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Chile: Uncertain Energy Landscape

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The impact of Chile's energy problems on industry, housing and the economy.

CHRONICLE SPECIAL
Knowledge@Wharton

When Chile signed an agreement with Argentina in 1995, it staked its future on natural gas from Argentina. Chile launched the construction of massive gas pipelines and plants for the conversion of electrical generators. Encouraged by a supply of gas that promised to be both cheaper and have fewer pollutants, Chilean industry also invested heavily in infrastructure for producing with natural gas.

According to the CNE, the Chilean National Energy Commission, more than half of all electric energy consumed in that country in 2003 was generated by electrical power plants fed by natural gas. That situation only increased Chile’s dependence on Argentina, Chile’s only provider of hydrocarbons. There was no way to reverse that state of affairs, and things became even more troubling starting in 2004.

In 2004, Argentina’s energy ministry promulgated Resolution No. 659/2004, which gave it the authority to grant natural gas supply privileges to domestic consumption rather than to exports. This was the first in a series of restrictions that affected natural gas shipments to Chile. One of the most severe such restrictions came on August 5, 2005, when the Argentine government imposed rationing that was the equivalent of 59 percent of Argentina’s total shipments to Chile. On May 17, 2007, those restrictions reached a high point of 64 percent of total shipments. That means the supply of natural gas shrank by 14.1 million cubic meters at a time when Chile’s daily imports were 22 million meters, according to the CNE. What was the result? Chile’s electrical power plants are now obliged to operate with diesel power in order to counteract the effects of a reduced supply of gas.

Without doubt, electric power has been one of the sectors most damaged by rationing, says Roberto Román, dean of the University of Chile’s department of physical sciences and mathematics. “In fact, more than 70 percent of Chile’s nominal demand for natural gas is for electricity within the northern and central parts of the country. With the shortage of gas, combined cycle generation plants have had to use diesel, which is much more expensive than natural gas. In addition, we all pay a high cost in the form of the higher level of pollution that comes from diesel,” he said.

IMPACT ON INDUSTRY, HOUSING AND ECONOMY

Adolfo Vera, professor at ANEPE, Chile’s national academy for political and strategic studies, points out the negative macroeconomic consequences that the country suffers from these restrictions. “It has led to a potential drop in the GDP; increased the Consumer Price Index; raised [Chile’s] country risk; and provided disincentives for foreign investors.” In addition, Vera says, “Several projects that were on the table, and which had a direct relationship with production systems based on Argentine natural gas, have had to be aborted.”

 According to Eduardo Cordero, president of the AIE, Chile’s electricity and electronics industry association, “The impact of rationing is that the cost of the fuel has quadrupled now that we are using a higher volume of diesel.” Cordero is also the general manager of Kolff, a company that provides solutions for emergency power and lighting systems. “If we don’t have the equipment to produce with diesel now, it means we need to make new investments that had not previously been contemplated. That means the country has to spend even more.”

Cordero points out the repercussions for the productivity of local industry. Every segment of the economy has suffered a setback. “Apart from electric power plants, the sectors hurt the most have been metal processing, companies that require food refrigeration, and companies that use geothermal processes in their chains of production.”

Verónica Kunze, dean of the University of Chile’s department of economics and business, emphasizes that the housing sector has also been very much affected by rationing. “Generally speaking, the scarcity of Argentine natural gas has had an impact on all of us Chileans.” She is referring to the higher cost of producing electrical energy with diesel, which has meant lighting bill hikes of about 20  percent.

ENERGY SUPPLIES AT RISK

Nevertheless, repeated restrictions in natural gas shipments are merely a signal of things to come, warns Roberto Román. “It is highly probable that we will once again have the same level of supply of Argentine natural gas that we had in 2003. In the best case scenario, Argentine production will stay stable. However, it will probably begin to drop because natural gas deposits are already near their maximum level of production. This is already happening with local deposits of gasoline, and natural gas will follow very shortly,” he notes.

