sector.
above), shall be priced according to the short-term marginal costs of the electric system. These costs shall be calculated by the operation-coordination entity or ELDC. As may be appreciated, the operation of the ELDC is governed by a regulation which complements the law, and whose content is described below.
ELDC operational framework ECONOMIC LOAD DISPATCH CENTRE Another fundamental pillar in the generation deconcentration policy is the operation of the ELDC. The basic objective considered by CNE in organizing the ELDC were to permit the access of any generator 3 to the interconnected system, and to harmonize the existence of a competitive environment at the production level with the safe and economic operation of the system. This required that first, market conditions be established for the sale of electric power by the generating companies, without discriminating among them, and by facilitating their access to the transmission system; and second, operating the interconnected system at minimum cost, which is important in order: to preserve the overall efficiency of the sector; maintain the coherence with the pricing system, based in the marginal operational costs of an electric system optimally sized and operated; guarantee, 'politically', that the coexistence of various generating companies can be accomplished at the same cost which would prevail in the event of only one generating entity operating efficiently; and, finally preserve reliability in the operation of the interconnected system. It can be seen that the basic criteria defining the ELDC are neutral from the point of view of the ownership and number of the generating companies, which may be state-owned, private or mixed.
Institutional framework The general framework in which the ELDC operates is broadly defined in the new General Law on Electric Services (DFL 1) enacted in 1982. In fact, this law states that the operation of interconnected electric power facilities shall be coordinated to attain the three objectives set out above. Such coordination shall comply with the rules and regulations established by CNE. In turn, the law provides that 'transfers of energy between electric power generating companies operating in synchronism with an electric system and resulting from the coordination standards (indicated
374
Essentially, the ELDC comprises a series of rules which must be observed by the generating companies supplying energy to the interconnected system. These rules establish: 1. 2. 3.
4. 5.
The criterion for the operation of the interconnected system. The criterion for pricing the energy transfers between generating companies. The criterion for pricing the power transfers between generating companies and for pricing the reserve installed capacity which make the system reliable. The payment criterion for the shared use of the transmission system. The coordination of the maintenance of the generating units.
The ELDC therefore has the structure of a 'generators" club'. The participation of a state entity (CNE) is minimum and mainly in relation to such aspects as supervising that the ELDC operates under the provisions and regulations of the electricity law and as arbitrator in the conflicts of interest arising between the members. The ELDC has been conceived to concern itself exclusively with the operation of the existing system, without establishing an explicit relation with the planning of generation-transmission works. It operates the system considering only the generating activity of each company, independently from the conditions in which the energy is marketed by each entity. In this respect, the ELDC does not consider the prices set forth in existing contracts with endclients. The generators may join the ELDC under different schemes; both directly as partner, or by establishing a power and energy sale contract with another generator which belongs to the ELDC. In this event, the ELDC considers both as a single generating entity and operates the units regardless of the contactual commercial conditions established between the parties. As previously indicated, the small interconnected generators are not required to join the ELDC. The ELDC is responsible for the medium-term (annual and monthly) as well as the short-term (weekly and
ENERGY POLICY August 1988
Spot pricing in Chile's electricity sector
daily) planning of the operation of the system, but not the exploitation in real-time. In addition, the ELDC controls the operation results and periodically records the prices and energy transfers between generators as well as the payments of the latter to the owners of the transmission system. The ELDC considers the reliability of the system as the first priority and minimizing the global operation cost as the second priority.
