ENERGY SECTOR REPORT CHILE 2013
contents
energy sector report chile 2013 INTERNATIONAL INVESTOR WOULD LIKE TO THANK ITS KNOWLEDGE PARTNERS:
2 sector data: ENERGY IN NUMBERS 3 OVERVIEw It is a pivotal moment in the generation and transmission of the Chile’s power, and decisions must be taken regarding the development and progress of Chile’s energy sector. The urgency of these decisions has to be considered in light of the sector’s inextricable connection to the country’s most important export, copper and the success of the country’s economy.
24 Jorge Rodríguez Grossi, Empresa Eléctrica Guacolda S.A. 26 Ignacio Cruz, COLBÚN s.a. 27 Andrés Kuhlmann Jahn, TRANSELEC S.a. 28 PABLO BURGOS, SOLARPACK 30 Carl Weber, Hidromaule s.a. 32 Rudolf Araneda Kauert, GasAtacama s.a. 34 Alberto Schilling, Banco BICE 36 Greg Holland, Cámara Chileno Británica 37 Francisco Alliende, Grupo SAESA
7
7 ROUNDTABLE: Transforming Chile’s Energy Sector In order for the Chilean economy to remain on its upward trajectory, the problems that continue to beset the energy industry must be overcome. This roundtable debate brought together government, industry stakeholders and investors to discuss the developments, challenges and opportunities that may arise during the necessary process of transforming Chile’s energy sector. 23 interview: 23 Jorge Alberto Bunster Betteley, Minister of State for Energy, Chile
38 FOCUS: The role of gas in Chile’s energy mix After many years of reducing it dependency on natural gas imports, recent developments in potential sources of gas and its role in the energy generation matrix mean options for increased natural gas participation are back on the table. There are many benefits to this eventuality, but the role it will play in Chile’s energy future depends on several factors.
40
sector data  energy
energy in numbers GENERAL STATISTICS
GENERATION BY THE SIC AND THE SING 2000-2011 9.88
70,000
Net Imports (Mtoe)
24.85
60,000
Electricity Consumption (TWh)*
61.76
Electricity Consumption/ Population MWh/capita
3.58
CO2 Emissions** (Mt CO2)
76.31
CO2/Population (t CO2/capita)
4.42
Portion of FDI in Electricity Sector (incl gas & water)
18.4%
Gross Generation (GWH)
Energy production Million tons oil equivalent (Mtoe)
50,000 40,000 30,000 20,000 10,000
* Gross production + imports - exports - losses ** CO2 Emissions from fuel combustion only
0 2000
2001
Source: International Energy Agency (IEA) 2011
2002
2003
Wind power
2004
2005
Derivatives
Biomass
2006 Coal
2007
Natural Gas
2008
2009
2010
2011
Hydroelectric
Source: Energy Ministry, CDEC-SIC and CDEC-SING
PRICE IN USD PER KILOWATT/HOUR FROM APRIL 1998 TO APRIL 2013 (NOMINAL) 1433.83 MW
GENERATION BY THE SIC AND THE SING 2000-2011 80
20 10.000 10
Biogas
Biomass Coal Wind Hydro Run of River Diesel
Hydro Dam Solar
Source: Source CNE 01/04/2013
SIC
Apr-13
Apr-12
2011
Oct-12
Apr-10
Apr-09
2010
Apr-11
2009
Oct-11
2008
Hydroelectric
Oct-10
2007
Natural Gas
Oct-09
2006 Coal
Apr-08
2005 Biomass
Oct-08
2004
Derivatives
Apr-07
30%
2003
Oct-07
25%
2002 Wind power
Apr-00
20%
Apr-99
15% Capacity
Apr-98
10%
Oct-98
5%
Source: Energy Ministry, CDEC-SIC and CDEC-SING
SING (Antofagasta) Source: SNE
GENERATION BY THE SIC AND THE SING 2000-2011 Gross Generation (GWH) Derivatives
0%
2001
0
25.82 MW
Apr-06
2000
4.60 MW
Oct-06
374.01 MW
Apr-05
316.00 MW
30 20.000
Oct-05
328.00 MW
40 30.000
Apr-04
Technology
396.00 MW
Oct-04
91.00 MW
no further data available
50.000 50 40.000
Apr-03
18.50 MW
60.000 60
Oct-03
SING
70.000 70
Apr-02
100%
Oct-02
SIC
80%
Apr-01
40% 60% Capacity
Oct-01
20%
Oct-99
0%
Oct-00
120.10 MW
Generation (GWH) Derivatives Price Gross in $/KWh (Nominal)
Transmission System
GENERATION PROJECTS UNDER CONSTRUCTION SIC AND SING AS OF APRIL 2013
70.000
INSTALLED GENERATION CAPACITY SIC AND SING 2012
CHILE ELECTRICITY CONSUMPTION 2001-2011 2001 2002 2003 2004
30
40 (TWh)*
50
INSTALLED CAPACITY Total (MW)
Total (%)
Technology
Total (MW)
Total (%)
Hydro Dam
3393.43
25.45%
Coal
1932.61
46.62%
30.000
Natural Gas
2560.70
19.21%
Natural Gas
1831.23
44.17%
20.000 Hydro Run of River
2522.90
18.92%
Fuel Oil Nro. 6
177.60
4.28%
Coal/Petcoke
2008
Wind
2000
2403.85
18.03%
Diesel
131.14
3.16%
1338.63
10.04%
Diesel/Fuel Oil
39.46
0.95%
561.94
2001
2002
195.73
Wind power
2003
4.21%
2004
1.47%
Derivatives
2009
Biomass
2010
Fuel Oil Nro. 6
86.00
0.65%
Petcoke
62.98
0.47%
BioGas
11.80
0.09%
Solar
1.08
0.01%
Total installed capacity
13332.17
60
*Gross production + imports - exports - losses
2 INTERNATIONAL INVESTOR
70
80
Source: IEA
INSTALLED CAPACITY
Technology 40.000
2007
2011 20
SING
50.000
Coal
2006
10
60.000
Diesel 10.000
2005
0
SIC
193.12
1.45%
Cogeneration
2005 Biomass
2006
2007
Hydro Run of River Coal
Solar
Natural Gas
17.50
2008
2009
14.93
Hydroelectric
1.35
0.42%
2010
0.36%
2011
0.03%
Energy Ministry, CDEC-SIC and CDEC-SING Total installedSource: capacity 4145.82
Source: CNE
energy overview
energy Decisions must be taken regarding the development and progress of Chile’s energy sector. The urgency of these decisions has to be considered in light of the sector’s inextricable connection to the success of the country’s economy. The issues that envelope the industry impact every citizen and every business.
CLEANER TECHNOLOGIES ON THE RISE All these factors have helped to advance renewable energy deployment, which has been taking off rapidly in 2013. Numerous non-conventional renewable energy (NRCE) projects are currently under development; however, they must overcome difficulties in terms of project finance and avaliable infrastructure.
The Chilean electricity market is divided into four principal electric grids
Chile’s energy sector is reaching a crucial point in its development, which may affect the overall growth of economy; satisfying future electricity provision is the main challenge. Given that the annual growth of electricity demand is likely to be at least 6 per cent until 2020, shortages are predicted. This will lead to higher operational costs for consumers. In terms of industrial energy provision, for Chile’s most important industry, mining, energy costs make up 20 per cent of operational costs and could have a crucial impact on business, especially during periods in which metal prices fall due to lower worldwide economic growth. Energy clearly has a significant impact on industry; billion dollar projects are regularly re-evaluated due to higher associated risks, one of these being the uncertainty of energy availability and future energy costs. Moreover, investors and market players in the generation, transmission and distribution
sectors also evaluate the feasibility of expansion when considering new investment in generation projects. Large scale conventional projects (non-renewable and hydropower greater than 20 megawatt installed capacity) generate public criticism due to their negative impacts, real or percieved, on local communities and the environment. In the past decade, many projects have been rejected due to on-going litigation, despite having previously obtained environmental approval. In terms of hydropower, which represents 44 per cent of installed capacity in the Sistema Interconectado Central (SIC), generation in June 2013 only reached 32 per cent of total energy generated. In comparison to previous years, hydroelectricity has significantly decreased due to a sustained period of drought, which has lasted for several years. This has resulted in higher hourly marginal costs in the SIC, reaching levels above US$300 per megawatt hour.
GENERAL CONTEXT As a result of the enactment of the General Law of Electric Services decree Nº 1/1982, the Chilean power sector was the first in Latin America, and one of the first in the world, to deregulate (1981) and privatise (1986—88) its generation sector, forcing participants to compete with each other. Within this framework, the State only exercises regulation, supervision and control functions, as well as offering recommendations in framework planning. The Chilean electricity market is divided into four principal electric grids that operate independently and are not interconnected. The grids are coordinated by independent entities of mainly technical character, known as Centers for Economic Load Dispatch (CDEC). CDEC members are the companies that own power generation plants, power transport lines, power distribution plants and power distribution lines i.e. companies that generate, transport or distribute electricity. Non-regulated consumers that are directly connected to the transmission lines can also be members of CDEC if they meet certain requirements. The four electric grids which supply the country are: the Sistema Interconectado Norte Grande (SING), the Sistema Interconectado Central (SIC), the Sistema Eléctrico de Aysén (SEA) and the Sistema Eléctrico de Magallanes (SEM). The SING supplies electricity to the northern part of the country which represents 24.5 per cent of installed capacity and the SIC supplies electricity the central zone which
CHILE 3
overview energy
Strengths ■■ Best credit risk rating in Latin America. ■■ GDP growth rate is expected to be around 4.5% in 2013. ■■ Double taxation and trade agreements with a large number of countries in the world. ■■ Generally solid regulatory framework. ■■ Robust structure of governmental institutions ■■ Natural resources for NCRE projects and big potential for conventional hydroelectricity.
opportunities Many investment opportunities regarding generation / transmission / distribution projects. ■■ Many NCRE projects in pipeline without access to finance. ■■ Open market to participate in each particular segment of the sector. ■■ High growth rates in demand and lower expansion in generation than demand growth, high energy prices are predicted, which may generate higher cashflows. ■■ Law project 20/25 approved which aims to achieve 20% of NCRE generation by 2025. ■■
makes up 74.7 per cent of installed capacity (see fig. 1). Past and future Historically, the technologies used to satisfy demand have been hydroelectric, gas, petroluem diesel, and carbon power generation. As Chile has limited sources of fossil fuels, it heavily depends on fossil fuel imports. In the south, the availability of water means that hydropower is the key fuel type; however, this is subject to rainfall. Due to the high cost of gas and LNG, coal fired power plants have become the technology of choice in the SIC and dominated capacity in recent years. In November 1998, following a prolonged drought, the country’s dependence on hydropower caused an energy crisis. The impact of this drought was amplified by the repeated failures of several power plants that should have served as backups to hydroelectric power generation; the considerable delays in commissioning combined cycle natural gas power plants; and the lack of coordination and transparency in the generation sector.
