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Innovative Decarbonization Policies: Chile

Romain Zissler, Senior Researcher, Renewable Energy Institute

24 December 2020

Chile has ambitious climate change and renewable energy policies: it aims for carbon neutrality by 2050, by phasing out coal power by 2040 and targeting 70% renewable energy electricity by 2030. Renewable energy already accounted for 45% of the country’s total electricity generation in 2019, mainly thanks to hydropower, and increasingly thanks to solar and wind power. With the Atacama Desert, Chile has the world’s best solar resources from which it can generate plenty of low-cost low-carbon electricity. The country’s main challenges are to transport this electricity from where it is generated to where it is consumed, and to maximize the value of abundant cheap and clean electricity. Innovative technology-neutral auction design is playing an important role in accelerating the deployment of solar photovoltaic and onshore wind in Chile. The country is now advancing domestic electrical grid interconnections and green hydrogen as main solutions to accompany the growth of variable renewable energy electricity.    
   

Story

Recognizing both the risks posed by climate change and the opportunities in addressing this crisis, Chile made three major ambitious energy and climate announcements in 2019: (1) Reaching carbon neutrality by 2050, (2) phasing out coal power by 2040, and (3) increasing the share of renewable energy (RE) in electricity to 70% by 2030 – against by 2050 as originally planned. In 2019, coal accounted for almost one-third of the country’s total electricity generation, and RE 45% (Chart 1). The combined share of solar PV and wind reached almost 14% at this date, against below 1% just six years before.
 
Chart 1: Chile Electricity Generation Mix 2019 (%)
Source: International Energy Agency,  Data and Statistics: Electricity, Chile 2019  (accessed November 20, 2020).

Not a fossil fuel rich country, Chile is a net importer of coal, oil, and gas. This vulnerability may jeopardize its energy security as painfully empirically demonstrated by gas supply disruptions from Argentina in the 2000s. It is, however, blessed with the world’s best solar resources in the Atacama Desert in the north of the country (Map 1).  
 
Map 1: Global Solar Potential, Focus on Chile and the Atacama Desert
 
Note: Renewable Energy Institute added the texts “Chile” and “Atacama Desert” accompanied by a box and an arrow, respectively, to indicate their location.
Source: Vaisala, Global Solar Map (accessed November 20, 2020).

It is estimated that the potential of solar power in Chile is over 1,800 gigawatts (GW).  Most of this potential, around 70%, may be exploitable using solar photovoltaic (PV) technologies (the rest being exploitable using concentrated solar power technologies, not yet installed in Chile because of less favorable economics and technical maturity). Capacity factors for solar PV in Chile are very high: as low as a high minimum of 20% for non-tracking technologies, and as high as a very high maximum of 34% (!) for tracking technologies.  Compared to solar, wind resources are lower, but still high: 37 GW (with capacity factors of at least 30%). Onshore wind resources are particularly excellent in the extreme south of the country.

Together with cost reductions in solar PV and onshore wind technologies, these abundant resources allow for low levelized cost of electricity (LCOE). The LCOE of solar PV in Chile ranges between about $20 per megawatt-hour (/MWh) and $60/MWh, and that of onshore wind between $40/MWh and $50/MWh.  These low LCOE enable cheap electricity prices, critical for the domestic mining industry facing international competition, Chile is the world’s largest copper exporter, and to attract foreign investments. Regarding the latter, environmentally friendly and cheap power were decisive criteria for Google to establish its first data center in Latin America in Chile in 2015.      

However, fully exploiting Chile’s RE resources faces an integration obstacle: the mismatch of locations between RE electricity generation and consumption.  For instance, whereas best solar and wind resources are available in the north and south, respectively, the main demand center is the Santiago metropolitan region in the center of the country. The key challenge is thus to massively transport and/or store the electricity that can be generated from RE resources. In Chile, this challenge is magnified by the geographical shape of the country – at the same time somewhat similar to and more extreme than that of Japan: long from the north to the south (4,300 kilometers), and narrow from east to west (on average, 175 kilometers).

Renewable Energy Integration

Three main solutions are advanced in Chile to massively deploy RE electricity: (1) Innovative technology-neutral auction design, (2) domestic electrical grid interconnections, and (3) green hydrogen.

-    Innovative technology-neutral auction design is Chile’s main solution to achieve a significant expansion of unsubsidized RE electricity.  Introduced in 2015 to reduce prices by increasing competition the new auction design has demonstrated that new RE may outcompete established conventional technologies. In the auctions, generation companies can offer bids based on existing or new capacity. Before launching an auction, the National Energy Commission prepares an adequacy report that outlines future electricity supply and demand. It also decides the volume of the auction, the length of the auction contract (maximum 20 years), and the price cap for the offers. Four supply blocks are offered: Whole year 24/7, quarterly, daylight, and night time. As a result of these changes, the number of participants has increased dramatically and prices have decreased (Chart 2).      
 
Chart 2: Chile Volume and Price ($/MWh) of Electricity Supply Auctions 2012-2017
 
Note: Renewable Energy Institute shortened the observation period from 2012 to 2017 to highlight the relevant trends in recent years.
Source: International Energy Agency,  Energy Policies Beyond IEA Countries: Chile 2018 Review (January 2018).

