How Chile is embracing renewable energy

What do you get when you combine favorable policies with strong institutional frameworks, high investor confidence and ample natural resources? You get Chile—the latest renewable energy hub in Latin America. With vast deserts and mountains, 4,000 km of coastline and 140 active volcanoes, the country has enormous renewable energy potential offering an abundance of new public-private partnership (PPP) opportunities for investors. Since 2012 alone, rigorous activity has culminated in commitments of US$9.2 billion—roughly double the investment Chile had the previous 20 years combined. And with frequent droughts, earthquakes, and pricey electricity and fossil fuel imports, the country has made a conscious effort to increasingly utilize green sources as part of its energy mix.

A major catalyst in Chile’s energy sector makeover came in 2007 after the gas supply crisis with Argentina that resulted in power shortages and ballooning prices. Forcing the country to reexamine its energy scheme, key legislation was introduced in 2008 to promote the use of non-conventional renewable energy (NCRE) including geothermal, biomass, wind and solar power. This was seen critical in a country where not only was energy so heavily dependent on imports, but where scarce domestic fossil fuels made the cost of electricity one of the highest in Latin America.

Early results of the new strategy were minimal with only seven Private Participation in Infrastructure (PPI) projects closing from 2009 to 2011. Although green shoots began to appear in 2012, it was the passage of the 20/25 law in 2013 that quickly improved prospects as it introduced a more streamlined concession application process, put in place annual targets for electricity producers, and established a goal to have 20 percent of total power generation come from renewables by 2025.

In the process, the government created an environment of competition, despite not offering subsidies or feed-in tariffs. Projects were bid out separately on an IPP basis through a newly revised auction system, and awarded power purchase agreements (PPA) ensured long-term bankability for investors. And while auctions were previously dominated by steady suppliers of energy that used more traditional fossil fuels and hydro power, recent droughts and the lifting of barriers such as the rule that required developers to offer continuous power—which historically prevented wind and solar projects from winning—ultimately resulted in rising demand for NCREs.

The exact result? Private participation in NCRE investment exploded, leaping from $212 million in 2011 to $933 million in 2012 (Figure 1). Activity that year was driven primarily by wind projects, but also solar and hydro deals.

With the passage of the 20/25 law, 2013 witnessed even more significant gains as investment jumped to $3.1 billion. Hydro captured 69 percent of the total—driven by a single deal—the 531 MW Alto Maipo Hydro Power Project for $2 billion. The remaining $1.1 billion was spread across solar, wind, biomass, and other, smaller hydropower projects.

Investment momentum continued into 2014 as 12 new deals closed for $3.4 billion—which alone added over 1GW of capacity. Solar dominated the landscape with seven projects totaling $2.4 billion. The most notable deal wasAbengoa’s Atacama 1 Solar Complex for US$1 billion, which will be Latin America’s largest solar platform once complete. The facility features a 100MW PV Plant and a 110MW thermal solar plant covering 1,000 hectares. Considered highly advanced technology, the thermal storage plant will utilize molten salt to provide stable energy 24 hours a day.

But it wasn’t just government policy that drove the deal-making: renewables were simultaneously becoming cost-competitive with traditional hydrocarbons. For instance, the average global cost to convert solar power into electricity fell from $315 per MWh in 2009 to $129 in 2015; similarly, the cost of onshore wind fell from $96 per MWh to $85 in the same six-year period, making renewables more attractive by the year.

Complementing favorable government legislation has been Chile’s record GDP growth, which has significantly buoyed investor confidence. With a five-year compounded annual growth rate of 4 percent, Chile has been one of LAC’s most disciplined and high-growth economies. Add in relatively low corruption levels and strong institutional and regulatory frameworks that encourage competition, and the result is one of the world’s leading renewable energy markets, able to draw record foreign investment.

Stay tuned for my next post that looks at some of the challenges and assesses the outlook for renewables in Chile.