The Uruguayan Utility and Energy Regulator of the future

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The Uruguayan Utility and Energy

Regulator of the future

Authors: Felipe Bastarrica and Gonzalo Irrazabal Centre: Observatorio de Energía y Desarrollo Sustentable Institution: Universidad Católica del Uruguay

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Abstract

The world is under a new energy landscape, in which fossil fuels are being replaced by non-conventional renewable energy resources, and centralization is ceding way to decentralization. Uruguay has gone through a rapid transformation of its energy and electricity mix. This paper seeks to analyze whether the regulatory framework and the status-quo of the vertically integrated public utility (UTE) and the energy regulator (URSEA) fit the new landscape.

Firstly, a brief description of the electricity sector of Uruguay is provided. Subsequently, the current role of the two above-mentioned institutions is analyzed. Thirdly, upcoming realities of the utility of the future and the regulator of the future are discussed. In this exercise, challenges that these institutions may face in Uruguay are depicted, suggesting changes to enhance the efficiency of the adaptation process.

Re-thinking institutions, a more rigorous application of the regulatory framework (specially concerning tariff setting), efficiency incentives, further pursuing reforms, adapting UTE’s business model, and empowering and modernizing URSEA are some of the main discussions brought forward.

Abstract (español)

El mundo se encuentra bajo un nuevo panorama energético, en el que los combustibles fósiles están siendo reemplazados por recursos energéticos renovables no convencionales, y la centralización está cediendo paso a la descentralización. Uruguay ha experimentado una rápida transformación de su matriz primaria y eléctrica. Este artículo busca analizar si el marco regulatorio y la situación actual de la empresa verticalmente integrada (UTE) y el regulador del sector (URSEA) se ajustan al nuevo panorama.

En primer lugar, se brinda una breve descripción del sector eléctrico de Uruguay. Posteriormente, se analiza el papel actual de las dos instituciones mencionadas. En tercer lugar, se discuten las realidades venideras de la empresa eléctrica y regulador del futuro. En este ejercicio se describen los desafíos que estas instituciones pueden enfrentar en Uruguay, sugiriendo cambios para mejorar la eficiencia del proceso de adaptación.

Repensar las instituciones, una aplicación más rigurosa del marco regulatorio (especialmente en lo que respecta a la fijación de tarifas), incentivos de eficiencia, búsqueda de reformas, adaptación del modelo de negocios de UTE y el empoderamiento y modernización de URSEA son algunas de las principales discusiones planteadas.

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Key takeaways

• There is a need to re-think institutions and their governance (the “rules of the game”) which have mostly been conceived a century ago under a different landscape, so that commercial rather than political goals are pursued. This discussion has been brought forward by the UCU energy observatory in the “White Paper: institutions in the energy sector” (2015). Issues such as regulatory capture, agency problem, checks and balances, separation of fiscal policy and public services, profitability and transparency of state-owned enterprises, legal regime, selection of management and remuneration, among others, remain untackled.

• Uruguay has successfully diversified its electricity mix in the past few years, due to a rapid penetration of non-conventional renewable sources (mainly wind, solar and biomass). Even if this has translated in significant improvements in its primary energy mix, fossil fuels still account for almost 40% of final consumption. Developments in the transport and industrial sector will be key in efforts to further reduce their share.

• The mentioned penetration of non-conventional renewable sources in the electricity mix has significantly lowered the volatility of the cost of supply and the impact that water shortages have had on the system’s costs. In turn, it left the country well positioned for the next wave of renewable energy in terms of infrastructure and knowledge. Nonetheless, this has not translated into lower end-user tariffs, which are high when compared with neighbouring countries. Furthermore, technical quality of service is below international best practices.

• Residential customers are currently not encouraged to become prosumers, mainly from a financial standpoint. Unlike commercial and industrial customers, they cannot access fiscal benefits and tax credits. Notwithstanding the above, considering that residential tariffs are high as already mentioned, coupled with the arguably grid parity achievement, and that the marginal cost of the system would be optimized by further increasing microgeneration, the number of residential prosumers should increase in the upcoming years.

• Concerning the “Washington consensus” reforms of the electricity sector, Uruguay has not progressed significantly, according to an index constructed in this paper, following a methodology developed by the World Bank. The country has pursued the least disrupting reforms. Arguably, reform benefits the sector (and society) when implemented as a package and following a coherent sequence. The current approach might bring imbalances to the power sector. In this line, further unbundling UTE is suggested at least in terms of accounting or functions/management. We emphasize the need for UTE to publish regulatory accounts. Despite the fact that these are mandated by law (and thus available to the company), they are not publicly available.

• The current regulatory framework for remunerating the stages of the supply chain of the electricity service is not fully enforced. The tariff setting process is not transparent and the economic rationale behind tariffs remains unclear. Furthermore, regulatory

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incentives to nudge the distributor into efficiency, which are now a common practice internationally, are needed.

• The powers given to URSEA are behind international best practices in certain key areas. For example, it does not set tariffs and does not have a say in areas that regulators typically do (e.g. concessions, bilateral contracts and investment plans). Strengthening and empowering the regulator is imperative so that the regulatory framework of the electricity sector can be fully implemented, updated if necessary, and so that tariffs reflect technical criteria.

• UTE needs to evaluate transforming its business model from an energy provider to an energy service provider. A success case of such a transformation is described in this paper: the ENEL group, in Italy. Despite the fact that UTE’s executives define a vision in this line, current efforts and progress remains unclear in the information available to the public.

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Mensajes clave

• Es necesario repensar las instituciones y su gobernanza (las “reglas del juego”), que en su mayoría se concibieron hace un siglo en un panorama diferente, de modo que se persigan objetivos comerciales más que políticos. Esta discusión ha sido adelantada por el observatorio de energía de la UCU en el “Libro Blanco: instituciones en el sector energético” (2015). Temas como captura regulatoria, problema de agencia, control y equilibrio, separación de política fiscal y servicios públicos, rentabilidad y transparencia de las empresas estatales, régimen legal, selección cargos y remuneración, entre otros, quedan sin abordar.

• Uruguay ha diversificado exitosamente su matriz eléctrica en los últimos años, debido a una rápida penetración de fuentes renovables no convencionales (principalmente eólica, solar y biomasa). Incluso si esto se ha traducido en mejoras significativas en su matriz de energía primaria, los combustibles fósiles aún representan casi el 40% del consumo primario final. Los avances en el sector del transporte e industria serán clave en los esfuerzos por reducir aún más esta participación.

• La mencionada penetración de fuentes renovables no convencionales en la matriz eléctrica redujo significativamente la volatilidad del costo de abastecimiento de la demanda y el impacto que los déficits hídricos históricamente han tenido en los costos del sistema. A su vez, dejó bien posicionado al país en lo que será la próxima ola de energías renovables en términos de infraestructura y conocimiento. Sin embargo, estos beneficios no se han traducido en una reducción de las tarifas del usuario final, que son elevadas cuando se comparan con países vecinos. Además, la calidad técnica del servicio se encuentra por debajo de los umbrales de mejores prácticas internacionales.

