1. LIBERALIZATION OF THE CHILEAN ELECTRICITY SYSTEM AND ITS EFFECTS ON ENVIRONMENTAL PERFORMANCE Hugh Rudnick, P.Universidad Católica de Chile, Departamento de Ingeniería Eléctrica. Raúl O’Ryan, Universidad de Chile, Departamento de Ingeniería Industrial. Rodrigo Bravo, Universidad de Chile, Departamento de Ingeniería Industrial. GRENELEM PROJECT Santiago, Chile, September 2001 Universidad de ChilePontificia Universidad Católica de Chile

2. SING (800 km) SIC (2200 km) AISEN MAGALLANES Universidad de ChilePontificia Universidad Católica de Chile Main Characteristics (2000): Continental surface: 756626 km² Population : 15 millions National Consumption : 39142 GWh Peak Demand : 5800 MW Installed Capacity: 10080 MW Frequency: 50 Hz Transmission Systems : 66 kV, 110 kV, 154 kV, 220 kV y 500 kV Interconnected Systems: (SING, SIC, AISEN, MAGALLANES) CHILE’S ELECTRICAL MARKET

3. CHILE’S ELECTRICAL SYSTEMS SIC (Sistema Interconectado Central) Maximum demand 2000: 4.576 MW Installed generation capacity: 6.646 MW Percentage of thermal generation: 36% 93% population, industrial and domestic consumption SING (Sistema Interconectado Norte Grande) Maximum demand 2000: 1.211 MW Installed generation capacity : 3.352 MW Percentage of thermal generation : 99,6% Large consumers (10 correspond to 75% of demand, largest client 25% total demand) Universidad de ChilePontificia Universidad Católica de Chile

4. COLOMBIA 1994 PERU 1993 BOLIVIA 1994 CHILE 1982 ARGENTINA 1992 BRAZIL 1998 CENTRAL AMERICA & PANAMA 1997-9 Pioneering regulatory changes in the electrical sector Universidad de ChilePontificia Universidad Católica de Chile

5. Sistemas competitivos Procesos de reestructuración avanzados Primeras etapas de procesos de reestructuración Fuente: R. Palma, U.Ch. Universidad de ChilePontificia Universidad Católica de Chile

6. FuelcoGasco Genco Sellco Gridco Waterco Fuelco Genco Sellco Gridco Brokeco Buyco Lineco Brokeco Buyco Lineco Disco Cons Disco SEGMENTATION OF THE INDUSTRY competitive and regulated (William Hogan, Harvard) DISTRIBUTION Poolco/Marketco GENERATION TRANSMISSION Universidad de ChilePontificia Universidad Católica de Chile

7. *wholesale market deregulation (unregulated prices for large consumers) *competition at generation level with centralized generation dispatch (Poolco model) -Chile, Bolivia, Peru, Brazil, Central America - audited costs -Argentina- bids with caps -Colombia- unrestricted bids *short term marginal cost based schemes ELECTRICITY MARKET REFORMS Universidad de ChilePontificia Universidad Católica de Chile

8. *two part price scheme -short term energy marginal cost -capacity pricing (adequacy signal) *nodal pricing (generation-transmission interaction) *financial bilateral contracts (non physical) ELECTRICITY MARKET REFORMS Universidad de ChilePontificia Universidad Católica de Chile

9. *regulation in transmission and distribution *transmission open access regulation, global allocation of network costs, use of system approach, concession required *incentive based regulation in distribution (yard stick competition, price cap), concession required, obligation to serve, quality of service regulated ELECTRICITY MARKET REFORMS Universidad de ChilePontificia Universidad Católica de Chile

10. Governance CDEC Generators Transmiters Distribuitors Large users Ministry Economy Environmental body Local governments Small users Antitrust body SECCNE Universidad de ChilePontificia Universidad Católica de Chile

11. Chile- yearly growth of energy demand High load growth Universidad de ChilePontificia Universidad Católica de Chile

12. Investment in the SIC Source: CNE Chile Universidad de ChilePontificia Universidad Católica de Chile

13. Losses (technical and non technical) Universidad de ChilePontificia Universidad Católica de Chile

14. Prices decreasing Universidad de ChilePontificia Universidad Católica de Chile

15. WEAKNESSES -High horizontal integration (generation) -Vertical integration (generation-transmission-distribution) -Efficiency increases not transfered to consumers -Governance problems in pool -Transmission regulation faces difficulties

16. Universidad de ChilePontificia Universidad Católica de Chile Evolution of Installed Capacity and Energy Production

17. Universidad de ChilePontificia Universidad Católica de Chile Evolution of Installed Capacity and Energy Production (cont.)

