Chile: Challenging Market
By Brian Greene and Guillermo Sandoval Coustasse
Simply to keep the lights on, Chile needs to increase its electric generation by 6% a year, but developers have put the Chilean government in a difficult position by suspending several large-scale power projects and attributing the delay to government policies.
The reasons, according to developers, are environmental claims and uncertainty caused by conflicting views between the judicial and executive branches of the Chilean government.
The executive branch believes the courts are creating obstacles to construction of projects and, in turn, the judicial branch complains that the executive is not respecting judicial independence.
A central issue in the debate between the executive and the judicial branches in Chile has been the approval of transmission lines required to connect new projects to the electric grid. Under pressure, the government recently announced the introduction of a bill called the “Electric Highway Law” in an attempt to clarify the law governing the electricity grid.
An Energized Market
Chile has the highest electricity consumption per capita in Latin America, and the prices for electricity are the second highest in the region next to Uruguay.
The World Bank’s 2013 Doing Business study ranks the Chilean economy number 37 in the world and number one in Latin America (where the regional average ranking for 2012 is 103). The Chilean political system is stable, and the judicial system is reliable and sophisticated. Moreover, estimates indicate that for Chile to become a developed economy, it must double its current electric generating capacity by 2025.
These factors have turned Chile into an attractive place for energy investors and developers.
However, recent developments are causing investors to think twice about proceeding with Chilean projects. A growing number of civil society groups and organizations have emerged to oppose diesel- and coal-fired power plants, and sometimes even hydroelectric dams. These groups have succeeded not only in stopping projects through political pressure, but also in persuading Chilean courts to reassess the process for granting environmental approvals for energy projects of all types.
In 2010, Suez Energy obtained the environmental approvals to build the Barrancones power plant, a 180-megawatt coal-, gas- and diesel-fired facility. The Barrancones plant was to be built only a few kilometers away from the Humboldt penguins’ national reserve. Social uproar and street protests all over the country ensued. The pressure on the executive branch led the Chilean president to call Suez Energy to ask for the company to stop development until it could find a better location. While the project was in compliance with Chilean law, the president told Suez Energy the project was only approved so close to the national reserve due to some “loopholes” in the legislation. Suez Energy has not followed through with plans to relocate the Barrancones project.
In 2012, two major projects have been suspended. The first suspension happened in May when Cobún, the owner of 49% of the 2,750-megawatt HidroAysén project, announced that it would recommend suspending presentation of the environmental impact assessment study for HidroAysén’s transmission line due to uncertainty surrounding environmental regulations. As the president of Colbún’s board explained, “As long as a national [energy] policy is not in place and backed by a broad-consensus, we think that the conditions to develop a project of this level and complexity are not present.”
The second project was suspended in August when the Chilean Supreme Court revoked the environmental permits for the construction of Central Castilla, a 2,100-megawatt coal-fired power plant, which was the second biggest energy project under development in Chile and the largest proposed coal-fired power plant in South America. MPX Energia and E.ON, the project’s developers, had proceeded with the project on the understanding that they would submit three different environmental impact studies (one for the port where coal was received, one for the transmission line, and one for the actual power plant). Before the case was brought to the Supreme Court’s attention, it was unclear whether developers were allowed to present different environmental impact studies for different facilities or stages of a project. The Supreme Court declared that if any facility or part of a project is required for, and the viability of each part of the project is interdependent upon, any other facility or stage, then the developer must conduct an environmental impact assessment that covers all the facilities or stages of a project together. The Chilean president and the Environmental Ministry publicly criticized the Supreme Court for this decision on both political and factual grounds.
Promotion of Energy Development
At the same time as uncertainty has appeared over the environmental, regulatory and judicial processes surrounding energy projects, a political consensus has emerged in support of energy development and, in particular, renewable energy.
The proposed 2013 budget for the Energy Ministry includes a 78.6% increase over its 2012 budget. The focus is supporting the operations of the state-owned oil company, establishing an energy efficiency plan and fostering the development of non-conventional renewable energies (which in Chile means renewable energy other than large-scale hydroelectric projects). The proposed budget for the Energy Ministry for renewable energies shows an increase of 24.1% compared to the 2012 budget.
The minister of energy has declared that subsidies are planned for small generation plants, with a focus on biofuels, small solar PV plants, hot water solar collectors, biomass, small hydroelectric plants and solar-powered irrigation pumps. Subsidies or incentives for larger solar or wind projects are currently being studied, but they are expected to be limited to start the development of those energies in Chile.
Recently, the Environmental Evaluation Service has approved several solar and wind projects in different parts of the country, ranging from 7.5 to 237.5 megawatts in size. Solar projects are being planned in the Atacama desert, the driest desert in the world and, reportedly, the location with the biggest solar potential in the world. Wind farms have been concentrated in the IV and VIII regions in the central part of Chile.
