Fast decarbonization in a cost-based wholesale power framework: the case of Chile

This study provides an extensive examination of the Chilean power generation market in the last eight years, with a particular focus on the impact of renewable energy sources such as solar and wind on traditional power generation and in the total producer surplus in the short-term market. The research highlights the changing operating patterns of traditional power plants, with a general trend of following net demand, and a corresponding increase in heat rates.

Key figures from the study indicate that, despite the retirement of inefficient coal units and the operation of more efficient ones, heat rates have been increasing, likely due to the higher variability in operation. Moreover, there has been a clear change in the operating pattern of coal based units, from a stable base load, to an hourly variable scheme following net demand. Similar changes have experienced some hydroelectric power plants.

The study also explores the producer surplus in the Chilean short-term market, showing two main findings. First, due to their high correlation and systemic character, solar generation impacts on spot prices has significantly decreased the average perceived price by that technology, unlike other renewable sources such as wind and hydroelectric. Second, under the current cost-based wholesale market design, all zero-cost generation shocks produce a negative impact on total producer surplus, with a small magnitude until the shock becomes relevant. When the generation of zero-marginal cost source is large as a proportion of the demand, the impact on producer surplus becomes disproportionately big.

The research underscores the significant role of ancillary services in the power generation segment, which have grown significantly in recent years. These services, although outside the spot market, contribute to the variable costs in the power generation segment.

The findings might have important implications for energy policy and future research, particularly in the context of renewable energy integration and the pursuit of sustainable and efficient energy systems. The study also underscores the need for further research into the theoretical underpinnings of the quantitative impact of zero-marginal cost generation shocks on producer surplus and short-term prices.