Anatomy of the Electricity Crisis

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.