Coming in from the cold: Chile takes a belated step towards renewables

With the approval of the target of ten per cent of all electricity produced to come from renewable sources by 2025 by the Senate, Chile appears to be finally turning its back on its dependence on foreign gas, particularly from its neighbour, Argentina.

By Rafael A. Junquera

The natural gas battle with neighboring Argentina, which began back in 2004, is without doubt having a deep impact on the Chilean electricity market, with some saying that the market is already in crisis. If you take an optimistic point of view, however, its impact is not all bad because it is forcing the Chilean government to look at ways of achieving a more balanced electricity mix, with the inclusion of all available options, ranging from nuclear, which is currently under study, to renewable generation sources, such as wind and solar.

Currently, Chile has approximately 300 MW of installed generation capacity from renewable sources. However, the country took a big step forward at the beginning of this year when its Senate approved a new law, which mandates that ten per cent of all electricity produced in Chile must come from renewable sources by 2025. If this projection is met Chile would have between 1600 MW and 2000 MW of installed renewable energy capacity. An earlier target was also set, whereby five per cent of all electricity must be produced with renewable energy sources between 2010-2014.

Chile is blessed with an abundance of renewable energy resources but progress has been slow
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This is not the first time in Chile’s recent history that its electricity market has faced a crisis. In 1996, because of a poor rainy season, the country experienced a major shortage of electricity. Interestingly enough, the counter measures established back then to avoid an over-dependence on large hydropower plants, are the ones responsible for today’s problems. Because of its previous over-dependence on hydro resources, the government initiated a campaign to promote the usage of thermal plants, primarily natural gas powered. Pipelines were built to connect Chile and Argentina, and quickly the energy mix in Chile balanced itself out; perhaps it did too much considering the current state of affairs. In the last decade thermal power has grown to a point where it is currently the dominant source in the country’s generation mix, with 7922 MW of installed capacity; over 12 000 MW at the end of 2007.

However, Chile is learning quickly from its mistakes. Once the gas crisis began, the Chilean authorities and other organizations, such as Corporaciàƒ³n de Fomento de la Producciàƒ³n (Corfo), realized that diversification was not only essential for the well being of its electricity market, but for Chile’s economy as a whole.

Realizing the renewables potential

What may seem odd at this juncture is why it has taken Chile so long to begin exploring and promoting the use of renewable sources for electricity generation, especially given the fact that many analysts estimate the country is rich in those resources, almost as much as it is scarce in fossil fuels.

During a seminar entitled “Security and Energy Efficiency” held in Santiago last month, some panelists argued that the country possesses all the resources to produce electricity from a diverse range of renewable sources, such as wind and biomass, which are considered the most economically viable, as well as solar and wave energy.

According to Eduardo Bitran, the president of the National Innovation Council, Chile is a country particularly privileged from a renewable energy a perspective. “We have solar energy in the north, wind energy in both the north and south. There’s the potential to generate electricity from waves and tides.”

The Chilean government is convinced that renewable energy from sources such as solar power can be competitive at a price similar to fossil fuels
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Chile has 4000 km of coast. UK engineering consultant Baird & Associates reported last month that wave energy along Chile’s coast could satisfy up to 24 per cent of the country’s energy demand in summer and 26 per cent in winter.

On top of that, if there is a country in Latin America that has all the ingredients to develop renewable energy then it is Chile. Its economy is solid, as well as its social and political climate. It is also the country in that region of the world following advanced international trends in many of its industries.

Taking all these together makes one think that Chile could and should prepare itself for the development of renewable energy, but it also could create an environment in which new economic activity could be developed. Such an environment already exists in Spain and Germany, two country with an strong culture of using renewable energy, which in turn has fostered economic activity with the creation of 250 000 jobs in Germany and 188 000 in Spain.

The Chilean potential for the development of an ecosystem of renewable energy has been recognized by Energy Minister, Marcelo Tokman, who declared when the new law promoting the use of renewable sources was approved in the Senate: “We [the government] know that there is cheap and cleaner energy that is not being developed [in Chile] and that is why we need to put our effort for their development.” Tokman added that the government is convinced that these sources of energy can be competitive at a price similar to those using fossil fuels.

From small acorns grow

Although the new law promoting the use of renewable sources for electricity generation was only approved this year, the seeds for the development of these sources were planted four years earlier with the approval of the Short Law I, which facilitated the entrance of small players into the national system, which previously could not compete in their negotiating power with larger generators.

At the same time, the gas restrictions from Argentina started to create a supply shortage resulting in an upward trend in the price of electricity. The increasing price of electricity, which has persisted for a few years, has played in favour of small generators, such as small hydro and wind, because they were suddenly able to accelerate their return on investment.

In 2005, Corfo, with the support of Comisiàƒ³n Nacional de Energàƒ­a (CNE), initiated a ‘beauty contest’ offering grants to cover the feasibility studies of renewable projects from private companies. To date, Corfo has organized three of these contests, one per year, resulting in the approval of 140 projects with a total subsidy of $4.5 million. If all these projects are finally built, they will add between 800 MW and 1000 MW.

Corfo, however, does not expect all the projects to be completed because the studies could prove that either the resources or the financial feasibility of the project do not meet the minimum expectations. There are, however, five projects that are being built and combined represent 50 MW of new installed capacity. Another 20 such projects are being negotiated to obtain financial support.

Corfo recognizes that the cost of the feasibility studies is the first barrier renewables have to overcome, but not the only one; financing comes next. Although the Chilean financial community has had a long experience in backing new energy projects, these same institutions believed that renewables, and specially small ones, are a risky proposition despite the fact that they have proven economically feasible in other parts of the world. Corfo started a programme to educate the sector to make sure that the projects with positive feasible studies had the support of the financial community.

Corfo also launched a yearly seminar on renewables to attract international private investors. Combining the two editions in 2006 and 2007, more than 300 companies visited Chile and showed interest in participating in this nascent market. Among the companies showing interest in entering Chile’s renewable market include Iberdrola of Spain, Australia’s Pacific Hydro, SN Power of Norway, USA’s Econergy and Skyllermarks of Sweden.

Undertaking major projects is the future challenge

Considering that most of the current renewable energy plants in Chile are from self-suppliers using primarily biomass, the current challenge is to attract investors and promoters to build larger plants that utilize sources such as wind.

In favour of Chile is the fact that the steps taken four years ago are seeing results today because as Javier Garcàƒ­a, sub general manager of strategic programming at Corfo, puts it, “The market has gone from zero activity in renewables to being very dynamic at this point and with many interesting prospects.”

Last year a milestone was reached in the race to get the big international players involved in this nascent market. In September of last year, Endesa launched the largest wind farm in the country with 20 MW of installed capacity. Although compared to international standards, such as in Germany, Spain or the United States, this project is small, it is significant for the Chilean market, says Garcàƒ­a. This could be the first phase of a larger project because its installed capacity was constrained by several factors such as the transmission lines. Chile hopes it is the first phase of a new era in its electricity market.

This article is based on an article published in the March 2008 issue of Potencia, PennWell’s Spanish language quarterly magazine focused on the buoyant Latin American electricity market. Rafael A. Junquera is the editor.

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