IEEE Power & Energy Magazine - May/June 2020 - 40

There is no easy solution to this problem within the
present paradigm because the model-firm philosophy is to
remunerate a virtual company. Built in a greenfield fashion,
model firms cannot properly capture the need for additional
funding to improve reliability in real companies. The mismatch between the remuneration needed to cover the cost
of a greenfield model firm and that of a hypothetically efficient real firm with legacy concerns can be mathematically
proved. In mathematical programming terms, the solution
to the optimization problem that determines the model
firm's investments and assets from scratch will differ from
the solution to the optimization problem that determines
the efficient investments and assets of a firm subject to past
decisions. Although the mismatch is self-evident (given the
different building approaches of the real and model firms),
it must be emphasized since it has profound impacts on
remuneration adequacy.
Reliability, Fairness, and Affordability in Rural Networks
In the discussion of supply security and remuneration,
another important aspect arises: fairness and affordability in rural networks, since the current system is ill-suited
to remote areas. It is well known that delivering reliable
power to consumers in rural areas is more costly than in
urban areas (for example, Frontel versus Enel in Figure 4)
because the number of connected customers per kilometer
in cities is significantly higher than in provincial locations.
Consequently, a cost-benefit analysis to balance investments
against their reliability gains will justify worse reliability
levels in rural areas and higher network tariffs. This technoeconomic result is fundamentally problematic from a public
policy perspective. This is particularly relevant in light of
the Chilean energy policy that seeks uniformly distributed

SAIDI across the country (that is, reliability fairness) at
affordable costs.
Incurring higher costs to improve reliability in rural
areas is no trivial matter, since provincial consumers, who
already pay higher electricity bills (see Figure 4), are likely
to have lower incomes. Equalizing reliability levels across
a country may significantly raise network tariffs beyond
affordable levels in rural areas. That would be the case if
tariffs sought to be cost reflective (note that cost reflectivity is a key techno-economic principle and an important
objective in tariff design, especially in the future context
of DERs). Hence, cross subsidies between areas might be
needed to achieve reliability fairness at affordable costs for
rural consumers.
Finding the right balance between conflicting objectives
(in this case, cost reflectivity and fairness) and resolving
the political-economy conundrum becomes a complex task.
There have been efforts in Chile to develop a concept called
equidad tarifaria (tariff equity), which internalizes the cross
subsidies within tariffs, tending to equalize them. Questions regarding the efficiency of the current mechanism have
been posed, since the issue of balance can be alternatively
resolved (and potentially more effectively) through subsidies in the form of separate payments that target consumers
who really need the financial support and preserve the original cost-reflectivity levels in network tariffs. In light of the
escalating need for reliability and fairness, this debate will
become increasingly important during the coming years.

40	

ieee power & energy magazine	

Total Bill (US$/kWh)

Density (Connections/km)
SAIDI (h/year)

Concerns Regarding Decarbonization
Through Grid Modernization
Effectively managing a distribution network with increased
DER penetration and participation in new flexibility- and
ancillary-services markets at the
transmission level requires an
active (rather than the historical
0.3
140
passive) approach to its operaFrom Rural to Urban Networks
tion, which necessitates changes
120
0.25
in the way system infrastructure
100
is planned. Chile has an increas0.2
ing number of DG projects and EV
80
0.15
infrastructure, as shown in Fig60
ure  5. In the future, we expect to
0.1
see a larger array of dispatchable
40
resources at medium- and low0.05
20
voltage levels, including demand
response, energy storage (for in--
0
0
stance, batteries, EVs, and thermal
Frontel
SAESA
CGED
Chilquinta
Enel
demand), DG [primarily photoUtility
voltaic (PV)], and equipment that
Density
SAIDI
Bill
will efficiently adapt the network
Linear (Density)
Linear (SAIDI)
Linear (Bill)
to changing operating conditions
on a minute-by-minute basis. This
will require distribution innovation
figure 4. The density, residential electricity bill, and SAIDI for the main distribution
to promote cost-effective solutions
companies in Chile.
may/june 2020
IEEE Power & Energy Magazine - May/June 2020

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