British Embassy Santiago

January 2014

Summary

High energy prices, both for industry and private consumers, low supply margins, and popular or judicial rejection of new energy projects make for regular “energy crisis” headlines in Chile. While the lights will stay on, the costs to users and to the economy are expected to be high. The sector presents the UK with some good commercial prospects, particularly in renewable power where Chile is, in theory at least, abundantly endowed.

Detail

Chile’s continued macro-economic success story means it is expected to have to double its current 17,600MW generation capacity by 2030. Chile has huge potential in almost every type of renewable energy and a new 20% target for it by 2025 (or 600MW more than now). However, renewables currently only account for 6% of national capacity. Hydro accounts for 30% of generation capacity and thermoelectric – for which Chile is totally reliant on imported fuels  – for 64%. But recent and predicted droughts, coupled with fuel price expectations, are pushing up the price of forward energy supply contracts.

Within that overall picture, mining companies are expected to double their own energy consumption between now and 2021. Concerns about future energy supplies are already affecting the (mainly copper) mining industry which accounts for half of all exports and nearly 20% of GDP. Some emblematic projects have been shelved, while London-listed Antofagasta Minerals and other companies have bought into generation projects to guarantee future supplies.

Uncertainty is commonplace, and Chile’s institutional set-up doesn’t help head off a possible energy crisis.  There is no zoning policy to set aside limited areas for energy developments as a way of preventing opposition elsewhere. Developers question the value of environmental permits which are costly in time and money without guaranteeing projects will go ahead.  Local and indigenous communities almost routinely reject projects and/or seek financial compensation.  Increasingly, courtrooms not boardrooms have the final say here about which projects finally go ahead, and an estimated US$20bn of power sector investment is currently on hold because of legal delays. The uncertainty is also drying up the future project pipeline.

Costs keep rising. Some companies have already gone to the wall unable to cope with the Latin American region’s highest unit costs, while others defer investment decisions. The higher prices that result from lower supply have the knock-on effect of restricting future economic growth  – according to one credible study, 2012-2019 growth will be 6% less than it might have been because of power sector issues.

Popular sentiment is firmly part of the debate.  The power industry has become an emotive issue that has brought tens of thousands of people into the streets to protest, ostensibly out of environmental concerns but at a deeper level because of the perception that the public voice is not considered.

President elect Michelle Bachelet has pledged a new national energy policy in her first 100 days. That strategy will have to demonstrate how to minimise public opposition to key projects and unlock transmission bottlenecks. It could also give a big further push to the development of renewables, including local research and development of new technologies, particularly in solar, geothermal, wave, tidal and methane hydrates energy. With a new fund available for S&I cooperation with this emerging power, there is scope for cooperation in this area, not just with the incoming government, but with universities and local industry. 

Renewable energy is also an important part of our climate change work in Chile. Through the FCO’s Prosperity Fund we have supported the development of the government’s marine energy strategy and the design of a new financing instrument for renewable energy. The UK is also contributing to multilateral projects to develop solar and geothermal energy. Since 2010, our climate finance for renewable energy here has totaled over £17m. In November the UK-Germany NAMA climate finance selected a Chilean project to develop distributed renewable energy for a further €15m.

Actis is the biggest UK participant so far in the renewable sector as a partner in a US$1.4bn wind and solar investment plan. Rurelec has entered the Chilean power generation market with two gas-fired projects and a potential total investment of US$1bn. Identifying further such possibilities is a major priority for our UKTI/commercial section.

Disclaimer

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