Environmental Organizations in Chile Ask the Environmental Court to Invalidate a Rule that Artificially Prioritizes Electricity from LNG Over Renewables

In Chile, environmental organizations have turned to the Environmental Court to challenge a regulation that grants priority to electricity generators using liquefied natural gas (LNG) purchased under take-or-pay contracts, regardless of whether it is the cheapest source of electricity, displacing clean and renewable energy, and causing an enormous impact on the climate. This would be the first time that the Court would rule on a regulation in the electricity sector – a key sector in the fight against climate change and to safeguard the constitutionally protected right to a healthy environment.

Power markets meet energy demand with electricity generated by various companies from coal, gas, hydro, sun, and wind. Companies compete to sell their electricity to the power grid based on the lowest price. In Chile, the National Electricity Coordinator, the power market operator, determines the priority order for dispatching energy from each generator, always taking the least-cost electricity first. Renewable energies typically are dispatched first due to their lower generation costs.

However, a regulation adopted in 2016 created a fiction to allow electricity generated from LNG purchased under take-or-pay contracts to be given priority dispatch over other generators even if their electricity isn’t the cheapest.  The fiction is that because the gas must be taken under these contracts, even if it’s not needed — the supposed “inflexibility” of the contract — its marginal cost is effectively zero.  This market manipulation displaces cheaper renewables from the wholesale electricity market.

The regulation artificially categorizes LNG purchase contracts as “inflexible” — they can’t cancel or modify them and must accept them — creating the legal fiction that the fuel price is zero.  This effectively allows LNG generated electricity to jump the queue and be dispatched to the country’s electrical grid first before cheaper electricity from wind and solar.  In 2019 and 2020 more than half of LNG used in power generation was declared “inflexible” under this regulation, effectively forcing LNG into Chile’s energy system, regardless of the cost or need.

The aim of this regulation is to throw a lifeline to increasingly uncompetitive gas by shielding companies generating electricity generation from LNG from well-known inherent risks in the global LNG industry. Most LNG contracts are negotiated on a “take or pay” model. This means that the buyer of the gas, which arrives via ships to ports, must pay for the LNG irrespective of whether it can be used – i.e. regasified and burned or stored — upon unloading from the ships. The fiction of “inflexible gas” was introduced to mitigate the risk that generators purchasing gas might have to discard gas that cannot be stored, and to spare them from having to make reasonable investments in storage construction or take other measures that would make electricity generated from LNG even less competitive compared to renewables.  This so-called “inflexibility” is an inherent risk in the LNG import market that is addressed in other countries with straightforward approaches such as allowing the cancellation of shipments by paying a fine, postponing gas deliveries, transferring sales to other buyers, or building more storage.

In 2019 and 2020 more than half of LNG used in power generation was declared “inflexible.”

The unfairness of the rule has not gone unnoticed.  Renewable energy generators have filed a lawsuit before the Free Competition Court against the rule.

The environmental groups’ challenge takes a different approach based on the constitutional right to a healthy environment and the urgency of transitioning to clean energy in the era of climate crisis. In August 2023, a group of environmental organizations in Chile requested the National Energy Commission to invalidate the rule in question, but the request was denied. This left the way open to present a challenge request to the Environmental Court to review the legality of the rule. This is precisely what is happening. We are faced with a rule that is being challenged for being regressive in double measure, both in terms of free competition as well as environmental and climate concerns.

Cristina Lux, lawyer for the Inter-American Association for the Defense of the Environment (AIDA, by its acronym in Spanish), that represents the organizations challenging the rule, said in a statement: “We are facing an unprecedented case, where the Environmental Court is being asked to rule on a problem that was born in the energy sector. The urgent need to transition to clean energy in Chile is fundamentally an environmental issue, both because we must meet the nation’s climate commitments and also because we must provide relief to the communities that have been sacrificed and made to pay with their health for the fossil energy that the entire country uses. The Environmental Court has the authority and responsibility to redirect Chile’s energy transition along the path of justice by invalidating this costly rule.”

Why is the rule so harmful? On the one hand, it allows more gas into the country’s electricity mix, and and less opportunity for renewables, resulting in more emissions of greenhouse gases (particularly methane) and local pollution from burning gas.  It also unjustly impedes the clean energy transition which recognized as national policy by both the current and previous governments of Chile. In addition, the LNG that arrives in Chile is imported, so greater volumes of its use imply greater leaks at the regasification stations when it enters the country, with important and inevitable environmental impacts.

Recent evidence shows that gas is even more polluting than we once thought. Current trends indicate that gas is replacing and surpassing coal as the largest source of fossil fuel emissions worldwide, leading to more detailed analyses of its true planetary climate impact.

Recent data has highlighted the enormous global warming potential of methane, the main element of gas. According to the Report of the Intergovernmental Panel on Climate Change (IPCC), the climate forcing, or warming potential,  of methane is up to 82.5 times over  a 20-year period than that of CO₂, and up to 29.8 times over 100 years. Thus, leaks throughout the entire gas production and supply chain, have proven to be much more serious than previously understood and can make LNG as damaging for the climate as coal. It has been estimated that methane is responsible for 30% of the increase in global temperatures since the industrial revolution.

Gas has been falsely sold to the public and policymakers as a so-called transition fuel, necessary to achieve the take-off of renewables, but this is not the case. It is not necessary to use gas, a fossil fuel, to get off coal, another fossil fuel – renewable energy solutions are available to transition directly to a clean energy future. Artificially privileging LNG, as this Chilean regulation does, is dangerous not just because it has led to more gas in the country’s energy mix.  Going forward, it also creates an incentive to build more LNG infrastructure, tying the country to an unnecessary dependence on an expensive, polluting fossil fuel, and displacing clean, low-cost renewable energy.