Chile’s Alternative Growth Industry: Renewable Energy

Chile may be short on fossil fuels but, on energy, it has an asset that, as concern about global warming mounts, is becoming ever more valuable – vast quantities of renewable energy. But, before it can make full and efficient use of this resource, there are still a number of challenges.   

By Ruth Bradley

Thanks to rivers that drop steeply from the Andes Mountains to the Pacific Ocean, so-called “conventional” hydroelectricity has long played a key role in Chile’s energy matrix. In February, according to the National Energy Commission (CNE), some 45% of the power consumed in Chile came from hydroelectric plants, either large dams like Ralco, high in the mountains of the Biobío Region, or the run-of-the-river plants that tap into a river’s natural flow without needing a reservoir.

But Chile has also begun to discover its wealth of non-conventional renewable energies (NCREs) – for now principally the sun and the wind. According to the government’s National Center for Sustainable Energy Innovation and Promotion (CIFES), installed capacity using these sources currently reaches some 2,500 MW, equivalent to 12% of the country’s total capacity.

That compares with only 733 MW (4% of total capacity) just four years ago and puts the country well on the way to achieving the government’s target of 20% by 2025. And there is more in the pipeline, according to CIFES, another 2,700 MW is already under construction and projects representing a further 19,000 MW have obtained an environmental permit (although that does not necessarily mean they will be built).

The biggest surge has been in solar photovoltaic (PV) plants – after all, northern Chile has some of the world’s best solar radiation – of which there are now around 1,000 MW. “More than in any other Latin American country,” points out Cristián Sjögren, country manager for First Solar, the Arizona-based company that has built what is currently the region’s largest solar PV plant near Copiapó in northern Chile.

But wind farms, at around 900 MW, aren’t lagging far behind. And then there are 433 MW in mini-hydro plants -which, unlike their larger equivalents, count as “non-conventional”- and 417 MW using biomass.

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All these are quite new technologies. Humans have been using wind energy to grind grain for centuries or, as in the Netherlands, to drain land but it only began to be used to generate electricity on a relatively large scale in the late 1970s. And utility-scale solar generation is more recent still.

Like conventional power plants, NCRE plants can also face not-in-my-backyard opposition, mostly on the grounds of visual contamination and, in the case of wind turbines, noise. But they have a huge advantage: they are clean.

The electricity industry is estimated to account for around a third of Chile’s total greenhouse gas emissions “so it’s easy to deduce the considerable impact NCREs could have on reducing them,” points out Carlos Finat, executive director of the Chilean Association of Renewable Energies (ACERA).

The entry of new players like First Solar, Spain’s Solarpack and Brazil’s Latin American Power (LAP) has, moreover, increased competition in a market previously dominated by three large players. And -although this is far from the only reason- electricity prices, which businesses and the government once lamented were the highest in Latin America, have dropped to what, in 2016, may be their lowest level since Argentina cut off its exports of cheap natural gas over ten years ago. 

Transmission bottleneck

NCREs do, however, have an important drawback. Unlike conventional thermal plants which can be built more or less where the power is needed, NCRE projects have to go where the resource is. And, in Chile, at least for solar energy, that means the north, hundreds of kilometers away from the main consumption centers further south.

Much of current NCRE capacity is, in fact, currently located on the northern edge of the Central Interconnected System (SIC), the grid that supplies most of Chile down from the Atacama Region in the north to the Los Lagos Region in the south. And it is trapped there because transmission lines down to Santiago are overcrowded.

Excess supply in that area is such that, at some hours of the day, the spot price of electricity drops to zero.  Indeed, the SIC’s Dispatch Center (CDEC) estimates that, if all that cheap energy were effectively used, the contribution of NCREs to total power supply would rise by two percentage points.

But help is on the way in the form of a new 750-kilometer transmission line from the Cardones substation near Copiapó in the Atacama Region to Polpaico, just outside Santiago. Progress on the line, being built by Colombia’s ISA transmission company, has not been as fast as generators would have liked. There have been some difficulties with an indigenous community but, in December, the project, which represents an outlay of some US$1 billion, obtained its environmental permit and the company expects to have it in operation by December 2017.

Another project that will also facilitate NCRE development is the union of the SIC with the Northern Interconnected System (SING), the grid that serves the far north of the country. This requires another transmission line, in this case, from the port of Mejillones in the Antofagasta Region to Cardones.

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Francisco Torrealba, Valhalla co-founder
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It is already being built, at a cost of some US$780 million, by the E-CL generator, a subsidiary of French-Belgian Engie, and, following its recent acquisition of a 50% stake, Spain’s Red Eléctrica transmission company. Expected to start service in the second half of next year, this 600-kilometer line will mean that, barring the Aysén and Magallanes Regions of the far south which each have their own grid, Chile will have one countrywide grid.

Meanwhile, Congress is debating a bill to modernize transmission regulation.  Although there is some concern among transmission companies about a proposed change in their regulated rate of return and about higher fines for service interruptions, the generation industry has broadly welcomed its proposals.

One of the things it would do, in a bid to avoid a repetition of the Cardones-Polpaico bottleneck, is to plan the country’s transmission infrastructure over a longer horizon and with a more generous margin of slack. That’s important for NCRE plants, points out First Solar’s Cristián Sjogren, because they can be built in as little as a year, much faster than conventional plants, so leave less time for transmission infrastructure to adjust to their needs.

Storage challenge

But, as well as often being located inconveniently far from consumption centers, NCRE sources have another drawback, their intermittency and the resulting mismatch of supply and demand. Households consumption, for example, tends to peak in the evening just when solar plants are out of action and mining companies, the main power users in the far north of Chile, need just as much power at night as during the day.

