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Chile’s Energy Crisis: No Magical Solution

Chile’s energy sector faces a dangerous level of insecurity, inefficiency and lack of sustainability - but there's no magical solution.


Diversification is not only a buzzword for one’s personal investment strategy, but also the one-word summation of the current energy policy debate in Chile.  More specifically, security, efficiency and sustainability are the clear-cut pillars of the government’s strategy as set forth by Minister of Energy Marcelo Tokman.  Unfortunately for Chile and its citizens, the last three years have seldom found all three elements satisfactorily combined. 

Whether due to insufficient natural gas supplies, the high price of oil or the less-than- adequate hydrological levels, Chile’s energy sector has, in fact, faced a dangerous level of insecurity, inefficiency, and lack of sustainability. With the country’s booming economy, driven largely by copper and the mining sector, the need to address the problem has become urgent.


Each passing winter has caused a subsequent deepening of the crisis and made it clear that there is not one magic solution readily available. And, complicating matters are the two unique electrical systems in Chile; SIC in the Center and SING in the North.  These two grids face entirely different challenges with SING having a distinct disadvantage due to a complete lack of hydroelectric resources.

Indeed, certain inadequacies of the current system and energy matrix have led to an intense and spirited debate in the country within the halls of government and almost all sectors of the economy.  As with any debate, there are divergent opinions. Many hold out hope for a silver bullet; others are confident in the system to withstand the shocks; some are championing specific technologies or projects. 

Consequently, and as one would expect from serious and committed public and private sector representatives in Chile, several responses to their energy dilemma have been unveiled. Proposals and projects have focused on several options for diversification: liquefied natural gas (LNG); coal; increased hydroelectricity; non-conventional renewable resources; energy efficiency; the Magallanes Basin; and, nuclear.


The most well-known of the hoped-for silver bullets is LNG.  Given the country’s existing natural gas import and transmission infrastructure and the reliance developed for the fuel in terms of power generation - roughly 38 percent of power generation is gas-fired - this does seem like a natural solution.  Beginning with the commitment of the national government under former President Ricardo Lagos and state oil company ENAP, an LNG import terminal - in the Port of Quintero - was the first move toward diversification of supply. More recently, state mining company CODELCO and SUEZ Energy also announced their intentions to fast track an LNG import terminal in the northern region, at the Port of Mejillones.

Without question LNG has several potential upsides for Chile including adding security to their sources of supply as well as plugging the country into the international natural gas market. Experts in Chile also point to the flexibility of fuel benefit for increased gas-fired projects, those predicated upon LNG imports. Yet, many of the “pros” have been similarly pointed to as “cons” for LNG in Chile as the global LNG market tightens, supply becomes scarcer and LNG and natural gas prices on the international market continue to trend upwards.


The past several months proved to be another winter of discontent with Argentina taking their cuts in natural gas exports to a dire level.  Choosing not to cut power supplies, Chile’s electric generators were forced to switch to coal and petroleum products. In addition to serving as a short-term fix, the increase in coal-fired power has also caused many generators to move forward with projects that will use coal as the primary fuel source.  Indeed, some experts indicate that coal will be the primary fuel source and should be the main option for diversification for the next few years. Some do worry, however, about the possible environmental implications of increased reliance on coal, as well as the costs of conversions.

Chile’s potential remains great in this area, with five projects scheduled for completion in the next five years, generating 3,500 MW. Even so, expectations are that hydroelectric’s contribution to the energy matrix will remain relatively stable, hovering around 50 percent.


Not surprisingly, non-conventional renewable resources currently make up a very small percentage of power generation in Chile – only 182MW.  As in other countries, and given global energy prices, renewable energy options have become more attractive in Chile.  The government aims to almost double the installed capacity from renewable sources and point to adequate legal and regulatory support (the Ley Corta I and II) to enable these developments; the Ley Corta II included language aimed at eliminating any discrimination against renewable projects. Yet, some of the authorities feel that additional incentive is necessary for renewable resources and thus the Congress is preparing legislation to put in place a framework for simplifying implementation of renewable projects; the legislation remains in a draft stage in the Chilean Congress.

Another important element of the effort to increase renewable energy development is the role of CORFO, the Chilean investment promotion agency.  CORFO is currently funding 53 feasibility studies for renewable energy projects; many of the projects will be featured as part of a major renewable energy conference hosted by CORFO in Santiago in mid- November.

