Renewable Energy in Chile: Barriers and the Role of Public Policy

Tuesday, April 16th, 2013

Chile has a dire need as well as a vast potential to expand renewable energy production and the government has recently introduced regulatory reforms and incentives to facilitate their development. Nevertheless, the governance structure of the electricity sector poses significant barriers to the attainment of national energy aims. Actors from the state, private sector, as well as civil society must tackle the main constraints to provide a cohesive and targeted policy response to the issue.
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In the face of rising energy prices and scarcity of energy resources, due to a world increase in demand, energy security is a crucial concern of states and the private sector alike. In a context made additionally complex by concerns such as environmental sustainability and demands for public participation that are added to the traditional issue of supply security, policies that shift energy supply towards renewable energy sources have become increasingly central. Understanding the opportunities and challenges involved in systematically enhancing their expansion is of utmost relevance.

Chile has a dire need as well as a vast potential for the development of renewable energy and has recently formulated national aims to promote its expansion. However, the current governance structures of the electricity sector—based on a market economy with minimal regulations—put the fulfillment of these aims into question. A study is required to detect where the shortcomings of the market are, and in which way those factors prevent actors from developing renewable energy projects. Inferring from an analysis of the constraints to the development of renewables, one can develop policy recommendations for the government, market actors, as well as other stakeholders such as civil society, in order to provide incentives to remove barriers and make significant advances.

Since 2010, Chile has been a member of the Organisation for Economic Co-operation and Development (OECD), which increases its responsibility to shift towards a more sustainable economic development. This not only has implications at the national level but also at the international level, as the country aims to expand sustainable development. Chile’s pioneering liberalization reforms in the energy sector, specifically in electricity in the 1980s and 1990s, served as a role model for many other countries. Chile’s reforms to promote renewable energy can also function as an exemplary model for other countries in Latin America and beyond.

Context and Research Question

Chile imports around 70 percent of its primary energy supply, due to having limited domestic energy resources.[i] However, since 2010, growth in Chile has had high annual rates of 5 to 6 percent, and the demand for electricity to feed this growth continues to rise at an annual rate of 6 to 7 percent.[ii] With a relatively high energy intensity concerning electricity (Chile is at 0.42 compared to the OECD average of 0.27), Chile requires high levels of electricity input to produce an increase in its GDP, revealing a low energy efficiency of its economy (increasing the GDP by 1 unit requires an almost 1.5 unit increase in the electricity supplied).[iii] To feed Chile’s future development, the country faces the challenge of designing suitable energy polices to safeguard the country’s national autonomy, secure its economic growth, and maintain its living standards. Energy crises in recent years—the latest being in 2008, when Argentina unilaterally cut off gas lines to Chile—have increased the country’s reluctance to rely on volatile import conditions and have strengthened national energy debates and investments into the country’s energy security.

To rectify the imbalance between national energy supply and demand as well as Chile’s dependence on predominantly imported conventional resources, Chile is increasingly emphasizing the promotion of alternative domestic energy sources, most notably that of renewable energies.[iv] Stretching across a length of 4,300 km and tucked between the Andes Mountains and the Pacific Ocean, Chile is endowed with potentially rich and varied renewable resources for energy generation, including solar energy in the vast deserts in the north, biomass and hydraulic power in the forests and rivers in the south, strong winds across the country to generate wind energy, 10 percent of the world’s active volcanoes for geothermal energy, and 6,400 km of coastline where tidal and wave power could be harnessed.[v] In this light, the Chilean government has on several occasions in recent years declared its aims to diversify energy production by including a significant proportion of renewable energies.

Small changes in regulations have facilitated the process with an aim of producing 10 percent of the electricity from renewable resources by 2024.[vi] The National Energy Strategy 2012-2030, launched in March 2012, places the promotion of renewable energy as its second highest priority.[vii] The president of Chile has even 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.[viii]

While studies show the feasibility of renewable energy in terms of its potential and the competitiveness of its electricity prices, the actual level of renewables in the electricity matrix is lagging heavily behind aspired goals. While the law demanded 5 percent of electricity to come from renewable energy sources in 2010, in that same year only 2 percent had been reached. It is projected that if the country continues on its current trajectory, by 2030 only 8.5 percent of electricity will be generated from renewable sources.[ix] It is therefore doubtful that the proposed national target of 20/20 is possible under the current electricity sector governance structures, since both the prevailing market forces and the regulatory system that govern the energy sector seem to hinder the development of renewable energy. It is vital to understand these and other impediments to the development of renewables in Chile if one wants to draft policy recommendations that facilitate the fulfillment of the proposed national target.

