renewable energy chile

7/28/2019 Renewable Energy Chile

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RENEWABLE ENERGY IN CH ILE: BARRIERSAND T H E ROLE OF PUBLIC POLICY

Sophie von HatzfeldtChile has a dire need as well as a vast potential to expand renewable energy productionand the government has recently introduced regulatory reforms and incentives to facilitatetheir development. Nevertheless, the governance structure of the electricity sector poses sig-nificant harriers to the attainmen t of national energy aim s. Actors from the state, privatesector, as well as civil society must tackle the main constraints to provide a cohesive an dtargeted policy response to the issue.

I n the face of rising energy prices and scarcity of energy resources, due to aworld increase in demand, energy security is a crucial concern of states and theprivate sector alike. In a context made additionally complex hy concerns such asenvironmental sustainahility and demands for puhlic participation that are addedto the traditional issue of supply security, policies that shift energy supply towardsrenewable energy sources have become increasingly central. Understanding theopportunities and challenges involved in systematically enhancing their expansionis of utmost relevance.

Chile has a dire need as well as a vast potential for the development of renew-able energy and has recently formulated national aims to promote its expansion.However, the current governance structures of the electricity sectorbased on amarket economy with minimal regulationsput the fulfillment of these aims intoquestion. A study is required to detect where the shortcomings of the market are,and in which way those factors prevent actors from developing renewable energyprojects. Inferring from an analysis of the con straints to the developmen t of renew-ables, one can develop policy recommendations for the government, market actors,Sophie von Hatzfeldt is a graduate student in puhlic policy at the Hertie School of Covernance inBerlin. She previously worked for the German International Development Cooperation (GIZ) in Chile


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Sophie von Hatzfeldtas well asother stakeholders such as civil society, inorder toprovide incentives toremove barriers and make significant advances.

Since 2010, Chile has been a member of the Organisation for EconomicCo-operation and Development (OECD), which increases its responsibility to shifttowards amore sjstainable economic development. This not only has implications

at the national level but also at the international level.between s thecountry aims to expand sustainable develop-

AnHpQ ment. Chile's pioneering liberalization reforms in, J the energy sector, specifically in electricity in theM o u n t a i n s and ^ gQ ^^^ JQQ ^ 5 ^ ^ ^ ^ . i ^^^^^^ ^^^ ^^^

t n e 1 a c i l i C U c e a n , other countries. Chile's reforms to promote renewableC h i l e is e n d o w e d ' energy can also function as an exemplary model for

. , 1 , , . n other countries inLatin America and beyond.With po tentially ^rich and varied C O N T E X T AN D RE S E ARC H QUE S T IONrenewable Chile imports around 70 percent of its primaryrPSOlirCPS for energy supply, due to having limited domestic energyresources.' However, since 2010, growth in Chilee n e r g y g e n e r a t i o n . . . .. u i . f c-, . , . ,u

oJ o has hadhigh annual rates or 5 to 6percent, and thedemand for electricity to feed this growth continues

to rise atan annual rate of to 7percent.^ With a relatively high energy intensityconcerning electricity (Chile is at 0.42 compared to theOECD average of 0.27),Chile requires hjgh levels of electricity input to produce an increase in itsCDP,revealing a low energy efficiency of its economy (increasing theCDP by 1 unitrequires an almcst 1.5 unit increase in theelectricity supplied).^ Tofeed Chile'sfuture development, thecountry faces thechallenge of designing suitable energypolices tosafeguard the country's national autonomy, secure its economic growth,and maintain its living standards. Energy crises in recent yearsthe latest beingin 2008, when Argentina unilaterally cut off gas lines to Chilehave increased thecountry's reluctance to rely onvolatile import conditions andhave strengthenednational energy debates and investments into the country's energy security.

To rectify the imbalance between national energy supply and demand as wellas Chile's dependence on predominantly imported conventional resources, Chileis increasingly emphasizing the promotion ofalternative domestic energy sources,most notably that of renewable energies.*" Stretching across a length of 4,300


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Renewable Energy in Ghile: Barriers and the Role of Public Policygenerate wind energy, 10 percent of the world's active volcanoes for geothermalenergy, and 6,400 km of coastline where tidal and wave power could be harnessed.'In this light, the Chilean government has on several occasions in recent yearsdeclared its aims to diversify energy production by including a significant propor-tion of renewable energies.

