When Chile decided to import natural gas from Argentina in 1995, it never suspected the unfortunate outcome that the initiative would have for its energy sector.
Up until then, 65% of Chile’s energy came from hydroelectricity, according to Alfonso Guijón, head of Poch Environmental Products, a Chilean consulting firm specializing in engineering projects. However, with hydrocarbons being cheaper and less polluting than hydroelectric power, local industry began constructing gas pipelines and natural gas-powered thermoelectricity plants. The country also invested millions of dollars adapting electricity plants for hydrocarbon processing. At the same time, the government approved laws promoting natural gas and discouraging hydroelectricity, signing contracts with utility companies in some cases for as long as 20 years to generate 40% of its electricity from natural gas for residential and commercial markets.
According to Chile’s National Energy Commission (CNE), more than 50% of the electric energy consumed nationally by 2003 was generated by power plants fed by natural gas. But rather than gaining greater energy independence, the country actually increased its reliance on Argentina.
Hugh Rudnick, professor at the Catholic University of Chile’s Electrical Engineering Institute, notes that “the almost complete absence of fossil fuels in Chile" is the crux of its energy dependence. What’s more, he says, "the only significant source we have is hydroelectric power, and that has not yet been developed,” though a number of proposals are waiting to receive permits from the government.
Pivotal in all this is the major setback that Chile’s energy sector suffered in 2004. Amid its own growing energy demands, Argentina began granting its domestic users privileged access to natural gas supplies to the detriment of export markets. Thus began a series of restrictions affecting natural gas shipments to Chile. The export cuts peaked in May 2007, impacting more than half of Argentina’s shipments overseas, according to the CNE.
Adding salt to the wound, the Argentine government later raised taxes on hydrocarbon exports. As a result, power plants switched to using imported diesel fuel, despite being more expensive than natural gas. By the start of 2008, electricity prices were 40% higher than in 2006. All kinds of companies in Chile were adversely affected, from metal processors to businesses whose supply chains rely on thermal processes.
The Carbon Crossroads
In many respects, Chile’s energy companies were no different than their counterparts elsewhere in the world. “Depending on foreign markets for energy supplies is reasonable,” says Sebastián Bernstein, partner at Synex, a Chilean energy consulting firm. The key for companies, however, is diversification. “Most countries in the world do that, especially when their sources are diversified,” he notes.
Amid the diversification drive, the government has been holding public auctions for the construction of liquefied natural gas (LNG) plants. In June last year, Chile’s first LNG complex — in Quintero, in the Valparaíso Region — began operating, after having received the first shipment of LNG from Trinidad and Tobago. Since then, Chile has imported LNG from Equatorial Guinea and Egypt. A second LNG plant, in Mejillones in northern Chile, will come on stream sometime in the next few weeks. Then there’s Chile’s Short Law II, which promotes the development of coal plants and hydroelectric complexes, many of which will begin operating between now and 2012.
Among the fuels that Chile imports – LNG, coal and petroleum – coal is the cheapest. At US$150 a ton in 2008, its price fell to US$60 a ton in 2009 and is expected to hover around US$70 a ton this year, according to UBS, a Swiss investment bank.
Currently, Chile’s electricity grid generates 2,050 megawatts (MW) of power, or 15% of the country’s total installed capacity. However, plans are under way to increase that amount to 7,200 MW, including coal projects that have been approved or are awaiting approval by the environmental agency.
From an environmental perspective, however, this isn’t good news. Following a study by the CNE in 2008, the commission’s experts warned, “The increase in coal plants in Chile could mean that the country’s annual emissions of carbon dioxide will increase from 70 million tons today to about 300 million tons in 2030, which would be higher than the emissions of many countries in Europe and other developed countries.”
But Guijón notes that in terms of overall CO2 emissions, Chile is a minor player. “Our country is among those that have an average level of per capita global emissions of CO2 – about 3.9 tons per person," he explains. In comparison, Spain emits 7.6 tons, the U.S. 20.6 and Australia 25.6.”
