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By Alternative Latin Investor -- The combination of pro-renewable energy legislation, economic stability and industrial demand are fuelling a vibrant wind power sector in Chile.
The Latin American nation has limited indigenous energy resources, with the exception of hydropower. As a result, the country must import the bulk of its energy needs. Up until 2004 Chile met most of its demand for energy by importing natural gas through an agreement signed in 1995 with neighboring Argentina, which had agreed to supply 22 million cubic meters a day. However, subsidized energy prices in Argentina boosted domestic demand in that country, which consequently saw exports to Chile fall drastically.
Currently Argentina is only sending 10% of the agreed quantity of natural gas to its Andean neighbor. Faced with an energy crisis that was beginning to impact 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,” says Chinchon. “Also because of historical reasons we don’t have natural resources to produce energy in the north, and the only way to [run the copper mines] has been gas. But we don’t have gas, so we must buy it from other countries. Our neighbors 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 made this energy source unreliable (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 there is geothermal energy, and there is also great 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.
Chinchon, a Chilean who advises European companies on setting up renewable energy operations in, explains that his country has had an open energy market for many years.
“The electricity market in Chile has been completely liberalized 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,” he says.
However, Chinchon adds that having a free market energy sector can make it difficult for renewables to compete unless market conditions are favorable.
“The Chilean government has 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,” says Chinchon. “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 is good for renewables now.”
While conditions in the Chilean energy sector are attractive, Chinchon says companies and investors are keeping 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%,” he says.
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 Chinchon thinks the time to make investments is now.
“If the crisis 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.”
Investors seem to agree with Chinchon. 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 to be 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 can’t recover your investment as no one will guarantee you a tariff for say 20 years,” he says. “At the moment there are a lot of problems with energy and it 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.
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), is comprised of 11 wind generators and operates in the Coquimbo region in the village whose name it bears.
Surprisingly, Chile, with its lengthy Pacific coastline, is not a good location for offshore wind projects because that is where the tectonics plate from the Pacific and the continent meet. “After a couple of meters, the dip of the sea in that area is around 4000 meters,” says Chinchon. “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.”
Numerous companies are making moves in the sector. GDF Suez has been contracted to build two wind farms; Canada-based Methanex has 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; British energy company Seawind is investing US$230 million in a 100MW wind farm in the Tocopilla region; And Norwegian renewable energy developer SN Power is 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.
This article first appeared in Alternative Latin Investor. Alternative Latin Investor is the first online publication to provide information on alternative investment opportunities within the Latin American region. The publication covers hedge funds, private equity, agribusiness, real estate, forex, wine, art and other alternative asset classes. Register for free to gain full access.