The ultimate solution is storage. However, there is another less expensive option, that of geographical diversity, points out Vasilis Fthenakis, director of the Center for Life Cycle Analysis Earth and Environmental Engineering at Columbia University, New York. The larger a grid, after all, the wider the choice of sources that will be available when a particular NCRE source is out of action. Denmark, for example, can rely heavily on wind turbines because it has a connection to Norway which can supply hydroelectricity on demand.

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Carlos Finat, executive director of the Chilean Association of Renewable Energies (ACERA)

Chile’s unification of its two grids points in that direction and Fthenakis, indeed, estimates that Chile could obtain up to 35% of its power from NCREs without needing to get into storage. Interconnection with neighboring countries’ grids would also be an advantage, adds ACERA’s Carlos Finat.

But storage is still the biggest challenge for the NCRE industry worldwide. That is why, in October, the Chilean-American Chamber of Commerce, AmCham Chile, led a mission to the United States, co-organized by CIFES and Chile’s Foreign Investment Promotion Agency, with support from the Chile Image Foundation and Chile-California Council, to scout the current state of storage technologies and how they can be integrated into electricity systems.

Its most important conclusion, says Tatiana Molina, executive director of the AmCham Chile-US Energy Business Council, was that regulation needs to be flexible and actively promote the entry of storage capacity. That is what California, for example, is currently seeking to achieve through a series of tenders.

As regards technology, she adds, the most advanced and commercially viable is pumped storage, well ahead of battery storage. Quite fast progress is being achieved on the latter, notes Sjögren at First Solar, which has invested in a battery storage start-up company, but it is still not quite competitive.

Water has long been used to store electricity -hydroelectric reservoirs are, after all, simply a large storehouse of power waiting to be generated- but pumped storage puts a new twist on this old practice by using excess power generated by, say, a solar plant during the day to pump water up to a reservoir and, then at night, releasing that power by running the water back down again to turn a turbine.

That is precisely what the Valhalla project on the coast of northern Chile would do. Currently seeking to raise finance for its construction, the project consists of a 600 MW solar photovoltaic farm, accompanied by a pumped storage plant that would take advantage of a natural 600-meter drop from a nearby cliff to the sea.

Pumped storage is much cheaper than other technologies currently being tried such as the use of molten salts, asserts co-founder Francisco Torrealba. At a conservative estimate, he adds, Chile’s potential capacity for pumped storage reaches over 100,000 MW.

New economic context

The recent explosion of construction of solar and wind capacity in Chile was partly a result of high electricity prices combined with a sharp drop in the costs of these technologies. However, the government has helped too.

In 2014, it made changes to the terms of the public tenders through which distribution companies award supply contracts -or, as they are known in the industry, power purchase agreements (PPAs)- to generators, offering them the option of bidding to supply only during certain hours of the day, rather than continuously throughout the day. That opened the way to the participation of NCRE generators.

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Tatiana Molina, executive director of the AmCham Chile-US Energy Business Council.

This has, moreover, made it much easier for NCRE projects to raise financing. “If a project has a PPA or, in other words, cash flows, it can get financing,” states First Solar’s Cristián Sjögren.

But, for NCREs, economic conditions are not what they were. They may have very low running costs, but they are still heavy on capital outlay, making the possibility of a rise in interest rates a concern. And the drop in the prices of fossil fuels -coal and gas as well as oil- has narrowed their competitive advantage with respect to conventional generation.

But, according to Columbia University’s Professor Fthenakis, NCREs still have some advantages up their sleeves. The cost of solar generation will continue to drop over the coming years, he predicts, as the technology gets ever cheaper.

And then there is the fuel price risk of conventional thermal generation -just as the price of fossil fuels has come down, it could go up again- a risk not faced by NCREs. As well as important plus for banks considering financing an NCRE project, that also means they can offer 20-year fixed-price PPAs, adds Valhalla’s Torrealba.

An upcoming tender for PPAs with distribution companies -at 13,750 GWh for supply between 2021 and 2041, the largest since the tender system was launched in 2006- will provide a key indication of the future growth of NCREs in Chile. Originally set for April, it has now been delayed for a few months to allow Congress to complete passage of the bill on transmission regulation.

But the recent exponential growth of NCREs in Chile is likely to slow, recognizes ACERA’s Carlos Finat. But, although moderating -due partly to a higher statistic base of comparison with the capacity already installed- it will remain in double-digit figures for the next few years, he predicts.

Progress to date and that prospect suggest that Chile will almost certainly over-achieve the government’s target of producing 20% of the country’s electricity from NCREs by 2025. But then, according to Fthenakis, that was never a very ambitious target for a country with Chile’s prime geographical and climatic conditions for NCRE generation.

Net Metering: Household Contribution 

Under a law that came into force in October 2014, Chile’s households and small and mid-sized businesses can make their own contribution to the growth of non-conventional renewable energy and, at the same time, save themselves some money. This is the net metering law which enables them, if they have their own alternative generation -typically, solar panels- not only to use it to reduce what they buy from their distributor, but also to sell any excess -generated, for example, during the day when household demand drops-  to the grid (at roughly half the rate they pay the distributor).

In the eighteen months since the law came into force, distributors have received some 480 requests for connections of this type, mostly from households or firms in Santiago. The experience of some households who have applied suggests that the process, which includes certification of their equipment and, in many cases, the installation of a new meter, can be lengthy. However, Chilectra, the distributor for Santiago, has recently announced the first stage of the replacement of its old meters with a new “intelligent” model that would significantly simplify the process, as well as providing households with more information about how much energy they are consuming and when they are doing so and allowing the company to read meters remotely.

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