4 INTERNATIONAL INVESTOR
weaknesses ■■ Key industry manufacturing of technology / equipment does not exist as yet. ■■ Lack of professionals and few specialists in the market, competition with mining industry for specialist workforce. ■■ Insufficient infrastructure in terms of existing transmission lines and market expansion. ■■ Asymmetric density of population (and infrastructure) may result in higher costs for additional transmission lines. ■■ English is not universally spoken; Spanish speaking agents are necessary to conduct business. ■■ Environmental permission and community issues play an important role in project advancement. Can lead to litigation (NCRE projects are widely accepted, but require stakeholder engagements). ■■ Uncertainty about future regulation.
threats Uncertainty about future growth. Mining sector represents higher production costs at lowered metal prices. ■■ Highly concentrated energy market with few big players, but many players in development of NCRE projects. ■■ Access to transmission lines, time lags, delays to transmission line expansion and capacity constraints. ■■ Local banks conservative in terms of risk perception leading to high capital costs / debt finance. ■■
In the years following the crisis, the participation of natural gas was increased from 9 per cent in the primary energy matrix to 29 per cent, substituting primary energy consumption of carbon, biomass and crude oil. This increase was a direct result of the competitive prices at which natural gas was obtained from Argentina. From 2004, the country registered cuts in the natural gas supply from Argentina, decreasing natural gas power generation. Despite efforts to mitigate this situation, the supply of natural gas was cut further in the following years, which lead to an emergency situation in which around a third of power production had to be covered by diesel based generation. This resulted in significantly higher operational costs. The effects of this situation on Chilean power prices are reflected in its marginal cost, reaching a maximum spot market average of US$338 per megawatt hour in March 2008 and, more recently, an hourly marginal cost in the SIC of US$312 per megawatt hour on June 26 2013. These figures emphasise the
country’s price volatility and high generation costs, and have been affected by the ongoing dry period and consequent decrease in hydropower generation. These events demonstrated the vulnerability of the Chilean energy system, which heavily depends on fossil fuel imports, and the lack of an adequate infrastructure to sustain the national electricity demand. National electricity demand has grown significantly in the past decades, quadrupling between the years 1987−2006. It is expected that this growth in demand will be maintained in the future; an annual growth rate of approximately 6 per cent is predicted until 2020. Figure 2 shows the growth forecast of capacity and energy demand until 2028 for the SIC and SING interconnected systems. Energy Sharing Chile has one of the highest energy costs in South America. As a result, the government has started talks on possible energy integration in the region. The plan would include Chile, Peru, Colombia, Bolivia and Ecuador and could reduce Chile’s costs by up to 25 per cent. The project is scheduled to start in 2014, but will involve major investment and the resolution of political issues between countries. The Inter-American Development Bank (IDB) is the responsible agency for the infrastructure and policy studies that will allow the project to advance. The Chilean government is also promoting the possiblity of an interconnection between the SIC and SING systems. Market operation Energy consumption is divided into two large customer groups, the regulated and the non-regulated; 90 per cent of customers in the SING and 40 per cent in the SIC are non-regulated. The regulated customers are the consumers with a connected capacity no greater than two megawatts and purchase their electricity from distributors, who in turn purchase it from generators. The price at which the distributors purchase electricity is based on the ‘nodal price’ (which reflects generation and transmission components resulting from distribution company biddings). Regulated rates are established, which depend on customer voltage and size. Non-regulated customers are generally those who consume more than two megawatts; however, regulated customers who consume between 500 kilowatts and two megawatts can opt to be non-regulated customers. These customers are not subject to price regulation and can freely negotiate prices and supply conditions with generating and distribution companies. Thus, the supply price for energy is established through bilateral contracts and/or the spot market.
energy overview
1. CHARACTERISTICS OF CHILEAN ELECTRICITY GRIDS AS BY END OF 2012
Peru
Brazil
Bolivia Interconnected System of the Greater North (SING) Installed capacity — 24.5% Mainly serves mining industry in northern Chile. Almost 100% thermal generation. (Coal=46%; LNG=46%; Oil=8%)
Paraguay 4,599 MW
Central Interconnected System (SIC) Installed capacity — 74.7% Serves 74% of the national demand (92% of population; 76% of PIB) in central Chile. Even distribution between fuel & hydro in current generation portfolio. (Diesel=16%; Coal=17%; LNG=20%; Hydro=42%; Biomass =2.6%)
Argentina
Santiago
Uruguay
14,039 MW
Atlantic Ocean
Aysen (SEA) Installed capacity — 0.3% Serves southern Chile.
50 MW
Falkland Islands
Magallanes (SEM) Installed capacity — 0.5% Serves southern Chile.
101 MW Total installed capacity:
Tierra Del Fuego
18,789 MW Source: Generadoras de Chile A.G.
The market for bilateral contracts aims to provide power supply to distributors and nonregulated customers. These contracts are associated with a specific company and not a specific generation asset. The generating company has to comply with supply obligations using its own capacity dispatched from the CDEC, contracts with third party generators or the spot market. In most PPA situations, the generator is obligated to supply the energy stipulated in the contract, if this amount is not supplied they have to purchase the energy from somewhere else, normally the spot market. This can mean it is risky for projects which cannot count on a substantial energy generation forecast, in these cases lenders will apply risk premium, which increases investment costs and, therefore, the levelised cost of energy.
In Chile, the spot market is accessible to generators only. The price and physical transfer of this exchange are established by the CDECs depending on the hour of the day. In general terms, the spot market is characterised by high price variability. This variability reflects short-term marginal costs resulting from the temporary equilibrium between energy demand and supply. The contract market reflects negotiations between generating companies and large customers or distribution companies, which predict stable and long-term prices. It is important to point out that purchase and sale of energy and capacity between distributors and non-regulated customers is not part of the wholesale market. In Chile, there is no retail market that is operated by commercial companies.
Project realisation Public awareness of generation and transmission projects has been increasing in recent years. In 2008, Chile ratified OIT Convention N° 169, which deals specifically with the rights of indigenous people, and affected communities and the public are increasingly concerned about the environmental impacts of mega projects. As a result, the development of hydroelectric projects and coal-fired plant has been delayed. Project delays raise questions about the country’s ability to meet future electricity demand. Even if approved coal-fired plants in the project pipeline meet expected commercial operation dates, the predicted demand will be higher than generation. Bottlenecks will have to be backed-up by costly diesel generation and this will raise electricity prices.
CHILE 5
overview energy
2. ENERGY DEMAND AND CAPACITY GROWTH PREDICTION 35,000 140,000 30,000 120,000 25,000
20,000 80,000 15,000
Energy (GWh)
Capacity (MW)
100,000
60,000
10,000 40,000
5,000
0
20,000
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Geothermal
Solar LNG
Wind Carbon
Hydro NCRE Diesel
Big Hydro
Biomass
0
Run of River
Demand GWh Source: Comisión Nacional de Energía
3. GENERATION PROJECT PIPELINE UNDER QUALIFICATION
APPROVED
Type
Capacity (MW)
Investment (MUS$)
Capacity (MW)
Investment (MUS$)
Wind
2,036
4,089
4,725
10,175
Solar
1,663
6,083
4,376
13,570
Hydro
1,519
2,335
4,774
6,564
Geothermal
-
-
120
510
Biomass
28
47
311
593
Gas + LNG
792
773
1,469
975
Coal
-
-
6,500
11,947
Diesel + Fuel Oil
-
-
1,692
1,424
TOTAL
6,038
13,327
17,467
45,758
Source: Servicio de Evaluación Ambiental (SEA)
Figure 3 shows the actual pipeline of generation projects in the SIC and SING, which obtained an approval on environmental impact assessment and those which are still under qualification. NCRE deployment The Chilean government has committed to reducing greenhouse gas emissions and this has encouraged NCRE development in the country. NCRE in Chile relates to wind, solar, biomass, biogas, geothermal, tidal and hydro (less than 20 megawatt capacity). An NCRE law was brought into effect in April 2008, applicable to supply contracts signed after August 2007. The law established obligations for electrical companies that withdraw more than 200 mega-
6 INTERNATIONAL INVESTOR
watts to sell to distributors or non-regulated customers, requiring them to prove that part of these withdrawals within a calendar year correspond to NCRE generation (owned or contracted). Between 2010 and 2014, 5 per cent of the withdrawals had to correspond to NCRE generation, this will be increased by half a percentage point a year until it reaches 10 per cent in 2024. Recently, a proposal to modify the law has been approved by the senate; it plans to change the quota of renewables required by law to 20 per cent by 2025. NCRE growth has predominantly occurred in hydro, biomass and wind energy. Market players There are 40 generating Companies in Chile,
the leading ones being: Endesa, Colbún, AES Gener and Duke Energy, a new entrant that arrived in 2012. In the SING, E-CL, a subsidiary of GDF Suez dominates the market. Over the four electricity systems, there are 10 transmission companies operating of which Transelec is the largest and controls most of the SIC. There are about 30 distribution companies operating in Chile. The main distribution companies in the SIC are Chilectra S.A., Compañía General de Electricidad, Compañía Nacional de Fuerza Eléctrica, Emel, Chilquinta und Sociedad Austral de Electricidad S.A. The main companies operating in the SING are Emelari S.A., Eliqsa S.A., Elecda S.A. Investment Climate The Chilean electricity sector represents opportunities in all segments. However, the rejection of mega projects as a result of legal action, as well as uncertainty about future regulation and volatility of energy prices, has resulted in cautious behaviour towards investment in this area. Difficulty for smaller generators in securing long term PPAs with large industrial clients has meant it has been necessary to lower investment risk and make projects bankable. Ultimately, new ideas such as price stabilization schemes have been developed to guarantee stable revenue flows and, moreover, the government has initiated different activities to find solutions regarding this dilemma. For some recently developed NCRE projects, project finance has been obtained without having a PPA. In the renewables sector, the most active local banks in the renewables sector are BICE, Santander, Corpbanca and BCI. In terms of Foreign financing institutions, the players are the Mitsui Banking Corp, Bank of Tokyo-Mitsubishi UFJ and Credit Agricole. Banks may require application of equator principles and IFC perfomance standards to lower risks during project realization. To value investment, the following parameters are important to include in remuneration / cash flow models: Active Energy: where the buyer pays for the active energy generated at the Sales Point (US$/megawatt hour), the seller assumes all costs until defined sales or injection point Power capacity: where NCRE Generator will be paid by CDEC or offtaker (US$/kilowatts) depending on participation. NCRE Certificates; where buyer mostly purchases certificates that are effectively recognised by the CDEC-SIC (UTM (monthly tax unit)/megawatt hours), if they are not required they can be sold to other participants of CDEC (often included as part of “contract price”, thus depends of contract terms).
energy roundtable
roundtable: Transforming Chile’s Energy Sector In order for the Chilean economy to remain on its upward trajectory, the problems that continue to beset the energy industry must be overcome. The following roundtable debate brought together government, industry stakeholders and investors to discuss the developments, challenges and opportunities that may arise during the necessary process of transforming Chile’s energy sector.
AGENDA ■■ ■■
■■
■■
ROUNDTABLE PARTNERS
■■
■■
■■
Economic growth story and industry requirements Chile’s energy matrix ●● Role of fossil fuels and natural gas / LNG ●● Increasing diversity in the matrix Role of renewable energy ●● Hydroelectricity ●● Advantages of Hydro ●● Challenges for project development ●● NRCE ●● Long-term contribution ●● The importance of competitiveness ●● Incorporation into the grid ●● Barriers to development Transmission ●● Connectivity constraints: what are the bottlenecks? ●● Short-term ●● Medium-term ●● Moving forward with transmission Attracting investors to Chile’s energy Sector ●● Difficulties in project progression ●● Environmental and Community opposition Managing stakeholder interests ●● Creating a broad consenus ●● Community particpation ●● Public policy instruments ●● Communication strategies Conclusions
CHILE 7
roundtable energy
SERGIO DEL CAMPO Vice Minister Ministry of Energy
PARTICIPANTS
Sergio has over 20 years experience in the electricity sector; he has served in senior management positions in various companies including: Electric Guacolda, in Chile; Unión Fenosa Generación in the Dominican Republic; and Hidroeléctrica Piedra del Águila Neuquén, in Argentina. In the public sphere, he was superintendent of education between 1989 and 1990. Sergio holds a degree in business from the Universidad de Concepción and an executive MBA from the Universidad Adolfo Ibáñez.
Rodrigo Castillo Executive Director Empresas Eléctricas A.G.
Rodrigo is a lawyer, who gained his degree from the Universidad de Chile. He is an expert in the field of regulated markets and is currently a professor at three universities: Universidad Adolfo Ibáñez, Universidad del Desarrollo and the Universidad de Chile. He lectures about economic regulation and regulation theory. Rodrigo is an executive committee member for the Platform for Energy Scenarios: Chile 2030, a body that seeks to contribute to the development of the electric energy vision in Chile.
René Muga Chief Executive Officer Generadoras de Chile A.G.
