Currently Argentina is only sending 10% of the agreed quantity of natural gas to its Andean neighbour, Chile. Faced with an energy crisis beginning to impact upon economic growth, Chile was forced to scour the globe for energy sources says Eugenio Chinchon, a Chilean business development manager specializing in renewable energy.
“Chile provides most of the copper in the world. As China has been booming and asking for a lot of minerals, the price of copper has gone up. So they want to produce more but because there is a shortage of energy, they couldn’t produce. Also because of historical reasons we don’t have natural resources to produce energy in the north, and the only way to produce has been gas. But we don’t have gas, so we must buy it from other countries. Our neighbours like Peru and Bolivia have a lot of gas, but because of historical reasons, there is a lot of rivalry and they don’t want to sell us gas. So Chile has to buy liquid gas from the Far East and it’s very expensive. So the prices are going very high and the Chilean government wants to have wind energy”.
The reduction in Argentine exports of natural gas prompted an energy policy rethink in Chile and a firm commitment by its Government to diversify its energy sources. Legislation signed into law by Chilean President Michelle Bachelet last year requires that electric utilities invest in and supply non-conventional energy sources. The law is an attempt by the energy poor country to diversify supply as it tries to feed booming industry, particularly its copper mining sector.
The law mandates that, NCES account for at least 10% of the energy supplied by Chile’s electric utilities by 2024. Upon signing the law Bachelet said “the main idea is to establish conditions to attract investment to projects for non-renewable energy by accelerating the development of the market, eliminating entry barriers making those new sources compatible with the country’s electricity market”. Historically, up to 75% of Chile’s domestic energy production came from hydroelectric projects which are mainly located in it southern regions. However, recent droughts in the region have exposed unreliability in this renewable energy source (rain at the end of 2008 did restore hydroelectric energy production capacity). Energy diversification has thus spread to different potential sources.
Geography has been kind to Chile with regards renewable energy sources. With many active volcanoes in its southern Patagonian region, geothermal energy is pursued as is tapping into the solar energy potential of northern Chile, where year-round clear sunny skies provide some of the best conditions in the world for this form of renewable energy.
Hydroelectric capacity is set to be increased with GDF Suez building at least six new hydro plants in southern Chile, but GDF is also one of many companies now entering Chile’s exciting Wind power sector.
Chile’s status as having the most economically liberal economy in the region is making the country a magnet for alternative energy investors seeking a foothold into the whole of Latin America.
According to the Index of Economic Freedom, jointly produced by the Wall Street Journal and the Heritage Foundation, Chile currently ranks 11th in the world and is number one in Latin America when it comes to having established economic freedoms within the workings of the economy.
Eugenio Chinchon a Chilean who advises European companies on setting up renewable energy operations in Chile told Alternative Latin Investor that his country has had an open energy market for many years.
“The electricity market in Chile has been completely liberalised since 1982. It was the first country in the world to do so. That means for renewables, that in order for them to compete with electricity they have to do it on the same terms”.
However, Chinchon says that having a free market energy sector can make it difficult for renewables to compete unless market conditions are favourable “The only way to help the renewables is the Chilean government forced the electricity generators to have a 5% share of their electricity coming from renewables (this will rise to 10% by 2024, as earlier mentioned). And if they don’t comply with that they have to pay a penalty. At the moment it is cheaper to pay the penalty, however, having said that, at the moment Chile is having energy problems because the price of energy is based on market rates and now there is a shortage so now the prices are very high. Even with the competitive market it’s good for renewables now”.
Whilst conditions in the Chilean energy sector may currently be attractive Eugenio Chinchon believes we are witnessing alternative energy investment strategies with an eye on the whole region “I know there are many companies who are interested in Chile in particular for many reasons. They want to use Chile as a platform for the rest of South America. Because the market is not that big in Chile, it is not that attractive for that, but you can set up your headquarters and you are assured that you are not going to have problems. You are going to have less risk than in other countries such as Argentina or Brazil or even riskier countries such as Bolivia or Peru. Also in terms of wind, Chile and Argentina have good wind resources, so if the tariffs are low you can get good wind revenues. I think the capacity factor could be over 30%”.