• Actualmente, los clientes residenciales no tienen incentivo a convertirse en prosumidores, principalmente desde el punto de vista financiero. A diferencia de los clientes comerciales e industriales, no pueden acceder a beneficios y créditos fiscales. Teniendo en cuenta que las tarifas son elevadas como ya se mencionó, junto con el posiblemente logro de paridad de red, y que el costo marginal del sistema se optimizaría aumentando la microgeneración, el número de prosumidores residenciales debería aumentar en los próximos años.

• En cuanto a las reformas del “consenso de Washington” del sector eléctrico, Uruguay no ha avanzado significativamente, según un índice construido en este trabajo siguiendo una metodología desarrollada por el Banco Mundial. El país ha llevado a cabo las reformas menos disruptivas. Se argumenta que estas reformas benefician al sector (y a la sociedad) cuando se implementan como un paquete y siguen una secuencia coherente. El enfoque actual podría generar desequilibrios en el sector energético. En esta línea, se sugiere una mayor separación de UTE al menos en términos de contabilidad y funciones/gestión. Se destaca la necesidad de que UTE publique la contabilidad regulatoria. A pesar de que es obligatoria por ley (y, por lo tanto, está disponible para la empresa), no es de acceso público.

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• El marco regulatorio para la remuneración de las etapas de la cadena de suministro del servicio eléctrico no es aplicado en su totalidad. El proceso de fijación de tarifas no es transparente y la justificación económica de las tarifas sigue sin ser clara. Además, se necesitan incentivos regulatorios que impulsen al distribuidor (UTE) a mejoras de eficiencia, que es una práctica común a nivel internacional.

• Los poderes otorgados a URSEA están detrás de las mejores prácticas internacionales en ciertas áreas clave. Por ejemplo, no fija las tarifas y no tiene voz en áreas que los reguladores suelen tener (por ejemplo, en lo que respecta a concesiones, contratos bilaterales y planes de inversión). El fortalecimiento y empoderamiento del regulador es imperante para que el marco regulatorio del sector eléctrico pueda ser implementado en su totalidad, actualizado en caso de ser necesario, y las tarifas reflejen criterios técnicos.

• UTE debe evaluar transformar su modelo de negocios, de proveedor de energía a proveedor de servicios energéticos. En este artículo se describe un caso de éxito de tal transformación: el grupo ENEL, en Italia. A pesar de que los ejecutivos de UTE definen una visión en esta línea, los esfuerzos y avances actuales siguen sin estar claros en la información disponible al público.

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Table of Contents

Abstract ...2

Abstract (español) ...2

Key takeaways ...3

Mensajes clave ...5

CHAPTER -I- General overview of the Uruguayan electricity sector. ...9

1. Overview of the power system of Uruguay. ...9

2. Electricity Consumption and Tariffs. ... 12

3. The energy transition in Uruguay. ... 13

CHAPTER - II – The utility and energy regulator of the present ... 20

1. UTE ... 20

2. URSEA ... 23

Chapter -III- The Utility of the Future ... - 30 -

1. The global picture and Enel as a case study: from energy provider to service provider - 30 - 2. UTE’s vision of the future ... - 31 -

3. Future customers and business models. ... - 33 -

CHAPTER IV- The Regulator of the future ... - 36 -

1. Catching up ... - 36 -

2. Emerging objectives for regulators ... - 44 -

CHAPTER -V - Conclusions ... - 46 -

1. Reform... - 46 -

2. Consumer welfare ... - 46 -

3. UTE’s business model ... - 47 -

4. Transparency in the tariff setting process and efficiency incentives. ... - 47 -

5. Empowering and modernizing the regulator. ... - 47 -

BIBLIOGRAPHY ... - 49 -

ACRONYMS ... - 54 -

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List of Figures

Figure 1 - Evolution of peak load and minimum load (MW) for the 1999-2019 period ... 9

Figure 2 – Evolution of installed capacity per source (MW) for the 1990-2018 period ... 10

Figure 3 – Electricity generation by source, 2018 ... 11

Figure 4 – Energy supply by source, 2018 ... 11

Figure 5 - Microgeneration in Uruguay ... 17

Figure 6 –UTE’s Organization Chart ... 22

Figure 7 – URSEA in the institutional framework ... 24

Figure 8 –URSEA Organization Chart ... 25

Figure 9 - Enel Organizational Model ... - 31 -

Figure 10 – Smart grids by UTE ... - 32 -

Figure 11 – The future utility customer ... - 33 -

Figure 12 – Evolution of the average weighted tariff (constant UYU of 2018) ... - 36 -

Figure 13 – Distribution losses (technical and non-technical) ... - 37 -

Figure 14 – Incentives for Utilities USA ... - 40 -

Figure 15 – Mechanisms in Europe ... - 41 -

Figure 16 – Emerging objectives for regulators ... - 45 -

List of Tables

Table 1 – Applicable tariffs for residential consumers, as of July 1st, 2019 ... 12

Table 2 - Electricity price by country and type of consumer. ... 13

Table 3 - Benefit on marginal cost of incorporating PV solar microgeneration to the system ... 19

Table 4 – Uruguay’s Power Sector Reform Index ... 21

Table 5 – Human Resources and assets ... 23

Table 6 – Scale gain ... 23

Table 7 – Sphere of involvement of URSEA ... 26

Table 8 – Other regulators in Latin America ... 27

Table 9 - New business models for utilities ... - 35 -

Table 10 – Technical quality of service targets ... - 42 -

Table 11 – Regulatory reform ... - 55 -

Table 12 – Restructuring reform ... - 55 -

Table 13 – Competition reform ... - 55 -

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CHAPTER -I-General overview of the Uruguayan electricity sector. “Uruguay, Latin America’s Renewable Champion”

Rebecca Bertram

1. Overview of the power system of Uruguay.

Figure 1 portrays the evolution of peak and minimum demand during the 1999-2019 period. As depicted, peak demand increased from 1,349 MW in 1999 to 2,121 MW in 2019 (CAGR of 2.3%),

whereas minimum load increased from 502 MW in 1999 to 705 MW1 during the same period.

Figure 1 - Evolution of peak load and minimum load (MW) for the 1999-2019 period

Source: MIEM (2020a)

Figure 2 depicts the evolution of installed capacity per source (MW) for the 1990-2018 period, which increased from 1,571 MW in 1990 to 4,912 MW in 2018 (CAGR of 4.2%). It is interesting to note the diversification of sources from 2008 onwards, prior to when, electricity was mostly generated with hydro and fossil fuels. Further on in this chapter we describe the political landscape which allowed for the penetration of non-conventional renewable energy sources in the electricity matrix2.

1 Excluding 0 MW in June 16th, 2019 when the interconnection system between Argentina and Uruguay

collapsed.

2 Law N. 18.597 of 2009 provides the following list of non-conventional autochthonous renewable energy

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Figure 2 – Evolution of installed capacity per source (MW) for the 1990-2018 period

Source: MIEM (2020b)

Considering both datasets, it is possible to note that the reserve margin3 increased from 56% in 1999 to 138% in 2018.

Figure 3 depicts the evolution of electricity generation by source (“Sistema Interconectado Nacional” - SIN) in the 2009 – 2018 period. The mentioned penetration of non-conventional renewable sources is also portrayed in this figures, showing that they accounted for 97% of the electricity dispatched into the SIN by the end of the period.

