An electricity shortage looms in Chile this year as a result of drought conditions and the reduced volume of natural gas imports from Argentina. The Chilean economy is in a state of uncertainty and there is an urgent need to find solutions to its dangerous condition. Local markets are pinning their hopes on the hydroelectricity projects that Endesa Chile will launch in Chile’s Patagonian region (the country’s Aisén region, also known as Region XI). Their goal is to provide 15% of the country’s electricity supply.


The problem is that the project needs water resources that are a component of the country’s cultural and natural heritage. The economic impact of building five hydroelectric plans, along with the high voltage electricity they generate, have triggered a debate about the country’s real priority: Should Chile focus on overcoming the current shortage or on preserving its ecosystem?


Construction of the Ralco hydroelectric generator in the Chilean region of Bio-Bio marks a turning point in the country’s economic development. This significant project, sponsored by Endesa Chile, will eventually contribute the equivalent of nine percent of the country’s entire electricity supply. However, launching the project has sparked a major conflict between that company and the indigenous population of the region, which would be geographically displaced. The Action Group for Bio-Bio, together with Political Ecology, a non-governmental organization, have organized efforts aimed at preventing the project from becoming a reality.


In 1997, Chile’s National Commission on the Environment (CONAMA) gave the green light to the Ralco project. “Beginning in that year, lawsuits, criminal activity and violent protests became commonplace among the Pehuenche [tribe of] Indians. That ended in 2004 when the Pehuenche handed over 50 hectares of land that had made it impossible [for Endesa Chile] to fill up the dam,” said Aaron T. Napadensky, an architect at the University of Bio-Bio. A specialist on the Human Settlements and Territories at ECLA (Economic Commission for Latin America), Napadensky is the author of “The Territorial Impact of Economic Growth: Electricity Generation Infrastructure.”


The Endesa Project in Patagonia


Endesa Chile and Colbun S.A., the local electric utility, are preparing to build five new hydroelectric plants in Chile’s Patagonia region. Their plans call for two power plants along the Pascua River, another two plants on the Baker River, and a fifth plant on the Del Salto River. These vast projects will cost investors an estimated $2.4 billion. They will produce 2,430 megawatts of power, and eventually contribute 15% of the country’s entire generation of electricity. The firms plan to deliver a study on the environmental impact to CONAMA later this year. Their goal is for the project to be operational in 2013.


Although the new plan does not involve displacing families of Native Americans, the local population has warned about its negative repercussions on the environment. The region is one of the least contaminated areas in the country, and is well known around the world for its natural landscapes, sport fishing and rushing rivers. Opponents of the project have established the Defenders of the Spirit of Patagonia, a group comprised mostly of environmentalists, executives, politicians and representatives of the local community.


Nevertheless, Chile is currently facing an energy emergency because of the minimal quotas of natural gas that Argentina has set for its exports to Chile. It is very difficult for Chile to compensate for that lost volume of imported natural gas by using diesel fuel. Add to that the current drought and the reductions in electricity supply that have been announced for 2008. Put all those factors together, and it’s clear why the market views the Patagonia project as both necessary and a viable investment.


Will today’s conditions damage the country’s plans for sustainable economic development? Or will the green initiative of the opposition groups lose popularity because of the urgency to maximize the energy benefits of going ahead with the projects?


Life-saving Impact of Hydroelectricity


Chile’s characteristic climate, soil and topography have turned water power into the country’s principal source of electrical energy. Nevertheless, a system of water rationing, introduced in 1998 during a period of intense drought, made it clear that the country’s Central Interconnected System (SIC) – its national energy grid– is fragile. The energy grid is not very diversified and it is fundamentally based on water resources, says Napadensky in his report. “This led both the government and private sector at the time to diversify the supply of electricity by creating the gas agreement with Argentina. Starting then, natural gas played an important role in Chile’s economic growth because it lowered [energy] costs,” says Napadensky. In 2003, about 60% of the electric power generated by SIC came from natural gas.


However, the bonanza didn’t last long. In 2004, the trans-Andean authority set restrictions on exports of hydrocarbons [to Chile]. Last year, electric power plants in Chile were forced to switch from using natural]gas to diesel power, and production costs shot up as a result. Those costs were passed on to consumers, who now pay 30% more per person.


Beyond all that, there is the recent decision by Argentina’s President Cristina Fernandez de Kirchner, to raise taxes on the currently reduced volume of Argentine natural gas exports to Chile. Finally, another factor that has increased uncertainty about the Chilean economy is the low level of rainfall so far this year.


Nevertheless, Chilean industry seems to have seen the light at the end of the tunnel — the construction of a new hydropower infrastructure that would take advantage of the fast-flowing rivers in the south of the country. However, this approach means exploiting some of the country’s natural and cultural treasures.


Energy Benefits vs. Sustainable Development


Juan Pablo Muñoz, a professor of economics and business at the University of Chile, supports the Patagonian initiative. In his view, it is going to satisfy the country’s huge need for power. “Current plans for economic development require the construction of new hydroelectric plans because they provide energy that is both clean and economical. Considering that [energy] demand will double by 2020, this is one of the most efficient ways to guarantee [sufficient] supply in coming years.”


Muñoz adds that Chile has important comparative advantages when it comes to producing hydroelectricity — its experience [in doing so] and its vast hydropower resources. “Don’t forget the other positive impact that this mega project can have on job creation.”