Small changes in regulations have facilitated the process with an aim ofproducing 10 percent of the electricity from renewable resources by 2024.^ TheNational Energy Strategy 2012-2030, launched in March 2012, places the promo-tion of renewable energy as its second highest priority.'' The president of Chile haseven raised the target to 20 percent by 2020, which is unofficially referred to as the"target 20/20." This target is currently under discussion in parliament.^

While studies show the feasibility of renewable energy in terms of its poten-tial and the competitiveness of its electricity prices, the actual level of renewablesin the electricity matrix is lagging heavily behind aspired goals. While the lawdemanded 5 percent of electricity to come from renewable energy sources in2010, in that same year only 2 percent had been reached. It is projected that ifthe country continues on its current trajectory, by 2030 only 8.5 percent of elec-tricity will be generated from renewable sources.' It is therefore doubtful that theproposed national target of 20/20 is possible under the current electricity sectorgovernance structures, since both the prevailing market forces and the regulatorysystem that govern the energy sector seem to hinder the development of renewableenergy. It is vital to understand these and other impediments to the developmentof renewables in Chile if one wants to draft policy recommendations that facilitatethe fulfillment of the proposed national target.

Against this background, this study aims to understand what the main bar-riers are to the fulfillment of Chile's proposed target of 20 percent of the electricitymatrix provided by renewable energy by 2020, and what policy recommenda-tions could be formulated to address these constraints in a targeted and cohesivemanner.

DRIVERS OF RENEWABLE ENERGIESAs conventional energy resources become scarcer and costlier globally, research

on energy security has increased, and the issue is rising in importance on globalpolicy agendas. The number of studies on renewable energy sources and theirpotential contribution to long-term economic growth and environmental sustain-ability has increased. Likewise, the required corresponding strategies, both on theglobal and national level, have been studied extensively.


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Sophie von Hatzfeldtsupply as well as the stability of electricity prices); an environmental nature(primarily regarding CO^ emissions); and social nature (concerning accessibilityfor regionally marginalized groups and acceptance by civil society regardingthe exploitation of the new energ)' sources)."^ These three drivers may be called"generic" because of their existence in the predominance of industrialized coun-tries today. This holds true for Chile as well, but there are certain factors specificto Chile that ensure that renewable energies will have a significant role to play inthe future generation of electricity.

First and foremost, Chile's potential is remarkable. A number of scientificstudies, performed by the Chilean M inistry of Energy, as well as the UN EconomicCom mission for Latin America and the C aribbean (ECLAC) and th e Global EnergyResearch Institute, have measured the potential of renewable sources, arriving atestimations for potential installed capacity:

R e n e w a b l e E n e r g y :>malt Hvdraubc .... . _ , _. y- * i . < ^c / >/ i i. i/ x ^'nrf Soiar Biom ass Ceothermal OceanSource (, 17-24; Renewable energy source est imated potent ia l in megawatts (MW).

The currently installed capacity of renewable energy source however, is farbelow this potencial:Renewab le Energy Sm a l l Hy d rau l ic .... . . , , ^ ^ ,r / -irt i i i i / ^'"c/ Bwm Qss Solar TotalSource (


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Renewa ble Energy in C hile: Barriers and the Role of Public Po licyBoth national and international actors have increasingly recognized in recent

years this rich presence of renewable resources as presenting a great opportunityfor the country. As a result, facilitation reforms have been introduced and invest-ments into the sector have since increased. This is linked with the increasing com-petitiveness of nonconventional technologies vis--vis conventional technologies,primarily due to growing technological maturity but also to the spread of cheapertechnology internationally. A study performed by Bloomberg New Energy Financeassessing the comparative costs of various electricity producing technologies inthe Chilean power sector shows that electricity from renewable sources is in factalready competitive today and will become even more so in the future."

Recently, as a response to the challenges in energy security and the opportu-nities presented by renewable resources, the Chilean government has introducedseveral reforms into the regulatory framework that have driven renewable energyproject development and the participation of renewable energy in the electricitymarket. The first reform was introduced in 2004 through the enactment of Law19.940, which enabled any generating companyregardless of its sizeto sellenergy in the electricity market.'^ Moreover, the law introduced a partial or fullexemption for those renewable energy plants supplying the system with a surpluspower of less than 20 MW from paying tariffs for the transmission of their elec-tricity through the main distribution networks.'3 The opening of the market tosmall power generators facilitated the viability of small renewable energy plants.