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Figure 3 – Electricity generation by source, 2018

Source: MIEM-Balance Energético Nacional 2018

Renewable sources have also changed the primary mix, yet at a slower pace than the electricity mix. Despite the fact that the share of oil and derivatives in the total energy supply has been significantly reduced, as the figure below shows, almost 40% of the energy supply is still sourced from fossil sources as of 2018, according to data from the BEN-MIEM 2018 (“Balance Energético Nacional”). Given that Uruguay is not a producer of fossil fuels, and the environmental advantages of renewable energy, the share of oil and derivatives is expected to be further reduced in the coming years.

Figure 4 – Energy supply by source, 2018

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As of 2018, the transport sector accounted for 27% of final energy consumption and the industrial sector for 43% (1274 ktep and 2019 ktep out of 4661 ktep, respectively). Out of the energy demanded by the transport sector in 2018, 95% corresponded to fossil sources (604 ktep gasoline, 601 ktep gasoil and 0.3 ktep fuel-oil). Electric and hydrogen-fueled vehicles will be key developments in the upcoming years to decarbonize the transport sector. It is out of the scope of this paper to discuss further, however, it is worth noting that there are already government initiatives in place with this scope, including the MOVES project for sustainable and efficient mobility (“Movilidad Eficiente y Sostenible”) and the VERNE project of ANCAP (the state-owned company producing petroleum products, alcohol and Portland).

2. Electricity Consumption and Tariffs.

Residential customers account for the highest share of electricity sales (GWh) and revenue (USD) of the state-owned utility (“Administración Nacional de Usinas y Trasmisiones Eléctricas” - UTE) (UTE 2019a). The average consumption of residential customers as of 2018 is 230 kWh per month, which is low for a high-income country. For example, in the U.S. the average household consumed 914 kWh per month as of 2018 (EIA, 2019). Even if it important to note that energy efficiency policies aim at reducing inefficient consumption, higher consumption provides higher scale for utilities which allows for better investment decisions. Thus, policies to foster efficient consumption are expecte in the coming years, in particular, in the industrial sector.

Uruguay is one of the only countries in Latin America which has implemented a comprehensive tariff structure which allows to incorporate many of the benefits of smart grids. The current structure provides the right economic signals in terms of charges for contracted demand, energy consumption, time-of-use (ToU), a fixed charge and a charge for reactive energy. Notwithstanding, given that UTE is rolling-out a smart meter program which aims at reaching 100% penetration by 2023, new tariffs and changes in the tariff structure based on the new information gathered are expected (e.g. dynamic pricing being introduced). The current applicable tariffs for residential consumers are portrayed in the table below.

Table 1 – Applicable tariffs for residential consumers, as of July 1st, 2019 Class

Contracted Demand

(kW)

Energy charge (blocks) Fixed charge (UYU / month)

Demand charge (UYU / kW)

Energy charge (UYU / kWh)

Block 1 Block 2 Block 3 Block 1 Block 2 Block 3

Residential: simple = < 40 kW 1 kWh - 100 kWh 101 kWh - 600 kWh > 600 kWh 198.9 (5.7 USD) 61.9 (1.8 USD) 5.2 (0.15 USD) 6.5 (0.19 USD) 8.1 (0.23 USD) Residential: double schedule = > 3.3 kW = < 40 kW Peak: 17:00 - 23:00 hrs Off-peak: 00:00 - 17:00 & 23:00 - 24:00 hrs 359.4 (10.3 USD) 61.6 (1.8 USD) 8.6 (0.25 USD) 3.5 (0.10 USD) Residential: triple schedule = > 3.7 kW = < 40 kW Peak: 17:00 - 23:00 hrs Mid-peak: 07:00 - 17:00 & 23:00 - 24:00 hrs Off-peak: 00:00 - 00:07 hrs 359.4 (10.3 USD) 61.6 (1.8 USD) 8.6 (0.25 USD) 4.7 (0.13 USD) 1.8 (0.05 USD) Residential: basic consumption* = > 3.7 kW 101 kWh - 140 kWh 141 kWh - 350 kWh > 351 kWh 322.7** (9.2 USD)

*For the purpose of remaining in this rate, 230 kWh / month may not be exceeded more than twice in the last twelve months, automatically going to the Simple Residential tariff for the third month that the mentioned consumption is exceeded.

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Source: own elaboration based on UTE (2019c)

Despite the fact that different electricity tariff schemes have been promoted (double and triple schedules in the table above), almost half of the consumers (47%) remained in the simple tariff (UTE, 2018). The double-schedule tariff establishes two shifts with different prices, as a Demand-Side Management (DSM) strategy, by changing consumers’ behavior from peak hours to other time of the day in which electricity is cheaper. The triple-schedule is analogous, with three shifts.

Uruguay has a substantially higher electricity tariff than the global average (Climatescope, 2017). The table below provides a benchmark average industrial and residential electricity tariffs of a sample of neighbouring countries. As portrayed, the rate paid by household in Uruguay on average is 3.4 times the rate paid by households in Paraguay and 2.4 times the rate paid by residential customers in Argentina. Despite the fact that a proper cost study must be undertaken to determine if tariffs are cost-refflective, and to determine also the current level subsidies and cross-subsidies, the reduction in cost of supply which renewable generation has brought to the system has not translated into lower tariffs, as portrayed further below in this paper.

Table 2 - Electricity price by country and type of consumer.

Country Industrial (USD/MWh) Residential (USD/MWh) Uruguay 97 208 Chile 111 166 Brasil 99 163 Argentina 71 88 Paraguay 43 62

Source: SEG Ingenieria (2020)4

3. The energy transition in Uruguay.

According to the International Renewable Energy Agency “The energy transition is a pathway toward transformation of the global energy sector from fossil-based to zero-carbon by the second half of this century” (IRENA, 2019).

Uruguay is known as a country that has gone through an energy transition by incorporating non-conventional renewable energy sources to its energy mix (mainly wind, solar and biomass). The first move towards a transformation in the Uruguayan energy sector was the so called “Energy Policy 2005-2030” in 2010 by all political parties. Such document briefly depicted the reasons for Uruguay to transform, at least, its generation system. The basic short-term goal was to reach 50% of the primary energy mix and 90% of the electricity mix from renewable energy sources by 2015 (Gurin, Milen, et al., 2016). This objective was achieved before the deadline. Additionally, in the last 10 years Uruguay has doubled its generation capacity with a special focus on the incorporation of renewable energy (Deloitte, 2017).

4 Information obtained from

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Even if law N°14.694 of 1977 declared electricity generation to be a public service, law N°15.031 of 1980 allowed UTE to embark in private projects of electricity generation as long as it was authorized by the executive power. Subsequently, law N°16.832 (1997) declared that electricity generation was no longer a public service and thus liberalized it. However, it was not until 2009 that the government established a new legal framework in which private investors could rely on. Power purchase agreements (PPAs) between the state-owned utility and private generators were promoted by several decrees of the Executive Power. Notwithstanding, private generation remained at the “will” of UTE, rather than at independent rules (which could be set by another institution such as ADME - Administración del Mercado Electrico -, the market administrator).

