Co-authored by Martín Cataife, Industry Analyst and Gustavo Stainoh, Research Analyst – Energy & Environment Practice, Frost & Sullivan - The Growth Partnership Company
Our last commentary on the subject indicated that the establishment of a Renewable Portfolio Standard (RPS) and a statutory net metering has positively impacted the dynamics of the Chilean electricity market.
However, some clarifications on the regulatory framework are needed. Albeit decisive, regulations represent just one element of RE implementation: the setting of a profitable business scenario where private investors perceive the possibility of achieving a tangible income or, conversely, deflect capital investment to conventional energy sources. In this respect, Chile has proved effective in the instrumentation of public policies oriented towards the procurement of foreign direct investment (FDI) as well as the allocation of budgetary funds into electricity mix diversification.
Still, during 2012 there were several reasons to be skeptical on the effective commissioning of RE plants. Power generation projects are frequently postponed and challenged by funding issues, inconsistent policies, and other project implementation barriers. While this is the case for some projects in Chile, green electricity has actually progressed and expanded.
Today's milestone within the Chilean electricity market is the increased penetration rate of RE: the first quarter of 2013 showed unprecedented and auspicious results for renewable energy generation in Chile as 57.4% of add-on electricity demand was supplied with green energies. Thus, if large hydro plants are excluded from the analysis, Chile has reached the highest renewable electricity penetration rate in South America.
When compared to the first quarter of 2012, today’s improvement is significant as only 17.8% of add-on electricity demand was actually supplied with green electricity.
Flashback: How Chile was brought to implement RE
Historically, Chile relied extensively on its hydropower potential through a conjunction of major dams and run-of-the-river facilities accounting for 11 GW installed in the Interconnected Electrical System of Central Chile (SIC). Low hydrology has recurrently affected supply capacity, and caused a reserve margin reduction. Further, the droughts in 2007-2008, 2010-2011 and 2012 have limited hydropower generation and led to acute power supply problems. Several adjustments were implemented during the last two decades, but the most relevant fact was the widespread commissioning of thermal units.
During the past 15 years, natural gas from Argentina played a pivotal role; its low price and availability led to the construction of four pipelines and about 4,000 MW of generating capacity with this fuel (from 1997 to 2006). However, subsequent supply interruptions (2004, 2006, and 2008) forced Chile to stop the construction of combined cycle gas turbines (CCGT) and convert existing gas power plants to diesel. Moreover, Chile was unable to sustain gas prices as the imports from Argentina were suspended.
Since then, external factors have prevailed in cost setting for fuelling power plants, in other words Chile has internalized a higher pricing for fuel imports.
Power Generation companies’ report this situation as difficult to sustain in the mid to long run and call for an immediate solution in the event large power plants are not constructed. As today, Castilla and HydroAysén projects, respectively 2.100 MW (coal) and 2.750 MW (hydro), were interrupted by the local justice. Moreover, Chile dismissed the construction of nuclear power plants after the Fukushima events.
To conclude, this it’s not how the electricity sector pictured RE evolution, but it’s clear that we are experiencing a major shift in the production on electricity as Chile becomes a green energy producer.
Martín Cataife is an Industry Analyst for Energy & Environment Practice, Frost & Sullivan - The Growth Partnership Company
Gustavo Stainoh is an Research Analyst for Energy & Environment Practice, Frost & Sullivan - The Growth Partnership Company