With the introduction of Law 20.257 in 2008, Chile became the first and onlycountry in Latin America to introduce a quota system, requiring electricity com-panies to fulfill a renewable energy quota or face a penalty for failure to comply.'4These legal reforms opened up the electricity market for greater competition,driving down the costs of nonconventional energy technologies and sending pricesignals that incentivized investment into the new technologies. In the followingyears, the incentive structure was enhanced by several direct economic incentivesincluding subsidies for pre-investment studies and implementation of projects aswell as public funding for research and development (R&D).'^ In 2010, a Ministryof Energy was established with the mandate of coordinating the energy marketand sectorial policies, developing renewable energy markets, and setting minimumstandards for energy efficiency.

BARRIERS TO RENEWABLE ENERGIESWith the privatization and liberalization of the electricity market in 1982,


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Sophie von HatzfeldtThe new governance structure was based on free market competition, with onlyminimal regulation where necessary.'^ The electric system has been widely cel-ebrated for its successes in privatization and deregulation: installed capacity hasrapidly increased as private investment has dramatically grown and access to elec-tricity in rural areas has spread to 94.5 percent.'^ Costs and prices have decreaseddue to improved productivity of labor and capital, and energy losses in the distri-bution system have sunk.'^

Whether the governance structure of the electricity market is adequate tofacilitate the development of renewable energies is questionable, as can be seenfrom the above-described gap between their real and potential participation. Thereforms that were introduced by the government in 2004 and 2008 seem to havebeen insufficiently strong to change the dy nam ics of the mark et th at would help toachieve the 10 percent aim by 2024, not to mention the more ambitious target of20/20. While the Ministry of Energy has set the development of renewables highon its agendathe division for renewable energies is the ministry's largest depart-mentthe plans and measures described in the National Energy Strategy lackdetail and concreteness.'^ Moreover, the g overnm ent seems to lack the po litical willfor implementation and faces a highly contested political battlefield, illustrated bythe fact tha t in April 2012 Jorge Bu nster became the fifth ministe r of energy sincethe founding of the ministry in 2010.As the current governance structure of the electricity market is not adequateto deal with the challenge of integrating renewable energies to the electricity mix,a clear understanding of the barriers to implementation is essential to addressingthese challenges with targeted public policies.

One of the most significant constraints is the lack of available financingfor renewable energy projects. Funding is crucial for such projects, both in pre-investment assessment stages and in the early capital-intensive realization stages.Unfortunately, the financial markets in Chile are not favorable for renewable ener-gies. This is due to the lack of understanding about nonconventional sources, guar-antee requirements, doubts about long-term profitability, the unpredictable pricesof renewable electricity in the spot market, unattractively low prices in powerpurchasing agreements (PPA), and the availability of alternatives in the conven-tional sector with lower risks and higher profitabilitydue largely, though nevermentioned, to environmental and social costs being externalized.^"^ Moreover, thescarcity of financ ing is due to the lack of political will, desp ite official dec larationsto the contrary. Indeed, there is a noteworthy absence of state measures providing


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Renewable Energy in Chile: Barriers and the Role of Public Policygeneration and commercialization is in the hands of three companies and theirsubsidiaries.^' Moreover, there exists a potential conflict of interest between thestate and the private sector due to close purported semi-official ties between influ-ential individuals who move frequently between public and private administrativepositions.^^ This tends to impede the development of transparent public-policydecisions and their effective enactment. Admittedly,this is true not only for Chile but for all of Latin I f t h e S t a t eAmerica, as the presence of large, diversified business ^j-iirrV ' n r i n r i t vgroups blurs the division between politics and theprivate sector, giving much political leverage to thesegroups.23 This applies to Chile, where four influential it shouldfamilies run large groups that dominate 47 percent of national andthe Santiago stock exchange, with activities diversi-fied into the energy sector.^''

Another difficulty that puts any new actor at a Campaigns.disadvantage is the fact that nonconventional gen-eration plants, by their nature, tend to be geographically isolated and require thebuilding of new transmission lines to reach the main grid.^^ This makes it difficultfor newcomers to access existing electricity networks and engenders a wide rangeof unpredictable costs.