Before joining Generadoras de Chile, René was the senior vice president of corporate affairs for LAN Airlines. Prior to this, he was the general manager of the CPC. René has been chief trade negotiator with Europe for the Chilean Ministry of Foreign Affairs, and director of business development at CODELCO. René holds a bachelor’s degree in economics and a master’s degree in international economic relations, both from the Pontificia Universidad Católica de Chile.
8 INTERNATIONAL INVESTOR
Marcelo Tokman Former Minister of Energy
Marcelo Tokman has a Ph.D in economics. He advises and sits on the boards of several companies and NGOs and was the CEO of Vestas South America. As Chile’s first Minister of Energy, he was responsible for creating the Ministry of Energy, the Center of Renewable Energies and the Energy Efficiency Agency. Prior to assuming his post in Chile’s Energy Ministry, Marcelo was head advisor at the Ministry of Finance and head of research at the Budget Office.
Carlos Eugenio Finat Díaz Executive Director ACERA A.G.
Carlos Eugenio is an electrical engineer from the Universidad de Chile. Before joining ACERA in 2012 as executive director, he has had many executive positions. In 1999, he was apppointed director of operations and wheeling at CDEC-SING. In late 2008, he joined Collahuasi where he served as strategic supply manager, VP (I) administration and services, and energy manager. During this period, he joined the board of the CDECSING and was elected as chairman for the period 2011—2012.
Arturo Errázuriz President of the Climate Change Committee British Chilean Chamber of Commerce A.G. (BCCC)
Arturo is currently a partner and executive director at Errázuriz & Asociados. In 2009, he assumed the presidency of the climate change committee at the BCCC and he is the board director of the corporate leaders group for Climate Change Chile. Prior to these roles, Auturo was regional director for the Andean region at EcoSecurities. Arturo studied economics at the Pontificia Universidad Católica de Chile and has a MSc in environment and development from the London School of Economics.
energy roundtable
Andrés Kuhlmann jahn Chief Executive Officer Transelec S.A.
Andrés has been the CEO of Transelec S.A. since 2007. He was the CEO of Siemens in Chile between 2001 and 2007 and of Electroandina S.A. from 1997 to 2001. For a period of two years ending in 1996, he was the commercial and operations manager at EDEGEL, an electrical generation company in Peru. Andrés graduated from the Pontificia Universidad Católica de Chile with a degree in civil and industrial engineering. He sits on the several boards, including Fundación San Agustín.
Rudolf Araneda Kaurert Chief Executive Officer GasAtacama
Rudolf’s experience in the energy sector began in 1992, when he became CEO of TransGas / GasChile. He is currently general manager and CEO of GasAtacama. Rudolf has devoted his career to his dream of trade, transport and energy integration in the Southern Cone region of South Amercia. He is an industrial civil engineer with a master’s degree in engineering from the Universidad de Chile and has completed management and energy courses at various other institutions.
Gonzalo Salgado Country Manager Hot Rock Chile S.A.
Gonzalo is the country manager for Hot Rock Chile S.A. He has worked as chief of staff in the Chilean Ministry of Energy and as a lawyer for ENAP, the state oil company. For ENAP, he worked in areas such as natural gas, geothermal energy and on new business, overseeing project structuring and financing. He has a master’s degree in law awarded by Universidad de los Andes in conjunction with Northwestern University and an MPA from Columbia University, New York.
Jorge Rodriguez Ortiz Chief Executive Officer Interchile S.A.
PARTICIPANTS
Jorge has a degree in electrical engineering from the Universidad Nacional de Colombia and holds an MBA from Universidad Eafit. He has spent 33 years working for the ISA Group. For the last 14 years, Jorge has been in charge of building electric transmission investment projects in countries where ISA Group has a presence. After having served as director of entrepreneurship at CTEEP in Brazil, he was appointed CEO of Interchile S.A.
José Ignacio Escobar Chief Executive Officer Mainstream Renewable Power
Jose Ignacio has a degree in electrical engineering from the Pontificia Universidad Catolica de Chile and a master’s degree in economic regulation from Universidad Adolfo Ibañez. He has co-founded several companies related to nonconventional renewable energies, including Andes Energy, which incorporated a joint venture company with Mainstream Renewable Power in 2009 to develop, build and operate wind and solar power projects in Chile.
Francisca Rivero Garay National Representative Fundación Avina
Francisca has extensive experience in the public sector in the areas of social policy and poverty reduction. As a consultant, she has designed intervention strategies for vulnerable families, groups and communities and worked for international consultancies with multilateral agencies, such as the World Bank. Francisca teaches at the Pontificia Universidad Católica de Chile and is the national representative for the Fundación Avina in Chile.
CHILE 9
roundtable energy
Sergio del Campo, Vice Minister of Energy: Today we will discuss the issues that are central to the development of Chile’s energy sector in the medium and long term. I will begin by providing some background about the country’s economic growth and industry’s energy requirements. Over the last six years, our gross national product has practically doubled. Market growth has averaged around 5.8 per cent and has reached 6 per cent for the last three years. However, the Central Bank is projecting Sergio del Campo Vice Minister Ministry of Energy
The learning curve we have experienced over the last years...has taught us that it is necessary to develop a diversified matrix slightly lower rates for the next two years, around 4 per cent. The country’s energy consumption is still below 4,000 kilowatt hours per capita, far below the average for countries in the OECD. The demand on the country’s two main electricity systems, the Sistema Interconnectado Central (SIC) and Sistema Interconnectado Norte Grande (SING) is approximately 60,000 gigawatt hours per year. By 2025, we project this will increase to around 120,000 gigawatt hours, with an average annual increase of 5.8 per cent. Currently, Chile’s installed energy capacity is made up of 34 per cent hydroelectricity, 26 per cent liquefied natural gas (LNG), 22 per cent coal, and 14 per cent diesel. This represents a substantial change in the country’s energy matrix compared to 1996, when the installed capacity was 6,016 megawatts (made up of 65 per cent hydroelectricity and 24 per cent coal). Today our installed capacity is approximately 17,500 megawatts. Traditionally, 70 per cent of our energy is imported. Let’s start by considering the role that fossil fuels will play in the future of Chile’s electricity market. Within this context, what part can LNG play as a component of the country’s electricity matrix? Marcelo Tokman, former Energy Minister: The learning curve we have experienced over the last years, as a result of droughts and the issues surrounding Argentine
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natural gas supply, has taught us that it is necessary to develop a diversified matrix. Recently, the energy sector has been through different phases; one dominated by hydroelectricity combined with coal; another dominated by gas from one particular supplier; and then a crisis, during which the sector had to adapt. However, in terms of fuel diversification, Chile has now arrived at a more balanced situation. Non-conventional renewable energy (NRCE) participation has risen from less than 2 per cent, in 2007, to more than 7 per cent, with more than 1,050 megawatts operating and another 500 megawatts under construction. These changes are significant and necessary, and have allowed the matrix to be rebalanced. The introduction of LNG, through the Mejillones and Quintero projects, has enabled a more reliable approach to natural gas. Moving forward, from the point of view of lower costs, better advantage should be taken of the LNG supply, load centres need to be secured and expansion should be continued in the area of renewables. Aside from the issue of matrix composition, the greatest problem is related to the difficulties we have been having in approving and executing projects. The situation is worrying, as projects for base load generation are not being developed as predicted. Moreover, we must not allow ourselves to fall into the trap of assuming that we will have access to gas and, subsequently, do nothing with regard to other energy options. There are still some problems with gas, we do not know if new projects will materialise. We have to overcome social and environmental underlying issues that are stopping projects, of all technologies, from being able to start construction. We must do something about these underlying problems to ensure sufficient future generation. Rudolf Araneda Kaurert, GasAtacama: When you ask about the role of fossil fuels in the future, we are really talking about the issue of coal versus gas and whether or not, as a country, we take a position on this debate. The evolution of shale gas in the US, which is in the process of approving exports, may play a major role in the development of Chile’s energy sector. Ninety per cent of Chileans would like future development to be based on renewable energies. Technically,
energy roundtable
this is impossible to achieve in the short term, but we shouldn’t just dismiss this goal as unreachable. We must incorporate 20 to 30 per cent renewable energies into the matrix and implement the use of gas on a much larger scale. If the use of fossil fuels and bio carbon fuels continues to grow, incorporation of renewable energy will be significantly restricted. The critical issue for our country is that the value of the energy is not absorbed by the cost. Today, we have an opportunity to access US gas in large volumes that allows for a levelised cost of around US$110 per megawatt hour. The levelised cost of coal would be between US$95 and US$105. So, the cost of central gas would be 10 per cent more than coal, as long as we do not add CO2-related costs, which is no small issue. However, these gas centres would allow for large blocks of renewable energy of between 30 to 50 per cent, a progression that would satisfy the expectations of the majority of the country. Furthermore, with regard to gas, in order to get to a price of US$10.5 to US$12, as opposed to the world market average of US$14 to US$16, we need to reduce the intermediaries and have a direct association with the supplier. Arturo Errázuriz, British Chilean Chamber of Commerce (Britcham): I think Marcelo and Rudolf have been heading in the right direction; Chile has a need for a diversified matrix. Natural gas, through open and combined cycle projects, allows for an almost natural compatibility with renewable energy sources and it also allows us to have a much cleaner generation alternative to coal. The matrix must be studied in order to discover how to mitigate the impacts of ‘dirtier’ generation. In this sense, LNG represents an alternative that is very attractive, as compared to coal. However, and considering that sustainable development is the balance of the economic, social and environmental policies and measures, we cannot do away with any type of generation, but we rather have to see how these technologies can coexist and gradually evolve towards cleaner solutions. Gonzalo Salgado, Hot Rock: The worldwide consensus is that there are two different roads to go down: nonconventional natural gas or coal. Developed countries are
opting for gas and, in my opinion, the developing countries are going to go with coal. Which road will Chile take? The natural gas path brings some commerce issues into play. For example, it could create tension in the commercial relationship between the US and China. One possible problem for China is that the US will start to look at the environmental issue, in terms of CO2 emissions. The US has plenty of gas and that will be a commercial advantage. It will allow them to reduce gas imports in order to motivate the development of shale gas inside the US. Generally, our system is a marginalist system; the price of coal sets the price of energy in Chile. For example, if I want to assure a dispatch from my plant, it will have to be coal or natural gas. This creates a problem because, today, there is no mature spot market developed for natural gas. Therefore, if I want a long-
Marcelo Tokman Former Minister of Energy
We must incorporate 20 to 30 per
cent renewable energies into the matrix and implement the use of gas on a much larger scale. term contract and I don’t have assured dispatch, I am running certain risks. If we want to enter the world of gas, we have to ask ourselves what legal and systemic modifications we will have to make to ensure dispatch. Coal has problems that are not considered at the moment of approval. Although it appears to be much less expensive to dispatch energy from a combustion plant, it has intrinsic costs that we, as a community, are not quantifying well. Andrés Kuhlmann, Transelec: Diversifying the matrix also has consequences in the area of transmission. For example, some NRCEs have a great advantage in that they are very even energy producers. Other technologies create increasing challenges as the network grows. Wind and solar power, for example, produce intermittency in transmission. So there is a swing between generation extremes. Development based on natural gas is very attractive as you can place load centres close to consumers. This
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roundtable energy
isn’t true of coal plants because they affect the surrounding environment and must be located far from the population. This has consequences in terms of transmission. One has to take these things into consideration in terms of the development of the grid. There must be a concrete development plan and issues regarding grid connection have to be looked at very early on in the project, so the system can be adapted.
