In the latest years there has been a growing concern for the protection of they Chilean environment, especially about the impact produced on it by the newÿ electrical generation projects, both thermal an hydro.

Historically, the Future Planning for the generation and transmission projects, made by the National Energy Commission (CNE), has been in general followed not only by new investors, in fact also those who are already in the market. The main goal of this Planning is just to make an indication to the private sector about the plants that are necessary for the country and the appropriate time for their operation.

Although the present regulatory structure makes no requirements in terms of concessions for new generation and transmission projects, the CNE’s Plan has been used by the investors as a way to obtain the funds for those projects highly intensive in capital. Thus, a project included in the CNE’s Plan has the recommendation of the regulatory entity of the sector, but it has to deal with strong pressures from environmental groups that either do not want projects to be built or demand that projects fulfill more mitigating actions.

In this way handling the Environmental Externalities (EE) in generation projects becomes an additional risk to be considered along with those already mentioned. In order to decrease the uncertainty, it is essential to define the necessary conditions to make the analysis, sensibilities and conclusions about the real impact of the EE in the electric generation projects.

This paper presents a comprehensive study of the previous matters.

First, a general methodology of analysis is introduced, which establishes the different stages and actions to determine the critical EE and their impact in the electrical sector. This represents a general methodology and the simplicity in its application is determined by the possibility of designing a good model for the behavior of the market.

For the Chilean case, it’s implementation becomes natural since the operation and planning systems generate conditions that make its application absolutely feasible.

Second, the critical EE have been obtained measuring their impact in the market model designed in terms of the current regulatory frame. Then, a sensibility study was carried out for each of them, concluding that there is a clear necessity to generate a policy that creates incentives to include the environmental costs of each project.

Finally the paper proposes a policy to take into account the EE’s, not only in the operation but also at a planning level, since this represents the correct approach to the topic and it’s efficiency is demonstrated in the model under the current regulatory framework.