PMGD’s an attractive option for project development in Chile

The Chilean Energy Market has been leading the renewable revolution in the Latin America region. About a decade ago, it was driven by the high spot price in the Chilean electrical grid. The first projects were financed under a merchant scheme; however, due to the high volatility and the considerable decline in prices over time, the banks stopped financing under this structure. Therefore, renewable generators began to look to power purchase agreements (PPA) in the private sector and at the public tenders. In the past years, there have been some examples of private PPAs between renewable generators and big consumers such as Santiago`s Subway or the Google Data Center in Santiago but because of the inherent challenges of the renewable generation to supply a load base consumption, this market is still moving at a slow pace. The 2016 Chilean Public Tender draw the attention of everyone in the sector by its low-price results: setting a momentary record for the lowest price in solar at 29,1 US$/MWh and an average price of 47,6 US$/MWh. These results left the awarded companies with a big challenge to finance and build their projects at very competitive prices and a target date by 2021. However, after the big success of the tender, the Chilean renewable market seems to be slowing down instead of picking up its pace.

On the meantime, a new market is rising as an attractive opportunity: distributed generation, driven by a regulation that presents some aspects different from those normally used in other countries. As a matter of fact, the Government Decree 101 presents the concept of Small Generation Means “PMG” (from its acronym in Spanish, Pequeños Medios de Generación) and Small Distributed Generation Means “PMGD” (from its acronym in Spanish, Pequeños Medios de Generación Distribuida); both with particular characteristics.

The PMG are projects with installed capacity up to 9 MW, and are connected to the main transmission, sub-transmission or additional transmission grid. PMG projects that are over 3 MW must obtain an Environmental Impact Declaration “DIA” (from its acronym in Spanish, Declaración de Impacto Ambiental). For projects that are under 3 MW, the DIA is not mandatory, which will considerably reduce the development time and investment at the project Capex.

A PMG project using non-conventional generation will be able to request to the grid operator a “self-dispatch” operation scheme, which means that the project is guaranteed to automatically connect to the grid and not to be curtailed. Once declared the “self-dispatch” operation option, it shall be maintained for at least 12 months.

Any project connected to the transmission grid must pay for transmission tolls (1), but for non-conventional generation PMG partial or total waivers may apply in accordance to the grid operator instructions. Furthermore, a PMG project can sell its energy to the system at the marginal cost or at a stabilized price regime. The stabilized price is a theoretical price that can be understood as an approximation of the short and long term energy market prices, where:

• Short term price will consider the weighted value of all PPAs currently operating in the market and
• Long term price for the weighted average over time of the spot market prices for the next 4 years.

The potential variation of both prices are stabilized by a band mechanism, defined on the Art. 168 from the Decree “DFL-4” (2) (from its acronym in Spanish, Decreto de Fuerza de Ley), hence its “stabilized” denomination. The price is calculated every 6 months by the National Commission of Energy “CNE” (from its acronym in Spanish, Comisión Nacional de Energía), and the methodology used for its calculation grants stability over time and in each period-to-period calculation to the generators energy injection valorizations.

On the other hand, the PMGD are also projects with installed capacity up to 9 MW, but unlike the PMG, they are connected to the distribution grid or to installations of a company that owns electric power distribution lines that make use at least partially of state property. PMGDs have the same characteristics as PMG projects, they can be “self-dispatch”, get transmission toll reductions, have access to the stabilized price regime and do not need to have a DIA for projects under 3 MW.

In order to avoid any disconformity with the distribution grid owner, the process to connect a PMGD to a distribution network is well defined by the PMGD Connection and Operation Technical Standard “NTCO” (from its acronym in Spanish, Norma Técnica de Conexión y Operación de PMGD), a summary (3) of such process will be as follows:

1. The distribution company receives in writing a request to connect, and the background information of the project is presented through the form called Request for Information “SI” (from its acronym in Spanish, Solicitud de Información).

1. Distribution company provides the general information about the facilities that are necessary for the connection and operation of the PMGD project, existing projects and their status of Network Connection Request “SCR” (from its acronym in Spanish, Solicitud de Conexión a la Red) for all feeders in the Distribution Substation’s feeder where the application was filed.

1. Once the connection point has been defined, the project owner should submit to the distribution company the SCR, containing in more detail information about the project itself and its equipment.

1. After receiving the SCR, the distribution company provides enough in-detail information about the distribution feeder so that the PMGD owner can develop the System Impact Studies, a set of electrical studies showing the impact to the distribution network of the generation project.

1. Once developed, these studies are delivered to the distribution company within a certain timeframe. To address any concerns between the project owner and the distribution company a Q&A and revision process starts, until agreement is reached.

1. The distribution company has up to three months since the moment the in-detail information is provided to the project to issue a Connection Criteria Report “ICC” (from its acronym in Spanish, Informe Criterio de Conexión), which informs the final agreement or disagreement with what is proposed in the SCR.

1. In the event that the distributor does not accept the SCR, the project owner may challenge the correction to the delivered reports for an additional review round; or it can start a new process, by suggesting another connection point or change the characteristics of the project.

1. If the SCR is accepted through a favorable ICC, the permit grants the PMGD project the right to interconnect to the distribution grid in 9 months, with the possibility of renewal of the time for Solar and Wind technology for 9 additional months.

A particular case that arises while evaluating the SCR is when the project owner presents a project that will inject up to 1,5 MW and the project is considered to have Non Significative Impact “INS” to the grid (from its acronym in Spanish, Impacto No Significativo). This project will not require additional works or electrical studies. The information that should be submitted is the following:

• Power flow of the feeder (in MW) compared to the design capacity of the feeder;
• The short-circuit to power ratio to determine the impact on the voltage of the feeder;
• The contribution of PMGD to the short-circuit current of the primary distribution substation and the distribution grid; and
• Compliance with the protections coordination.

Although the permitting process is very well defined in terms of periods for document delivery and evaluation, it may seem complicated to someone that is unfamiliar with it and counting with a partner specialized in the market can greatly ease the process.

A standard practice in the market is to group these projects to make them more attractive for investors and to be able to achieve financing. Projects subject to the stabilized price scheme have already been successfully financed by multilateral banks and Chilean commercial banks, setting a precedent in the Chilean energy market, placing the PMGDs as the new viable option for developers and investors in Chile.

(1): The transmission tolls payment by generators is a scheme that was recently changed by the new transmission law (Ley 20936), and a transition period has started over which all transmission tolls will be pay by the consumers of the electrical grid.

(2): DFL 4 Can be found on the following link: http://www.sec.cl/sitioweb/transparencia_activa/julio2010/DFL_4_20018.pdf
(3): For the official process scheme, refer to the Chilean Electrical Superintendence web page: http://www.sec.cl/portal/page?_pageid=33,6449714&_dad=portal&_schema=PORTAL