Against this background, this study aims to understand what the main barriers are to the fulfillment of Chile’s proposed target of 20 percent of the electricity matrix provided by renewable energy by 2020, and what policy recommendations could be formulated to address these constraints in a targeted and cohesive manner.

Drivers of Renewable Energies

As conventional energy resources become scarcer and costlier globally, research on energy security has increased, and the issue is rising in importance on global policy agendas. The number of studies on renewable energy sources and their potential contribution to long-term economic growth and environmental sustainability has increased. Likewise, the required corresponding strategies, both on the global and national level, have been studied extensively.

The main drivers affecting the expansion of renewable energies are of an economic nature (i.e., their operational relevance to ensure the security of energy supply as well as the stability of electricity prices); an environmental nature (primarily regarding CO2 emissions); and social nature (concerning accessibility for regionally marginalized groups and acceptance by civil society regarding the exploitation of the new energy sources).[x] These three drivers may be called “generic” because of their existence in the predominance of industrialized countries today. This holds true for Chile as well, but there are certain factors specific to Chile that ensure that renewable energies will have a significant role to play in the future generation of electricity.

First and foremost, Chile’s potential is remarkable. A number of scientific studies, performed by the Chilean Ministry of Energy, as well as the UN Economic Commission for Latin America and the Caribbean (ECLAC) and the Global Energy Research Institute, have measured the potential of renewable sources, arriving at estimations for potential installed capacity:

Renewable Energy Source
Small Hydraulic (<20 MW)
Wind
Solar
Biomass
Geothermal
Ocean
Estimated potential
10,000 MW (at least)
40,000 MW
275 MW/km2
1370 MW
16,000 MW
 164,000 MW

Source: Shayla Woodhouse, “Renewable Energy Potential of Chile” (California: Global Energy Network Institute, August 2011), 17-24; Renewable energy source estimated potential in megawatts (MW).

The currently installed capacity of renewable energy source however, is far below this potential:

Renewable Energy Source
Small Hydraulic (<20 MW)
Wind
Biomass
Solar
Total
In Operation
278 MW
205 MW
394 MW
2.4 MW
880 MW
Under Construction
114 MW
107 MW
58 MW
2.5 MW
281 MW

Source: Alfredo Olivares S. and Paula Maldonado G., “Estado de Proyectos ERNC en Chile” (report, Centro de Energías Renovables, Government of Chile, Santiago: December 2012), http://cer.gob.cl/boletin/diciembre2012/Reporte%20Diciembre.pdf.

Both national and international actors have increasingly recognized in recent years this rich presence of renewable resources as presenting a great opportunity for the country. As a result, facilitation reforms have been introduced and investments into the sector have since increased. This is linked with the increasing competitiveness of nonconventional technologies vis-à-vis conventional technologies, primarily due to growing technological maturity but also to the spread of cheaper technology internationally. A study performed by Bloomberg New Energy Finance assessing the comparative costs of various electricity producing technologies in the Chilean power sector shows that electricity from renewable sources is in fact already competitive today and will become even more so in the future.[xi]

Recently, as a response to the challenges in energy security and the opportunities presented by renewable resources, the Chilean government has introduced several reforms into the regulatory framework that have driven renewable energy project development and the participation of renewable energy in the electricity market. The first reform was introduced in 2004 through the enactment of Law 19.940, which enabled any generating company—regardless of its size—to sell energy in the electricity market.[xii] Moreover, the law introduced a partial or full exemption for those renewable energy plants supplying the system with a surplus power of less than 20 MW from paying tariffs for the transmission of their electricity through the main distribution networks.[xiii] The opening of the market to small power generators facilitated the viability of small renewable energy plants.