Rudolf Araneda Kaurert Chief Executive Officer GasAtacama
...the energy component of our exports will significantly affect their carbon footprint and this, in turn, could affect Chile’s future profitability and competitiveness The country has always failed in this area because we have not prepared the technical side well enough. We have instances in which not all of the system’s requirements are considered or the business plan model does not stipulate the required changes. Carlos Finat, ACERA: I disagree. Gas plants are installed where it is feasible, not where it is most desirable. Gas and coal plants need to be near the ocean due to water issues, and if you are incorporating air refrigeration you run into efficiency problems making them uncompetitive. Therefore, in terms of transmission, which is certainly a tremendous challenge, we are going to have to make it work somehow. The variability of a hydroelectric power plant can be much greater than the variability of NCRE. In this sense, the market has already resolved these issues by forecasting and programming. This has an effect on costs. We need to recognise that this mechanism is much less dependable. Some of the energies that are being incorporated are less dependable, but this has been an issue for hydroelectricity for many years, so it is nothing new. We have to make use of this same technology for development of the system into the future. RAK, GasAtacama: Regarding commerce issues relating to the role of gas; until recently, the US has looked the other way and has tried to ignore the issue of carbon
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credits. The US planned their future on coal generation and dismissed the European suggestions of creating trade obstacles related to CO2 emissions. Now, given these developments, it must be very certain that it has a clear competitive advantage. It would not surprise me if the US starts to make an issue of CO2 emissions, when it comes to its commercial relationships. Chile is an exporter of fruit, salmon, wine, and copper and will not be overlooked regarding this issue. We are a relatively small country, so the total emissions are not going to be that high. However, the relevant issue is the carbon footprint of each bottle of wine that competes with Australian or Italian wine, or the carbon footprint of each pound of copper in comparison to Peruvian or Central African copper. From this perspective, the energy component of our exports will significantly affect their carbon footprint and this, in turn, could affect Chile’s future profitability and competitiveness. We have to take this structural change in the US into account. Rodrigo Castillo, Empresas Eléctricas: Ostensibly, at least to me, we are having a discussion on two very different levels. One level has to do with public policy: the goals of public policy and the direction in which we move as a society and a country. The other level relates to short-term financial and economic indicators that are created by a certain model. These indicators give investors certain messages that allow them to make certain decisions in the financial world and in the real world. Thus, when someone makes a strategic point suggesting that a country like Chile should develop infrastructure relating to natural gas, there are important questions that are not being raised. Imagine that, as a society, we were all in agreement about how to progress and the arguments put forward here were accepted in the public domain. The question regarding how this idea or policy would be implemented still remains. In my view, Chile does not have the necessary public policy tools to put the plan into action. Perhaps, in some distant reality, economic incentives could converge and a positive decision could be taken by each of the different investors, but as a long-term public policy strategy discussion, I feel that we simply do not have the tools to have this type of conversation.
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roundtable energy
SdC, Vice Minister of Energy: Over the last ten years, the world has changed significantly in terms of energy prices. Chile is an exporting country and, because of this change, we find ourselves struggling to compete with countries that have natural energy resources. NCRE offers an opportunity to redress the balance as their development costs have been falling.
Andrés Kuhlmann Jahn Chief Executive Officer Transelec S.A.
We should take advantage of the opportunities that hydroelectricity provides us, as the price of hydroelectricity is much lower than other energies However, depending on the type of NCRE, in terms of their transmission, they have constraints that need to be adequately managed. Nevertheless, solutions have emerged in which NRCE could be incorporated as part of the development of combined cycle plants. So, let’s consider NCREs future participation in Chile’s electricity matrix, addressing in particular, hydroelectricity. By hydroelectricity, I refer to plants of all sizes. MT, former Energy Minister: To jump into the water with hydro; hydroelectricity is Chile’s main energy resource. This is changing, there are advances in other technologies, but we should take advantage of the opportunities that hydroelectricity provides us, as the price of hydroelectricity is much lower than other energies we have been discussing. However, we know there are some problems, we saw the results of the El Nino y La Nina phenomena, which presented a hydrological risk to the matrix. Having a diversified matrix is obviously one solution; another, although more politically complicated, is to move forward with the use of reservoirs, which will help with the problems of accumulation and regulation. Reservoirs are also needed for agricultural activities and, if the predictions about climate change are correct, we are going to become more vulnerable to hydrological cycles. So, the construction of reservoirs will enable us to manage hydroelectricity’s variability. Finally, also politically problematic, is to take advantage of the potential for generation in the south, which is less variable.
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Hydroelectricity has advantages in terms of emissions; it might be even a better solution than gas, but it also may be more difficult regarding other political and economic issues. AE, Britcham: The potential of hydroelectricity up to 40 megawatts is clear and normally accepted, but it would be absurd not to take advantage of projects of 50 megawatts or more. However, over the next 50 years in the central-south regions of Chile, studies suggest we are going to see a drastic reduction in water availability. This has potential solutions. Reservoirs, as Marcelo said, are a possibility; however, this would require adequate public discussions to ensure that the development of these projects present undeniable advantages. Reservoirs may allow us to take advantage of variable marginal costs at different times of the day. Then we could generate when prices are high and pump it up during moments when the energy cost is low, giving the system important flexibility. The key question is, how can we change the current negative perception about these projects? In terms of emissions and climate change, projects like HidroAysén are tremendous opportunities because they offer a large amount of very stable energy, greenhouse gas reductions and also cost reductions at the level of the grid. They make Chile much more competitive as an exporter and as a country. Furthermore, we have to stress that this energy is renewable, which itself is a positive attribute. But we have to understand the transmission effects and the potential for collateral environmental effects. Projects like HidroAysén present a huge challenge in terms of energy transmission and this has to be faced. Francisca Rivero Garay, Fundación Avina: To date, I think that grave mistakes have been made in terms of establishing relationships between communities and hydroelectric projects. For this reason, we see far more litigation surrounding the development of these projects. My understanding is that the relationships have not worked because they generally have had compensation as their basis. Thus, the companies have failed to comprehend the impact of these projects on communities in a broader sense, who have felt abandoned at every stage of the process.
energy roundtable
Moreover, the demands being made of the state in this area are due to Chile’s growing maturity in terms of social involvement. Today, at least in our country, it is not enough just to have a standard, for example in the area of environmental impact, and think that this guarantees social participation. If participation processes are not linked to strategic decisions, the litigation process will continue. When I say that these things are not linked, it is because, according to Chilean law, they are not. The participation process needs to be regulated and institutionalised. Currently, the opinion of the community is considered in the dossier, but nothing more. It would be interesting to increase involvement so the community could be a larger part of the decision-making process. Regarding hydroelectricity, the decisions are rather politically difficult. It is difficult to say in a public forum that hydroelectricity is important in terms of the energy development of our country. It is difficult because there has not been a serious public discussion. When we say hydroelectricity, people think HidroAysén, which is just one little (or one big) part. What about the rest the sector, for example, mini hydro? People don’t know about it. There is a communication process that needs to take place with regard to Hydroelectricity. SdC, Vice Minister of Energy: Ok, let’s move on. How do you evaluate the long-term contributions of NRCE? In your response, please distinguish amongst the different types of energy because this affects the type of plant they have, the contribution they make and their competitiveness. GS, Hot Rock: Geothermal energy has a great advantage among the NCREs in the sense that it is a base load energy and has a high plant capacity factor, around 95 per cent. This makes it rather attractive for complementing other renewables that have lower plant capacity factors. However, development of geothermal, in the long term, will have to deal with the problem of drilling risk and geological risk. Each renewable energy has its own obstacles that must be overcome. In the case of geothermal, a geothermal risk guarantee system has been created. In Germany, an insurance company has offered a drilling
insurance that covers 80 per cent of the cost and this has allowed geothermal to happen there. We are much more ambitious about the future of geothermal in Chile as a result of the development of this system. If the risk guarantee system is offered in our market, and Hot Rock is currently in talks with this company, it would allow for the development of geothermal. In order for this to happen, the insurance company is looking for the support of the State to ensure there will be several projects. Being optimistic, Geothermal could contribute 1000 megawatts to the system. I doubt it will be more because the top five countries generating geothermal have between 2000 and 1000 megawatts, then capacity drops to 500 megawatts. However, within this Chilean matrix that has to meet so many needs, every little bit helps.
Gonzalo Salgado Country Manager Hot Rock Chile S.A.
Geothermal energy has a great advantage among the NCREs...it is a base load energy and has a high plant capacity factor José Ignacio Escobar, Mainstream: I think the key issue with NCRE is levelling the cost. The important thing is the cost, the technical issues will resolve themselves. Most countries that incorporate high levels of renewables have similar matrixes to Chile. Ireland set a target of 5 per cent renewable energy, now they have more than 36 per cent and say they want more than 70 per cent combined with thermoelectric. Germany actually wants to achieve 100 per cent renewable energy. The important thing to remember is that each country goes about finding its own technological solutions in terms of variability. By 2030, I think we will see a large increase in the use of renewable energy. The installed capacity, exclusively for renewable energies, will need to be around six to eight gigawatts. I agree that 1000 megawatts could be contributed by geothermal, but it has a more complicated development process. The last step will be incorporating wind and solar energy. By 2030, they should each be contributing 2 to 2.5 gigawatts. However, these technologies are still on the ground due to the plant factor, the current leveling costs of energy. In the
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future, they will replace more expensive energy and they may even compete with conventional energy costs, without generating external costs. If the regulatory, cost and social issues are all sorted out, Chile could increase its NRCE level significantly from the 6 per cent we have today to percentages that would create real movement in the energy price bubble that consumers are experiencing.
René Muga Chief Executive Officer Generadoras de Chile A.G.
The challenge is to find a way to ensure
that NCRE can coexist with and complement the base load energy in this country René Muga, Generadoras de Chile: There is no doubt that there has been greater penetration when it comes to NCRE; however, there are still many things to discuss. There is still a lot of misinformation that circulates regarding NCRE. The challenge is to find a way to ensure that NCRE can coexist with and complement the base load energy in this country, which also needs to increase. We need to find a balance within this sector that ensures the development of a competitive energy industry and can, therefore, help sustain the competitiveness of Chilean economy. The differences between one type of generation and another have to be laid out in terms of their cost of investment, energy production and how they contribute to the organised backup needed by a market that demands a diversified production but need increasing amounts of energy, secure and competitive supply. Unfortunately, when we approach this topic, these types of discussions tend to have a lot of passion, but a lack of technical arguments. Congress is a place where debate ought to be based on technical issues rather than passion. It is important that these discussions involve all relevant actors and adequately understand Chile’s energy problems and the options that are available. AK, Transelec: I think the backers of renewable energy projects know that a significant part of their investment will be in transmission. We have to develop these projects and also develop the technological solutions
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that allow them to be incorporated into the grid. The development of the grid is an important consideration. Projects do not develop the grid; the grid is developed according to the regulator’s indications. At the moment, these technologies create effects that we have not seen because this type of technology is not common in our matrix. We have to rectify this. Moreover, some NRCE projects, such as mini hydros, solar parks etc., are located very far from the grid in geographical and voltage injection terms. This is very important to take into consideration. We must have equal access to the grid for these projects; it is absolutely fundamental to their functionality. A mini hydro project is not just the plant; it is also the transmission method that takes the energy to the grid so it can be commercialised. Small companies do not have the economic capacity to take on the social and environmental issues that may arise from this. Therefore, it is obvious that coordination is needed in order that these projects can access secondary transmission systems. Transmission lines interfere with the environment and, currently, there is nothing we can do about that. Our environmental law is designed to qualify projects and not to rank them, thus, we do not have organised information regarding the land through which these lines pass that would make it possible to create the most “environmentally-friendly” design. Developers have to use the information available to make decisions about which project is the best economically, environmentally and socially speaking. But if a project qualifies according to the authorities, that is good enough. It doesn’t matter whether it is the best project or not. This needs to be addressed. RAK, GasAtacama: There has been a continuous fall in the levelised cost of a variety of renewable energies. In the area of photovoltaic energy, fortunately for Chile, the development costs or levelised costs are already at US$90 or less. This is already 10 per cent below the price of coal remembering, of course, a limitation in the availability of works. In the future, it is going to be possible to incorporate these energies, without subsidies, at a percentage level that surpasses the system’s capacity to take them on.