A further hindrance to reaching the 20/20 target is the institutional proce-dures for the establishment of renewable energy projects. This third barrier ofprocedu ral delays is very disruptive, as excessive pe rm it requ iremen ts, delays in theconstruction process of the sites, and strong social and environmental oppositionin the past have constrained renewable energy projects.^^ Moreover, procedures areoften based on informal negotiations with local communities that surround projectsites or with land owners to run transmission lines rather than clearly definedprocesses. This is a constraint for the development of renewables, as it increasescosts and risks for project developers and deters investors. Here the state can havean important role to play as well, but it is difficult to determine the impact ofthe state's prioritization of renewable energy. If the state places a high priority onrenewable energies, it should conduct national and targeted awareness campaigns,reform the regulatory framework to improve participatory and distributive consid-erations, and gauge the likely level of public participation during project planningand evaluation processes.POLI CY RECOMMENDATI ONS


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Sophie von Hatzfeldtthat hinder their attainment, one can draw targeted policy responses to addressthe principle barriers. Tackling all three barriers will provide a cohesive responseto the problemif there is enough political will.

To overcome the problem of financing, public and private financing initiativesmust be equally invigorated. Public funding must expand the portfolio of possibleinvestment sources for R&D, pre-investment studies, and project implementation.Provision for public investment opportunities must increase, and likewise themechanisms for the financing of R&.D from the private sector must be improved.Mining and other energ)'-intensive industries should contribute to a fund for thedevelopment of technological innovation and pilot projects, as these industries areintensive electricity users and contribute greatly to the nation's CO2 emissions.2Additionally, the renewable energy market must be made more attractive forpotential investors. To this end, the environmental and social costs of conventionalresources must be internalized in their pricing; only then can the real costs of dif-ferent generation technologies be properly assessed. More importantly, accuratepricing ensures that the playing field will be equitable for all electricity producersthat vie for funding and market share. Furthermore, improved research and sta-tistics must clearly discern the potentials of specific nonconventional technologiesand geographical localities. With improved information and guidance, projectdevelopers, private investors, and public institutions can more easily preparefeasibility studies and modeling of capabilities and can incentivize investmentsinto renewables. In addition, building up local capabilities is indispensable for theimplementation and maintenance of the energy projects.2^

Overcoming market concentration and barriers to entry for new, smalleractors is vital to Chile's electricity system. Raising the quota of renewable energyby statute to the target of 20/20 and possibly extending the quota system ontofinal energy consumption will increase competition among generation companiesand incentivize large generation companies to engage in renewable energies whileencouraging the participation of smaller market actors. Likewise, the introductionof a system of feed-in-tariffs, by which distribution companies are obliged to buy allelectricity produced from renewable sources at a price fixed in long-term contracts,will generate incentives for private investments, including by households and busi-nesses, and encourage a significant and rapid diffusion of nonconventional tech-nologies. The government's current plans to introduce a net-metering law, enablingsmall-scale renewable energy producers to inject their electricity into the networkbased on a credit procedure, must be speedily advanced and implemented.


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Renewable Energy in Chile: Barriers and the Role of Public Policyelectricity sector amongst policymakers and judges. Operators of the electricsystem must be transformed into wholly independent bodies, autonomous fromthe generation and transmission companies as well as from the largest consumersso as to ensure impartiality in the operation of the electricity sector.^'

Third, regarding institutional procedures, reforms should be enacted for theestablishment of renewable energy projects. Surveys and public awareness cam-paigns can serve to inform the local communities about the social, environmental,and economic benefits of renewables vis--vis conventional energy so as to lessenlocal opposition. Reforms in the regulatory frameworks of electricity and the envi-ronment that are meant to improve participatory and distributive considerationsin project development must facilitate determining how far public participationcan or should be guaranteed in the planning and evaluation processes in renewableenergy projects. Accountability of projects has to be enhanced through improvedmechanisms for the monitoring of ongoing projects and for ex-post evaluations.

Last but not least, objectives regarding renewable energy must go hand-in-handwith energy conservation, and policies regarding renewable energies and energyefficiency must be designed in a convergent manner. Along the same line, the gov-ernment must maintain its focus on reducing energy demand through strategiesincluding energy efficiency. As outlined in the National Energy Strategy, projecteddemand must be reduced by 12 percent by the year 2020, with private sector actorsincluding households, the building, industry, mining, and transportation sectors,being incentivized to improve their individual efficiency.

