Rising Rates and the Future of Energy: What Lies Ahead?
In 2016, Chile experienced a historic moment when an electricity tender succeeded in reducing prices by 63%. Authorities at the time assured the public that electricity rates would drop by 20% by 2021. However, these promises were not fulfilled, and several factors explain this discrepancy.
Despite significant growth in the renewable energy sector, no reductions in electricity rates are expected this decade. The more than US$6.5 billion in debt held by power generators and the lack of infrastructure to transmit renewable energy—primarily solar and wind—to major consumption centers are key factors affecting this outlook.
Regarding rate stabilization, a total of US$7.212 billion has been committed, distributed among various funds and charges. The share of Non-Conventional Renewable Energy (NCRE) contracts remains low, accounting for only 23% of current contracts. NCRE has helped mitigate increases in electricity bills, and as NCRE-based contracts come into effect, the goal of providing secure and clean energy at competitive prices will be achieved.
Adjustments to electricity rates for regulated customers are estimated at 57% for households and 39% for businesses. This increase has implications for inflation, which threatens production and logistics costs, impacting margins. According to the Central Bank, the expected impact on inflation over one year due to the rise in electricity rates is estimated at 145 basis points, with 122 being direct and 23 indirect, which account for the indirect effect (pass-through of higher business costs, price indexation to past inflation, changes in household purchasing power, substitution effect, among others).
For example, the mining sector, Chile’s main source of revenue, will see a significant increase, representing a 19% difference compared to mining operations in other countries. In 2023, the cost was US$107 per MWh, while in other copper-producing countries, the average hourly cost was US$90. In addition to the cost implications for companies in the sector, there is concern about how this may affect new investment projects.
The first of three increases in electricity rates took effect in July 2024. This measure immediately generated social and political repercussions, but it is not yet complete.
Chile’s electricity market is characterized as a natural monopoly, regulated by agencies such as the Superintendency of Electricity and Fuels (SEC) and the Ministry of Energy. There are significant barriers to entry, such as the investment required and the need to have a substantial number of customers for the business to be profitable for the various stakeholders, which makes it more advantageous to have fewer suppliers.
Components of the Chilean Electricity Market
The electricity market is divided into three main segments: generation, transmission, and distribution. Generation, which accounts for approximately 70% of the final cost, is handled by companies that produce electricity using various sources such as water, wind, solar, and coal. Transmission, which contributes 20% to the final cost, is responsible for carrying the energy from generation points to cities. Finally, distribution, which accounts for only 10% of the cost, delivers electricity directly to households.
Energy Needs of Companies in Chile
At first glance, it might seem that only cost is relevant, but many general and financial managers express additional needs such as control and reporting, ongoing consulting, defining purchasing strategies, contract negotiation, and risk reduction/hedging.
At ERA Group, we have experience in countless projects to optimize energy procurement and consumption—value that we have passed on to our clients.