PH i(sklWh)QiCIPA P*I-- --"~',Q-A }~- ~
As previously indicated, the criterion adopted for the operation of the power stations - after the reliability of the service has been preserved consists in minimizing the discounted global operating cost of the system. Discounted costs must be considered since the existence of seasonal and interannual regulation reservoirs requires studying the operation over periods of time which may extend up to 10 years. The indicated criterion means that the ELDC acts independently from the particular preferences of each generator and takes its decisions on the basis of parameters which are acceptable to all participants, reservoir levels, prices of coal and of oil, demands, etc. Energy transfers between generators are priced according to the short-term marginal costs of the kWh measured at the substation at which the transfer has been carried out. The simplified example of a single production-consumption node, see Figure 1, depicts the operation of the scheme. Assume that (A), (B) and (C) are three generating companies having energy (GWh) supply contracts with their end-clients, for the following hour, in amounts of QA, QB and O respectively ((C) is a pure generator). The supply curves of each generator are CA, C, and Cc, respectively; in the short term, these curves coincide with the short-term marginal cost curves. Company (A) owns an hydraulic station (nil marginal cost) and three thermal units with increasing costs. Company (B) has an hydraulic station capable of generating G,, and a thermal sation which is very expensive to operate; while (C) has a thermal station capable of generating Gc GWh/hour. The aggregate supply curve of the system is obtained by adding these curves horizontally. Its intersection with the aggregate demand curve (QA + QB) indicates the operation point of the system. The price P* represents the short-term marginal cost of the system and is the equilibrium price which 'clears the market'. Through it one can identify in each chart the optimum generation GA, GB and Gc which balances ENERGY POLICY August 1988
P*l ...... i ..... --,,,~B P.....
'i
Pricing energy transfers between generators
]
QAGA E(GWh) Generator A
Pi .
.
.
.
.
.
.
i
GB QB E Generator B
IP |
"C j BIP Cc .
GC E GeneratorC
CA+CB+Cc .
.
.
J
,
GA+GB+Gc=QA+QB E Electric system A+B+C Figure 1. Operation of a single production - consumption node.
the demand QA -t- QB. As may be appreciated, in this case (C) (pure generator) must operate at full load; (A) generates an amount in excess of its own demand (GA - QA), and (B) generates with the hydro, but since it does not cover its own demand, it receives the amount QB - GB from the producers (A) and (C) (GA -- QA from (A), Gc from (C)). P* is the relevant price for the transfers from (C) to (B) and from (A) to (B). This price is independent from the contracts signed between (A) and (B) and their respective clients, a problem in which the ELDC is not involved. Theoretically, to meet the ELDC objectives, it would be enough for this entity to indicate at each instant the marginal costs of the system, each generator making decentralized operation decisions, generating until its cost is equivalent to P*.4 However, it is considered preferable for the ELDC to operate by instructing each generator as to how it should operate its stations, determining P* and evaluating at this price the amounts of transferred energy. The ELDC plans the medium- and shortterm optimum operation of the interconnected system and calculates the short-term marginal costs P* in the centre of gravity of the system, by applying the same mathematical model developed by CNE to 375
Spot pricing in Chile's electricity sector
calculate the rates at the generation level. The P* values are relatively stable throughout the day and the week; Chile has an important regulating capacity in the various reservoirs, and this tends to level the hourly marginal costs. The marginal costs in the different substations of the system where transfers occur between generators, are subsequently calculated by applying to P* the penalty factors referred to in the description of the pricing system.
Power transfers between generators It has been considered that power transfers between generators should be priced according to a criterion which meets the following conditions: •
•
•
•
•
Not discriminating between generators. Ensuring that some generators use the power of the other generators without due retribution. Pricing according to the economic merits of the available power, and not according to other merits such as for instance, the commissioning date of the power stations. Tending to attain economic efficiency, encouraging the installation of power only when required, and its adequate maintenance. Tending to produce a certain financial stability in the generating agents, to which effect transfers are defined ex-ante, early in the year, and not under the real operation conditions. Flexibility and simplicity in its application.