energy roundtable
In the SING, the system operators have indicated the maximum capacity for renewables is around 400 megawatts, but we are going to quickly pass that number and run into the same error that we made with the first installations here. They were bigger than the system could handle. So, it is going to be necessary to limit generation. I think it is possible to produce a relevant and increasing percentage of renewable energy, but we have to prepare ourselves to receive them. The compatibility of the different types of renewable energy with machines that can take this swing at low costs is very interesting. If the development cost continues to go down, and photovoltaic could arrive at US$105 in about three years time, one can imagine centres that take advantage of shale gas from the US and machines that use these energies and create large blocks of renewable energy that can be incorporated at higher percentages. Another point, related to transmission, is that there are many smaller projects in the North. It is a big area and, therefore, it makes sense to continue to try to concentrate on certain areas to take economic advantage of each transmission center. It is a region that allows for incorporation of these energies at levels that optimise the costs of transmission. MT, former Energy Minister: If we want to take advantage of this potential, certain obstacles still need to be eliminated. We have implemented policy instruments that deal with making public information about resources available, pre-investment subsidies, longterm loans and a law that established a mandatory percentage of renewables in new contracts to make large conventional companies take renewable energy seriously. Furthermore, projects for dealing with the issue of explorative risks in geothermal, as well as the issue of concentrating projects in areas that are isolated form the grid, have been proposed. If we want to have faster penetration of renewables, barriers have to be identified and solved. There have been advances in the area of regulation and in the development of support mechanisms that are responsible for the positive results we are seeing in terms of the ongoing project to increase NCRE penetration. I have a positive view of the framework that was
created and the results it is achieving. I think new projects are entering at a reasonable speed, although we must careful not to press to much without eliminating the barriers that they still face. SdC, Vice Minister of Energy: In terms of the transmission sector, What are the restrictions or bottlenecks that don’t allow us to optimise economic dispatch and efficient production of energy in Chile? Where are the main problems that in some way reflect or originate from the reality we are experiencing in this country?
If we want to have faster penetration
Carlos Eugenio Finat Díaz Executive Director ACERA A.G.
of renewables, barriers have to be identified and solved AK, Transelec: The issue of transmission was a big problem in 2008—9 when there was significant under investment in the sector. In 2009, at least two major things were achieved in the sector: first, as a result of the earthquake, the safe design of the grid was taken seriously. After the earthquake the grid was tremendously fragile, but by 2010, there was a clear consensus that the grid needs to be safer and investments that are now being presented and approved work towards this. Second, large transmission projects in the Norte Chico, northern SIC and main reinforcement networks in the south were begun. We don’t know when they will be finished, but at least they are being built; we can see light at the end of the tunnel. Possibly by 2018, if investments continue as they have been, we are going to have a good grid. From now until 2017, it is going to be very complicated in terms of the grid. Both from the point of view of supply power to mining clients, but also to connect the wind parks. Right now, there is not enough transmission to connect all of the parks that are being started in that region. Over the medium term, some works are under construction and are close to being finished; however, we have a problem with the ordinance that authorises works to increase capacity. There a huge number of works proposed, including ours, that were not long-term solutions but rather short-term, that have a high rate of return
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for the users, especially for the generators that pay for the transmission system. If it is a five-year project, the return is at two.
Problems regarding new investments in
transmission are mostly in the environmental and social areas Jorge Rodriguez Ortiz Chief Executive Officer Interchile S.A.
However, there are two big problems with their progress. First, due to the crisis, this type of work is very slow to be authorised. We have at least five works in folders that the transmission approval process does not recognise, but the energy generators recognise. We have proactively approached some energy generators to figure out how we can finance these works. Unfortunately, here it is obvious that the system needs this, but the process doesn’t allow it to be recognised. Second, the approval process that looks at increasing the main network capacity only considers projects that are necessary over the long term. When you have a grid of this type there are solutions that have a component of low equipment but high works. Unfortunately, the law, or tariff recognition, doesn’t recognise the works. So there is no incentive for investment. Jorge Rodriguez Ortiz, InterChile: Problems regarding new investments in transmission are mostly in the environmental and social areas. These are the two variables that have become the main challenges to consider and to overcome. We are now attempting to manage these two aspects to the best of our ability, by approaching the communities ahead of time, for example. However, at some point we are going to feel the effects of these two areas, as are other investors, and there needs to be some proactivity regarding these issues. In terms of connecting small wind and solar centers to the transmission system, I imagine that here in Chile you use the same system as they do in Brazil, where a collection unit groups together the connection of several small generators and the profits are divided up as a percentage of the main network and paid directly to the generators. This structure has been successful, but
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there is more risk for the transmitter who will have the responsibility of making sure that this energy can enter the transmission system. Another issue is that the centers have arrived before the transmission itself. I have just been in Brazil and here generation is coming before transmission. This really needs to be considered so we don’t have to shut down generation projects because of transmission problems. Generally, the transmission system doesn’t take care of these bureaucratic measures and it is getting problematic. The profits for tariffs here in Chile are good. The Chilean model has been a model for many countries including Colombia and other parts of America. I don’t think there are complaints about profits. What I would suggest is, when an investment is made, costs that could be eliminated due to environmental and social issues are explained and determined. I think these issues should receive more attention. RM, Generadoras de Chile: One issue that has to be solved in the very short term is how we group together small projects that can’t solve problems individually, e.g. transmission, social and environmental problems. Today, we don’t have the instruments to find these solutions. The concept of Electric Highway has suggested a solution, but I think we need to act more rapidly. Having said that, I should add that there is light at the end of the tunnel for the main transmission network. If projects move forward as planned, in five years time the network should be reinforced. However, it will depend on the type and difficulty of environmental and social opposition that these projects face. The new concession law, which is being discussed in congress will expedite procedures, ease processes and eliminate the problems where, unfortunately, in many cases, there has been abuse of the law. There are many examples where this abuse is obstructing the speed at which these projects can be developed seriously affecting confidence in and the capacity of transmission. GS, Hot Rock: Regarding Jorge’s comment about the Brazilian model, it is important to emphasise the relationship that exists between the way that the transmission system is designed and the way the designs specifically influence the competitiveness of generation companies.
energy roundtable
In general, transmission has been a sort of agent that follows generation, finding financers, ways of financing, etc. Part of the conversation that we are having today has to do with the potential that putting together clusters, i.e. moving transmission toward geographic areas that have potential in terms of certain technologies, generally renewable energy technologies of all types.
Chile offers wonderful conditions for
investment in the energy sector
The State, through public policy tools, can give a sign to the generation sector that will encourage the development of transmission projects. One has to understand that generation can collaborate in creating a message regarding the development of a competitive market, by way of transmission. At least the discussions regarding the Electric Highway Law have been to do with financing transmission projects and the logic of large scale investment, which is vital. SdC, Vice Minister of Energy: Chile offers wonderful conditions for investment in the energy sector; we have clear regulations and one of the healthier financial systems in the world, making financing very competitive for long-term investment projects. Inflation is controlled, the economy is experiencing sustained growth and unemployment is at a historic low. The country shows good economic indicators, has a stable legal system, good institutions, and even between different political parties there is a limited range of economic models, which prevents extreme viewpoints gaining traction. Notwithstanding these advantageous conditions, we are in transition and are behind in terms of attracting investors to the energy sector. I think this brings us to the key issue; what is it that communities are rejecting in the development of new projects not only in Chile, but also all over the world? This relationship with the community is turning into the greatest obstacle in the creation of investment projects. 15 years ago, when we talked about energy projects, the main issue was long-term financing and investment
payback. Then, it was the environmental impact. Now we are seeing the necessity of community participation. What exactly are the people rejecting? FRG, Fundación Avina: I think this is the fundamental question. You mention a series of indicators that highlight Chile’s progress in certain areas; however, we must consider the indicators that are not highlighted. These indicators are, and will continue to be, the sources of rejection if nothing is done. Without doubt, one is inequality. We are not only talking in terms of who has the wealth in our country on an economic level, but also with regard to the transformation of our energy sector. Some large investors don’t consider reinvestment or paying the costs to the territories where the investments are taking place. From the areas that are excluded, you can observe that Chile’s development is going very well, but no form of protection reaches these places. In terms of inequality, social, territorial, economic and environmental concerns, all this has to do with feeling included versus feeling excluded from a process. All of us, including the private sector, have to be ready and open to innovate not just from a technological point of view, but also with regard to how these issues are approached. The private sector tends to make mistakes regarding these matters; they think that this translates into wealth distribution via economic compensation. This is not necessarily what communities are asking for from the private companies or the state, which should protect and safeguard public interests. I think this resistance comes from annoyance, anger, indignation; there are many different expressions. The process is no longer sitting down to talk and taking notes, as it was before. But rather, the state, the private sector, the communities and civil institutions need to make connections with each other. Currently, the connections with communities are fragile and that is why there is so much distrust of institutions, political parties, and the authorities. I think the types of agreement being offered out of date. Communities, the people, want to establish new agreements. No one has the answers. They have to be created by all of us. We have to concern ourselves with it and I don’t think this is what is happening. The responses to
Francisca Rivero Garay National Representative Fundación Avina
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these questions from the communities are a smoothed over, for containment purposes, and the discussion that really needs to take place is ignored.
José Ignacio Escobar Chief Executive Officer Mainstream Renewable Power
CF, ACERA: Regarding attracting investors, I think that you just have to look at the millions of dollars and the number of projects that are in the process of approval or have been approved, and the number of new market players. These are the best indicators that show the sector is attractive for investors. International financial groups and new international energy companies are looking at Chile. There is no lack of interest, just difficulties with carrying projects through.
International financial groups and new
international energy companies are looking at Chile
There are new concerns in Chile as a result of its development. The problems require a state that is willing to take on some degree of political cost and if, after evaluation, projects meet with requirements, the state should insure that they are approved in the timeframe that has been established. Regarding inequality in distribution: inequality is clear, in terms of generation and transmission projects connecting to grids, when the benefits of the project go beyond the place where they are being carried out and the costs and impact greatly affect the community, I think here it is very legitimate that these communities have opposition. In the Electric Highway Law, the specific design of the transmission line route has to take into account things other than just the most economically efficient way to carry out transmission. The problem behind all this has to do with what Francisca suggested; we have to take advantage of the communities wish to participate. Legally, it is defined where a transmission line is allowed to pass and where not, but if there is no space for conversation or coming to a consensus, resistance will happen everywhere. It is not a technical issue; therefore, it is irrelevant whether you have a map that indicates where you can
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build if the interested parties don’t see that there was a process of participation where their point of view was considered. Without this, we won’t reach the final goal, which is to facilitate the advancement of projects. MT, former Energy Minister: The way that companies approach these projects needs to change. There are some who focus on engineering and construction and other issues, like relationships with communities, seemingly don’t exist. This is no longer a possibility. Addressing environmental concerns and creating a good relationship with the communities is a requisite for the feasibility of the projects. But this does not have to be seen only as a burden. We have to promote the maxim that, if this work is done seriously the resulting project and the longterm relationship will be enriching for the company. Gradually, we are seeing cases in which companies realise that it is not just about meeting requirements, but rather trying to figure out what is behind the people’s concerns. I think there are any number of possible solutions to deal with the social opposition to projects. But we need solutions from a public policy point of view to avoid inefficient individual negotiations per project. We need a system for adequate compensation and to work seriously in land use planning. Both have to be done in a process that considers adequate citizen participation processes so that these solutions are legitimised by the population. RM, Generadoras de Chile: I think there is a great lack of legitimisation in environmental approvals and this impacts the projects because currently people are questioning how the system is designed and works. It probably needs time and effort to make it more legitimate and accepted by all parties. Part of this legitimatisation probably has to do with finding policy instruments that allow different, constructive and stable relationships with the communities. Essentially, when a company is facing the environmental impact assessment of a project, local communities find themselves in a process that they believe will bring nothing but costs. It is very difficult for the investor to change this perception if there has not been
energy roundtable
a dialogue with these communities beforehand. The types of relationships that we need should come from a process where confidence is built in advance and not linked with the environmental impact assessment. Finally, it is clear that the tools to disseminate information need to be improved. We have to find instruments that lend more certainty to a project developer. Information needs to be provided at a very early stage and communities must feel that their concerns have been taken into account and that they have access to information regarding the project in advance. Currently this is not happening in many cases opposition sometimes comes from lack of information and confidence among different parties. RC, Empresas Eléctricas: Rejection of projects takes place whenever two visions are very different. There are projects that are rejected for national, and maybe even universal, issues; there are projects where the only problem is with community relations; and there are projects where both of these factors combine. For now, we have to realise that holding the citizens entirely responsible for submitting environmental impact to the system is something that definitely does not work. It has not been designed to work that way and if we try to give them this responsibility, we are going to fail over and over again. Furthermore, we are going to have to recognise that within the judging criteria for the viability of a project there are elements that are neither environmental, technical, financial nor economic. There are elements that have to with other preferences and, currently, there are no formal processes through which these preferences can be channeled, so they are being expressed through protests, phone calls, etc. While this situation remains, we are not going to be able find an adequate solution. CF, ACERA: I would hate for us to give the impression that the energy situation in Chile is totally negative. In the recent years there has been an investment in renewable energies of more than 1000 megawatts, which monetarily is close to US$3 billion. There are also about US$6 billion in investments in energy projects that are in the process of enrollment or about to be built.