Following such policies, UTE carried out public tenders to award PPAs related to wind, solar and biomass projects between 2009 and 2014. The generators submitted bids that should include location, description of the project, guarantees, price (one of the most important elements of the bids), local content in the investment, among others. As of 2019, more than 40 private generators are feeding electricity into the grid (Deloitte, 2017) and most of them via PPAs. These contracts, oblige generators to sell the energy to UTE, and the latter should pay the agreed price. These agreements included a take-or-pay clause, meaning that although UTE is entitled not to take the energy, the generator will still receive the agreed payment (Irrazabal, Gonzalo, 2014).

Uruguay does not have a Feed-In-Tariff (FIT) for large-scale renewable energy projects but the take-or-pay clause, in the context of public tenders with bids, implies similar effects to a FIT. Indeed, UTE will pay the same price for a specific term (e.g. 20 years or 30 years depending on the sources of renewable energy used) adjusted in accordance with the agreement between the parties regardless of the price of electricity in the wholesale electricity market.

PPAs also affected the price of the energy delivered in the spot market. The incorporation of such long-term agreements translated into less acquisitions of energy by UTE in the spot market,

which dropped from 209 USD/MWh in 2012 to less than 24 USD/MWh in 20195.

The energy transition also implies a revision of the energy pricing system, yet political systems generally prefer stable and predictable energy pricing mechanisms, avoiding intermittency and securing the supply-side. Currently, this still means fossil fuel technologies at least partially (Blazquez, Jorge, 2019). In the case of Uruguay, this mindset lead to the commissioning of a 540 MW combined cycle power plant in 2019.

Prosumers and microgeneration were also promoted by the Uruguayan government. Decree 173/2010 passed by the Executive Power established the main legal framework for microgeneration of energy in Uruguay. According to Section 1 of the Decree, end-users (“Subscribers” as defined by Decree N° 276/2002) could install wind, solar, biomass or mini hydro power plants. The current voltage could not exceed 16 amperes, with some exceptions in which the current voltage could reach 25 amperes.

5 Own numbers according to data collected from the annual reports of ADME. See

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The process to install a microgeneration system is (theoretically) simple. In practice, there is a net-metering system6 (albeit the regulation does not use these words). End-users and UTE must sign a Subscription Contract. UTE will pay the generator the tariff that the end-user pays for the energy consumed from the gird, with a few exceptions (Bermudez, Magdalena et. al, 2014). There also is not a FIT for microgeneration projects in Uruguay. The micro-generator will not pay any charges for using the distribution network, other than a connection fee (“tasa de conexión”) for connecting the microgeneration system to the grid (Bagnulo, Florencia, et. al, 2017).

According to section 7 of the Decree 276/002 a Self-Generator is an energy producer with a generation capacity superior to 500 kVA that consumes all or part of the energy that is generated. If there is any surplus sold to the wholesale energy market, it cannot exceed 50% of the annual generation.

In this context, the Decree 43/2015 introduced a new section to the Decree 276/0027 to regulate Self-Generators, distributors (DSOs or DisCos) or transporters (TSOs or TransCos) that are isolated from the grid. According to such decree, any power plant, distribution or transmission network not connected to the SIN will require prior authorization from the Ministry of Industry, Energy and Mining (MIEM) provided that the installed capacity exceeds 150kW (Rodriguez D’ Espada, Ana Laura, et. al, 2017).

There is no regulation that provides a definition of prosumers. However, the definition of microgeneration included under Decree N°173/2010 clearly refers to the activity of prosumers and not to small-scale projects for a group of people. The Decree N°173/2010 only referred to a subtype of microgeneration and there are other types of generators that could be performing essentially the main activity but not complying with the requirement of the mentioned Decree or the Self-Generator already referred to (Rodriguez D’ Espada, Ana Laura, et. al, 2017).

Additionally, it is not clear whether the microgenerator could participate in the wholesale energy market. The regulation is silent as to this possibility. However, considering that generation of energy is liberalized in Uruguay by law N°16.832 any individual is entitled to perform such activity and the fact that the microgenerator is not mentioned as a participant of the wholesale energy market is not an impediment. Indeed, it is possible to conclude that microgeneration could stem from a Generator or a Self-Generator as defined in the wholesale energy market regulation (Rodriguez D’ Espada, Ana Laura, et. al, 2017). Although theoretically the microgenerators have such possibility, currently there is no microgenerator participating in the wholesale energy market as an energy provider nor as a consumer.

Interestingly, a resolution passed on May 12, 2017 by the MIEM modified the General Conditions that allowed the bidirectional exchange of electricity between UTE and microgenerators. The resolution stated that the amount of annual electricity fed into the grid by the generator should be smaller than or equal to the annual consumption of electricity that the generator purchased from the grid. Additionally, at the moment of installing the microgeneration power plants, UTE should verify that the estimated annual generation of the power plants will be

6 ‘Uruguay Will Make You Believe in a Clean Energy Future’

<http://blogs.worldwatch.org/uruguay-believe-clean-energy-future/> accessed 16 April 2018.

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smaller than or equal to the annual consumption of electricity by the end-user considering past consumption records. If the end-user is new to the system, UTE will request a sworn statement in relation to this requirement signed by the end-user.8

The rationale behind these amendments is explained in Section II, III and IV of subheading “Resulting” (“Resultando”) of the resolution. In summary, the Ministry argued that there are microgeneration projects that are selling rather than consuming electricity from the grid. Additionally, the distributor (UTE) is overpaying the electricity purchased from these generators, given that the price is equal to what the microgenerators pay for the electricity taken from the grid, while the spot price is significantly lower. These situations are increasing the cost of the electricity network. Therefore, these amendments are necessary to re-balance the network.

Arguably, the attitude adopted by microgenerators was similar to the results of the empirical study in other countries. For example, in Sweden, the FIT (in this case net metering policy) encourages end-users to sell their energy back to the grid rather than to consume it given that they earn more money by doing so (Palm, Jenny et. al, 2018). Section 3 of the resolution passed on May 12, 2017 by the MIEM establishes that the modifications will be binding for new microgeneration systems that will be installed after the date of the resolution. Therefore, it is clear that there is no retroactive effect.

As of 2016, out of the nearly 280 of the microgenerators that were connected to the grid under Decree N°173/2010, 99% used PV solar power and 1% used wind power. The total capacity installed was 8 MW. As of December 2018, the installed capacity scaled up to 16.8 MW (UTE, 2018) and currently there are more than 20.8 MW installed. Consequently, microgeneration represents 0.44% of the total generation capacity of Uruguay (which reaches 4634 MW as of 2019) (UTE, 2020).

The following map shows that microgeneration is concentrated mainly in Montevideo, the capital city of the country (southernmost point of the country) with 246 microgenerators. Albeit, there is a significant number of projects in the west and north west of the country, where solar radiation is higher than in the south.

8 Oriental Republic of Uruguay, Resolution of the Ministry of Industry, Energy and Mining dated May 12, 2017,

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Figure 5 - Microgeneration in Uruguay

Source: UTE (2020)

Considering the information portrayed above, it is clear that consumers still prefer the traditional supply of energy to becoming prosumers. Internationally, scholars have identified some of the roadblocks for consumers switching to prosumers. These include obtaining financing for small projects, capital costs, lack of trust in the microgeneration system, impact on residence, among others (Couture, Toby, et. al, 2014). Furthermore, barriers depend on the culture, availability of technology, funding, among other regional and national particularities.