José Miguel Sánchez, professor at Institute of Economics at the Pontifical Catholic University of Chile, agrees. “The country needs to add at least 300 megawatts of power per year. In that sense, putting up hydroelectric plants in the Aisén region is of major importance, especially if Chile no longer considers nuclear energy a valid alternative, and if the contribution made by such alternative sources as wind power are minimal.”


Alvaro Espejo, a professor at the business school of Adolfo Ibáñez University, takes a totally opposite view. “The Patagonian project reflects the mentality of the past century, which focused only about maximizing profits without taking account of the consequences. It is irresponsible to destroy a region whose rivers and forests are unique in the world — a region that can set the standard for the tourism sector in Chile’s future – when your only goal is to produce energy at a low cost over a period of some years.”


Espejo argues that tourists who visit Chile – especially from Europe or the U.S. – are looking for unspoiled landscapes, extreme experiences and ecotourism. “This is precisely what Patagonia offers, and now it is at risk of disappearing,” he adds.


The Hydroelectricity Infrastructure


In his study, Napadensky notes that hydroelectric plants used for generating, transmitting and distributing energy, are among the infrastructure projects that make the greatest contribution to economic growth. However, he warns that the impact they have on the ecosystem can be either high or low, depending on their characteristics.


“There are two types of plants – those that involve dams and those that harness free-flowing waters. The first type has a high impact on the land, flooding vast amounts of territory, radically changing the flow of rivers, altering the local ecosystem, and depriving the local countryside of its natural wealth. That has been the case in hydroelectric plants at Rapel, Colbun, El Toro, Pehuenche, Pangue and Ralco. Nevertheless, they provide a high level of energy productivity.”


Napadensky says that those power plants that don’t have dams – but which harness free-flowing rivers – have only a moderate impact on the environment because they don’t change the way rivers flow nor flood large areas of land. “However, they are a lot less productive when it comes to generating energy.”


Although the Patagonian hydroelectricity project involves using dams, Sánchez defends the plan because he is certain that it has been recently modified in a way that will minimize its impact on the environment. “The original design has undergone a series of changes in order to mitigate its impact on the ecosystem. The two power plants at Baker River are today more free-flowing [projects] than dam projects. That means that they are going to flood a substantially smaller area than was originally planned.”


For Sánchez, the most worrisome thing about the huge Endesa project has nothing to do with the five hydroelectricity plants that will be constructed but about the transmission line that will be built to connect these plants with the SIC [Chile’s national power grid]. This 2,000 kilometer-long high-voltage network will pass through five national parks and two wildlife reserves.


The Unpopularity of the Ecology Movement


According to Ernesto Fontaine, professor of economics at the Pontifical Catholic University of Chile, “They have to continue to develop the hydroelectricity plan for Patagonia while minimizing all of its environmental costs.”  So how can these two aspects of today’s Chile become compatible?


Sánchez says that “Although every sort of [environmental] defense mechanism has been built into the plan, it will have a negative impact on the environment nevertheless.” Since Chile’s top priority is to emerge from the current state of emergency, sustainable development as a political cause is losing power and is becoming unpopular, states Guillermo Bilancio, professor at the business school at the Adolfo Ibáñez University.


“Any measure taken today to increase the supply of energy is more popular and generates more votes than any ecological initiative. The problem is that the sort of approach that is popular today can lead to a scenario that is unpopular in the future,” Bilancio adds. However complex the challenge, Chile must find a balance so that the decisions it makes about infrastructure don’t wind up harming the environment over the long run, he stresses.


The fundamental problem, according to Bilancio, is that “the short-term mentality that currently characterizes the country’s business sector has triggered a race to achieve profits over the short term, and cast aside [the goal of] Corporate Social Responsibility (CSR).” That goes a long way toward explaining our current condition, he adds. “This is an area where Chile still has a long way to go.”


Corporate Social Responsibility: Marketing, or Good Business Practices?


According to a 2005 study entitled “Corporate Social Responsibility in Chile,” written by Juan Pablo Muñoz and other economists at the University of Chile, Corporate Social Responsibility isn’t widely practiced in Chile. Of the five components that comprise CSR, only the first two are commonly practiced by companies in Chile: raising workers’ quality of life and making a commitment to the community. The other three areas of CSR are protecting the environment; a high standard of business ethics and responsible marketing practices.


The study, which included a universe of 11,000 Chilean executives and sample size of 157 interviewees, determined that it was mostly big companies that undertake CSR in Chile. They do so “by making donations, but even more so through a strategy of generating a better corporate image and a better positioning for their brand in the market. That trend can still be seen today in Chile,” says Muñoz.


Maria Emilia Correa, manager of social and environmental responsibility at Masisa S.A., agrees that CSR in Chile is mostly focused around corporate philanthropic initiatives that provide support for social foundations and involve making financial donations. Nevertheless, Correa says that CSR is gaining strength and occupies an important place on the corporate agenda.


“The debate about CSR is beginning to become more intelligent and analytical in the sense that people are now evaluating which roles must be played by the various participants in the market – especially by companies – when it comes to achieving the twin goals of financial profitability and appropriate social and environmental management,” notes Correa.


Espejo says that the electricity sector is one of the sectors that has participated the least in this sort of debate. “Because their experience has been positive – meaning, they have achieved their goals — these companies have learned to work in such a way that opposition from one sector of the community has no effect on their projects.”