A status quo report: Energy policy framework in Chile 2010

Term Paper (Advanced seminar), 2010

23 Pages, Grade: 1,0


0. Index

1. General Introduction

2. The Energy Matrix

3. The Electricity Sector
3.1 The reform process
3.2 Privatization and what results can be expected?

4. Renewable Energy Opportunities
4.1 Hydropower
4.2 Windpower
4.3 Geothermal Energy
4.4 Solar Power
4.5 Ocean Energy
4.6 Biomass and Biofuels
4.7. Regulatory Framework and Perspectives for implementation

5. Energy Efficiency
5.1. Energy measures in different sectors

6. Concluding Remarks

7. References

8. Annex
Table 1: Chile’s Energy Balance, 2007 (Mtoe)
Table 2: Chilectra’s historical performance after the reform process
Table 3: Renewable Energy Potential in the SIC, projections for 2025.
Table 4: Total Primary Energy Supply per GDP (PPP), 2007
Figure 1: Chile’s Electricity Grid with installed Capacity and Client distribution
Figure 2: Scenario for Energy Matrix (2006-2020)

1. General Introduction

The Republic of Chile is located in the south west of America with Peru, Bolivia and Argentina as neighbouring countries. The geographical profile includes 39 grades of latitude with an north-south extension of 4300km which provides diverse climatic and geographical conditions. Located in the north the driest place on earth, the Atacama desert, with an N-S extension of nearly 1700 km. The central region, where the majority of Chilean population lives, is characterized through a Mediterranean climate with one of the highest point of the Andes called “Ojos de Salado” (6880 meters). In the southern zone predominates a rainy temperate climate with yearly precipitation of 5000 mm.[1]

Chile is one of the most successful countries in the southern hemisphere in terms of political stability, economic growth and pioneered a market reform process in the electricity sector. With the end of the Pinochets’ dictatorship in 1990 the economy regained its pace and since then grew faster than any other country in the region. The economy is largely based on abundant mineral resources mostly located in the north as well as agriculture, forestry products and fishing. By 2008 Chile has signed trade agreements with 58 countries with the United States, China, the EU and Japan as the most important trading partners. Due to its liberal free market thinking export share has risen in two decades from 26 to 45 percent in 2006. Sound monetary policies and anti fiscal management enabled a fast recuperation through stabilizers such as the Economic and Social Stabilisation Fund as well as the Copper Stabilisation Fund with savings of more than USD 21 billion (12% of GDP, because of high copper prices in the last two years) by the end of 2008.[2] The unemployment rate remained near nine percent with a low inflation rate of three percent. Due to the vigorously reducing interest rate from 8.25% to 0.5% the central bank has set an impulse on the monetary side in the first half of 2009 that permitted an strong incentive for investments to stimulate the economy after the property markets crash in the United States.[3] In total numbers Chile has been developed very successfully reaching the highest GDP per capita in PPP term of USD 14500 in 2008, ahead of Brazil and Argentina which totalled 236 billion US-Dollar in the same year.[4] This has lifted the share of people that came out of poverty from 54,9% in 1987 to 86,3% in 2006.[5] For its merits on economic sound policy making and political stability Chile has become the first OECD member in South and Central America by January 2010. This membership marks a milestone and can be seen as model for other countries in the region.[6]

The following part of the paper examines the structure of Chile’s current energy matrix. Chapter 3 will analyse policy reforms and the privatisation process in the electricity sector with a brief historical perspective. The fourth part investigates the possibilities to implement non-conventional renewable energies (NCREs) to the electricity grid followed by an analysis of the potentials of energy efficiency measures and the last section concludes the outcomes.