In Uruguay, tax credits and other fiscal benefits (mainly Law N°16.096) have made the difference, which mainly commercial and industrial customers have had access to, but residential customers have not. From an economic perspective, the former generally obtain finance for up to 70% of the total costs of the project, while the latter cannot access financing mechanisms. Additionally, the former obtain tax exemptions and exemption of import duties while the latter have no access to tax credits (MIEM, 2012). Indeed, these two advantages (financing and tax credits) is the tipping point between making the project profitable or not in Uruguay. This has lead to residential consumers not being financially motivated to become prosumers. Finally, the term of 10 years instead of 20 years (as is the common practice for large-scale projects) also affects the return of the investment (MIEM, 2012).

Notwithstanding, the government is currently promoting micro-generation. For instance, on an official website the government has announced that “anyone can generate his own energy”, briefly describes the legal framework, and provides information on solar PV and solar thermal energy.9

From a technical perspective, there are some policy recommendations that would eventually help to increase microgeneration activity in Uruguay. For instance, (i) develop an online simulator in which a consumer could partially analyze each case, (ii) promote special credit facilities for

9 See section ‘Genere su Energía’

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these type of projects with special conditions related to guaranties required by creditors, and (iii) develop similar tax credit and fiscal benefits for residential consumers as to those that exist for industrial consumers (MIEM, 2012).

Although microgeneration development in Uruguay is underdeveloped, there are examples of industries and small businesses that have decided to install microgeneration systems for self-consumption. For example, the company “La Abundancia” located in Montevideo installed a solar PV farm of 90 kWp on the rooftop of its warehouse (Ventus, 2018). And in 2019, Cristapet S.A, leader company in the manufacturing of containers and other packaging products, inaugurated a solar farm for self-consumption (Ventus, 2019). Other companies such as Portezuelo, Doña Coca and ZonaAmérica installed solar PV generation systems for an average capacity of 500 kW/each. Same case as “Frigorifico Las Piedras”, manufacturer of prime cuts of beef and lamb, which installed a wind farm generation system for an average capacity of 2.2 MW (El Pais, 2018).

Concerning the reasons for these companies to decide to implement self-generation power plants, one possible answer is that the combination of tax credit and other fiscal benefits with lower prices to install solar panels has made these investments profitable. An alternative response would be that Uruguay has achieved grid parity. Indeed, this was the conclusion of a recent report from the Deutsche Bank Securities Inc.10

Arguably, grid parity11 in Uruguay is a consequence of high electricity tariffs (discussed earlier in this paper) and a sharp drop in installation costs of solar PV panels and other microgeneration systems. If prosumers continue to grow at an exponential rate (and at a faster pace than demand) the total surplus of energy would increase.This is not beneficial for the network segments of the utility, as the price that UTE needs to pay for that electricity is higher than the price of a possible exportation due to the net metering system imposed by Decree 173/2010.

A recent report concludes that, from a marginal cost perspective, 444 MW of microgeneration would be the optimal installed capacity in Uruguay. Thus, the potentiality of consumers that eventually will switch to prosumers could eventually reach 30% of todays’ total power. In order to reach these conclusions, the authors used a software to simulate different scenarios considering the marginal cost of the system, the total cost and investments needed in each scenario.

The following table portrays the different scenarios, prices and additional benefits of incorporating microgeneration to the system, as modelled by Florencia Bagnulo, Isabel Briozzo and Santiago Varela (2017).

10 See figure 3 in p.3 in Vishal Shah and Jermiaj Booream-Phelps, ‘Crossing the Chasm. Solar Grid Parity in a

Low Price Era’ (Deutsche Bank) Market Research.

11 For more information about Grid Parity please refer to Hagermand Shelly, Jaramillo Morgan Granger. “Is rooftop solar PV at socket parity without subsidies? Energy Policy 89 (2016)

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Table 3 - Benefit on marginal cost of incorporating PV solar microgeneration to the system

Microgeneration Marginal Cost

(USD/MWh) Additional benefit (%)

0%Pc- 0 MW 37.58 - 10% Pc- 147.86 MW 32.63 (37.58-32.63)/37.58=13.17% 30% Pc- 443.58 MW 24.90 (32.63-24.90)/37.58=20.57% 50% Pc-739.30 MW 19.46 (24.90-19.46)/37.58=14.50% 70% Pc- 1035.0 MW 16.06 (19.46-16.06)/37.58=9.03% 100% Pc- 1478.59 MW 13.11 (16.06-13.11)/37.58=7.84%

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CHAPTER - II – The utility and energy regulator of the present “The manager accepts the status quo; the leader challenges it”

Warren G. Bennis

1. UTE

As mentioned, UTE is the vertically integrated utility of Uruguay. Its organic law (Parliament of Uruguay, 1980) delineates the classic pre-reform utility: electricity generation, transformation, transmission, distribution, export, import and commercialization carried by one state-owned company.

In an attempt to follow the reforms of the electricity sector carried globally – and by some of Uruguay’s neighbors such as Chile in the late 80s and Argentina in the early 90s – the parliament of Uruguay passed the Law N° 16.832 of 1997, which then became operational in 2002 with decrees N°s 276/002, 277/002, 278/002 y 360/002. This normative framework separated the segments of the electricity sector (Generation, Transmission and Distribution), established the wholesale market (MMEE, administered by ADME), established the energy regulator (first URSEE, which then incorporated other energy sources than electricity and water into URSEA) and determined transmission and distribution as regulated activities.

However, the degree at which this normative framework has actually been applied remains largely at question (see for example Vignolo et al. 2014). On the one hand, it did enable competition in generation; IPPs currently account for almost 60% of installed capacity12 (own calculations based on MIEM, 2019). On the other, the role of the wholesale market is limited given that these IPPs have signed contracts selling almost all their electricity production to UTE. Furthermore, there is no competition in distribution nor in commercialization, and URSEA has limited powers over the regulated sectors (e.g. does not sets tariffs), as described further below.

How much has Uruguay reformed its electricity sector? And a corollary, how unbundled is UTE?

Concerning the first, the World Bank has defined an index to measure power sector reform on a 0 – 100 scale by weighing four types of reform: regulatory, restructuring, competition and private sector participation. Given that the index is not reported for Uruguay, below is our estimate. The reader is referred to the annex of this paper for definitions.

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Table 4 – Uruguay’s Power Sector Reform Index

Reforms Spectrum Uruguay

Score Weight Regulatory No regulator = 0 Regulator = 100 100 25% Restructuring Vertically integrated = 0 Partial vertical unbundling = 33 Full vertical unbundling = 67

Vertical and horizontal unbundling = 100 0 25% Competition Monopoly = 0 IPPs = 25 Single buyer model = 50 Bilateral contracts = 75 Competitive market = 100 25 25%

Private sector participation 50 x (percentage of generation capacity with private sector participation)

+ 50 x (percentage of distribution utilities with private sector participation)

50 x 59.9% + 50 x 0%

= 30

25%

Total 39

Source: own elaboration based on World Bank (2017)

As portrayed in the table above, we estimate a low power sector reform index in Uruguay (39 out of 100). Furthermore, Uruguay has approached reform selectively, by pursuing those reforms which were less disrupting to the status quo, as is the case in most developing countries. According to the World Bank in its power sector reform index, least disrupting reforms include establishing a regulator (often with insufficient power) and private sector participation in generation (usually through IPPs). The problem is that reform is argued to benefit the sector (and society) when implemented as a package and following a coherent sequence. Out of the sample of developing countries analyzed by the World Bank, about a third approached reform “unevenly and leading to imbalances in their sector structures”. Uruguay, joins that club.