The current economic crisis and the knock-on effect on the price of oil have made renewable forms of energy less attractive than in the recent past but Eugenio Chinchon told Alternative Latin Investor that the ideal time to make investments is now
“If the crisis, say, ends next year, and we have recovery, things will be completely different. Many people who invest now will get very good returns. Probably if you are trying to get into renewables particularly in Chile, in two years time you will be fine, but not as good as now. Now is the time to get in on the ground floor”.
It would seem that many investors are thinking in line with Chinchon as over 20 wind farm projects began in Chile last year alone. Ironically, the success Chile is having in attracting alternative energy investors could ultimately prove a negative influence according to Chinchon.
“If they build too many wind farms I think prices are going to drop and when you get some point that prices are so low, you cant recover your investment as no one will guarantee you a tariff for say 20 years. You have to live with the fact that every six months there will be a change in the tariff, and you expect it to be high but there is a lot of risk in terms of the tariff. At the moment there is a lot of problems with energy and that has been (like that) since 1995, and that is not going to change for the next 12 years. So, if you build a wind farm now you will have at least have 12 years of a very good price. If you have a good tariff, in less than 10 years you pay off your investment”.
Surprisingly Chile, with its lengthy Pacific coastline in not a good location for offshore wind projects as Eugene Chinchon explained to Alternative Latin Investor.
“Offshore is very difficult, why? Because off the coast of Chile is the junction of the tectonic plate from the Pacific and the continent. After a couple of metres, the dip of the sea in that area is around 4000 metres. I think it is difficult on the Pacific side, and might be more possible on the Atlantic side. But in Chile I don’t think it’s a solution.
Nor would any Latin American countries on the Pacific coast be interesting for investors”. Those who do choose to invest in Chilean wind power are typically looking at a 20 year life cycle for a return on their investment and Chinchon estimates that if the current tariffs don’t change too much you are looking at an 8% return or higher over 20 years.
Though some 20 projects are currently under way in Chile there is only one wind farm that is presently operational. The Canela 18.15 MW wind farm, which is owned and operated by -Endesa Eco (a subsidiary of the Enersis group), comprises of 11 wind generators and operates in the Coquimbo region in the village whose name it bears. Eugenio Chinchon explained to Alternative Latin Investor some typical costs of setting up a comparable though larger wind farm operation.
“The most expensive part is the EPC contract. Depending on the size of the wind farm; Suppose a million watt wind farm using 25 turbines of two Megawatts, 80 meters high, more or less 65% of total cost, 80 million Euros. Turbines 65%, 10% civil works, 5% network to connect to a grid, 20% of the revenues go to maintenance”.
The mining sector in Chile is one of the main reasons for the upsurge in investment in harnessing Chile’s wind according to Chinchon.
“There are companies, mining companies who need electricity but don’t know about the energy business and are looking for companies or investors to put money into wind and doing a PPA agreement: Can you guarantee me energy for 20 years and make such type of deals. As these companies don’t know much about energy it is a good deal for investors who have done quite well. At the beginning there were only developers. Now there are investors who don’t have any idea, but outsource or contract out to companies. The company gets the permits and builds the wind farm, and gets shares”.
Some companies making moves in the sector are GDF Suez, who have been contracted to build two wind farms; Canada based Methanex have announced plans to develop a wind farm in the Magallenes region in Southern Chile in order to boost power production at its methanol plants hit by Argentina’s natural gas supply cuts; Australia’s Pacific Hydro is working with BHP Billiton to build wind farms in northern Chile. BHP wants to use wind energy to power some of its mining operations; British energy company Seawind is investing US$230 million in a 100MW wind farm in the Tocopilla region and finally Norwegian renewable energy developer SN Power are developing a project called the Totoral Wind Farm, which will have the capacity to produce 46 MW when it becomes operational at the end of this year.
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