2. The Energy Matrix

Diversification is one of the most vital issues related to Chiles energy situation considering the last two decades. The government has set security, efficiency and sustainability as its strategic target meeting the current challenge of energy security. Problems arise from insufficient gas supplies, high oil prices and the vulnerability of droughts that affects the hydroelectric power generation and makes Chile’s economy vulnerable.[7]

Chile energy structure can be described by three basic characteristics:

First, in comparison to other countries in the southern cone like Bolivia or Venezuela, its natural fossil energy resources are limited. The economic growth of the last two decades resulted in a significant increase of energy demand that mostly has to be covered by energy imports. Due to missing alternatives in the short run, Chile has suffered various energy crisis the most serious in the year 2007/8 during a long drought. Therefore, as a second characteristic, energy imports are vital to the economy as Chile covers almost 80% of the countries total primary energy supply (TPES) from fossil fuel. Out of these energy resources 98% are oil, 75% natural gas and 98% coal, according to the Chile’s National Commission of Energy (Comisión Nacional de Electricidad - CNE) 2006. From a historical viewpoint, hydroelectric power has been the dominant source to cover power and electricity production, while industrial and residential sector were highly dependent from oil until the mid 90s.[8] This has changed due to changes in governmental policy to lower the dependency and to diversify the sources of energy.

In the year 1973 Chile energy production was about 5.08 Mtoe[9] with imports of 3.39 Mtoe. This has changes drastically in the year 2007 where production not even doubled but imports have risen by more than 600% to 24.13 Mtoe.[10] Imports of crude oil (about 230.000 barrels/day) came from Brazil (25%), Ecuador (23%), Angola (20%) and Colombia (17%) while coal (5.8 million tons) was basically imported from Colombia, Indonesia, Australia and Canada.[11]

Chile has increased its percentage of gas in the electricity production from 1% in 1997 to 33% in 2004, replacing coal and oil-abased generation. Due to shortage in gas supply from Argentina, the main supplier, beginning in 2004 and extreme weather events like severe droughts that have lowered the electricity production of hydroelectric power and have made various economic sectors vulnerable to external factors.

In the mid 90s Chile started to diversify its energy mix mainly by substituting oil for natural gas with Argentina as main supplier. This was fixed in a contract between the two countries to deliver natural gas from 1995 onwards. However this relation with its neighbors is quite complicated. Due to historical dispute with Bolivia, natural gas can not be purchased directly. Argentina imports natural gas from Bolivia to cover its own energy necessities and exports their own gas resources to Chile. In case of energy shortages from Bolivia, Chile is always indirectly affected with the risk of energy shortages from Argentina. In 2003 half of the electricity production was generated by natural gas. In August 2005 gas exports were cut by 59%, in may 2007 by 64%, which has caused several blackouts in Chile, forcing the electricity plants to switch to expensive diesel power generators.[12] Apart of this fact, Argentina has increased the its natural gas export tax from 20 to 45% that might cause more difficulties in future to cover its natural gas needs at a reasonable price.[13]

Out of these background Chile tried to diversify in the way to substitute natural gas for Liquid Natural Gas (LNG) with the advantage, that the existing gas infrastructure can be used without a lot of additional infrastructure investments. Before LNG was imported, Chile was almost completely dependent on Argentinean natural gas. In the same year Chile signed a preliminary contract with Indonesia for the delivery of LNG starting in 2007.[14] There have been built the Quintero terminal 155 kms in the north of the Metropolitan Area of Santiago and a second, the Mejillones terminal, which went on-stream a few month ago[15] fulfilling the energy needs of the mining industry in the north. In the short term, LNG is an interesting solution to diversify the energy matrix, but as the international market tightens the prices will probably go up in the near future as more and more countries use LNG. Furthermore transportation costs remain relatively high, because of process inherent energy needed and terminal infrastructure.[16]

Other approaches to satisfy the energy needs are the broader implementation of non-conventional renewable energies (NCREs) and energy efficiency measures that will be discussed later in this paper.

3. The Electricity Sector

Chile is a pioneer country that has reformed its former government-owned electricity sector in a quite comprehensive way. The process began in 1982, when Chile’s first important electricity law passed the legislation. Argentina followed next in 1992 and in the following two years Peru, Bolivia and Colombia.[17] Some decades ago, the situation was quite different when in 1974 the two largest energy generators, Endesa and Chilectra, were in a ‘desolate’ condition resulting in a negative net income of 4.3% and 3.2%, respectively.[18]

Since the late 1970s, energy policy as been based on two crucial concepts: economic efficiency and the subsidiary role of the state. This enables the state to intervene in case of market failures, like natural monopolies, that are quite common in the telecom and the electricity sector.[19] This structural change of legal framework was supported of economists in the government, coming from the University of Chicago where these free market ideas are referred as best case solution to optimize social welfare.

