Chile has emerged as a leader in the energy transition, with some of the most ambitious decarbonization targets in the world. For example, Chile intends to shut down all its coal plants by 2040. According to, an estimated 21.8 gigawatts of solar, 17.6 GW of wind, and 3.3 GW of energy storage is required to accomplish this goal.
The problem arises when renewable energy companies experience these zero-price injections more frequently than expected, and the prices in their long-term supply contracts are not sufficient to compensate for these occurrences. This leads to financial losses for the renewable energy companies, as they are unable to cover their costs and make a profit from their operations.
By providing capacity revenues, governments or regulatory bodies can bolster reliability and security of the electricity system by incentivizing the availability of generation capacity. This becomes particularly important in systems with a high penetration of variable renewable energy sources, which may require backup or balancing resources to ensure a stable supply of electricity.