Chile: Opportunities in the Energy Sector

1. Chile’s Energy Matrix

Today, Chile has a total installed capacity of 16,970 megawatts (MW). The power grid is separated into four main systems: The far north of Chile, mostly part of the vast Atacama desert, holds the SING system, which primarily feeds Chile’s large mining industry (25.6%). In central Chile, about 60% of the country’s population uses the Central Interconnected System (SIC) (73.6%). In the south, home to Patagonia and an expansive area of remote territory, there are two small local electric systems in the regions of Aysén and Magallanes (0.8%)[1].

The electricity sector in Chile currently relies predominantly on hydro-electric power generation (41.9% of generated energy in 2008), while traditional fossil fuel sources of electrical power generation account for most of the remainder – petroleum based power plants (24.1%) and coal (27.1%).

In recent years economic considerations (rising fossil fuel prices, dwindling supplies) and environmental concerns (climate change, carbon emissions, air quality) have shifted the focus in many countries to energy policies that stress the diversification of the matrix with new generation sources, especially those electrical generation technologies known as Non-Conventional Renewable Energy (NCRE).

Chile is no exception. It is a developing country whose electricity demand is increasing at the rate of approximately 6% annually, similar to its GDP growth projection. Looking to reduce dependence on imported energy and diversify the sources feeding the main power grid, Chile’s interest in harnessing NCRE has grown significantly over these last years.

2. Regulatory Framework

Chile has a rather liberal legal framework for the energy sector that is based on the principles of competition in the generation segment and separation of the functions of electricity generation, transmission and distribution. Both national (domestic) and foreigners alike can participate in the energy sector without any regulatory barrier. The state currently only controls the functions of regulation and monitoring, the National Electric Commission (CNE) being the state entity responsible for preparing and coordinating plans and standards. Moreover, there is a guaranteed access to transmission lines for all energy projects (no discretional exclusions) and partial or total exemption of transmission charges for small scale NCRE.

3. Non Conventional Renewable Energy (NCRE)

Chile is considering a law that would set Latin America’s highest renewable energy goal and spur billions of dollars of investments in clean power projects, reducing the country’s reliance on hydroelectric dams. The lower house is considering a bill that would make it mandatory for electricity companies selling energy to final customers to assure that a minimum of 20% of the energy they sell comes from NCRE sources by 2020. This would substantially increase the current mandatory limit of 5%, which will increase by 0.5% per year as from 2015 to reach 10% in 2024.

To promote the introduction of NCREs into the electricity generation matrix,amendments have been made to the General Law on Electrical Services, through Short Law I (Law Nº 19,940) and Short Law II (Law Nº 20,018). In brief, these amendments improved the entry conditions for NCRE into electricity systems by:

  • Assuring any renewable energy generation company the right to sell its energy in the electricity market at spot price.
  • Fully or partially releasing NCRE power stations with power outputs of less than 20MW from transmission tolls.
  • Assuring that a minimum percentage of the demand for NCRE arises from regulated clients.
  • Allowing for the connection of small power stations (less than 9 MW) to distribution networks.

4. Opportunities in Energy

4.. Investment in Northern Chile in Wind and Solar Projects.

BHP, Anglo American Plc and other multinational mining companies will invest almost US$80 billion in Chile through 2013[2] to overcome a global copper shortage, boosting the need for energy in the Atacama Desert. Given this investment and the corresponding projected increase in electricity demand, there is a huge opportunity for investment in Northern Chile in wind and solar projects and there is a lot of movement in this area:

The Chilean government has launched an international tender call for three land-use concessions for up to 150 MW each of onshore wind. The Chilean Ministry for Public Lands is inviting developers to submit proposals for three state-owned territories with high energy potential in the Region of Antofagasta in the north of Chile. Each site could see wind farms of 40-150 MW.[3]