The whole electricity reform process has been considered as a very successful example that has served as a model for privatization in the industrialized and developed world alike.[20]

3.1 The reform process

The privatization process in Chile can basically be distinguished in three phases. There is a first stage in the period between 1974 and 1980, where 259 companies that have been expropriated under the Allende’s government were restored to their original owners. Second the decade of the 80s characterized through privatization of telecom and electricity companies so that by 1989 only a quarter of these enterprises remained governmental owned. In the last period 1990-2001 the privatization process slowed down. The government sold three large water and sewage companies and consummated the electricity sector privatization.[21]

The fundamentals of the reform process in the electricity sector was set with the 1982 new legislation and the establishment of new regulatory bodies in the late 1970s. This Electricity Act of 1982 paved the way for vertical and horizontal ‘breaking-up’ (unbundling), commercialization and the partly privatization of the former state owned electricity system which involves different institutional actors. In 1978 the CNE was established, as a regulatory authority responsible for planning and coordinating policies and standards to ensure compliance on energy-related matters. Secondly the Superintendent of Prices of Electricity and Fuels (SEC) with the responsibilities for data collection, enforcement of laws and regulation as well as all kinds of customer affairs. The next reform step was taken in 1999 after the 1998/9 drought experience which has led to energy shortages. Therefore, electricity producers were given an incentive to invest in more capacity and reliability enforced through compensation mechanisms for customers and the obligation to supply energy even in absence of an energy contract.[22] This has led to investment incentives and to a success in the rate of rural electrification. While in the year 1982 just 62% of rural house-holds were supplied with electricity this percentage has increased to 98.5% in the year 2008.[23]

The electricity sector basically has to fulfill three functions that can be realized by various companies: Generation, Transportation and Distribution. Unbundling made it possible to introduce competition in the wholesale market for energy as one very important aspect. This separation of the three businesses allow room for competition with an incentive to increase efficiency and performance-based regulation provide space for new market entrants as well as an incentive regulation in the distribution sector. This implies a setting of prices for distribution companies, with a predetermined rate of return and a lower risk level in a competitive market.[24] Today the privatized electrical industry market is characterized through a wide variety of providers. It is divided into 31 generation, five transmission and 36 distribution companies.[25] In most of Latin American countries illegal use of electricity has implied a serious burdens to the utility. Therefore the government has provided financial assistance after the reform process, especially by the installment of meters in shantytowns where energy thefts have decreased quite considerably.[26]

Chile’s electricity grid is based on two main systems. The northern interconnected system (Sistema Interconectado de Norte Grande – SING) and the central interconnected system (Sistema Interconectado Central – SIC) which amount together to more than 99% of the installed capacity. The remaining part is produced by the two southern systems Aysén and Magallanes, for more details see figure 1.

In 2008 installed capacity at SING grid was about 3,600 MW. Out of these around 90% were provided to mining and larger industrial companies in the dry north, where nearly all energy was thermally generated. In comparison the SIC grid most of energy produced was sold to private customers in the Metropolitan Area of Santiago including cities like Valparaíso and Concepcion, which alone represented nearly 50 percent of the countries’ population in 1999.[27] By 2008 there were 9,400 MW capacity installed with more than the half generated by hydropower.[28] This energy demand will rise concluding the projections for 2020. Regarding to the Chilean Energy Commission the country has to double its capacity until the year 2020 to around 24,000 MW. The law of 1982 distinguishes between two types of customers: regulated and free. The regulated is forced to pay the tariff that is set by the authority (CDEC) based upon a cost calculation for an ‘ideal’ distribution company. If the consumption is between 500 kW and 2 MW due to law of 2005 the customer is free to change to become a free customer. These represent two-third of the SIC and a tenth of the SING customers. Free clients, on the other hand, have a high energy consumption and therefore are able to negotiate their prices and conditions with suppliers directly.[29]

3.2 Privatization and what results can be expected?

The principal gain of a reform and privatization process is an improvement in economical performance of the enterprise. In many countries subsidies have provoked major welfare losses in terms of overall economic welfare.[30] In a competitive situation there is the profit-driven motive, that gives companies a strong incentives for an efficient use of resources which results in lower costs of production and finally stimulates competition (that does not exist in a monopoly situation with only one supplier) where at the end the consumer benefits from better services and lower prices.[31]