It should be noted that some government officials, as well as academics, have expressed their skepticism over the idea of increasing what they term market-distorting subsidies for alternative energy. However, on the most basic of levels, there is a general consensus that the market should guide investment and thus be the ultimate driver for increased incorporation of alternative sources into the matrix.


The old axiom goes that the best source of energy is that which you do not consume.  Or, as they hope to get across to the public in Chile, efficiency measures can and should be a key aspect of addressing the energy crisis.  In a country where the energy intensive mining sector serves as the key economic motor, efficiency is not just a feel-good concept. Moreover, as underscored by Senate Energy Commission Chairman Ricardo Núñez, the country’s energy demand growth currently exceeds the country’s GDP growth, an imbalance that requires attention by all.     

To confront demand growth, the government, through the ministry of economy, has embarked on an aggressive public relations campaign to make citizens aware of the areas where they can personally reduce their consumption habits.  Similar to the hugely successful Energy Star program in the United States, the government program hopes to reduce consumption in Chile by 15 percent in 10 years.


In the far south of Chile, and close to the snaking border with Argentina, lies the Magallanes Basin.  What for many years was an afterthought for the country’s domestic energy potential has, as with many of the preceding issues, suddenly gained in importance. 

In an effort to further the development of hydrocarbon resources in the Magallanes Basin, the Chilean government has undertaken an aggressive international bidding process to attract private investment for up to 10 blocks; 7 solely for private bidders and 3 in partnership with state oil company ENAP.  The initial indications are that all but one of the blocks received bids, though final technical and economic evaluations remain underway; the government hopes to have all contracts finalized before the end of the year. In the words of Minister of Mining Karen Poniachik - the mining ministry is leading the effort to develop the Magallanes Basin - the goal is for the Magallanes Basin to aid with their strategic efforts to assure greater autonomy for the country.

Skepticism does exist, however, as to the size and potential for reserves in the Magallanes Basin, as well as the fact that its geographic location would not greatly aid with energy supplies for the demand centers of Santiago and the North.  With that said, Geopark, the only private firm currently operating in the region, recently announced a new successful natural gas discovery.  Their announcement was surely greeted warmly within the Chilean government and particularly those championing the Magallanes Basin effort.


Nuclear energy as an option for Chile’s energy matrix is simultaneously remarkable and intriguing.  The seriousness of the discussion is underscored by President Bachelet’s recent remarks at the UN, as well as many public statements made by former President Lagos and current Senate Energy Commission Chairman Ricardo Núñez. 

Operating under the principle that all options should be on the table, the current government has committed itself open to debate on the issue; the Chilean Senate has also begun an intense review and plans formal visits to Russia and France to see their nuclear facilities firsthand. Moreover, the Bachelet government has stated that they will make a decision on the viability for nuclear energy prior to departing office in 2010.  Certainly a laudable goal, but given the topic under consideration it will be difficult and perhaps not entirely useful to place a time constraint on such a critical decision.


What is abundantly clear is that, to date, the proposed steps toward diversifying Chile’s energy matrix have been quite diffuse.  Moreover, the modified shotgun approach to their predicament is not embraced by all. Indeed, some feel that now, during a time of crisis, the continuation of a consistent approach is required and it is not the time for experimenting with possible solutions, particularly those they deem commercially challenging. Nevertheless, those advocating the status quo concede that the next few years will, despite the call for minimal change in the nation’s overall energy strategy, require a significant amount of thinking outside of the box.

The exact policy prescription for Chile’s energy sector remains elusive, but surely will be a combination of several of the ideas, concepts and projects underway and under debate. Energy diversification does not appear likely to diminish as a crucial policy focal point for the country in the short to medium term.

Fortunately, it appears that the continued strengthening of national institutions – the Ley Corta I & II, as well as other minor modifications have been roundly applauded - as well as a continued rational and steady approach to the situation will assure that policy making will remain proactive, sensitive to the near and long term implications, and grounded in market realities.  Do not think for a minute that Chile will simply sit back until 2010 with their fingers crossed praying for warm winters and rain - though a rain dance is not an entirely bad idea. 

Jeremy Martin is director of the energy program at the Institute of the Americas, a non-profit institution based at the University of California San Diego. He wrote this column for Latin Business Chronicle.

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