With the introduction of Law 20.257 in 2008, Chile became the first and only country in Latin America to introduce a quota system, requiring electricity companies to fulfill a renewable energy quota or face a penalty for failure to comply.[xiv] These legal reforms opened up the electricity market for greater competition, driving down the costs of nonconventional energy technologies and sending price signals that incentivized investment into the new technologies. In the following years, the incentive structure was enhanced by several direct economic incentives including subsidies for pre-investment studies and implementation of projects as well as public funding for research and development (R&D).[xv] In 2010, a Ministry of Energy was established with the mandate of coordinating the energy market and sectorial policies, developing renewable energy markets, and setting minimum standards for energy efficiency.

Barriers to Renewable Energies  

With the privatization and liberalization of the electricity market in 1982, Chile became a global pioneer in the comprehensive liberalization of the electricity sector, functioning as a role model for many other countries in Latin America and beyond, with even Great Britain following Chile’s model in the early 1990s. The new governance structure was based on free market competition, with only minimal regulation where necessary.[xvi] The electric system has been widely celebrated for its successes in privatization and deregulation: installed capacity has rapidly increased as private investment has dramatically grown and access to electricity in rural areas has spread to 94.5 percent.[xvii] Costs and prices have decreased due to improved productivity of labor and capital, and energy losses in the distribution system have sunk.[xviii]

Whether the governance structure of the electricity market is adequate to facilitate the development of renewable energies is questionable, as can be seen from the above-described gap between their real and potential participation. The reforms that were introduced by the government in 2004 and 2008 seem to have been insufficiently strong to change the dynamics of the market that would help to achieve the 10 percent aim by 2024, not to mention the more ambitious target of 20/20. While the Ministry of Energy has set the development of renewables high on its agenda—the division for renewable energies is the ministry’s largest department—the plans and measures described in the National Energy Strategy lack detail and concreteness.[xix] Moreover, the government seems to lack the political will for implementation and faces a highly contested political battlefield, illustrated by the fact that in April 2012 Jorge Bunster became the fifth minister of energy since the founding of the ministry in 2010.

As the current governance structure of the electricity market is not adequate to deal with the challenge of integrating renewable energies to the electricity mix, a clear understanding of the barriers to implementation is essential to addressing these challenges with targeted public policies.

One of the most significant constraints is the lack of available financing for 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 energies. This is due to the lack of understanding about nonconventional sources, guarantee requirements, doubts about long-term profitability, the unpredictable prices of renewable electricity in the spot market, unattractively low prices in power purchasing agreements (PPA), and the availability of alternatives in the conventional sector with lower risks and higher profitability—due largely, though never mentioned, to environmental and social costs being externalized.[xx] Moreover, the scarcity of financing is due to the lack of political will, despite official declarations to the contrary. Indeed, there is a noteworthy absence of state measures providing financial incentives including subsidies or purchase guarantees.

A further significant constraint to the 20/20 target is the barriers to entry for new actors in the highly concentrated electricity market: 90 percent of electricity generation and commercialization is in the hands of three companies and their subsidiaries.[xxi] Moreover, there exists a potential conflict of interest between the state and the private sector due to close purported semi-official ties between influential individuals who move frequently between public and private administrative positions.[xxii] This tends to impede the development of transparent public-policy decisions and their effective enactment. Admittedly, this is true not only for Chile but for all of Latin America, as the presence of large, diversified business groups blurs the division between politics and the private sector, giving much political leverage to these groups.[xxiii] This applies to Chile, where four influential families run large groups that dominate 47 percent of the Santiago stock exchange, with activities diversified into the energy sector.[xxiv]

Another difficulty that puts any new actor at a disadvantage is the fact that nonconventional generation plants, by their nature, tend to be geographically isolated and require the building of new transmission lines to reach the main grid.[xxv] This makes it difficult for newcomers to access existing electricity networks and engenders a wide range of unpredictable costs.