Between 2012 and 2014 a maximum of 18 bids were received in a single auction, and prices offered were always well-above $100/MWh. In 2015 and 2016, the numbers of participants rose to 38 and 84, respectively, and prices successively collapsed to approximately $80/MWh and below $50/MWh. In 2017, new rules for the auctions including higher penalties for project cancellations to reduce unrealistic bids and ensure project delivery were introduced. The number of participants decreased to 24, but this did not prevent prices to drop further; a little above $30/MWh. In the last two rounds of auctions, wind and solar power made great strides by being awarded roughly half of the supply auctioned. There has been no auction since then, the auction planned for 2020 being notably cancelled due to slow power demand growth in the past few years, a trend exacerbated by the consequence of the COVID-19 pandemic.  It may be noted, however, that if insufficient progress is made towards meeting the country’s RE target, the domestic legislation allows for the organization of specific auctions exclusively dedicated to RE.          

The innovative introduction of different supply blocks has been instrumental to RE’s success in the Chilean technology-neutral auctions, in particular the daylight block for solar PV. Under the previous design, blocks of electricity for a whole year, solar PV generators would have had to purchase the electricity they could not generate at night time. Instead of that, thanks to the new design, solar PV could shine in the 2017 auction, for example, by delivering a record-low bid of $21/MWh for the daytime block.   
   
-    Domestic electrical grid interconnections are actively developed to support the integration of variable renewable energy (VRE), solar PV and onshore wind, in Chile. The country’s electrical grid comprises four power systems: two main systems; the Sistema Interconectado del Norte Grande (SING) serving the desert mining regions in the north and the Sistema Interconectado Central (SIC) mainly serving numerous small consumers in the center, and two small isolated systems; Aysén and Magallanes both in the south. In a major development, the SING and SIC power systems have been interconnected thanks to the commissioning by French ENGIE and Spanish Red Eléctrica Groups of a 600 kilometers, 1.5 GW double 500 kilovolts interconnection between Mejillones (SING) and Cardones (SIC) in November 2017 (Map 2). This very significant step is considered as the formation of the national electricity system.

This first interconnection combined with the commissioning of a new transmission line between Cardones and Polpaico (further south in the SIC power system, near Santiago) in mid-2019 have enabled to export VRE electricity generated in the SING power system to the demand centers in the SIC power system more efficiently, drastically reducing curtailment: in October 2017 the overall curtailment of solar PV and onshore wind reached a quite high 22%, in October 2019 this number fell to a remarkably low 1%.

In comparison, international electric grid interconnections are less pursued. Chile has one cross-border interconnection with Argentina in the Antofagasta region (in the north of Chile). Electricity trade is limited between the two countries. 
 
Map 2: New Interconnected SING-SIC Power System (as of November 24, 2017)
Note: Renewable Energy Institute added the texts “SING (north of Chile)” and “SIC (center of Chile)” both accompanied by left braces, as well as “Interconnection SING-SIC,” “Mejillones,” “Cardones,” and “Polpaico” all accompanied by arrows (and boxes in the case of connection points) to facilitate understanding and improve readability.
Source: O4uchile, Map of the New SIC-SING Electrical System (accessed November 26, 2020) (in Spanish).

-     Green hydrogen is Chile’s latest big innovation to solve VRE integration. In November 2020, the country unveiled its national green hydrogen strategy aiming for nothing less than the world’s most ambitious goal – by very far – for electrolyzer installed capacity: 25 GW by 2030 (intermediate goal of 5 GW by 2025), about 4-6 times more than the most aggressive much bigger European economies (Chart 3).  
 
Chart 3: Electrolyzer Installed Capacity Targets by 2030 and Types of Hydrogen Pursued in Selected Countries
Notes: “Green hydrogen” refers to hydrogen produced via the electrolysis of water using RE electricity. “Decarbonized hydrogen” refers to hydrogen produced via the electrolysis of water using decarbonized electricity (including RE and nuclear). And “Low carbon hydrogen” is similar to decarbonized hydrogen, the use of carbon capture, utilization and storage technologies being additional.
Sources: Chilean Government, National Green Hydrogen Strategy (November 2020), French Government, National Strategy for the Development of Decarbonized Hydrogen in France (September 2020) (in French), German Government, The National Hydrogen Strategy (June 2020), Spanish Government, Hydrogen Roadmap (October 2020) (in Spanish), and United Kingdom Government, The Ten Point Plan for a Green Industrial Revolution – updated November 18, 2020 (accessed November 25, 2020).      

Supporting this objective are Chile’s enormous RE potential, and need to maximize the value of abundant, cheap and clean electricity. The government of Chile projects that by 2050 both the country’s electricity consumption and generation could more than double from their current levels, and the share of RE reach 96% which may be used for massive green hydrogen production beyond the country’s own needs. Therefore, Chile envisions to establish itself as a leading exporter of green hydrogen and its derivatives (e.g., methanol, ammonia, and synthetic fuels) in the coming decade. Regarding the latter, $1.5 per kilogram by 2030 is sought to be achieved in order to export hydrogen to European countries and Asian countries such as China, Japan, and South Korea.

