Chile's electricity markets: Four decades on from their original design

Abstract

It has been almost 40 years since Chile reformed its electricity sector. In 1982, the Electricity Act created an energy market for generators and large customers to negotiate supply contracts. It also established a centralized dispatch of power plants in ascending order of generation cost, independent of their owners' supply contracts. This setup results in power exchanges between generators, which are valued using the system's marginal costs. This paper: (i) describes the market design; (ii) shows its evolution to date; (iii) describes the triggers for change; (iv) draws policy lessons and (iv) provides a preliminary assessment of the reform.