Introduction
Introduction Chile’s power market is set to undergo significant transformation over the next several decades, driven primarily by the expansion of solar and battery storage. In a system that was historically reliant on fossil-fuels and hydropower (combined for 63% of total capacity in 2013), solar capacity is expected to quadruple until 2060, while storage will play a crucial role in balancing supply and demand. This shift aligns with Chile’s broader decarbonization goals, including the complete phase-out of coal by 2040.
Aurora’s Perspective: Solar at the Forefront, Balanced by Battery Storage and Supported by Strong Transmission
Due to favorable natural conditions and low costs, solar power is projected to reach a 46% share of total installed capacity by 2060 in Chile’s national electricity system, according to our first power market forecast. This growth will primarily take place in the north of the country, especially in the Antofagasta region where high irradiance and relatively lower development costs compared to other regions make it a cost-effective source of energy.
Battery storage is expected to play a complementary role alongside solar, with long-duration batteries (primarily 8-hour systems) facilitating its integration in solar-heavy regions. The growth of battery capacity will reduce the need for expensive thermal generation during peak hours and help balance supply and demand as renewable penetration increases.
As the share of solar and batteries in the Chilean power system expand, we see a need for changes to the current methodology to calculate capacity payments for both technologies to avoid incentivizing an oversupply of capacity. With an increase in solar capacity, peak demand hours in the middle of the day will be covered more reliably by solar generation while demand in fringe hours (morning and nights) will be critical to cover with other firm capacity. We, therefore, expect capacity payments to shift toward incentivizing the coverage of residual demand1 as opposed to peak demand in the future, which is the reason we anticipate solar capacity payments to decrease.
For batteries, we similarly expect adjustments after the end of the current transitory regime (DS70/2023) in the mid-2030s. As we’ve seen in other markets like Great Britian, an increase in batteries in the system leads to an overall decrease in capacity payments for the technology due to a flattening load curve. Long-duration batteries are expected to receive higher payments than shorter durations after the transitional period due to their higher firm capacity value, however, payments will be lower than they currently are.
Lastly, interconnections to Chile’s highest demand areas, located in of the country, will be crucial for the ability to transmit cheap solar power from the north to these central regions. Projects like the Kimal-Lo Aguirre HVDC line will improve the ability to export solar generation.
Conclusion
Chile’s solar and battery expansion is poised to revolutionize the country’s power market. Solar will dominate the energy mix, while batteries will ensure that renewable energy can be stored and dispatched when needed, mitigating intermittency issues. The success of this transformation depends on market incentives and strategic investments in transmission infrastructure to accommodate the growth of renewables. Our analysis indicates that while challenges such as renewable cannibalization exist, the overall outlook for Chile’s renewable energy future is highly promising.
Additionally, we expect the current status quo for capacity payments to change. With the end of the transitory regime for batteries in 2034, lower payments are expected to be received for these assets as has been the case in other markets that see increasing battery penetration. Similarly, increasing solar penetration is expected to lead to a reevaluation of the definition of peak demand where solar assets then receive lower payments than they currently do.
Learn more about our Power Market Forecast for Chile.
Residual demand is defined as total system demand minus wind and solar generation.
Authored by:
Marvin Gareiss – Senior Research Associate
Inês Gaspar – Senior Research Associate
