AnatomÃa de la Crisis Eléctrica

Abstract

This paper studies three issues of the Chilean electricity regulation and their incidence in the energy crisis of 1998-99. Could the price mechanism manage the supply shortage without blackouts? Did the regulation provide incentives to invest in reserve capacity?, and what were the effects of limiting compensations to consumers for blackouts? The model developed shows that the price mechanism is excessively rigid when facing shocks, mostly because outage costs are not contingent prices. In addition, the authorities dismantled the incentives to ameliorate the effects of the crisis when they limited the compensations to consumers, without efficiency gains or higher financial security to generators. Finally, errors in setting nodal prices affect all producers, independently of their thermo-hydroelectric mix. Consequently, even if the probabilities of droughts are biased downwards, firms will adjust optimally investment without hampering security levels.