A further hindrance to reaching the 20/20 target is the institutional procedures for the establishment of renewable energy projects. This third barrier of procedural delays is very disruptive, as excessive permit requirements, delays in the construction process of the sites, and strong social and environmental opposition in the past have constrained renewable energy projects.[xxvi] Moreover, procedures are often based on informal negotiations with local communities that surround project sites or with land owners to run transmission lines rather than clearly defined processes. This is a constraint for the development of renewables, as it increases costs and risks for project developers and deters investors. Here the state can have an important role to play as well, but it is difficult to determine the impact of the state’s prioritization of renewable energy. If the state places a high priority on renewable energies, it should conduct national and targeted awareness campaigns, reform the regulatory framework to improve participatory and distributive considerations, and gauge the likely level of public participation during project planning and evaluation processes.

Policy Recommendations

Having developed a clear understanding of the potential of renewables in Chile, the government’s objectives, and the constraints in the regulatory structure that hinder their attainment, one can draw targeted policy responses to address the principle barriers. Tackling all three barriers will provide a cohesive response to the problem—if there is enough political will.

To overcome the problem of financing, public and private financing initiatives must be equally invigorated. Public funding must expand the portfolio of possible investment sources for R&D, pre-investment studies, and project implementation. Provision for public investment opportunities must increase, and likewise the mechanisms for the financing of R&D from the private sector must be improved. Mining and other energy-intensive industries should contribute to a fund for the development of technological innovation and pilot projects, as these industries are intensive electricity users and contribute greatly to the nation’s CO2 emissions.[xxvii] Additionally, the renewable energy market must be made more attractive for potential investors. To this end, the environmental and social costs of conventional resources must be internalized in their pricing; only then can the real costs of different generation technologies be properly assessed. More importantly, accurate pricing ensures that the playing field will be equitable for all electricity producers that vie for funding and market share. Furthermore, improved research and statistics must clearly discern the potentials of specific nonconventional technologies and geographical localities. With improved information and guidance, project developers, private investors, and public institutions can more easily prepare feasibility studies and modeling of capabilities and can incentivize investments into renewables. In addition, building up local capabilities is indispensable for the implementation and maintenance of the energy projects.[xxviii]

Overcoming market concentration and barriers to entry for new, smaller actors is vital to Chile’s electricity system. Raising the quota of renewable energy by statute to the target of 20/20 and possibly extending the quota system onto final energy consumption will increase competition among generation companies and incentivize large generation companies to engage in renewable energies while encouraging the participation of smaller market actors. Likewise, the introduction of a system of feed-in-tariffs, by which distribution companies are obliged to buy all electricity produced from renewable sources at a price fixed in long-term contracts, will generate incentives for private investments, including by households and businesses, and encourage a significant and rapid diffusion of nonconventional technologies. The government’s current plans to introduce a net-metering law, enabling small-scale renewable energy producers to inject their electricity into the network based on a credit procedure, must be speedily advanced and implemented.

Furthermore, conflicts of interest emerging amongst public and private actors must be mitigated by an adequately rigid transparency law, if not halted through judicial intervention. Laws must more strictly regulate financial interests in the electricity sector amongst policymakers and judges. Operators of the electric system must be transformed into wholly independent bodies, autonomous from the generation and transmission companies as well as from the largest consumers so as to ensure impartiality in the operation of the electricity sector.[xxix]

Third, regarding institutional procedures, reforms should be enacted for the establishment of renewable energy projects. Surveys and public awareness campaigns can serve to inform the local communities about the social, environmental, and economic benefits of renewables vis-à-vis conventional energy so as to lessen local opposition. Reforms in the regulatory frameworks of electricity and the environment that are meant to improve participatory and distributive considerations in project development must facilitate determining how far public participation can or should be guaranteed in the planning and evaluation processes in renewable energy projects. Accountability of projects has to be enhanced through improved mechanisms for the monitoring of ongoing projects and for ex-post evaluations.

Last but not least, objectives regarding renewable energy must go hand-in-hand with energy conservation, and policies regarding renewable energies and energy efficiency must be designed in a convergent manner. Along the same line, the government must maintain its focus on reducing energy demand through strategies including energy efficiency. As outlined in the National Energy Strategy, projected demand must be reduced by 12 percent by the year 2020, with private sector actors —including 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 the liberal paradigm of the Chilean economy, market actors are the principal players, and their participation in R&D, promotion of generation projects, and provision of financing for renewable energy market expansion are indispensable. But so is the state. If its goals are to be reached, the state must show a strong political commitment to introducing concrete reforms that will improve the regulatory framework and incentive structures, create a serious penalty system, and take into account long-term economic, environmental, and social concerns. Last but not least, a civil society with active participation and ownership among the local populations is necessary. In fact, only when all stakeholders join hands will the prospects of 20/20 ever be accomplished. 