Electric Highway Law
Even if there were a clear set of rules for new transmission lines, transmission would be a major obstacle for project developers in Chile.
Many proposed projects (particularly hydro and wind farms) are far from the existing grid and require the construction of long and expensive transmission lines. However, when pure cost issues are combined with uncertainty over the environmental approval process, the results are crippling on project development. A new “Electric Highway Law” is supposed to set a path through which the main transmission lines will be built and, as a result, both streamline the environmental process and facilitate construction of transmission lines to connect a number of different power projects to the grid and to allocate costs amongst project developers, offtakers and consumers.
Under the Electric Highway Law, the process for determining the path through which new transmission lines will be built begins with the initiation of a comprehensive study on which path the transmission line should take (Estudio de Franja Troncal). The study is to be carried out by a third-party consultant who will have up to two years to determine the proposed path, taking into account a wide range of factors including environmental and geological conditions and social and economic factors.
The study must be approved by a technical inter-ministerial committee composed of representatives from the Energy Ministry, the National Energy Commission, the Superintendence of Electricity and Fuel and the Environmental Ministry. Once approved by the inter-ministerial committee, then the consultant must provide notice to landowners who would be affected by the proposed path of the transmission line, and these landowners will be given a time period to object.
Next, the Ministry of Energy must approve the study or request that the consultant make further modifications. The Ministry of Energy will then pass the study to the Council of Ministries for Sustainability (Consejo de Ministros para la Sustantabilidad), who will review whether the proposed path of the transmission line is consistent with Chile’s sustainability goals. Finally, the Chilean president will execute a supreme decree (Decreto Supremo) granting the concession for the transmission line and any corresponding easements. After the president signs the supreme decree, then the Chilean government will conduct a tender and grant the winner of the tender the right to the transmission line concession.
If passed, the Electric Highway Law will change the relevant time period taken into account when determining the required transmission capacity. Currently, transmission capacity for new lines is calculated based on the expected demand 10 years in the future. Under the proposed law, this will change to the expected demand 20 years in the future. The intention is to build transmission lines with a significant capacity for new generators to connect to the grid. Transmission costs for actual capacity used are not changed under the Electric Highway Law (80% of the cost is assumed by generators and 20% by consumers). Payments for extra capacity installed but not used will be assumed by the demand.
Importantly, the Electric Highway Law also attempts to streamline the process to build a transmission line by declaring that the path of a proposed transmission line will not be part of any environmental site assessment and that only impacts derived from the actual construction of any buildings or other installations will be taken into account. Furthermore, the bill seeks to reduce the time required for developers to obtain the permits required to build the transmission lines.
If the Electric Highway Law is passed and works as the government intends, then it will spur development of energy projects by increasing transmission capacity, providing a mechanism to allocate costs among projects and establishing a clear set of rules for how transmission lines will be approved and constructed.
However, critics of the bill charge that instead of solving the current uncertainty, the Electric Highway Law will only make the situation worse. In particular, they point out that in attempting to streamline the process, the Electric Highway Law violates certain protections for local communities and stakeholders. Critics also think that the proposed changes to the environmental assessment process are ambiguous and open to judicial dispute because it is not clear when an environmental impact would be due to the path or the construction of buildings or other installations, and because the factors taken into consideration to determine the path of the lines will probably not include factors relevant to affected stakeholders. Thus, the Electric Highway Law could result in more uncertainty, litigation and delays rather than less.
Some renewable energy executives see the Electric Highway Law as a way of promoting the growth of renewable energy projects in Chile. The fact that the charges for available extra capacity will be reduced as more generators connect to the grid is seen by some of these executives as a subsidy. The government has said that the Electric Highway Law should be an incentive for renewable energy because it will bring transmission lines to the places where wind and solar farms are projected, thus reducing an important cost of development. Furthermore, the government expects the Electric Highway Law to give certainty to investors as it will provide foreseeable transmission capacity to the places where the transmission lines are laid. Another relevant consideration for renewable energy generators is that the costs of transformers to connect to transmission lines will be included in every transmission project, and thus the costs will be shared by a larger group of system users.
From a practical perspective, the impact of the Electric Highway Law will depend upon the location and type of project involved. Projects that are located closer to the existing transmission lines will be affected less than wind and hydro projects (such as HydroAysén) that require construction of long transmission lines. Solar projects in the north that are near mines would not experience a significant impact (other than from price increases that could result from an energy shortage if the Electric Highway Law is not successful). Nevertheless, developers with an interest in Chile should keep a close eye on the progress of the Electric Highway Law and its implementation as they could determine the future of the Chilean market.