Tariff Increases and the Future of Energy: What Lies Ahead?
In 2016; Chile experienced a historic moment when the electricity tender managed to reduce prices by 63%. The authorities at the time assured that by 2021 electricity tariffs would fall by 20%. However; these promises
were not fulfilled; and there are several reasons for this discrepancy.
Despite significant growth in the renewable energy sector; no reductions in electricity tariffs are expected this decade. The more than US$6.5 billion in debt owed by generators and the lack of infrastructure to transmit renewable energy; mainly solar and wind; to the main consumption centers are key factors affecting this outlook.
In terms of tariff stabilisation; a total of US$7.212 billion has been committed; distributed among various funds and charges. The share of Non-Conventional Renewable Energy (NCRE) contracts is still low; representing only 23% of current contracts. NCRE has helped mitigate increases in electricity bills; and as NCRE-based contracts come into effect; the goal of providing safe and clean energy at competitive prices will be achieved.
Adjustments in electricity prices for regulated customers are estimated at 57% for households and 39% for businesses. This increase has consequences for inflation; which threatens production and logistics costs; affecting margins. According to the Central Bank; the expected impact on inflation over one year due to the rise in electricity tariffs is estimated at 145 basis points; 122 of which are direct and 23 are indirect; taking into account the indirect effect (transfer of higher costs from companies; price indexation to past inflation; changes in the purchasing power
of households; substitution effect; among others).
For example; the mining sector; Chile's main source of income; will see a considerable increase; representing a 19% difference compared to mining operations in other countries. In 2023; the cost was US$ 107 per MWh; while in the rest of the countries that extract copper; the average cost per hour was US$ 90. In addition to the cost to 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 had immediate social and political repercussions; but it is not yet complete.
The electricity market in Chile is characterised by being a natural monopoly; regulated by bodies such as the Superintendency of Electricity and Fuels (SEC) and the Ministry of Energy. There are significant barriers to entry for its management; such as investment and the need to have a significant number of customers for the business to be profitable for the various players; which makes it more convenient to have fewer suppliers.
Components of the Chilean Electricity Market
The electricity market is divided into three main links: generation; transmission and distribution. Generation; which accounts for approximately 70% of the final cost; is carried out by companies that produce electricity from various sources such as water; wind; sun and coal. Transmission; which accounts for 20% of the final cost; is responsible for carrying energy from the points of generation to the cities. Finally; distribution; which represents only 10% of the cost; carries electricity directly to homes.
Energy Needs of Companies in Chile
At first glance; it may seem that only the cost is relevant; but many general and financial managers express additional needs such as control and reporting; ongoing advice; definition of purchasing strategies; contract negotiation and risk reduction/hedging.
At ERA Group; we have experience in countless projects to optimise energy procurement and
consumption; a value that we have passed on to our customers.