Author’s Biography

Sophie von Hatzfeldt is a graduate student at the Hertie School of Governance in Berlin completing a master’s degree in public policy. Her studies focus on political economy, democratization processes, and migration and integration, and her dissertation analyzes the challenges of transforming conventional economic and political structures toward sustainable development. She spent a year working as a young professional with the German Society for International Cooperation (GIZ) in Chile, together with the UN Economic Commission for Latin America and the Caribbean, and in China on issues of socially and environmentally sustainable economic development. She previously completed undergraduate studies in human geography and international law at University College Utrecht in the Netherlands and Sciences Po in Strasbourg.

Notes

[i] The main sources of primary energy are: crude oil (41 percent), fuel wood and others (19 percent), coal (16 percent), natural gas (16 percent), and hydropower (8 percent); the main energy sources for the generation of electricity are hydropower (35 percent), natural gas (31 percent), carbon or petrol (16 percent), diesel (16 percent), and wind and biomass (respectively 1 percent); National Energy Commission, “Estadisticas” (unpublished data, Government of Chile, Santiago: 2010).
[ii] World Bank, “Data: Chile” (Washington, DC: World Bank, accessed January 2013), http://data.worldbank.org/country/chile.
[iii] Energy intensity is a measure of the energy efficiency of a nation’s economy and is calculated as units of energy per unit of GDP; International Energy Agency, “Energy Balances of OECD Countries 2012” (Paris: OECD Publishing, 2012), 66, 102.
[iv] Renewable energy generators include those whose primary energy source is solar radiation, wind power, hydraulic energy, biomass, geothermal energy, and energy generated from the sea. Chilean law distinguishes the more specific category of “non-conventional” renewable energies, which excludes large hydraulic power plants with a maximum capacity greater than 20 MW. In this study, “renewable energies” refers specifically to these nonconventional sources; Introduce Modificaciones a la Ley General de Servicios Eléctricos Respecto de la Generación de Energía Eléctrica con Fuentes de Energías Renovables No Convencionales 2008, Law 20.257 (Article 4.aa).
[v] International Energy Agency (2012), 159.
[vi] Law 20.257 (Article 2).
[vii] Ministry of Energy, National Energy Strategy 2012-2030 (Santiago: Government of Chile, February 2012), 13.
[viii] Sebastián Piñera, “Del Chile del bicentenario al país de las oportunidades” (presidential message, Valparaíso, 21 May 2010).
[ix] Manlio Coviello, Juan Gollán, and Miguel Pérez, “Las alianzas público-privadas en energías renovables en América Latina y el Caribe” (Santiago: UN Economic Commission for Latin America and the Caribbean, May 2012), 44; Shayla Woodhouse, “Renewable Energy Potential of Chile” (California: Global Energy Network Institute, August 2011), 5-6.
[x] Edmundo Claro, Juan Pablo Arístegui, and Esteban Tomic, “Desafíos y Oportunidades de las Energías Renovables No-Convencionales en la Matriz Eléctrica de Chile” (report no. 7, Konrad Adenauer Stiftung, Chile: 2012), 10-11.
[xi] Bloomberg New Energy Finance uses a “levelized cost of energy” financial model to measure the price of a standard unit of energy across the different primary energy generation technologies in Chile, including nonconventional renewable energy technologies. For more information on levelized costs of energy, see http://about.bnef.com/markets/renewable-energy/solar/; Bloomberg New Energy Finance, Natural Resources Defense Council, and Valgesta Energía, “Chile’s Clean Energy Future” (report, Bloomberg New Energy Finance and National Resources Defense Council, New York: April 2011), http://www.nrdc.org/laondaverde/international/files/chile-LCOE-report-sp.pdf.