By 1989, the privatization process of the electricity sector was completed after financial and corporate restructuring. The sector performance was relatively good but was reformed as a larger rationalization process of the economy. In the northern SING grid competition between companies has been improved formidable. For the SING resulted gains in efficiency, price drops and a better service quality.[32] As result, two groups have benefited from the reform process; the consumers and the electricity companies. The electrical sector can be distinguished in three activities: generation, transmission and distribution. This has given an opportunity for new market entrants, that under former conditions, would have had no chance to compete in a monopolistic market structure. In this competition environment a market of 31 generation, five transmission and 36 distribution companies has emerged.[33] The two largest operators could visibly improve their performance. Chilectra, that has been splitted into three firms, has doubled its annual sales in electricity between 1987 and 2001 while in the same time customer base grew from 973.000 to nearly 1.3 million. The sales per worker in GWh rose by over 700% and energy losses have decreased from former 19.8% to 5.2% in the year 2000.[34] A similar performance resulted for the second largest enterprise Endesa. The consumer, on the other side, benefited from lower energy prices. In the SING grid prices dropped from USD 0.05 to 0.022 per KWh in between 1996 and 2002, while in SIC prices slightly decreased from USD 0.038 to 0.022 per KWh which means a price decline in peso terms of 73% and 33%, respectively.[35] Furthermore, more people could benefit from the new regulation, so that in 2008 less than 2% of households in rural areas where without electricity access (compared to 48% in 1982).[36] Due to the larger investments in (technical) infrastructure and equipment the possibility of blackouts has been reduced.

Another structural process that have passed the Chilean legislation were the following four guideline principles for ‘good policy’. First the “separation of functions” between the Ministry of Energy (MoE) and the CNE, which has the responsibility for technical and economical regulation the rest of planning, etc. is now regulated under the MoE. Secondly, a different approach to sectoral co-ordination and integration of Chile’s regions. For reasons of better coordination, the Regional Energy Ministry Secretariats will be established to relieve the national ministry. Third, the harmonization process between environmental and energy issues with focus on the regional level is established.[37] And finally the improvement of regulating capacity of the CNE as decentralized public service entity for the analysis of prices, tariffs and technical standards.[38]

Further recent regulatory policy reforms, like the Short Law I+II and the law to promote renewable energies will be discussed in the context of renewable energies in the next chapter.

4. Renewable Energy Opportunities

The diverse geographical and natural conditions allow Chile a great variety of application and integration of NCREs. Chilean law defines NCREs as “those energy sources, or combinations of energy sources and technology, which are not generally used in Chile at present. The definition includes wind power, geothermal energy, solar energy (thermal and photovoltaic), biomass (solid, liquid and biogas), marine (currents, tides, waves and thermal gradients), and hydraulic energy (restricted to small hydro plants, defined in Chile as having less than 20 MW installed capacity).[39] The country has abundant water resources represented in a high usage of hydropower in the energy matrix. In the southern part of Chile biomass is widely used mostly in the traditional way as firewood. It will loose importance in future, but will remain an important energy source due to existing residues from the large forestry industry. A tenth of the worldwide active volcanoes are situated in Chile which makes geothermal energy an interesting future energy option. In the north there is the 1700km Atacama desert with one of the world’s highest solar radiations and finally a more than 4000km long coastline which provides a huge potential for wind and ocean energy generation.[40]

In 2007 NCRE (that excludes hydropower upper 20 MW) make up out of the energy supply only 2.7% or 347 MW of the produced energy.[41] Hydropower stations and energy from biomass used as firewood accounted for 79% of Chile’s domestic primary energy productions and 22% of its total primary energy supply, see table 1.

By early 2009, NCRE projects already approved or that are in the stage of environmental impact assessment account for an additional capacity of 1,600 MW, when fully installed would increase the energy supply to more than 15% related to 2007 installed capacity.[42] The following part will examine the potentials for each energy form in particular hydropower, solar, geothermal, wind power, ocean energy and biomass. A study by the Technical University Federico Santa Maria and the University of Santiago conducted a study for the renewable energy potential in 2025 in the SIC grid were there is a potential to increase up to 840%, the largest potential for solar and wind energy, see table 3 and projections of CNE (2008) for energy matrix in 2020, see figure 2.

