Toward Green Energy Production in Chile

A Successful Case of a Dissonant Policy Framework in Latin America
Published: Wed 08 May 2013

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By adopting a differentiated renewable support policy within Latin America, Chile was able to attract overseas ventures and start bidding for resource capitalization in a plentiful geography featuring constant wind influxes, great solar irradiation, and accessible hydro and geothermal resources.

Written by Martín Cataife, Industry Analyst for Energy & Environment Practice at Frost & Sullivan - The Growth Partnership Company

Although green power or renewable energy (RE) is a nascent industry in Chile, it’s impact on the electricity market dynamics has increased as a result of the establishment of a Renewable Portfolio Standard (RPS) in 2007 and statutory net metering since March 2012.

Large power utilities are obligated by the RPS condition contained in Law 20.257 to buy 5.0% share from renewable electricity producers in order to diversify its electrical matrix (1). RPS regulation embrace assorted RE sources for electricity production, and substitutes the lack of other renewable support policies such as feed-in-tariffs (FiT) and public competitive biddings (PCB). Although early to predict, the effects of net metering will benefit IPP’s (Independent power producers) by enhancing cost-competitive on-grid applications.

Contrary to Europe, Chilean regulatory agencies refrained from subsidies and insidious mechanisms for RE takeover and focused on alternative solutions to profit from existing resources and high costs of electricity. These costs are associated to the energy matrix dependency on imported fossil fuels, as Chile lacks indigenous oil and gas reservoirs, and therefore local electricity production is aligned to international hydrocarbons pricing.

Furthermore, the price volatility of fossil fuels, coupled with the need for additional power supply due to a consistent growth in the electricity demand, unveiled a growth scenario for the RE industry.

Under these circumstances, green electricity purchase from power utilities has surpassed 6.3% according to the Chilean Center for Renewable Energies estimates for 2012. Effectively, there was a higher contribution of each technology during 2012: hydro generation accounted for 36% of RE injections, biomass comprised 51%, wind power accounted for 13% and solar.

However this mix will possibly shift as new hydro projects are compromised. In fact, the discussion over the Hydro Aysén project led to the resignation of the energy minister, who pledged support of the dam before it was suspended by the Supreme Court of Chile. Also, severe droughts and water scarcity, accentuated a major drift away from hydropower to thermal sources.

Therefore, other RE will lead the growing path of RPS policy: power utilities, IPP’s and mining end users have begun to adopt wind and solar power.

Wind power installed capacity has expanded 56.8% since 2008 and reached 204.57 MW by the end of 2012 as a result of top class assets. Solar power contribution to RE is still marginal but European investments will provide momentum for a long road ahead. To date, only 3.6 MWp are generated through the Calama 3 the Huyaca PV and the Tambo Real plants possibly as a consequence of the highest levelized cost of electricity (LCOE) of utility scale PV and CSP plants, if compared to conventional energies and other renewable sources such as on shore wind farms. Finally, electricity production from geothermal plants is on the outset of the learning curve and only 50 MW had been introduced to the Environmental Impact Assessment System (SEIA) for project evaluation.

Martín Cataife is an Industry Analyst for Energy & Environment Practice at Frost & Sullivan - The Growth Partnership Company

(1) Present legislation also demands a mandatory target of 10.0% RE contribution by 2024. Although the Government has raised this target up to 20.0% of the energy mix by 2020, this excessive goal has been recently cut by the Ministry of Energy whereas compliance has been difficult to attain.