Chile is a country incredibly rich in natural resources that have the potential to generate power for millions, and yet much of it remains untouched. The country currently imports 75 percent of its primary energy supply, the majority of which is oil, coal and natural gas. Since 2010, the country has been a member of the Organization for Economic Cooperation and Development (OECD), which increases its responsibility to transition towards more sustainable economic development. Additionally, the country is eager to harness its domestic resources to improve national security and reduce its vulnerability from neighboring conflicts that have historically left the country high and dry in energy resources. Lastly, Chile requires an unusually high level of electricity input to produce an increase in its GDP (Chile’s high energy intensity for electricity is 0.42 compared to the OECD average of 0.27). The average electricity bill for Chileans has risen 20 percent since 2010, and is projected to rise another 34 percent.
Under the backdrop of an electrical sector based on a market economy with minimal regulations, the Chilean government has increased its role in the country’s energy matrix, and has set ambitious targets to incorporate more domestic extracted non-conventional renewable energy (NCRE) resources into the market. The government sees an increased role particularly for solar, wind and geothermal power in the production of electricity. In 2013, the current administration raised the nation’s target of electricity produced by renewable resources from 10 percent to 20 percent by 2025. Moreover, May of this year marked an unveiling of President Michelle Bachelet’s updated energy agenda, which included a goal that 45 percent of the newly installed generating capacity between 2014- 2025 will be of a non-conventional nature. Unfortunately, the past few years have given the country little hope of achieving these numbers. Given the short time period in which the country hopes to substantially alter its reliance upon non-conventional resources, both public, private and civil-society actors must act to address obstacles and carry out proper policy-based solutions.
LACK OF FINANCING FOR RENEWABLE ENERGY PROJECTS
As the graph below shows, the potential for NCRE resource capacity in Chile is massive, and yet, currently installed capacity, combined with plants under construction, make up less than 5 percent of the country’s potential energy source. This brings to light the enormous disconnect between the possibilities and the status quo of NCRE resources in the Chilean energy matrix. The crux of this issue lies primarily in the lack of financing available for the generation of these renewables. The main reason why the data for potential generation dwarfs that of current generation is that potential NCRE resource suppliers lack the capital to build these plants, both in the investment assessment stages and during the capital-intensive stages. This is caused by a host of factors, among these are included: investors doubts about long-term profitability, the volatility of prices in the electricity market, difficulty in passing purchasing power agreements, and the availability of price-stable conventional alternatives.
THE MINING INDUSTRY’S HEAVY CONSUMPTION OF ELECTRICITY
Industrial manufacturing in Chile makes up more than 60 percent of electricity consumption, and mining alone takes up 38 percent. As the largest copper exporter in the world, the mining industry is a pillar of the country’s economy. And yet, vast copper mines already pay twice as much for their electricity as their peers in neighboring Peru.
Currently, the government plays a large role in the approval process of Power Purchasing Agreements between mining companies and neighboring energy plants, which are often decelerated by permit requirements and procedural delays. For wind and solar plants specifically, finding land without a previously granted mining concession is a massive obstacle. Since the government is the country’s largest landholder, land-use concessions must be acquired through a competitive bidding process. This is projected to slow the development of solar plants by 1-3 years.
There is a gap between the government’s real and potential participation in the electricity market reform. This lies mainly in the lack of implementation of its policies and inadequate penalties for those don’t adhere to them. A more successful method may be through financial incentivizing and taking a ‘carrot or stick’ approach to reform. Additionally, due to the time constraints given by President Bachelet’s 2025 goals, the government should focus on NCRE resources generated by wind, solar and small hydro plants to achieve such goals.
1. INVOLVING MINING COMPANIES IN CHANGE
As mining companies consume more than one-third of the country’s electricity, change on their end is crucial to the 20 percent goal. First, the government should enact a series of quotas for mining companies, similar to that created for utility companies in 2004 (this was a law that required all utility companies to reach a quota of 5 percent generation from renewable resources, but failed to be properly implemented) The quota for mining companies should have a gradual scaling-up of percentage of NCRE resources. The numbers could be to the tune of roughly 5 percent of electricity generated by NCRE within the next 5 years, and raised to 10 percent within 10 years. This could be coupled with a simultaneous tax break on the purchase of grid energy from NCRE plants, stimulating financial incentive. Implementation must be met concurrently by a set of specific penalties for those that do not adhere to the quota. As the mining industry is a foundation of the country’s economy, taxes would not be appropriate. Instead, if companies were unable to meet a 5 percent quota by 5 years, they would not be granted a tax break for the following 5 years, but would still be mandated to increase their renewable consumption to 10 percent. The government could also implement a cap-and-trade policy with other mining companies in tandem with its quota requirements. This will allow industrial manufacturers leeway as they adjust to their new energy requirements. These simultaneous quota and cap-and-trade policies should begin in approximately 12 months, with a recommendation to reassess the possibility of augmenting the quotas at the 5 and 10-year marks.
2. FINANCING THE CREATION OF MORE NCRE PLANTS
The government has put forth an ambitious goal to have 45 percent of the new capacity installed in the country between 2014-2025 be of a non-conventional nature. These numbers can be realized quickest with financing put towards the speedy creation of small NCRE plants. The government should immediately implement a decade-long tax break on all infrastructure and capital costs involved in the creation of small renewable plants that plan to generate the power grid. This tax break should become increasingly small over time, diminishing to zero after ten years. This aspect should be well advertised, so investors are incentivized to act sooner rather than later. This will jump-start the creation of small plants that will be able to get up and running within 2-5 years and aid in driving down the cost of electricity to end users.