During Argentina’s grave economic crisis in 2001, companies in that country stopped investing in projects for oil and gas exploration and production. This meant that the supply of energy was lower than demand for it, a situation that continues to this very day. In addition, notes Román, “Argentina’s current economic recovery has led to increased internal demand for natural gas, which means that the country will not have, and does not now have, exportable surpluses.”

As a result, Chile’s energy prospects provide little room to be hopeful, according to Cordero. “We are going to continue to have minimal quotas for importing Argentine natural gas, and we are going to continue to produce on a base of diesel fuel, since the liquid natural gas systems – one of the initiatives materializing nationwide -- are not going to be ready by next year. Argentina continues to grow, and so does its energy consumption. I don’t see any improvement in this scenario.”

“You have to forget about Argentine natural gas,” stresses Raúl Cobo, chief executive of FEDELEC, which integrates automated platforms and programmable systems for electrical controls. Cobo believes that Chile’s energy supply is at risk. “If the country [Chile] continues to have the same growth rate, and if we don’t take the right sorts of measures, we will only have an assured supply of energy for a few more years,” he warns.

ENERGY FROM SUN

Given this situation, Chile has focused attention on projects for research and exploration into energy sources that are renewable, and which can be implemented within four years. According to Kunze, “There are a lot of exploration projects in alternative, renewable energy sources such as solar power, wind power and geothermal energy, and people are evaluating their technical and economic potential as well as the future sustainability of these resources.” Geothermal energy is derived from the internal heat of the earth, and its extraction begins with water, gas and hot vapors, Kunze explains.

These initiatives have been encouraged in part by the Law of Fiscal Incentives for the Development of Renewable Energy in Electricity Generation, promulgated by the Chilean government. According to Román, “at least 5% of all new electricity projects are based on renewable energy.” Román also notes other governmental initiatives such as those at CORFO, the Chilean economic development agency, and Chile Innova, which provides financing for development projects.

Román adds that some of the government’s key research and exploration projects involve solar energy. CNE is involved in one such project whose goal is the large-scale use of solar power. “Meanwhile, in the private sector, most projects are focused on wind power and hydraulic energy,” he notes.

Such plans are made possible by the fact Chile has significant sources for generating renewable energy. According to Cordero, “Throughout our country there are many areas that are windy, which makes it easy to mount equipment for generating wind power. Since it is a mountainous country, it is also possible to implement motorized systems for producing geothermal energy. Geographic conditions exist for setting up solar and photovoltaic equipment.”

If you add up all of the ongoing projects based on solar, wind and geothermal power, you see a wide range of benefits, notes Román. “They help make us less dependent from the point of view of energy. All of these activities involve new technologies and, as a result, new business opportunities and new jobs. In addition, we are contributing to lowering every sort of pollutant, including carbon monoxide, whenever we manufacture on a base of renewable energy.”

BARRIERS

Nevertheless, Cordero believes that renewable energy sources contaminate on a greater scale than conventional sources, such as diesel and hydrocarbons. “Studies show that in terms of the environment, and after the entire cycle is taken into account, producing with solar and wind power pollutes more than producing with systems that use natural gas. This is because you have to manufacture the equipment, market it, set it up and build an entire industry that requires transportation by land, sea and air. All of this means outputting more carbon monoxide. What’s more, some experts have warned that, in environmental terms, manufacturing solar and photovoltaic equipment generates as much or more waste than manufacturing that uses a base of natural gas.”

Another barrier to renewable energy is that exploration costs are very high, says Cobo. “In the case of geothermal energy, you’re dealing with a resource that has not yet been explored, and its start-up costs are extremely high. Using solar energy also means that your costs are 30 times higher than manufacturing based on carbon and water [hydrocarbons]. Hydrocarbons today are a very attractive resource because they are cheap, but they pollute a great deal and they are being depleted little by little, as in the case of diesel.”