Regarding how unbundled is UTE, it is useful to consider the following types of unbundling applicable to utilities in the European Union (EU) (CERGE-EI, 2007):

1. Accounting: separate accounts kept for the segments;

2. Functional/management: in addition to separate accounts, operational activities and management are separated;

3. Legal: segments put in separate legal entities;

4. Ownership: segments owned by independent entities, which are not allowed to hold shares in the other activities.

Before assessing UTE according to the four types of unbundling applicable in the EU, it is useful to depict its organigram (See Figure 6 below).

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Figure 6 –UTE’s Organization Chart

Source: UTE (2020)

As portrayed, UTE operates as a single entity. Therefore, steps 3 (legal) and 4 (ownership) have not been reached. Concerning step 2 (functional/management unbundling), the organigram of UTE shows all four segments under one directorate. Finally, UTE separates operating expenses per segment in its annual report, but not revenue or administration and sales expenses. Thus, it is not possible to assess the financial result of each segment. This is not a good signal for transparency, and generally implies cross subsidies.

The tables below show the evolution of infrastructure of UTE per segment (Generation, Transmission, Distribution and Commercialization) for the period 1999 – 2018, and the relative importance to employees13. These indicators are important to understand the gain in scale of UTE. It is an international best practice to include such scale gains by the regulator in tariff reviews, so that part of the gain is shared with customers, as we discuss further below in this paper. Currently this is not the case in Uruguay.

13 Corporate services were allocated to each segment according to the current weight of the employees of

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Table 5 – Human Resources and assets

Segment Employees Scale Employees Scale Employees Scale

1999 2004 2018 Generation (scale = MW) 841 1,174 642 1,161 755 2,066 Transmission (scale = km of transmission network) 1,018 4,359 862 4,373 889 5,561 Distribution (scale = km of distribution network) 3,519 61,425 2,839 64,428 2,882 85,230 Retail (scale = clients) 2,550 1,169,249 2,057 1,211,226 2,088 1,484,005

Source: own calculations based on ‘UTE en cifras’

Considering the human resources and scale portrayed in the table above, below we estimate the gain in scale of each segment during the period analyzed. As portrayed, our indicator shows a significant gain in scale across all segments.

Table 6 – Scale gain

1999 2004 2018 Generation (MW/generation employee) 1.4 1.8 2.7 Transmission (km of transmission network/transmission employee) 4.3 5.1 6.3 Distribution (km of distribution network/distribution employee) 17.5 22.7 29.6 Commercialization (clients/retail employee) 458.5 588.9 710.6

Source: own calculations based on ‘UTE en cifras’

2. URSEA14

Law N° 17.598 of 2002 established the objectives of URSEA which had been set forth in the already mentioned law N° 16.832 of 1997.

• Control compliance with applicable law and regulations;

• Issue regulations regarding the safety and quality of the services provided, the materials and electrical devices to be used; and

14 This paper considers the role of URSEA regarding the electricity sector only. Thus, natural gas, LPG, water

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• Dictate standards and technical procedures for measuring and billing control consumption; and use of meters and switches and reconnection of supplies.

Subparagraph L) of Article 14 of Law N° 17.598 of 2002 establishes that among its competences, URSEA must “permanently examine the rates and prices corresponding to the services included within its competence”. It is worth noting that URSEA is not tasked with setting the tariffs, which is the best international practice to reach efficiency.

As illustrated below, URSEA depends on MIEM, which is also not aligned to international best practices. In fact, the “urgency law” (“Ley de Urgente Consideración” – LUC) currently being discussed by the Uruguayan parliament15 seeks to increase its autonomy by turning it into a decentralized service.

Figure 7 – URSEA in the institutional framework

Source: own construction

15 At the time this paper was written, the LUC is still with the Executive Power. The sanitary emergency caused

by the COVID 19 paused sending the bill to parliament.

Executive Power / President of the Republic

Ministry of Industry, Energy and Mines

(MIEM)

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Figure 8 –URSEA Organization Chart

Source: URSEA (2020)

As mentioned, URSEA is not following best international practices in certain areas. In order to assess the degree of this gap, we have included in the table below a set of issues in which regulators generally have a say (without delving into the quality of this intervention). Furthermore, we assess whether URSEA has a say in those issues or not.

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Table 7 – Sphere of involvement of URSEA URSEA has legal responsibility on the

issue? (Yes/No) Brief description

Tariff level Yes (limited) URSEA only provides previous advice but is the Executive Power that makes a decision Tariff structure Yes (limited) Same limitation as above Quality of service Yes

It is the main purpose of URSEA. Parties subject to its controls need to obtain licenses,

provide information on a regularly basis. Consumer complaints Yes Is the arbitrator regarding any consumer

complaint Sector investment plans

- Generation No N/A

- Transmission No N/A

- Distribution No N/A

Wholesale market structure No N.A

Anti-competitive behaviour Yes N/A

Merger/acquisition reviews Yes N/A

Technical and safety

standards Yes See description for Quality of service

Concessions No N/A

Licencing Yes Only regarding safety and quality standards. Approval/validation of

bilateral contracts for selling or buying electricity (in the

regulated market)

No Although parties need to register the agreement before URSEA Approval/validation of

contracts for connection and use of transmission facilities

No Although parties need to register the agreement before URSEA Source: own elaboration

It is useful to contrast URSEA against, some of the regulators in Latin America with the most advanced regulatory frameworks: Brazil, Chile, Colombia and Peru.

In the table below, we summarize: • Institutional framework; • Legal support;

• Scope; • Mandate; • Organization;

• Appointment of Commissioners or members of the Board;

• Appointment / selection of high-level managers and professional staff; • Budget;

• Source of financing;

• Total budget per customer (US$); and • Staff.

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Table 8 – Other regulators in Latin America

Item Chile: CNE Brazil: ANEEL Colombia: CREG Peru: OSINERGMIN Uruguay: URSEA

Institutional framework

The National Commission of Energy (Comisión Nacional de Energía - CNE)

reports to the President trough the Minister of Energy

The National Agency of Electric Energy (Agencia Nacional de Energia

Elétrica - ANEEL) reports to the Ministry of Mines and Energy

The Regulatory Commission of Energy and Gas (Comisión de Regulación de Energía y Gas – CREG) reports to the

Ministry of Mines and Energy

The Supervising Organism of Investment in Energy and Mining (Organismo Supervisor de la Inversión en Energía y Mineria – OSINERGMIN) reports to the President of the Minister

Council

The Regulating Unit of Energy and Water Services (Unidad Reguladora de Servicios de Energía y Agua – URSEA)

reports to MIEM.