18. Universidad de ChilePontificia Universidad Católica de Chile Evolution of Energy Use and Emissions

19. Percentage of gross hydroelectric and thermoelectric generation Universidad de ChilePontificia Universidad Católica de Chile Evolution of Energy Use and Emissions

20. Universidad de ChilePontificia Universidad Católica de Chile Evolution of Energy Use and Emissions

21. REGULATORY FRAMEWORKS THAT AFFECT THE ENVIRONMENTAL IMPACT OF THE ELECTRICAL SECTOR Electrical Law Indicative planning: not a guide Power plant dispatch: favors polluting sources Environmental Legislation and the EIA Law 19300: Environmental Framework Law Law 3.133 EIA Universidad de ChilePontificia Universidad Católica de Chile

22. EIA Projects

23. ESSENTIAL ISSUES THAT LINK THE ENVIRONMENT AND THE DEREGULATED ELECTRICAL SECTOR Development of the generation infrastructure Plant technology Thermal plant location Hydro plant development Thermal plant fuels System operation Universidad de ChilePontificia Universidad Católica de Chile

24. PLANT LOCATION: THE BIO BIO BASIN Universidad de ChilePontificia Universidad Católica de Chile

25. ESSENTIAL ISSUES THAT LINK THE ENVIRONMENT AND THE DEREGULATED ELECTRICAL SECTOR Efficient Energy Use and the Electric Sector New Trends in Generation Nuclear Energy Clean Energy Embedded Generation or Distributed Generation Universidad de ChilePontificia Universidad Católica de Chile

26. IN CONCLUSION Universidad de ChilePontificia Universidad Católica de Chile CHILE’S ELECTRICAL SYSTEM HAS EXPANDED VERY STRONGLY IN RESPONSE TO THE HIGH ECONOMIC GROWTH RATES OF THE DECADE EMISSIONS OF ALL GASES IS INCREASING SIGNIFICANTLY, DESPITE SWITCH TO NATURAL GAS. TREND IN GROWTH AND EMISSIONS IS EXPECTED TO CONTINUE. TO REDUCE EMISSIONS THERMAL PLANTS MUST BE REPLACED BY LESS POLLUTING SOURCES SUCH AS HYDROELECTRIC POWER PLANTS, OR MORE RADICAL NUCLEAR SOURCES.

27. IN CONCLUSION Universidad de ChilePontificia Universidad Católica de Chile A STRONG PUSH IN ENERGY EFFICIENCY MAY HELP, HOWEVER THE POLICIES APPLIED IN THIS LINE OF ACTION HAVE BEEN WEAK. CLEAN ENERGIES AND DISTRIBUTED SOURCES CAN HELP TO REDUCE EMISSIONS BUT WILLNOT BE SIGNIFICANT. MOREOVER, THE TREND IN THIS DEREGULATED SECTOR SEEMS TO BE GOING IN A DIFFERENT DIRECTION: NATURAL GAS COMBINED CYCLE PLANTS HAVE ACTUALLY DISPLACED SOME HYDROELECTRIC PLANTS. DECISIONS ARE BEING TAKEN ON GENERATING TECHNOLOGY, WITHOUT DUE CONSIDERATION OF SOCIAL COSTS.

28. IN CONCLUSION Universidad de ChilePontificia Universidad Católica de Chile THE ENVIRONMENTAL STAKES ARE STILL OUT: NEW GAS PIPELINES ALSO FEED THE INDUSTRIAL AND DOMESTIC SECTORS. NATURAL GAS PLANTS HAVE REPLACED COAL PLANTS. DISPATCH BY MARGINAL COSTING DOES NOT HELP MUCH, IT IS DIFFICULT TO INCORPORATE ALL SOCIAL COSTS COMPANIES SEEKING COMPETITIVE ADVANTAGES ARE EXPLORING THE USE OF CHEAPER MORE POLLUTING FUELS SUCH AS PET-COKE. THE AUTHORITY MUST BALANCE EXTRA ENVIRONMENTAL REQUIREMENTS WITH THE ENSUING INCREASE IN ENERGY PRICES. THIS IS NOT AN EASY EQUATION.