For his part, Román recognizes other problems when it comes to renewable resources. “There have recently been some important initiatives that evaluate sustainable projects in renewable energy but those efforts are still rare and are not well-focused. In particular, research into geothermal energy is very far behind in our country, and this source could become the foundation for Chile’s development in the 21st century. Unfortunately, there are fewer than five real experts in Chile when it comes to geothermal energy, and it’s the same story in other areas of renewable energy.”

For example, he says, “if we managed to implement a massive program based on geothermal energy for the housing sector, it would be an unviable project because there isn’t any industry or people to set it up or appropriate personnel for carrying out the required maintenance on such a massive scale. We need an enormous number of professionals trained in the area of renewable resources.”

NUCLEAR ENERGY

Another important alternative to consider is nuclear energy. Chilean president Michelle Bachelet has flatly ruled out establishing guidelines for setting up nuclear projects in the country; instead, she has promised support for local environmental organizations. Nevertheless, business executives and academics in Chile have begun a debate about nuclear energy that is increasingly relevant.

According to Eduardo Cordero, nuclear energy is a totally viable alternative in Chile. He cites Japan’s experience. “Japan is as vulnerable to earthquakes as Chile is, and technology already exists for implementing [manufacturing] systems based on nuclear energy. Disastrous events in this area,” he adds, referring to Chernobyl, “are both predictable and avoidable, and they cannot be a reason to dismiss the use of nuclear energy. These sorts of projects should be explored starting right away because it takes between 15 and 20 years to set up a nuclear power plant. You have to make decisions, since nuclear energy would provide a solution to much of our energy problems,” he notes.

Much the same way, Cordero argues that the implementation of nuclear power would not contaminate the environment. “Once they are launched, new technologies for treating nuclear waste are going to be much more developed [than they are now]. I believe that over the long term, nuclear energy is going to be even cheaper than hydrocarbons.”

MORE EXPENSIVE

Román takes the opposite view. He states that nuclear energy is a very bad option for Chile today because “it has been proven to be much more expensive, and it has only been implemented in those countries where enormous government subsidies have been provided, either directly or indirectly. The technology used today (pressurized water reactors) is not at all efficient; even less so than any conventional power plant. In addition, it [nuclear technology] depends a great deal on having a supply of fuel. [To lower costs,] you need to create large generating units that always operate at levels close to their maximum potential.”

Román adds that “New technologies that promise to ‘breed’ fuel in its own reactor or provide greater thermodynamic efficiency do not yet exist. Nor do power plants that are more flexible and resistant to nuclear proliferation; these technologies do not yet exist even on an advanced scale in laboratories.” Another detail to consider is that “nuclear fuel sources are much more concentrated compared with petroleum. That means growing demand for energy on this planet will set off a struggle to control those nuclear resources. A few years from now, this conflict of interests will become much fiercer. Most likely, countries such as the United States, Russia, China and India will take the lead in this struggle, and smaller countries such as ours [Chile], will stay out of it.”

For his part, Cobo notes that when it comes to nuclear energy, the Chilean government would also have to regulate activity since there are security considerations, and regulations are required for setting limits on nuclear waste. “I believe that in another 30 years, we could wind up relying on nuclear energy but that would only be feasible if we produce it [nuclear energy] on a grand scale. If the process is well regulated, there is no reason why there should be any problems,” he says.

ENERGY SUFFICIENCY

Chile has already begun an effort to provide itself with an energy source that is secure, efficient and renewable. The government is working on an energy efficiency plan that would enable global energy consumption to grow at a slower rate than GDP. Román also cites efforts by INN, which manages Chile’s technical regulations, to create a regulatory framework for energy efficiency and renewable energy sources.

Equally important, he says, are “collaboration agreements [that Chile has made with] countries in the European Union, such as France, German and Finland, aimed at setting up projects that are based on renewable energy."

Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania.

 

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