Legal support

Decree Law N° 2.224 and its amendments (Decree Law 20.402)

created CNE

Law No. 9,427 / 1996 and Decree No. 2,335 / 1997

Laws 142 and 143 created the regulatory commissions to oversee the

activities of firms providing home public services (utilities)

Laws 26734, 27332 and 28964 created OSINERGMIN and expanded its

faculties

Law N° 16.832 of 1997 and Law N° 17.598 of 2002

Scope

It is responsible for analysing prices, tariffs and technical standards to which

the companies of production, generation, transport and distribution of

energy must adhere, to have enough, safe and quality service, compatible with the most economical operation

Provide favorable conditions for the electricity market to develop with balance between agents and for the

benefit of society.

Its objective is to ensure that the services of electric energy, natural gas,

liquefied petroleum gas (LPG) and fossil fuels are provided to as many people as possible, at the lowest possible cost and with an adequate return for suppliers, that guarantees quality, coverage and expansion

Its mission is to monitor, at the national level, the compliance of the activities of

the electricity, hydrocarbons and mining subsectors with the current legal

and technical provisions, as well as compliance with legal and technical standards related to environmental

conservation and protection

Its main objective, when regulating the energy, fuel and water sectors is to

protect the rights of users and consumers, check compliance with

current regulations, establish the requirements that must be met by those who carry out activities related to these

sectors, resolve user complaints, propose to the Executive Power the technical tariffs of regulated services, prevent anticompetitive behaviour and

abuse of dominant position.

Mandate

Exercise the following functions and powers:

Technically analyse the structure and level of prices and rates of energy goods and services, in the cases and

form established by law. Set technical and quality standards

indispensable for the operation of energy facilities. Monitor and project current and expected operation of the energy sector,

and propose to the Ministry of Energy the legal and regulatory standards that

are required.

Advice the Government, through the Ministry Energy, in all matters related

to the energy sector for its best development

Regulate the generation, transmission, distribution and sale of electricity;

Supervise, directly or through agreements with state agencies, the concessions, permissions and electric

energy services; Implement the policies and guidelines of the federal government regarding the

exploitation of electric energy and the use of hydraulic potentials;

Establish tariffs; Settle differences, at the administrative

level, between agents and between those agents and consumers, and Promote the activities of granting concessions, permission and authorization of electric energy projects

and services, by delegation from the Federal Government.

Regulate monopolies in the provision of public services, whenever competition absent, and to promote competition in

the provision public services. Set quality standards for the provision

of the services.

Determine formulas for setting the rates of public services, and indicate when there is enough competition to set the rates free to be determined by the

market forces. Order the merger of firms when there

are studies that show that this is essential to extend coverage and reduce

costs for users. Order the liquidation of official

monopolistic public services companies, and grant to third parties the

development of their activity, when they do not meet efficiency

requirements

Ensure compliance with regulations for quality and efficiency of the service

provided to the user. Supervise that activities of the electricity, hydrocarbon and mining subsectors are carried out according to

the legal mechanisms and technical standards in force. Exercise its powers in concerning metrological control, as well as the quality of fuels and other products

derived from hydrocarbons. Verify levels of quality, safety and efficiency, defined in the corresponding

regulations, in the provision of electricity and hydrocarbon services

Ensure compliance with the law and its regulations;

Issue regulations regarding the safety and quality of the services provided, the

materials and electrical devices to be used; and

Dictate standards and technical procedures for measuring and billing control consumption; and use of meters

and switches and reconnection of supplies.

Organization of board

The Commission´s administration will correspond to the Executive Secretary. The Executive Secretary will design the internal organization of the Commission

The board is formed by five members: the general director, and four directors.

The composition of the Commission to be the following: Minister of Mines and Energy (Head),

Minister of Finance (Ministro de Hacienda y Crédito Público), Director of the National Planning

Department, Eight Experts Commissioners, Public Services Superintendent (with

voice but no vote), and

The Directing Council is the highest level in the structure. There are five Directors in charge of planning, directing and supervising all the

functions of OSINERG The General Manager oversees administering OSINERG´s resources and executes all the Board´s resolutions.

URSEA has a three member board, being the president, vice-president and

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Industry and Commerce Superintendent (invited).

Eight Experts Commissioners appointed by the President of the Republic comprise the Experts Committee. The Executive Director is responsible

for the formulation, adoption, execution, and evaluation of CREG´s policies, plans, programs and projects to

fulfill the entity´s mission and objectives.

The Collegiate Bodies have three members. They must resolve any claim

about OSINERG´s scope. The User´s Claims Appeals Board knows and resolves, in the second and final administrative instance, the claims

of the public service users under OSINEG´s scope. The Deputy General Manager of Tariffs

Regulation is the executive body responsible for proposing to the Board the energy tariffs, prices or fees of the electricity and hydrocarbon subsectors

Appointment of Commissioner

s or members of the Board

The President of the Republic, through the selection process for public officials, appoints the Executive

Secretary.

The appointments will last three years and might be renewed up to two times,

for the same term

The general director and directors are nominated by the president and the nominations are submitted for approval

by the senate.

The President of the Republic appoints the eight Experts Commissioners for a

4-year term. The Industry and Commerce Superintendent is appointed and might be removed from office by the Minister

of Industry and Commerce

The Directing Council is made up of five members appointed by a Supreme Resolution endorsed by the Minister of

Energy and Mines, as follows: Two proposed by the Minister of Energy and Mines, one of which will

preside,

Two elected from the list proposed by the President of the Council of

Ministers, and One elected from the list proposed by the Minister of Economy and Finance

Members are appointed by the president of the country in a council of ministers

Budget CNE´s budget for year 2019 amounts to

CLP 6,721,500,000 (USD 9.4 million)

The actual budget of ANEEL in 2019 was BRL 2,949 billion (USD 730

million)

CREG has an authorized budget for 2019 of COP 38 billion (USD 11

million)

OSINERGMIN has an authorized budget for 2019 of PEN 394 million

(USD 118 million)

URSEA’s authorized budget is UYU 156 million (USD 3.5 million) as of 2019. For 2020, URSEA’s authorized

budget is expected to be reduced in 15% due to a general Government

budget reduction.

Source of financing

The Commission´s assets shall be assigned annually in the Budget of the State or in other general laws, and come

from any property, transferred or acquired by any means

In the electricity sector, ANEEL’s main funding is from the Electric Energy Services Supervisory Tax (Taxa de Fiscalização dos Serviços de Energia Elétrica - TFSEE). It accounts for 0.4%

of the annual profit of license holders and is paid by customers as part of the

bill.

To recover service costs of regulation provided by each Commission, and

those of control and surveillance provided by the Superintendent, the entities subject to its regulation, control and surveillance, will be subject to two

contributions.

The maximum rate of each contribution may not exceed one percent (1%) of the value of operating expenses, associated with the service subject to regulation, of the contributing entity in the previous

year

The Regulatory Bodies will collect a Contribution for Regulation, from the firms and entities under their scope. The

Contribution for Regulation may not exceed one percent of the value of the

annual sales revenue, deducted the General Sales Tax and the Municipal

Promotion Tax

URSEA is financed with: (i) Taxes related to the activities regulated by URSEA. Article 22 of Ley Nr. 19.535

created a new tax that will be exclusively for URSEA. (ii) Fines imposed by URSEA. (iii) 5% of the

income collected by the Energy Efficiency Trust. (iv) 0.2% levy on the

revenue of regulated activities.