One may ask what the difference is between projects that, on a monthly basis, comparing energy to energy, can already generate about 15 per cent of what HidroAysén would generate if totally built. Of course, the answer is, their social costs are much lower than those of HidroAysén. The issue of the local costs by way of global benefits has not been sufficiently considered. I think that there is a lack of credibility in terms of the development of some of these projects, including some for which global benefits are not going to be enough in a not very competitive market. If someone says they are going to lower the marginal cost of energy, that’s fine, but what interests me is whether my bill is actually lowered. This is an area that generates serious doubt. In general, smaller projects have a more direct relationship between local benefits and local costs, which makes it easier to resolve problems.
Rodrigo Castillo Executive Director Empresas Eléctricas A.G.
If the local communities saw there
was unity in our policy, it would be beneficial for everybody AE, BritCham: We should move towards more participation from different organisations in the communities, but, before that, I think we need a big picture framework. There are many issues presented today that are quite clear, the need to diversify the grid, the need for renewable energies. There is a lot said about these things, but in practice little is done. I think it is important we pursue commonly held sensitivities and then encourage politicians from different political parties to come to agreement with an agenda for our country in terms of energy. Our country has no unified agenda. If the local communities saw there was unity in our policy, it would be beneficial for everybody. It terms of compensation, I agree, it is not only the number that is important, but also the participation process. I think that within the creation of these processes there are two things that could help. First, engaging political NGOs and seeking out a political consensus. If people see that an organisation is protesting a particular project, it is extremely damaging.
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roundtable energy
Second, the potential of involving academics in the process. When you put the academic world together with the private sector, working with the government, you can foster closeness and engagement with the communities. It would be a very powerful tool. Not only because academics are a bit more objective, but also because they have the existing tools and knowledge that help these relationships.
Arturo Errázuriz President of the Climate Change Committee British Chilean Chamber of Commerce A.G. (BCCC)
Security of supply is needed, competitiveness is needed, and clean energies are needed A couple of months ago, I was with professor Chris Lazlo from the Case Western Reserve University. His philosophy was that to succeed in sustainable development, you have to implement methodologies that involve the participation of the different players from the very beginning. Participation is not just speaking with the community, then with the authorities, then with the bank, but rather bringing everyone together at the same table. Although they are not necessarily going to come to agreement, having had this open conversation validates the project, as it validates the process. SdC, Vice Minister of Energy: It is clear that energy has become a major issue for Chile. We hear about it everywhere, in every form of media. Local, regional and national communities have used social networking and, in some instances, taken to the streets to demonstrate against projects. Without a doubt, citizen involvement is experiencing an evolution. Each player that participates in Chile’s development, particularly in the energy sector, has a contribution to make in terms of responsibility. The State has a responsibility to provide a regulatory framework that promotes competitiveness and adequate protection of the environment and the private sector has a responsibility to be proactive in creating long-term and workable relationships with the communities. Our conversation also suggested there are significant opportunities of which we can take advantage, for instance, US shale gas. The State, too, can take a role in
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this. No amount of technology will be too much for a country with severe restrictions in terms of conventional energy resources. There is space for everyone in the area of renewables. Security of supply is needed, competitiveness is needed, and clean energies are needed. Thermoelectric plants in Chile have the same emission standards as those in Europe. The renewables, as well, have to meet with all the requirements suggested by the environmental impact evaluation system. We must take advantage of the potential of hydroelectricity. Given Chile’s scarcity of conventional energies, this is a massive renewable resource that, historically, has made a huge contribution in Chile. It is very important that we consider hydroelectricity part of the country’s long-term production portfolio. In terms of energy, competitiveness matters. The NCRE are increasingly entering the market. We are already at around 1300 megawatts. There is a significant price chain for these technologies. The price of commodities over the last ten years has created a space for NCREs that will allow for less dependence. We have to find a way to combine thermoelectricity, particularly using natural gas, and NCRE. This formula has worked in other countries and it could work for Chile. The Government needs to be proactive in planning transmission centres. This will guarantee that new types of technology will not put the security of the system at risk. In terms of bottlenecks, these are reducing. There are projects already in process; they should be finished by early 2018. Furthermore, the Concessions Law, which should be approved soon, should help reduce approval times for these types of projects. One of the main themes of this discussion has been the participation of the communities in the development of the projects. We need to have an effective understanding and knowledge of these communities, so we can encourage participation. Given that installation of projects in different communities throughout the country brings these communities extra costs, it would be useful to define clearly the benefits that will be given to communities and that this, ideally, would be established in law. Thank you all very much for participating in this event and for this enriching conversation.
energy interview
Jorge Alberto Bunster Betteley MINISTER OF STATE FOR ENERGY
INTERNATIONAL INVESTOR: Which policy areas will have the largest impact on the Chilean energy sector in the coming years? JORGE ALBERTO BUNSTER BETTELEY: We have recently developed a national energy strategy that we hope will direct the development of the sector for the next 50 years. The strategy was launched in February 2012 and is underpinned by six pillars. The first pillar is energy efficiency, and we have a program going ahead with an important budget and strong government support that aims toward bringing energy efficiency into the national culture. Our objective is to involve the public and businesses in a dialogue about how the country and its citizens can use energy in a more efficient way.
We have recently developed a national energy strategy that we hope will direct the development of the sector for the next 50 years The second pillar is non-conventional renewables. Chile has the potential to make renewables, both conventional and nonconventional, an important part of the energy sector. Today, although non-conventional renewables account for a small share of the matrix, not more than 4.5 per cent, the rate of growth and development in this area is becoming an increasingly important market. We hope to raise the percentage of renewables in the sector to between 10 per cent and 15 per cent by 2025. Accordingly, this will create opportunities for investment. The third pillar is the role of the traditional energies. Here we want to focus on hydroelectricity. Chile has a lot of water and we want to make a concerted effort to increase the use of this resource. However, at the same time, we have to address environmental and community concerns that can
CAREER DEFINING MOMENT
I think when I decided to enter Government office. I had worked all my life in the private sector. Then, three years ago, President Piñera invited me to work in the public sector. I think that was the moment when I began to see my work and my contribution to the country in a different way, and it certainly has been very gratifying. LESSON IN BUSINESS
Always focus on the customer needs, whichever sphere you are working in. In the public sector, this would be the common good of the general population; in the private sector, it would be the real customers of the specific market in which your company works. sometimes make developing these projects problematic. The fourth pillar is transmission. We have a long and narrow country, so transmission is a key aspect in the development of the energy sector. Congress is currently debating how to strengthen this sector and produce a more robust transmission system that would, in turn, make the system more open to the integration of new renewables. There are two projects that are helping us move closer to this goal: “the electric highway” and “the concessions project,” both of which aim toward invigorating the transmission sector. Furthermore, in order to make use of the efficient generation in the north of Chile, we are looking at an interconnection between the North (SING) and Central (SIC) Systems. This pillar is a very important part of the overall strategy and we are putting a lot of effort into moving this forward. The fifth pillar of the strategy is to encourage a more competitive electrical market. Distribution and transmission are often natural monopolies, so it is very important to configure an industry that has lower barriers of entry for the generation and transmission
sectors. We can then create a competitive environment that secures lower prices and provides opportunities for companies to enter the market. The sixth pillar is regional integration. This may be some way off, but our vision is to move the whole region i.e. Argentina, Peru, Bolivia etc. towards a more integrated electrical network. Of course, local integration between the North and the Central systems is part of this, but we are also thinking about network integration on larger scale. The legal system that regulates the electrical sector has been operating for 30 years, so it gives a very stable legal framework within which companies can function. We think there are many opportunities ahead in the energy sector for companies that are already in Chile, or foreign companies that may be looking to invest in the future. What plans do you have to structure the tendering process to allow nonconventional energy providers to compete as the market grows? We think renewables are already competitive. There are projects being built in all non-conventional technology areas: wind, solar, biomass, and hydroelectricity. In wind technology, we have almost 200 megawatts operating, 450 megawatts in construction and an additional 3,000 megawatts approved for construction. We see a ‘take-off’ situation with many of these technologies. One company recently informed us that they intended to build a solar plant with 100 megawatts of capacity, distributing at under US$100 per megawatt. The current high price of energy allows non-conventional providers to be more competitive and that encourages the market to grow. We know that we may still need some initiatives and we are trying to organise a special state subsidy in order to launch these types of projects in the north of Chile. However, we are very cautious not to commit ourselves to large subsidies, as has happened in Europe. Nevertheless, we would like to be able to promote the development of these energies in a competitive and transparent mechanism. Is it possible to create a winning formula between environmental stakeholders, the private sector, and the Government to catalyse large project development? This is a key issue. Citizens are more empowered now than they have ever been and it is easier for people to make their opinions heard. Occasionally though, pressure groups can inhibit the development of good projects and make progress more difficult, but I am sure this problem can be overcome by engaging the population and communicating our ideas clearly.
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interview energy
Jorge Rodríguez Grossi EMPRESA ELÉCTRICA GUACOLDA S.A. President
INTERNATIONAL INVESTOR: What events shaped the energy market before and during your time as Energy Minister? JORGE RODRÍGUEZ GROSSI: Before I became Minister for Economy and Energy, the entire electrical system was concentrating on a combined cycle electric production and all the investment in the power system was based on cheap natural gas from Argentina. The main problems in the electrical sector were related to the full payment of the transmission sector; there were many legal arbitrations and litigation with respect to payments, and investors in transmission were quite worried. When I became Minister in 2001, the challenge was to get new legislation to give assurance to investors in transmission that they would recall 100 per cent of their investment, which we did. The new legislation stipulated a methodology to determine the fee that has to be paid in the total transmission system and how that amount is then divided amongst the users. This stopped litigation against the charges.