Since some of these aspects are mutually contradictory, the application of compromise formulas has been required. Each member of the E L D C is entitled to have contracts with clients for up to its available firm capacity, being required to contract the differences from the other members in the event of deficit. This difference is called 'deficit of firm capacity'. The maximum demand of the producer is defined as the maximum aggregate annual gross demand of all its clients, integrated in a 15-minute period. Such demand may exclude the demand belonging to interruptible contracts. The firm capacity of each producer is the maximum power which its generating units can contribute in the peak period of the system, with a reliability exceeding 95%, The peak period is defined as an important block of high demand hours. The service reliability is defined on a yearly basis and may fluctuate in actual practice between 95% and 98%, in order to balance the total contributions of hydro and thermoelectric energy with the energy demand of the system. The firm capacity of each one
376
of the various generating units is calculated early in the year on the basis of a probabilistic model which considers the mechanical unavailability of the unit and its contribution of guaranteed power in the block of high demand hours, for the pre-established reliability. There are some supplementary provisions which lead to a certain balance between the sum of the firm capacities of the E L D C members and the total maximum demand of the system. Consequently there is no excess firm capacity and this fact avoids instabilities in its marketing. On the other hand, the firm capacity transfer price between generators is fixed and it is equal to the power rate at production level in the corresponding exchange substations,
SHARED USE OF TRANSMISSION SYSTEMS It can be shown that the use of the instantaneous marginal costs of the kWh for pricing transfers of energy between generators covers the cost of transmission losses and moreover, produces a surplus which reimburses the transmission system owner for a fraction F of the investment and exploitation costs in lines and substations. This fraction depends on the economies of scale originating in the development of lines and in the extent to which these lines are used. 5 Therefore, it is necessary to supplement the annual amount received by the owner of the transmission system when his facilities are used by third-party power stations. To this effect, a connection fee is established. This fee is estimated as the proportion of the cost which corresponds to the capacity of the transmission system which had to be developed to enable the power station of the third party to discharge its energy. Payment of this fee enables the owner of the power station to sell, without additional tolls, his energy to end-clients anywhere in the section of the transmission system to whose financing he is contributing; in the event of power station without end-clients, it enables them to market their energy through the E L D C at a price equivalent to the short-term marginal cost at the injecting substations.
RESULTS OBTAINED The implemented mechanisms have permitted the orderly coexistence of the various existing generat-
ENERGY POLICY August 1988
Spot pricing in Chile's electricity sector
ing and distributing companies, and have facilitated the development of a competitive environment and the pursuit of efficiency. The reasonable returns on asset attained by the electric companies, the stability of the rules of the game, as well as the deconcentration and decentralization of the sector have induced private participation; 100% of the distribution is currently private; five small-to-medium-size hydroelectric power stations (up to 40 MW) have been sold to the private sector; the installed capacity has been increased in private power stations; 100% of the shares have been sold in one of the large generating companies and the privatization of 45% of the other larger generating company has been achieved. The pension funds, electric company workers, new clients (by way of contributions reimbursable in shares), insurance companies and the general public have played an important role in this privatization process. The participation of these investors has contributed to dampen pressures directed to regulate the rates politically, therefore providing stability to the entire institutional scheme. This environment has enormously facilitated the obtainment of loans from international credit institutions to develop the sector, as well as the internal financing through previously unused schemes: issue of shares and bonds to be placed among the public and the consumers. Undoubtedly, the decision to deconcentrate and privatize the electric power sector represented a serious challenge to the government, as it had to solve important technical, economic and institutional problems, and had to break down barriers
ENERGY POLICY August 1988
associated with a long tradition of centralism and statism in the area. It must be recognized, however, that the circumstantial opposition to the application of some aspects of these new policies did not prevent the permanent loyal cooperation and significant technical contribution of the companies in the sector. ~Marcel Boiteux, Ralph Turvey, among others. 2In the period 1980-85, this table of prices was regularly calculated by CNE and published in the Official Gazette, therefore having the nature of prices fixed by the authority. Starting 1985, upon the organization of the ELDC, the values came to be directly determined by the ELDC, applying the same methodology. 3power stations exceeding 60 MW. Smaller power stations may have direct contracts with bigger producers, or with end-clients, making the pertinent toll payments when using the transmission systems of third parties. '=This was the scheme established by CNE in 1980, that operated until the formation of the ELDC. The CNE calculated periodically the short-term marginal costs of the system as a function of the reservoir levels and the coal prices, publishing them in the Official Gazette. The generating companies operating their installations independently, generating up to the point in which their own marginal costs were equal to P*. This price was also used for the transfers between companies. Sin fact, upon adding during a given hour block the powers injected by the various generators priced at the marginal costs prevailing at the injection substations, the resulting values exceeds the sum of the power withdrawn by the different end consumers, priced at the marginal costs prevailing at the withdrawal substations. This difference is paid by the ELDC to the owners of the transmission systems; without economies of scale, this surplus would exactly cover the pertinent capital costs. Due to the presence of economies of scale, the surplus pays for only a fraction (about 50%) of the capital costs of existing lines and substations. Furthermore, this fraction is reduced in the event of underutilization of the lines; on the other hand, their overutilization could lead to a fraction > 1.
377