Towards a Sustainable Energy Mix

For a country rich in natural resources like Chile, it seems odd that electricity should be so costly and controversial. But flicking the switch has become increasingly expensive over the last decade and Chile’s future economic competitiveness is threatened. There are different opinions about how Chile should adjust its mix of energy sources to reduce costs and improve supply security, but a national debate is shining a spotlight on future scenarios.

So how expensive is electricity in Chile?

Well, it depends. Most residential and commercial consumers pay, on average, more than double Chile’s neighbors and 50 percent more than US consumers. But the costs for non-regulated clients including many industries are even higher and some must pay volatile spot prices to cover their energy needs. Soaring copper prices have enabled mining firms to offset this increase, but other exporters are struggling to pay their bills.

A key structural problem is Chile’s lack of hydrocarbons. Unlike its gas-rich neighbors, it has very little gas and no oil which means it imports around 90 percent of its fossil fuel needs for power generation. In the 1990s, Chile solved this problem by piping cheap, abundant natural gas over the Andes from Argentina. This did not last, however, as Argentina has cut exports to near zero in the last decade.

In the absence of piped natural gas, Chile has turned to diesel, coal and, since 2009, liquefied natural gas (LNG) – all fuels that must be imported at volatile international prices and that release CO2, amongst other gases, into the atmosphere.

“Imported fossil fuels bring environmental problems, but their prices are also very volatile which affects cost stability,” says Marcelo Tokman, who served as energy minister in the final months of the Bachelet government in 2010 and who is now director of South America ex-Brazil for the Danish wind turbine producer Vestas.

This wouldn’t be such a problem if Chile could rely on hydropower, which dominates the country’s energy matrix. In 2008, which was a relatively dry year, 40% of Chile’s total power generation output was hydro, 27% came from oil, 24% from coal, 5.2% from biomass, 3.7% from gas, and 0.06% from wind, according to figures from the International Energy Agency (IEA). Today, hydro capacity represents about 55% of the matrix.

But droughts due to changing weather patterns have brought Chile to the brink of power rationing several times in the last decade. Emergency diesel generators and energy efficiency measures helped Chile avoid rationing during a severe drought in 2007-2008, and Daylight Savings Time was extended earlier his year to help conserve energy during another drought in the Southern Hemisphere summer.

These measures have helped avoid blackouts so far but, as Chile’s economy grows, consumers will inevitably buy more appliances and industries will need more power.

Currently, Chileans use relatively little energy compared to developed countries. On average, Chile consumes around 3,300 kilowatt hours (kWh) per capita annually, which is less than half the OECD average of 8,500 kWh. Even Scandinavian countries, known for their energy efficiency, use much more energy than Chile.

“Realistically, given the available technologies, it’s impossible to consider that Chile will join the developed world without using more energy,” says Tokman.

In other words, Chile will have to approximately double its installed generation capacity by the end of this decade to meet average projected energy demand growth of 5 percent annually.

But where will this energy come from?

Chile is not alone in this dilemma. Many countries including the United States faced with rising fossil fuel prices and concerns about global warming are re-evaluating their energy policies.

The common goal is energy supplies that are clean, cheap and secure, but finding sources that meet all three requirements is difficult, says Nicola Borregaard, manager of energy and climate change at Fundación Chile.

“There is a permanent tension between these objectives and all countries are trying to find the right balance,” she says.

Energy efficiency

While developed countries have invested in energy efficiency for several decades to address energy security concerns and demand growth, Chile has arrived late to the party.

Chile only began taking energy efficiency seriously in the last few years after Argentine gas stopped flowing, but it is making efforts to catch up, says Borregaard.

In 2008, the government of then President Michelle Bachelet launched a national energy efficiency campaign that included handing out efficient light bulbs, certifying appliances and financing energy audits. As a result Chile’s electricity demand, excluding the mining sector, fell for the first time in 2008 even as the economy grew.

But Chile still has a long way to go. For example, every dollar of GDP generated in Santiago requires 60% more energy than a dollar generated in Finland’s much colder capital, Helsinki, according to a competitiveness report by the McKinsey Global Institute.

Chile’s National Energy Commission estimates that reducing incremental consumption by 20% through 2020 will reduce the additional installed capacity needed by 1,600 MW, or slightly more than 11% of the total.

“From the cost-benefit viewpoint, there is no safer, cheaper or more environmentally friendly energy option than energy efficiency,” argues Tokman.

But since investments usually only pay off in the long term, they require additional incentives.

Tokman, who was president of the National Energy Commission from 2007 to 2010, says Chile has made progress – for example, by creating the Chilean Energy Efficiency Agency – but admits more could be done.

“Energy efficiency was supposed to be a long-term goal but the current government has had other priorities since last year,” he points out.

Non-conventional renewable energy

Using energy more efficiently will mitigate demand growth, but Chile also needs to diversify its energy sources to reduce dependence on imported fossil fuels.

Fortunately, Chile’s geography has endowed it with significant non-conventional renewable energy (NCRE) potential including hydro, biomass, geothermal, wind and solar.

These sources – mainly small hydro, biomass and wind – currently represent about 4% of the country’s generation capacity, but the government’s plan, known as 20/20, is to increase this to 20% by 2020.

But there remain significant barriers to these projects in Chile, says Tokman.

The cost of clean technologies has fallen in the last decade as subsidies in Europe and the United States have pushed prices down. In Chile the Center for Renewable Energy (CER) and the Chilean Economic Development Agency (CORFO) help to support NCRE initiatives in their early stages, but so far it is mainly the incumbent generators that have invested.