The policy recommendations given above show clearly that state, private-sector,and civil-society actors must be involved in renewable energy development. In theliberal paradigm of the Chilean economy, market actors are the principal players,and their participation in R&D, promotion of generation projects, and provision offinancing for renewable energy market expansion are indispensable. But so is thestate. If its goals are to be reached, the state must show a strong political commit-ment to introducing concrete reforms that will improve the regulatory frameworkand incentive structures, create a serious penalty system, and take into accountlong-term economic, environmental, and social concerns. Last but not least, acivil society with active participation and ownership among the local populationsis necessary. In fact, only when all stakeholders join hands will the prospects of20/20 ever be accomplished. '^


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Sophie von HatzfeldtNOTES

' Th e ma in sources of prima ry energy are: crud e oil (41 percent), fuel \\'ood and others (19 perce nt),coal (16 percent), natural gas (16 percent), and hydropower (8 percent); the main energy sources forthe generation of electricity are hydropower (35 percent), natural gas (31 percent), carbon or petrol(16 percen t), diesel (i6 p ercent), and wind and biomass {respectively I percent); Nationa l EnergyCommission, "Estadsticas" (unpublished data, Government of Chile, Santiago: 2010).2 World Bank, "Data: Chile" (Washington, DC: World Bank, accessed January 2013), http://data.worldbank.org/country/chile.^ Energy intensity is a measure of the energy efficiency of a nation's economy and is calcula ted asunits of energy per unit of GDP; International Energy Agency, "Energy Balances of OECD Countries2012" (Paris: OECD Publishing, 2012), 66, 102.'' Renewable energy gene rators include thos e whose prima ry energy source is solar radia tion, windpower, hydraulic energy, biomass, geothermal energy, and energy generated from the sea. Chileanlaw distinguishes the more specific category of "non-conventional" renewable energies, whichexcludes large hydraulic power plants \vith a maximum capacity greater than 20 MW. In this study,"renewable energies" refers specifically to these nonconventional sources; Introduce Modificaciones ala Ley General de Servicios Elctricos Respecto de la Generacin de Energa Elctrica con Fuentes deEnergas Renovables No Convencionales 2008, Law 20.257 (Article 4.aa).^ Inte rna tion al Energy Agency (2012), 159.'^ Law 20.257 (Article 2).^ Ministry of Energy, National Energy Strategy 2012-2030 (Santiago: Government of Chile, February2012), 13.^ Sebastin Pinera, "Del Chile del bicentenario al pas de las oportunida des" {presidential message,Valparaso, 21 May 2010).^ Ma nlio Coviello, )uan G olln, and M iguel Prez, "Las alianzas pblico-privadas en energas renova-bles en Amrica Latina y el Caribe" (Santiago: UN Economic Commission for Latin America and theCaribbean, May 2012), 44; Shayla Woodhouse, "Renewable Energy Potential of Chile" (California:Global Energy Network Institute, August 2011), 5-6.'^ Edm undo Claro, Juan Pablo Aristegui, and Esteban Tomic, "Desafos y Op ortun idad es de lasEnergas Renovables No-Convencionales en la Matriz Elctrica de Chile" (report no. 7, KonradAdenauer Stiftung, Chile: 2012), 10-11." Bloomberg New Energy Finance uses a "levelized cost of energy" financial model to me asure theprice of a stand ard unit of energy across the different p rimary energy generation technologies in Chile,including nonconventional renewable energy technologies. For more information on levelized costs ofenergy, see http://about.bnef.coni/m arkets/renew able-ene rgy/solar/; Bloomberg New Energy Finance ,Natural Resources Defense Council, and Valgesta Energa, "Chile's Clean Energy Future" (report,Bloomberg New Energy Finance and National Resources Defense Council, New York: April 2011),httpy/www.nrdc.org/'laondaverde/international/files/chile-LCOE-report-sp.pdf.'^ Regula Sistema s de Tr ans por te de Energia Elctrica, Establece un Nuevo Regimen de Tarifas paraSistemas Elctricos Medianos e Introduce las Adecuaciones que Indica a la Ley General de ServiciosElctricos 2004. Law 19.940 (Article 71-5).'3 Ibid., Ar ticle 71-7.' ' ' By this law, all electricity companies generating more than 200 MW became obliged to supply5 percent of their electricity from renewable sources between 2010 and 2014 and to increase thequo ta by 0.5 percent yearly after 2015 un til it reaches 10 percen t by 2024 ; De utsche G esellschaft frT'echnische Zusammenarbeit, 78-79.'^ Claro, Aristegui. and Tomic, 24-25." Inte rna tion al E nergy Agency, "Chile: Energy Policy Review" (report, OE CD Publishing, Paris:


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