We ensured we had a certain amount of gas for about three years ... but in 2008, we almost completely stopped importing natural gas from Argentina In March 2004, we received news from Argentina that natural gas was coming to an end. Thus, we had to find a substitute for natural gas and ensure that the private sector would continue to invest in new ‘postnatural gas’ power companies. By maintaining a friendly, diplomatic relationship with the Argentine Government, we ensured we had a certain amount of gas for about three years, mostly for residential consumption, but in
24 INTERNATIONAL INVESTOR
CAREER DEFINING MOMENT
It is more a theme than a moment. When I was young, I studied economics because I wanted to collaborate with economic and social development. Then I oriented my activities toward academia and teaching, which I still do. As I got older, I was engaged in governmental positions and finally into managerial and board-level director roles. LESSON IN BUSINESS
I have had to lead large organizations after or during severe crises at least 3 times. Thus, I have learned the value of preventive control. You must work with people you can trust and by means you trust, but that does not mean that you can relax controls or avoid having plan B and C. 2008, we almost completely stopped importing natural gas from Argentina. The electrical companies that used natural gas started trying to use diesel. There were technical problems at the beginning, but they succeeded, so we never had a blackout situation. However, the cost of producing electricity had increased enormously, especially during 2007, when the price of oil worldwide shot up exponentially. It was a dramatic change in cost. For two or three years after the initial announcement, the Chilean private sector was confident that Argentina would reverse its decision regarding natural gas. Investors were asking why they were expected to invest in a coal plant when cheap natural gas may again be available. So, we had to prepare new legislation to give assurance to investors that, if they were to invest in power plants that did not use natural gas, they could recoup their investment. Otherwise, we could have got into a severe capacity supply situation. This new legislation was achieved in 2005 by a change in the way electricity was provided to distribution companies. We changed the methodology to obtain PPAs (power pur-
chase agreements) with these companies through competitive bidding processes and establishing long-term contracts. That way, if you won a bidding process, you could have a contract for 10 or 12 years and safely repay your investment, even if cheap natural gas from Argentina had been reinstated. That was the way we diminished political uncertainties in our power market. At the same time, the Government went ahead with an LNG project in Quintero, using a state owned company (ENAP) together with two private companies. The effects were twofold. First, having LNG, and using natural gas again instead of diesel, was very reassuring for all combined site plants. Second, Chile could now import natural gas from anywhere in the world. This meant that, if Argentina had natural gas again, there would be no economic reason for them to sell it cheaply. Thus, we closed the door to any future dependence on Argentinian natural gas. With these two measures, we were able to give space to investors and, at this time, many new investments came to Chile mostly building coal plants, which were the cheapest and could be built quickly. Today, most of the companies in the electricity sector have both Chilean and foreign capital. The foreign investment used to be from the USA or Spain, now Italians are the owners of the main power company, but the Chilean pension funds also own part of the most important electricity companies in Chile: ENDESA, Colbún and AES Gener. KEY CHALLENGES What are the key challenges that are facing Chile’s energy market today? In the middle of the last decade, global warming became a very popular topic and started to affect public opinion. This has provoked new problems and challenges. I am absolutely convinced that, like other emerging countries, Chile has nothing to do with global warming. Not in the past, not in the present. We produce 39 per cent of our electricity using water; we are very friendly to the environment compared to the rest of the world. It is not up to us to lead the way with respect to global warming. However, a large proportion of our population think differently. Many people are against coal electricity production and large dams like HidroAysén. They advocate the use of so-called new renewal or non-conventional renewable energy, but most of them are very expensive and are mostly non-effective in terms of electricity production. I can show you three completely contradictory news articles regarding this topic. One relates to the Chilean population being against global warming; another is a survey suggesting
energy interview
We are very friendly to the environment compared to the rest of the world. It is not up to us to lead the way with respect to global warming
that Chileans rank environmental concerns thirteenth in their list of priorities; and the last says that people are against electricity becoming expensive. If you try to combine all these preferences, you end up doing nothing. So, providing electricity has now become a political issue and it has become more difficult to invest as a result. We prepare investment projects and try to fulfil all our obligations, but when we are ready to invest, we find out there are legal issues with the project and that we may have to spend two more years going through the courts having discussions with lawyers about the project’s feasibility. We need strong political leadership; we need to educate the population and convince people that if they do not want the conventional solutions they will have to pay a lot of money for their electricity. We have to convince people that electricity is absolutely vital for production. In Chile’s case, we need to use water, which we have in abundance. I cannot understand why some people think we should not be using the water we have to produce electricity. It is odd, but in families it seems the only person concerned about cost is the one who pays: the head of family. When you talk about the high cost of electricity, young people say they don’t care, which is probably true because they don’t pay for it! They don’t pay now, but they will in the future. Moreover, they will pay for it in the labour market since high electricity costs directly damages economic growth and employment. I use to talk about these energy problems, but it was not taken very seriously by the political actors. Unfortunately, the crisis we could potentially see in three years from now might be a way of making politicians start worrying about this issue. If we want to be competitive in the world we have to have the cheapest electricity we can get. Chile can’t compete if it has to use very expensive energy. We are far away from all the important world markets. We have to have low cost energy. COMPETITION AND DYNAMICS Do you think more competition is required in the generation market? The generation market in Chile is operated
through a marginal cost system. It tries to imitate a perfect competitive market. This is possible because a central command exists that orders you to produce when you are the cheapest one in the supply chain and to stop production when you become more expensive than others. We legally force companies to be competitive and, if you are very expensive, you will never be despatched. Thus, the production of electricity in our system is, from an economic point of view, perfect. It is ruled by the marginal cost principle and in perfect competition the supply curve is the marginal cost curve. In that sense, we have a perfect power production system. I do not think more entrants into the generation market would have that much effect on the price of energy for two reasons. First, CODELCO, the largest corporate copper producer in Chile, has called for competitive bidding two or three times and they have bought very cheap electricity compared to the market price. But they will never have a price of less than 6 or 7 per cent lower than the average, because it is not possible to sell energy so cheaply. Second, several mining companies have said that they will build their own plants, but that never happens because there are cheaper solutions than providing your own electricity. In the end, they call for competitive bidding and the power company that gets the project is always the cheapest. This comes as a result of competition. We have to compete to get customers. Almost all the clients we have at Guacolda have been obtained through competitive bidding with other power companies. Today we have more than 50 different power companies in Chile. We have three or four very big ones, but if you look at any industrial sector it is the same. This is a country of just 16.5 million with an annual per capita income of US$15,000. We cannot have 20 big companies in any sector; it’s just not possible. What are the crucial dynamics within the transmission sector? When the military government privatised the electrical system they also privatised the transmission system, but transmission was kept under ENDESA, which was part of the old state-owned system. ENDESA had the monopoly of transmission for many years, until the Antitrust Commission decided that transmission should not be in the hands of a power company. We brought in new legislation, which forbids transmission to be in the hands of a power company. Furthermore, we opened up ownership of the transmission business; it became law that any new investment has to be made openly. However, our unique geography means it is not easy to have a great many transmis-
sion systems; it is the same with highways, the entire infrastructure in this country is the same. We have an open system and the government determines the fees. The same applies in distribution: the government determines the fees. There, we have a non-competitive situation, which is the most efficient solution from an economic point of view, with a state determined fee, the optimal economic solution. When I look at the Chilean electrical system, I see a very efficient model. The problems that we have now are not economic, but political. There are a lot of people keen to invest in all sectors. We do not face safety provisions. If we are not able to go ahead with investment, it is due to political problems not economic ones. The system from an economic point of view is working very well.
There are no legal or economic obstacles preventing investors from getting into this sector, nor into any other economic sector in Chile Do you have any advice for investors who are looking for opportunities in the Chilean energy market? Over the coming years, Chile will need around 800 megawatts per year to keep the electrical market in equilibrium. That energy could come from any investor. Chile is very open in that sense; it is a matter of knowing how. If you know about electricity in the United States, in England, in France, or in Japan, you could get into this system very easily. There are no obstacles to get into the system. Obviously, the easiest way to invest would be to buy part of a company; then you get the human resources and support immediately. Insiders in all industries naturally have an advantage, but there are no legal or economic obstacles preventing investors from getting into this sector, nor into any other economic sector in Chile. You have to have the right to produce, you have to have the money to invest and you have to respect the legislation, but that’s all there is to it. Anyone who knows how to produce electricity and has money to invest can come to Chile, and that is what is happening today.
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interview energy
more competition, and for that to happen there needs to be more certainty regarding the development of new projects.
Ignacio Cruz COLBÚN S.A.
Chief Executive Officer
INTERNATIONAL INVESTOR: What do you believe are the best ways of engaging with the Chilean public? IGNACIO CRUZ: It’s not always easy, not only in the energy sector, but for every company. Today, it is very important to have a good relationship with the society in which you operate. To get to that point, you need to have a dialogue with local communities. This is something we have to promote throughout the country, across all sectors. I think the start of this process should be a system for better wealth distribution. So far, the state has not been very efficient at this, so companies have to involve themselves in this process. What we have seen is that people are not only complaining about wealth distribution, but also power distribution and many other things; people are complaining because there is a problem. This is an important issue in Chile and we need society as a whole to be involved in the solution.
It is very important to have a good relationship with the society in which you operate. To get to that point, you need to have a dialogue with local communities What should the various stakeholders in the energy market do to resolve the current issues in the sector? Investors need more certainty with regard to developing new projects. At the moment, many projects can be exposed to litigation, so there are uncertainties relating to project definition and approval. Consequently, I believe we need to modify the regulation in order to give society and local communities greater involvement in defining these projects. I think that, in the future, we need to develop projects and get the approval of the
26 INTERNATIONAL INVESTOR
CAREER DEFINING MOMENT
It was when I was appointed as General Manager of Minerales de Soro, my first General Manager position. Until that time, I had always worked in finance, it was a very big change. One other moment that had an impacted on me was the first time we had a fatal accident in Minera Los Pelambres, I was General Manager at the time. That was very tough. LESSON IN BUSINESS
Put people at the heart of the business. necessary authorities after we have the support of the communities. You need to develop business that is good for you, but is also good for society. A good example of this approach is our project in Angostura. The company involved the community very early on, before the environmental impact study, regarding how the project was going to progress. We set out what it could do for the people who were going to be affected, and they were given an opportunity to give their opinion. Sometimes, it is not necessary for everyone to agree on every little detail. People just want to be involved, so their opinions and needs are heard; then solutions can be proposed. I think this approach has a significant impact on the success of a project. Communities must have the opportunity to give their opinion and I think the industry is still learning about how to do this properly. Furthermore, I think the whole energy sector, including politicians and the regulatory framework, has to be concerned about how to split the development of projects across the sector, otherwise we will be facing a big problem in the medium term. We need to incentivise the development of new projects. I think it would be good to have more, relatively big, players entering the energy market to increase competition. I’m not saying it is not competitive, but it’s always good to have
How have the past years of drought impacted your strategy for leading the company forward? The past three years were very dry years, and we are going through the fourth now. This has obviously had an impact on Colbún. We have switched to more thermal generation in order to balance the lack of hydro. In 2012, we had approximately 65 per cent thermal generation and 35 per cent hydro, whereas in the past we have had 70 per cent hydro and 30 per cent thermal. We need to give more stability to our cash flow and we are managing that by making this change. We are currently trying to assure the LNG supply for our thermal plants and so we can have much more LNG backing our hydro production. What can you tell us about HidroAysén, the Joint Venture with Endesa? Are you prepared to sell a stake? What we have said is, if the project needs to be redefined in terms of the composition of the shareholders, we are willing to analyse other structures to make this project more feasible. I think it would be good for HidroAysén if more companies participate in the project. It is not that we particularly want to sell, or have a special interest in selling any part of the project. We are very much committed to the development of HidroAysén, we are just looking for the best way to make it feasible. How do you see the development of Non Conventional Renewable Energy progressing? I think there is a natural selection process happening at the moment, in terms of technology and location. There are a lot of renewable projects in the pipeline, many of them with an environmental impact study approved; however, they aren’t being constructed because they haven’t got to the point where they are competitive. They need to be competitive. This natural process means the best of these projects, with the best design, in the best location, will get the go ahead eventually. The others will be out. Furthermore, there needs to be some support for projects that are far from the consumer centres. There may be a lot of potential hydropower up in the mountains. That hydropower needs a transmission line to get to the consumer centre at the lowest cost. In terms of these kinds of transmission lines, it’s improbable you will get the energy at a competitive price without subsidy. So, if you want to pursue much more renewable energy, there will have to be some investment in the platform for that development.
energy interview
Andrés Kuhlmann Jahn TRANSELEC S.A.