  • AES Gener is seeking a permit to build a US$572 million solar farm in northern Chile and has announced plans to invest US$2.5 billion in Chile over the next 5 years.[4]
  • Dermersol Chile II Spa is seeking a permit to build a US$32 million solar farm in the Atacama region, where Teck Resources Ltd. And Barrick Gold plan new mines.[5]
  • Energia Renovables Fotones de Chile Ltda. also seeks a permit to build a US$400 million, 180 MW solar farm.[6]
  • Xinjiang Goldwind Science & Technology Co Ltd., a leading Chinese wind turbine manufacturer, is set to start construction later this year on the first 70 MW phase of a wind farm in Chile under a 50/50 joint venture agreement with Mainstream Renewable Power.[7]

4.2 Grants for feasibility studies and investments in NCRE Projects

In the context of modifying the national legal framework, the Chilean Economic Development Agency (CORFO) has been offering various incentives for investments in NCRE projects, including:

  1. Investment in Technology – for projects that involve investments of more than UF45,000 (approx. US$2 million). The amount of the subsidy is up to 12,000 UF (approx. US$500,000.-), provided that it may not exceed 15% of the amount committed by the company during the first two years of the project.
  2. Grants to fund preliminary pre-investment feasibility studies or specialized consultancy required before the materialization of NCRE projects that involve investments of more than US$400,000.- that are eligible in accordance with the provisions of the Kyoto Protocol to the United Nations Framework Convention on Climate Change (“Kyoto Protocol”). The amount of the subsidy is up to 50% of the total cost of the study or consultancy with a cap of US$60,000.- per project submission and provided that it does not exceed 2% of the total estimated investment.[8]
  3. Grants to fund advanced pre-investment feasibility studies. This program uses funds of the Banco KfW of Germany and the National Energy Commission (CNE) to co-finance part of the costs of basic and detailed engineering, electricity connection studies and environmental impact evaluations and/or declarations. The grant covers up to 50% of the total cost of the study or consultancy with a maximum of 5% of the estimated investment, provided that it does not exceed US$160,000.- per project submission.

4.. Other Financial Instrument to support Exploration in Geothermal Resources

The Ministry of Energy has announced a fund to be made available as from this year 2012 in the amount of US$47.3 million to grant insurance for the development of exploration in geothermal resources.

4.. Transmission Line.

The HidroAysén project – a US$3.2 billion hydroelectric dam project and private collaboration between the country’s two largest energy firms Endesa and Colbún– has recently been approved by the Chilean government. However, it must first seek approval for the construction and installation of a 1,912 kilometre transmission line, projected to cost US$3.8 billion, that would carry power through 8 regions to Santiago. If this project proceeds, it will bring a wealth of investment opportunities.

4.5 Trading carbon credits.

Chile has ratified the Kyoto Protocol and NCRE projects qualified under the Clean Development Mechanism (CDM) may obtain additional income by selling “carbon credits” to developed countries or operators in developed countries that have ratified the Kyoto Protocol.

Additional Guidance

The opportunities in the electric power sector in Chile are tremendous, particularly for companies with expertise and products relating to non-conventional renewable energy sources (solar, wind, tidal, geothermal). In our firm’s opinion, there are abundant opportunities for Chinese companies to enter the Chilean energy sector, particularly through joint venture agreements with Chilean companies, which would allow Chinese investors to enter easily in a market that is relatively unknown to them. In particular, you will need partners and advisors who have excellent relationships with both public and private sectors to help successfully execute on the opportunities.

This article was written by Grasty Quintana Majlis & Cia. For further information on the firm, please visit www.gqmc.com

[1] National Energy Strategy 2012 – 2030, Chilean Government, February 2012.

[2] Foreign Investment Committee Investment Review, March 2012.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] www.prensaminera.cl February 1, 2012.

[7] www.Xinhuanet.com February 21, 2012

[8] The wind prospecting studies have a maximum subsidy of US$20,000.- for monitoring in a point or US$30,000.- for two points.

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