“Renewable projects are becoming more competitive but we need to remove other barriers to their development,” says Tokman.

These include difficulties and high costs associated with obtaining water rights, land easements and connecting to the transmission system, says Jonathan Bensted, an independent renewable energy project developer and consultant.

“In many cases the transmission costs alone can make projects unviable,” he says.

That’s because NCRE project developers in remote locations often need to build lines and costly transformers in order to connect to Chile’s transmission system.

Another problem is the lack of price stability. “The market would benefit from a simpler and predictable mechanism to sell renewable energy, preferably with a specific price for each technology,” says Bensted.

Other incentives could include making it easier for project developers to sell to the grid. For example, in many developed countries people can install solar panels on their roofs and sell their surplus energy, says Borregaard.

Still, not everyone agrees that NCRE is a silver bullet for Chile’s energy crisis.

“Everyone talks about renewable energy, but no-one really knows the true costs involved,” says Jaime Vela, managing director of the Chilean energy project developer, South World Consulting.

Since NCRE is dependent on varying rainfall and wind, or daytime radiation in the case of solar, the system needs to be backed up with fossil fuel sources to meet demand at peak hours, says Vela.

In addition, both solar and wind projects require large areas of land that then cannot be used for other purposes such as farming or mining.

“To lower energy costs, Chile needs more efficient energy which, as of today’s market conditions, is provided by coal,” says Vela.

Cleaner coal

Given the large number of projects in different stages of development, the participation of coal in Chile’s energy matrix is set to grow. But many of these projects have been hampered by environmental concerns and permitting problems.

Coal’s main advantage is its cost. At around US$85 per MWh, it is cheaper than LNG and diesel while not being subject to the same price volatility as either of these fuels.

But the black rock has received a bad rap in Chile due to older plants that are dirty and inefficient. New coal technologies, while costlier, have special filters that reduce emissions by up to 90 percent in compliance with new norms for thermoelectric plants, says Vela.

 “We need to replace older units with more efficient, environmentally friendly technology,” he argues.

But this takes time. Plants must be located on Chile’s Pacific coast near ports to receive coal shipments, but the number of sites is limited and plants take an average of four years to build.

Several coal projects in central Chile – Campiche, Santa María and Bocamina II being developed by AES Gener, Colbún and Endesa Chile respectively – have been delayed by regulatory problems as well as, in the case of Santa María and Bocamina, damage caused by the 2010 earthquake.

“Clear environmental regulations are needed to make the permitting process transparent and efficient,” says Vela.

Building plants close to ports can avoid environmental and social opposition, but project developers have difficulty obtaining permits because, in many areas, pollution levels are saturated.

One solution is to offer incentives for industries to sell their emissions quotas to third parties that would, in turn, reduce pollution levels and improve living conditions in nearby communities, says Vela.

But even new coal projects will increase Chile’s carbon emissions thereby contributing to global warming. According to IEA figures, Chile’s energy-related CO2 emissions doubled between 1994 and 2007 to around 4.2 tons per capita as the economy took off, but while this is amongst the highest in Latin America, it is still less than half the OECD average.

“Even with five more coal plants we will still produce lower emissions per capita than New Zealand,” argues Vela.

Social participation

But it matters little which energy source is the cleanest or most efficient if it is rejected by most Chileans, points out Tokman.

Social opposition has already had an impact on Chile’s energy matrix. Suez GDF’s Barrancones coal-fired project in northern Chile was blocked last year after President Piñera asked the company to halt its development near a nature reserve, and HidroAysén has been the target of widespread protests.

In this scenario, it is no longer enough for Chile to produce energy at the minimum cost; it must also ensure that projects respect environmental norms and are socially acceptable, says Tokman.

“We need a system that is socially legitimate, it’s not enough that the state applies adequate norms and enforces them,” he says.

Public education is also important. If, despite its susceptibility to earthquakes, Chile decides to develop nuclear energy, this will require a broad national consensus. But after the recent near meltdown in Japan this could be easier said than done, admits Tokman.

While some Chileans seem to oppose all projects, others understand the country needs more energy but have doubts about whether new projects are being evaluated properly. To reassure them, the environmental approval process must be more transparent, says Tokman.

Borregaard agrees energy projects have become linked to a broader feeling of “social injustice” in Chile. To address this problem, she suggests local communities should be encouraged to participate in the energy debate so they feel part of decisions related to the country’s energy future.

This is precisely the aim of Energy Scenarios, a non-governmental organization founded in 2009 with the participation of Chile’s power distributors’ association Empresas Eléctricas, Fundación Chile, environmental NGOs and universities among others.

In its first stage, the organization produced a 40-page report with technical proposals for Chile’s energy matrix through 2030.

“In the beginning we thought we could define the optimum energy matrix for the country, but we realized this is not feasible,” says Borregaard who is a member of Energy Scenarios” technical committee.

Instead, she says the initiative has become a permanent platform for the exchange of ideas and opinions.

Some of these are being considered by the National Energy Advisory Commission, convened by President Piñera in May to study improvements to the energy system, which is due to present its report in September.

Both Tokman and Borregaard, who are members of the Commission, agree their task is not easy since all of Chile’s energy options imply trade-offs and sacrifices that Chilean society as a whole must be willing to make.

With the right rules and incentives, however, Chile has the opportunity to lay the foundation for a sustainable energy mix that balances cost, environmental protection and supply security.