Chile has emerged as a leader in the energy transition, with some of the most ambitious decarbonization targets in the world. For example, Chile intends to shut down all its coal plants by 2040. According to recent models, an estimated 21.8 gigawatts (GW) of solar, 17.6 GW of wind, and 3.3 GW of energy storage is required to accomplish this goal.
Today, Chile only has 64 megawatts (MW) of operational energy storage capacity. There are three significant bottlenecks to energy storage deployment that must be addressed for Chile to meet its climate goals.
Addressing zero marginal cost injections
Chile has a marginal cost electricity market. Since renewable energy plants have low operating costs, the marginal cost of the country’s energy transition to renewables is frequently being pushed to zero.
Zero marginal cost injections are a necessary although antiquated part of the operation of a system with a high penetration of renewables. They serve as a signal that no additional generation is needed in that specific location and period. The system is built this way because it’s a simple solution that comes at little to no cost to the rate payer. However, it’s not a sustainable solution since it results in the curtailment of renewable energy.
The problem arises when renewable energy companies experience these zero-price injections more frequently than expected, and the prices in their long-term supply contracts are not sufficient to compensate for these occurrences. This leads to financial losses for the renewable energy companies, as they are unable to cover their costs and make a profit from their operations.
Today, all energy storage projects in Chile are co-located with renewable energy because it serves to mitigate losses from curtailment and zero or negative pricing. If regulators choose to change the market structure to compensate renewable energy companies, energy storage will lack revenue certainty. This is why participation in capacity markets is currently a better business case for energy storage. It avoids shifting costs to the rate payer while also setting the stage for energy storage to contribute to grid stability.
Implementing capacity revenues
Energy storage can provide both capacity and flexibility. However, it’s currently unclear how energy storage facilities providing capacity in Chile would be paid for.
To address this issue, capacity revenues can be implemented as a mechanism to provide additional financial support to renewable energy companies. Under capacity remuneration mechanisms, generators are compensated for their ability to provide electricity capacity when needed, regardless of whether their electricity is dispatched or consumed.
By providing capacity revenues, governments or regulatory bodies can bolster reliability and security of the electricity system by incentivizing the availability of generation capacity. This becomes particularly important in systems with a high penetration of variable renewable energy sources, which may require backup or balancing resources to ensure a stable supply of electricity.
Chile is considering implementing capacity revenues to provide financial stability to renewable energy companies affected by zero-price injections. This would help address the mismatch between revenue expectations and the actual payments received by renewable generators, supporting their ongoing operations and encouraging further renewable energy and energy storage development.
Expanding transmission infrastructure
Chile’s geography causes significant congestion on the transmission network, which is being exacerbated by growing energy demand and renewable energy deployment. As more renewable energy projects are developed in remote or distant locations, there is a need to transmit the electricity generated from these sources to population centers where the demand exists.
Transmission issues are one of the factors contributing to the financial losses experienced by renewable energy companies. The mismatch between the locations of renewable generation and the existing transmission infrastructure capacity can lead to curtailment of renewable energy production or reliance on more expensive backup sources, affecting the profitability and viability of renewable energy projects.
The cost of transmission upgrades can be significant. Advanced grid technologies, along with the aforementioned capacity schemes, can be an extremely effective way to unlock the power of co-located energy storage assets.
Energy storage can play an important role in addressing transmission issues, but transmission assets are not currently allowed to simultaneously act as generators in Chile. If energy storage were allowed to perform both transmission and generation applications, investments in the sector would become much more attractive. It’s crucial that Chile defines a more advanced integrated resource plan (IRP) so that energy storage is not underutilized.
Storage is the key to Chile’s energy future
By every measure, Chile is on track to meet or exceed its renewable energy transition targets. With such rapid growth of renewable energy, it’s critical that energy storage is put in place. By mitigating the challenges associated with intermittent renewable energy generation, managing peak demand, providing grid services, and enhancing resiliency, energy storage helps optimize the use of existing transmission infrastructure and supports the integration of renewable energy sources into the grid. A robust and modern transmission infrastructure, along with supportive policies and collaborations, can enable the successful integration and expansion of renewable energy, leading to a more sustainable and reliable electricity system.
This article is sponsored by Wärtsilä.
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