Staff 108 (2019) 882 (2019) 95 (2019) 296 (2019) 64 (2018)

Population

(million) 19.0 211.0 50.3 32.5 3.5

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As a high-level comment of the table above, it is worth noting that:

• All regulators report to the Ministry of Energy of each country or to the Council of Ministry, therefore ultimately to the Executive Power. Thus, no legal independence of the regulators from the executive powers is seen in the cases analyzed.

• All regulators are multi-sector, except for ANEEL, which regulates only the electricity sector of Brazil.

• In Brazil and Colombia, the regulator sets the tariffs.

• Despite the fact that the budget of URSEA is the lowest of the sample, it is interesting to consider per capita values, for which we also include in the table the total population of the countries. The reported budget of URSEA corresponds to approximately 1 USD per capita, compared to 3.6 in Peru, 3.5 in Brazil, 0.5 in Chile an 0.2 in Colombia. Albeit, one should be careful when comparing, given that – as depicted – regulators differ in scope and mandate. • Similarly, considering staff, URSEA employs 1.8 individuals per 100,000 population, compared to 0.9 in Peru, 0.6 in Chile, 0.4 in Brazil and 0.2 in Colombia16.

16 It is worth noting that the staff of URSEA includes employees “in commission” (i.e. coming from a

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Chapter -III- The Utility of the Future

“Innovation isn’t about technology. It’s about your business model”. Maryrose Sylvester

1. The global picture and Enel as a case study: from energy provider to service provider

The new energy landscape is questioning the traditional utility business model. The traditional business model of the utility is capital-intensive, which requires a large group of customers to serve as to be reasonably profitable (Chesbrough, Henry. 2016). This however is changing fast with the incorporation of decentralized generation, prosumers and renewable energy (Holder, Tim. 2019). Thus, energy providers are switching to energy service providers.

Experts already suggest that traditional utilities are changing their business models by providing customers new services (Mcmahon, Jeff, 2019). In the words of Alex Laskey (CEO of Opower), “They have decided that they don’t want to be a commodity provider any longer. What they want to be is an energy services provider” (Worland, Justin, 2016). Thomas A. Edison suggested that “business is about selling”. Some argue that utilities need to adapt their product range or their profitability will be at stake. For example, they might offer customers different programs to reduce the electricity use to meet energy efficiency goals or directly sell solar panels (Worland, Justin, 2016). Others suggest that utilities might change to a network administrative role, balancing the grid and providing energy backup when needed (Mcmahon, Jeff. Ob.Cit).

A success case study of a vertically integrated utility which transformed its business model is Enel (“Ente Nazionale per l’energia Elettrica”), from Italy. The state-owned monopoly emerged in 1962 as a combination of small private utilities. At present, the company is partially private but the largest shareholder remains to be the Italian Ministry of Economy and Finance. Currently, Enel also operates worldwide by actively setting-up new ventures and acquiring companies.

When Franceso Starace stepped-in as CEO of Enel in 2014, he focused on innovation by recruiting innovation specialists and implementing various innovation processes. For example, the “Innovation World Cup” invited teams of internal staff to propose their own startup to be developed by the company. Additionally, the company established the Enel “Idea Factory” with the purpose of building the right environment for creative thinking among its employees (Chesbrough, Henry. Ob. Cit.). Currently, Enel is part of more than 91 innovation agreements, facilitates more than 6 Innovations Hubs worldwide and has organized over 28 activities for such hubs (Enel, 2019).

At an organizational level, Enel modified its structure. After 2016, each country has a country manager but also a manager per line of business. This led, according to an executive of the company, to a sharing culture within managers (Enel, 2019).

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Figure 9 - Enel Organizational Model

Sources: Enel’s Annual Report 2018 (2019)

As the figure above portrays, Enel has a regional team of managers supervised by a global team, which reports to the board. Regional managers perform the direct control over the businesses, and thus the global team has indirect control over the business lines (e.g. energy infrastructure and network, innovation, energy trading). This structure seems complex yet it has allowed to create a global mindset balanced with a “one company” culture.

2. UTE’s vision of the future

UTE started to work on an innovation plan by setting the Innovation, Investment and Development Unit. The purpose of the unit is to stimulate the innovation, find future business opportunities and design the future of the company. The Unit is composed by individuals that previously worked in different areas (transmission, distribution, generation, among others) who focused on innovation but individually. The Board has allocated funds of its budget to this unit so as to have financial resources to comply with its duties (UTE, 2019).

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UTE is also working on an Innovation Policy in order to establish indicators that will allow the board of the company to assess the fulfillment of UTE’s goals (UTE, 2019). No public information about the Innovation Policy is available at the time this paper was written.

The following illustration shows what the future grid would look like according to UTE. As portrayed, UTE is considering an incorporation of industrial prosumers that will reduce the amount of energy taken from the grid. As far as households are concerned, end-users will be encouraged to reduce the consumption of energy in peak hours by different schemes, as discussed earlier. Interestingly, the illustration includes a micro-grid that is off-the-micro-grid (right image of houses). Finally, in the centre, there is a strong presence of storage facility to store surplus energy.

Figure 10 – Smart grids by UTE

Source: UTE (2015)

Recently, UTE made a presentation of demand-side management, smart grids and customer services plans. At the end of the presentation, UTE’s representative concluded that the energy sector should focus on services rather than providing energy, comparing the situation with Uber, Facebook, Alibaba and Airbnb. Mainly, due to the fact that these companies do not own the assets they are selling, but act as facilitators (Dilavello, Tomas, 2017).

Therefore, in UTE’s vision, utilities should focus on delivering the necessary infrastructure in order to enable the exchange of energy (Dilavello, Tomas, 2017). This is in line with the new business models of utilities discussed in the following section. Particularly, the statement made by UTE is aligned with the “partner of partner” model (PwC). Under this scenario, prosumers are able to negotiate long-term or ad-hoc contractual relationships, while the distributor (currently UTE) would be paid a management fee plus a tariff for its distribution services.

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3. Future customers and business models.

Aligned with UTE’s vision of the future grid discussed above, consumers and utilities of the future will interact differently than at present. The figure below shows that customers will be able to interact with a wide range of providers in different areas, including: (i) customer experience, (ii) home energy management, (iii) transaction management, (iv) beyond electricity. All these new functionalities and possibilities require a smart platform with the capacity to perform several activities at the same time.

The figure also depicts the new and different ways of interacting with the grid that are emerging, particularly as a combination of smart meters, dynamic prices, peer-to per- transactions and the new functionalities brought forward by blockchain.

Each of the particularities of the new system depicted in the figure require an extensive description which exceeds the purpose of this paper. Notwithstanding, the figure hopefully provides a glance at the dimension of the future energy landscape being discussed.

Figure 11 – The future utility customer

Source: Deloitte, (2019)

The transformation of the energy landscape can be at least partly summarized as “[the option that] formerly passive consumers [have] to match their utilization of energy with

Figure

Actualización...

Referencias

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