4.1 Hydropower

The largest potential can be attained in the central and especially southern regions with a high level of altitude in relative short distance makes this form of energy quite competitive.

Hydropower still accounts for a considerable part of the energy mix, but there are still important potentials. According to the new policy guidelines of the CNE (2008), the potentials could amount to as much as 20,000 MW. Additional capacity installed in the last three years accounted for 900 MW. Projects which are currently examined by an Environmental Impact Assessment (EIA) account for an additional capacity of 3,700 MW which would mean an overall capacity of 10,500 MW.[43] Disadvantages result, as Chile has already experienced, in the case of a drought were generation differs much from the installed capacity.


[1] UNEP Country Profile Chile.

[2] IEA (2009). p. 25f.

[3] OECD (2010).

[4] IEA (2009), p. 23.

[5] CNE 2(008), p. 36.

[6] http://www.oecd.org/document/26/0,3343,en_2649_34487_44365210_1_1_1_1,00.html.

(Accessed on 28th January .2010)

[7] Martin (2007).

In the energy crisis 2007/2008 the spot price for electricity has risen to $US 350 per MWh in the SIC, see CNE.

[8] EU & Government of Chile (2008), p. 2.

[9] Million tons of oil equivalent.

[10] See Table 1 for more detailed information.

[11] IEA 2009, p. 30.

[12] Enerlac Magazine, No.1, October 2009, p. 14; see outrage cost Chile’s industry was confronted with in: Serra et al. (1997).

[13] The Encyclopaedia of the Earth, “Energy Profile of Chile,” http://www.eoearth.org/article/Energy_profile_of_Chile, Accessed on March 27, 2010.

[14] See ‘Govt. reportedly signs MOU with Indonesia for LNG supplies - Chile ’, Business News America, Julian Dowling, 25th November 2004.

[15] www.globallnginfo.org (update April 2010).

[16] For a detailed discussion on LNG, see Jensen (2004).

[17] Rudnick (1998), p. 189.

[18] Fischer et al. (2002), p. 23.

[19] IEA (2009), p. 37.

[20] Pollitt (2004), p. 2.

[21] Fischer et al. (2002), p. 2.

[22] Pollitt (2004), pp. 6-7; A detailed discussion of regulatory bodies and institutions, see GTZ & Government of Chile (2009).

[23] IEA (2009).

[24] Fischer and Serra (2000); For further discussion, see Pollitt (2004) and Bacon/Besant-Jones (2001).

[25] Bennett (2009).

[26] Rudnick (1999).

[27] Zegras (2005).

[28] IEA (2009), p. 30.

[29] GTZ (2009), pp. 36-39.

[30] Chile so far has no price capping or subsidies on fuels, etc. (IEA 2009, p. 42)

[31] Bacon/Besant-Jones (2001), p. 332.

[32] Lalor/García (1996), p. 1.

[33] Bennett (2009).

[34] Fischer et al. (2002), p. 35; See for further details table 2.

[35] CHILESUS (2003).

[36] IEA (2009).

[37] Chile has relatively low emissions of GHG and is not under the world’s top 20 emitters, but projections show that GHG will double until 2025 (CNE 2008, p. 50). Therefore the government has taken actions under the National Action Plan of 2008 to assign institutional responsibilities on adaption, mitigation and capacity-building in the next four years.

[38] CNE (2008), pp. 66-71.

[39] IEA (2009), p. 162.

[40] Ebd., p. 159.

[41] Bennett (2009a).

[42] GTZ and Government of Chile (2009), p. 8.

[43] CNE 2008, pp. 93-98; including the HydroAysén project (2.750 MW), see paper Hidroaysén (2008).

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A status quo report: Energy policy framework in Chile 2010
Cologne University of Applied Sciences  (ITT)
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Energy, Chile, Energy Matrix, Renewable Energy
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Diplom Volkswirt Christian Altrichter (Author), 2010, A status quo report: Energy policy framework in Chile 2010, Munich, GRIN Verlag, https://www.grin.com/document/162920


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