To address this, Claudio Tenreiro, professor of engineering at Chile’s University of Talca, predicts that the country will have “more penalties for energy producers using unclean methods." The reason: the Kyoto Protocol. The treaty, ratified by nearly 200 nations including Chile in 1996, aims to reduce gas emissions by 5.2% between 2008 and 2012 from 1990 levels. “The penalties [for non-compliance], which can be applied at a country or corporate level, will be affect all Chilean exports through fines and additional taxes," says Tenreiro. "They could even set production quotas that limit how much [goods] Chile sends abroad.” Considering that exports represent nearly 40% of Chile’s GDP, the impact could be enormous.
Tenreiro also foresees an effect on politics. If Chile increases its CO2 emissions, the country should brace itself for “public criticism, which could have repercussions on international trade relations and weaken Chile’s ability to globalize.”
The irony is, according to Rudnick, that more — not less — barriers are now standing in the way of the country achieving the government’s ultimate goal of diversifying its energy mix and increasing its energy independence. “By not developing our hydroelectricity sufficiently, we are making ourselves more dependent now on coal, with its unfortunate environmental impact,” he says.
Tenreiro is even more pessimistic. He says the government is doing “a lot of speechmaking about having a diversified [energy] mix … and studies have not been decisive and [the government is] not making any moves to require the development of alternative sources." When all is said and done, he adds, "the overall policy is to use the cheapest fuel rather than the one that is appropriate for a long-term energy plan controlled by the state — a policy that would guarantee stability, good prices, a secure supply and environmental protection.”
The High Price of Renewables
Since renewable energy is less detrimental to the environment than coal, the government has embraced it, passing a law in 2007 requiring that a part of Chile’s new electricity projects from 2007 until 2020 will be based on renewable sources. According to Bernstein: “Everything can change with more generation of hydroelectric power, LNG and renewable sources.”
Nevertheless, Rudnick believes that the development of unconventional renewable energy will not help reduce Chile’s dependence on coal by that time, “because the costs associated with renewable sources are still too high to make them attractive energy alternatives. If you tried to subsidize these energy sources, it would have a high cost for Chile.”
Of all renewable energy sources, experts say wind power is the most scalable because it can be developed on an industrial scale in sites where wind conditions are good. Its investment needs are also more predictable than other sources. “However, [wind] is 40% more expensive than traditional energy," says Bernstein. "Solar energy can also be very expensive, although its cost could drop in 10 or 20 years. Geothermal energy is another potential resource, but it is very risky during the exploratory stage, and it is slow and complicated to develop.” Ultimately, however, the impact of these alternative projects on Chile’s energy grid is very limited, say experts.
So what are Chile’s best energy alternatives to stop polluting the environment over the short and long haul? Rudnick says the country needs “to promote the hydroelectric power generation [capacity] that it still does not use," including in the southern Aysén Region.
In that region, two initiatives await a green light from environmental authorities. The first is HidroAysen from Endesa Chile — an affiliate of Spain’s Endesa — and Colbun. It will contribute 2,750 MW of power per year once it comes online. The second initiative is Rio Cuervo, which is being developed by Xstrata, the Swiss mining company, and it will contribute 640 MW.
The Nuclear Option
Nuclear power is another important energy source under consideration. “Nuclear energy is the most economical industrial alternative and cleanest in terms of CO2 emissions," says Bernstein. "[The costs to produce it] are only 10% higher than those involving coal-powered plants.”
While the costs of building a nuclear reactor are very high, Rudnick reckons that over the long term, Chile should focus on nuclear energy because it is an abundant and stable resource. “The central question here is: For how much longer will we be able to build the country on a foundation of carbon?”
Rudnick concedes that nuclear energy is not without challenges, including psychological barriers. He recalls the accidents at the Three Mile Island plant in Pennsylvania in 1978 and the Soviet Union’s Chernobyl in 1986. “These disasters paralyzed the development of nuclear projects worldwide," he notes. "Nevertheless, safety systems have [improved] and many countries are reconsidering nuclear energy.”
But the other major challenge is convincing the private sector to invest in nuclear energy despite uncertainty about the level of the government’s legal and financial support. Chilean president Michelle Bachelet, who leaves office in March, has repeatedly ruled out developing nuclear energy, favoring renewable energies instead. But as the country heads to the polls this week, the government’s nuclear stance could be on the verge of change. Both presidential frontrunners — Sebastián Piñera and Eduardo Frei — have voiced their support for nuclear energy.