[xii] Regula Sistemas de Transporte de Energia Electrica, Establece un Nuevo Regimen de Tarifas para Sistemas Electricos Medianos e Introduce las Adecuaciones que Indica a la Ley General de Servicios Electricos 2004, Law 19.940 (Article 71-5).
[xiii] Ibid., Article 71-7.
[xiv] By this law, all electricity companies generating more than 200 MW became obliged to supply 5 percent of their electricity from renewable sources between 2010 and 2014 and to increase the quota by 0.5 percent yearly after 2015 until it reaches 10 percent by 2024; Deutsche Gesellschaft für Technische Zusammenarbeit, 78-79.
[xv] Claro, Arístegui, and Tomic, 24-25.
[xvi] International Energy Agency, “Chile: Energy Policy Review” (report, OECD Publishing, Paris: 2009), 31.
[xvii] In 1982 rural access to electricity was only 38 percent. See Michael G. Politt, “Electricity Reform in Chile: lessons for developing countries” (working paper, Massachusetts Institute of Technology: 2004), 11.
[xviii] International Energy Agency (2009).
[xix] K. Franzen (advisor, Energy Program: Chile, Deutsche Gesellschaft für Internationale Zusammenarbeit), in discussion with the author, January 2013.
[xx] Ramon Galaz, “Analisis de Barreras Financieras de Proyectos Energeticos con ERNC en Chile” (unpublished document, EcofysValgesta), 13, http://www.redbiogas.cl/wordpress/wp-content/uploads/2009/06/12-Ramon-Galaz.pdf; G. Orellana, “Grupo español consigue el primer project finance para levantar parque eólico en Chile,” Pulso, 11 January 2013, https://www.pulso.cl/noticia/empresa-mercado/empresa/2013/01/11-16422-9-grupo-espano-consigue-el-primer-project-finance-para-financiar-parque-eolico-en.html; Plataforma Escenarios Energéticos, “Escenarios Energeticos Chile 2030” (Santiago: Diego Luna Quevedo, June 2010), 35-36.
[xxi] The three companies are Endesa, Colbún, and AES Gener; Rodrigo P. Behnke, Guillermo J. Estévez, and Ignacio A. Arias, “Las Energías Renovables No Convencionales en el Mercado Eléctrico Chileno” (report, CNE/GTZ, Santiago: 2009), 25.
[xxii] Such conflicts of interest can be illustrated by cases such as the following: the current Minister of Energy Jorge Bunster had, for nineteen years, been general manager of Copec, a large Chilean energy company; Minister of Energy Fernando Echeverria resigned several days after taking office due to political conflict of interest with companies in the energy industry in 2011; Supreme Court Judge Pedro Pierry voted in favor of advancing the mega-hydroelectric power plant project, HidroAysen, while he owned shares valuing almost 100 million Chilean Pesos (approx. $210,000) in the concerned company, Endesa.
[xxiii] Ben Ross Schneider and David Soskice, “Inequality in Developed Countries and Latin America: Coordinated, Liberal, and Hierarchical Systems,” Economy and Society, 2009.
[xxiv] Luis Eduardo Escobar, ed., Hacia un crecimiento inclusivo: Propuestas de política económica (Santiago: Fundacion Chile 21, August 2010), 75.
[xxv] Javier García Monge and Pamela Delgado Moreno, “Análisis de barreras para el desarrollo de energías renovables no convencionales” (report, Chile Sustentable, Chile: July 2011), 14.
[xxvi] Many geothermal and wind projects faced heavy social and environmental opposition as did, for example, the proposed wind power plant to be built in the province of Chiloe; Comisión Ciudadana-Técnico-Parlamentaria para la Política y la Matriz Eléctrica (CTTP), “Chile Necesita una Gran Reforma Energetica” (report, CTTP, Imprenta Andes, Santiago: October 2011), 97.
[xxvii] Susana Jiménez, “Energia Renovable No-Convencional: Politicas de Promocion en Chile y el Mundo” (report, Libertad y Desarrollo, Santiago: September 2011).
[xxviii] Gerardo Canales, (Manager of renewable energy project management, Centro de Energias Renovables), in discussion with the author, November 2012
[xxix] CTTP, 18.