To realize this plan, Chile will first on the one hand build a domestic hydrogen ecosystem prioritizing six applications: oil refining, ammonia, mining trucks, heavy-duty trucks, long-range buses, and blending into gas grids, on the other hand seek to attract private investments by operating regulatory changes incentivizing hydrogen production and its use. Government funding is limited to $50 million.     

Achieving Future Goals

Chile certainly neither lacks of RE resources nor of ambitions. Yet, the country will still need to address challenges to reach carbon neutrality, some of them more complicated than others.

Among Chile’s challenges, phasing out coal power seems quite achievable. As of mid-2020, the country still had 25 coal-fired power plants with a combined capacity of close to 5.2 GW.  It is planned that by 2024, more than 10 of these power stations with a combined capacity of a little less than 2 GW will be permanently shut down. The government will then need to timely pave the way out for the remaining units. In this enterprise, it may be supported by forward-thinking businesses including for examples the major power company Enel and the mining company Minera Zaldívar.

Ahead of its peers, the Italy-based international power company has advanced the closures of its last two coal power plants in Chile Bocamina I & II (around 0.5 GW combined) from 2023 and 2040 to 2020 and 2022, respectively.  This decision was based on environmental and economic expected benefits, with Enel strategically engaged in replacing coal with RE (planned completion of 2 GW of RE capacity in Chile by 2022).

Ahead of its peers as well, in 2018, Minera Zaldívar was the first Chilean mining company (copper) that signed a power purchase agreement to operate with 100% RE electricity: a combination of hydro, solar, and wind power, instead of coal.  The reasons advanced by the company were not only again environmental and economic, but also energy security – critical for continuous industrial production – as electricity supply from domestic RE may not be affected by import disruptions contrarily to non-domestic fossil fuels.    
More challenging than phasing out coal power in Chile may be addressing the opposition from local communities affecting a number of transmission projects and realizing the country’s green hydrogen ambitions.

Regarding the former issue, the opposition from local communities has for example not prevented but delayed the realization of the new transmission line between Cardones and Polpaico previously mentioned. Into more details, this project has been delayed by seventeen months because of intense public opposition, slow rights-of-way negotiations given the large number of land owners, and a few extreme acts (e.g., protesters physically interrupting construction work).  RE power plants are built faster than electrical grids, and the narrowness of the country limits geographical options to draw new lines. These facts may slow down RE expansion. A more effective implementation of transmission projects is yet to be found.   

Regarding the latter issue, Chile’s green hydrogen ambitions may seem outsized because of a potential incompatibility between the objectives set and the funding made available to reach them. In other words, the dedicated financial support may be undersized. In comparison to Chile, France and Germany’s goals are more modest, but the two European countries have committed much more funding to achieve them. For instance, France and Germany’s spending to support hydrogen amount to about $8 billion and $11 billion, respectively.  In addition, beyond the financial hurdle, to become a leading exporter of green hydrogen Chile will need to solve the economic and environmental equation of the commodity long-distance maritime transport. Indeed, to be economically competitive and environmentally relevant green hydrogen exports from Chile need to be cheaper than productions in importing and other exporting countries, and be transported without harming climate change mitigation efforts.         

Finally, uncertainty remains on the speed and scale of battery storage systems deployment in Chile. Comparing to Australia, which also has a substantial VRE potential and made significant progresses in exploiting it, Chile is lagging a bit behind in the area of battery storage. In October 2020 only, the construction of Chile’s first RE + storage project was announced by AES Gener.  The project will include 253 MW of solar and wind power and a lithium battery storage system with a capacity of 112 MW, the largest in Latin America.       

Background Information

In Chile, the Ministry of Energy is responsible for elaborating, coordinating, and implementing the national energy policy.
The National Energy Commission is a technical organization responsible for analyzing prices, tariffs, and technical norms with which companies of the power sector must comply. The Commission is to ensure that energy supply is sufficient, safe, and compatible with the most-economic operation.

Chile was the first country in the world to liberalize its electricity sector by introducing competition into the generation sector and separating the industry’s generation, transmission, and distribution & supply segments. Privatization of the state-owned utilities began in 1986 and was completed by 1998. Fairness and openness to foreign investments are characteristics of Chile’s power sector. This favorable framework has proved to be a good match with the appetite for international expansion of power companies, especially from Latin European countries (e.g., France, Italy, and Spain) sharing some cultural background.     

In the generation segment, there are well over hundred companies competing. However, many of these companies are subsidiaries of the major companies: AES Gener, Colbún, Enel, and ENGIE.

At the transmission level, the National Electricity Coordinator is the independent system operator. Most of the grid is owned by the private company Transelec.

Finally, in the distribution and supply segment there are around thirty private companies including Compañía General de Electricidad and Enel for examples.
 
Simplified Presentation of Chile’s Power Sector
Source: Created by Renewable Energy Institute.


<Related Links>
Innovative Decarbonization Policies: Australia (16 November 2020)
Innovative Decarbonization Policies: India (18 September 2020)
Innovative Decarbonization Policies: California, United States (4 August 2020)



 

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