Chief Executive Officer
INTERNATIONAL INVESTOR: What are your views on the proposed interconnection between the Sistema Interconectado Central (SIC) and the Sistema Interconectado del Norte Grande (SING)? ANDRÉS KUHLMANN JAHN: This has been a topic of discussion for a long time. It may seem strange to have two separate systems; however, for geographical reasons, this is the reality. Very few people live in the area where the SING is situated. South of Antofagasta there is not another city for 400 Kilometres, so the reason is not related to providing residential energy. Electrically speaking, the SING is very weak, it is not a system in itself; it is a line system connected to some points with a little interconnected system. However, 90 per cent of the energy generated in the SING goes to the mining sector, which is clearly important for Chile. The real interconnected system is the SIC, which supplies the majority of the population and the rest of the country’s industry. The majority of power generated in the SIC comes from hydroelectric generation, whereas in the SING it is thermal generation. When Chile was importing Argentine gas, the reason for interconnection was that the gas from northern Argentina was cheaper than from the south and the SING had an overcapacity. Today, it is important to connect the systems for different reasons, for example, restrictions in adding new generation capacity to the SIC; the lack of back-up power for mining purposes in the north; and to supply the population in the south. Can you talk about the impact of the proposed Carretera Electrica (electrical highway) law on the transmission market? The principle of the law is good in that the state defines the route of the transmission lines. This will not only conceptually speed up projects, but it will also legitimise them. Thus, it will bring an important consensus,
CAREER DEFINING MOMENT
In my opinion, to be a complete company executive you have to have lived abroad. The very reason I am in the electrical sector is because of my decision to leave the country. The first company that offered me a position outside of Chile was Endesa, and I took it. LESSON IN BUSINESS
Your progress in business relies on the relationships with others, so you have to make a concerted effort to be in contact with people, both inside and outside your company. Furthermore, in order to achieve personal professional satisfaction, your goals have to be totally aligned with the success of your business. socially and environmentally. The state has to define the best route in the interests of the country, not in the interests of a private party. The law only covers the transmission lines belonging to the central trunk system, as well as some carefully chosen lateral lines, which is an important advantage of the project. These particular transfer lines are designed in order to develop duration poles for NonConventional Renewable Energy (NCRE) generation projects. If done responsibly, the planning of the transmission system should enable a long-term strategy. As the State defines the route and ensures the project is environmental and socially feasible, the company that wins the bid will find it easier to finalise all the environmental work and build the line. However, the law is not in place yet; it is being discussed in Congress. Moreover, many NCRE’s are having difficulties in their development due to transmission costs. For example, some renewable projects that are feasible because they are close to the particular resource are running into problems because they are not close to the transmission line. Thus, you end up with a situation where the transmission cost for these renewables kills the project. Fortunately, Congress is starting to understand this.
Investment opportunities What is Transelec’s position on new investors? Transelec holds 90 per cent of the transmission system, but the transmission market is open, anybody can enter the market. This is proven by the fact that Transelec has not won the biggest bids and that, recently, two new companies made large investments in the transmission sector in Chile. As for bigger projects, we are always open to invite or consider investors and presumably this will become a bigger requirement in the near future. The interconnection project, for example, will require an investment of US$850 million. Theoretically, we can afford it alone and we will try to approach it from a project finance basis. We have the capacity to fund the equity with our shareholders, but there is always an open door for third parties that are willing to accept slightly lower returns than our shareholders. Financing is the key to developing this infrastructure project because this is up-front spending and the recovery of the principal will be in 30 years or so. This makes it a perfect match for project financing structures. Would you say there is a crisis in the energy sector? For me, it is a crisis and it began many years ago. The problems are centred on the difficulty in carry out projects, both in generation and transmission. In transmission, it is marginally more promising and we have two very important bills in Congress: the Concesiones de Electricas (electrical concessions law) and the Carretera Electrica (electrical highway law). The first is the most urgent because it makes the approval process much easier and means that permits will be issued. We have convinced the authorities to plan longer term and this has meant projects are going ahead and we are catching up. In generation, the problem is worse because the government has not produced a framework that structures project approval. For the benefit of the country, projects have to be delivered as soon as possible. If the country does not have an efficient transmission sector, the price of energy will rise and this is an important influence on the economic growth of the country. In this country, the main success story is our macro-economic figures. However, due to the recent strength of copper and the mining sector, the appreciation of the peso has affected our competitiveness. Chile is a small country; it is totally open and export-focused. We have to ensure the competitiveness of our export products; thus, the price of energy is key. We need lower energy prices in order to be competitive in the international market.
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the amount of Solar PV that can be deployed in Chile. At the moment, from the general market perception, we are oversizing the possibilities, which is quite normal and happens in every market, but we need to be very realistic in terms of grid connections that are present in the market. Furthermore, this is a completely free market without subsidies. This does not happen anywhere else in the world and is a key difference between the Chilean market and others. We need to be conscious about the speed of the market when signing long term contracts as this is the key driver for market growth.
Pablo Burgos Solarpack
Chief Executive Officer
INTERNATIONAL INVESTOR: What are the most important features of the project agreement between Solarpack and, the mining company, Collahuasi? PABLO BURGOS: It is important because it is the first agreement of this size between a renewable energy generator and a big consumer, in this case from the mining industry, the major electricity consumers in northern Chile. It is also the first agreement of its kind in the SING (Sistema Interconectado Norte Grande), between a generator and a consumer, that adapts precisely to the characteristics of renewable energy, specifically Solar PV (Photovoltaic), which is intermittent and not manageable. This is significant because it means that consumers in this area will be partly supplied with energy from an intermittent energy source. Furthermore, the agreement is a clear demonstration of the competitiveness of Solar PV at this moment, particularly in northern Chile. The Collahuasi tendering process was not limited to one technology; any kind of technology could have been chosen. The fact that Solar PV signed the contract indicates that it is more competitive than other renewable energy sources in this part of the country, specifically wind or hydroelectricity. What differentiates Solarpack from the competition in terms of the services you provide? What differentiates Solarpack from our competitors is that we are extremely focused on our technology, Solar PV. Not all renewable energy companies are similarly focused. We also stand out because of our agility and speed in terms of developing our projects. We are not a big company, which can have its disadvantages, but one key advantage of our size is that we can move quickly. We are able to identify opportunities quickly. We develop all our projects from scratch, all in-house. We have not bought a single
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It was the decision to start-up Solarpack in 2005. The thrill of growing a new business and setting up a corporate culture and values. To be able to start operations at an international level are experiences and responsibilities that have been derived from that very special moment. LESSON IN BUSINESS
Be persistent in what you do, have faith in what you are pursuing, but at the same time watch out for the signals that highlight your path is not correct. Be honest and build honest teams. project in Chile, Spain or in any of the other countries where we have operations. Does Solarpack have the ability to obtain all the necessary permits before the construction of a project? Yes, we do all the permitting ourselves before construction starts. The first thing that we address on a project is the permitting issues. We select locations which we consider to be optimal for the projects and manage the complete permitting process in-house: environmental permits, land related permits, interconnection permits, and all the other minor permits involved in a project like this. It is a key value chain part of the project management that we provide. Solar PV development How would you best describe Solarpack’s development plans in Chile? How big is the pipeline of projects? We are not very keen on big pipelines, nor are we particularly worried about quantity of projects. We want to fully execute every project that we start to develop. We focus on having a really good selection of projects rather than developing a large number. We also feel we need to be realistic, particularly in the northern grid system, about
What are the advantages of Solar PV and how can the Government support its development? Solar PV has a big advantage and big value for the electricity sector in that it can be deployed almost everywhere in the northern part of Chile. We do not have to be at the seaside, like thermal generation facilities, nor do we have to be in a remote location, like wind generation facilities. We can build beside existing infrastructure and this can help level generation and consumption throughout the grid. In the Northern grid, there is a highly concentrated area of generation at the seaside, where the thermal facilities are located, and there is also a very concentrated consumer area where the mines are, which is at higher altitudes up in the Andes. The beauty of Solar PV is that it can help change this imbalance. Importantly, we do not need to build new infrastructure to connect our projects; we can use current infrastructure. The problem is that access to the existing infrastructure is not well regulated in Chile. It would be very helpful if access to infrastructure was organised in a better way for renewable providers, this would help to improve grid stability. Is the Chilean energy market moving towards the use of cleaner, thermotype technologies, such as gas, working together with renewable technologies? From the experience in other countries, like Germany or Spain, where a big base of renewable energy is already in place, it is not necessary for gas generators to be allied and work jointly with solar generators. The grid system has to be optimised and balanced so that both technologies can work simultaneously and the grid system is stable. The key point here is that the government, together with the CDECs (despatch centres), must work to improve the grid and ultimately achieve a grid where you can produce a large part of the energy through renewables when
energy  interview
 There is a lot of confidence in spot prices not falling below a certain point, which has proved to be enough for our technology to be financed and comfortable
you have the resource available and, when that is not available, you have a good base of gas fired plants in order to guarantee the power in the system. This can be done efficiently from an economic point of view. Project finance In terms of financing projects, how important is it to have a Power Purchase Agreement (PPA) for the project to get investment? It depends on the type of PPA, there are many different types. Under certain PPAs you are required to undertake market risk. There have already been situations in Chile, that investors in these kind of projects do not want to see repeated, in which some types of PPAs have proved to be problematic because the renewable energy operator is exposed to significant market risk. However, there is no need to sign these types of PPA. Renewable intermittent sources have a role to play in a certain percentage of the energy supply and they should be given the responsibility of supplying energy, but they should not be required to supply power. This is something they cannot do until we start to have storage technologies in place.
In terms of wind and solar projects selling into the spot market, what about projects that can get financing without a PPA and then compete with conventional power price-wise? This is a very interesting process and it is proof that investors are really thinking that energy prices are fairly resistant. I doubt that energy will drop significantly in price, at least in the Chilean market. Thus, there is a lot of confidence in spot prices not falling below a certain point, which has proved to be enough for our technology to be financed and comfortable. Also, equity investors are looking at the spot market as an excellent opportunity for outsiders. As in every free market, when the prices go up you can be sure there will be a lot of capacity sought in a short period of time and then the prices will come down again, this will certainly be the case in Chile. However, in a long-term renewable energy project you can benefit from up-sides at certain times in the long life of the asset and this is attractive to investors. For banks, as I said, the market price in Chile has proved to be a transparent process and they are confident that prices will not drop from a level that is sufficient for them to be confident in financing long-term projects. How aggressive do you have to be in terms of attracting the equity financing you need? We are not aggressively dropping asset prices, but we do have to work on it to an extent because our business model is to develop and build our plants to keep our minority stake, and as we are not an IPP (Independent Power Producer), we want to attract investors to our projects who want to have an investment as IPP in the long term.
There is a clear interest in investing in these kinds of projects. However, in terms of our initial projects, we have been focused on financing or raising the debt first, building the project, and then attracting investors to the equity of the projects for the long term. What type of investors are looking at the equity of these projects at the moment? Is it longer term investors, like pension funds, or is it more strategic, short-term investors? Institutional investors, like pension funds etc., are still not in the game. In Europe, some asset managers have invested in these types of assets, but this has not happened in Chile as yet. I am sure it will come. When these investments prove to be a good proposition, these types of investors will slowly come to the table. The investment community attracted to this type of project is basically industrial investors, such as generators or private equity investors. With regard to these type of investors, we have experience of both Chilean and foreign investors that are interested in the equity of these projects. Are lenders requiring a higher proportion of equity in order to lend on spot market projects at the moment? From our preliminary discussions about this, we are not in a process with a mandate to finance spot market projects, so I am not speaking about our experience, but in general I think this would be the case. It is our conclusion from the project cash flows, when you simulate P90 scenarios with the spot market they would of course go lower in the yearly cash flows compared to a PPA project, which are more stable in terms of cash flows.
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energy. However, that is compensated because the impact that the drought has on prices is far greater than the impact on water. It all depends on how you design your project. You have to design it with a higher load capacity, and banks have to look at each project. In my opinion, hydro projects are constructed more rapidly when you have all the permissions. My experience in terms of financing of hydro projects from Chilean banks was that there was no availability in 2006, moving to full availability by 2011. Our first project was a 19 megawatt plant, the second had a 6 megawatt capacity and the last one was a 14 megawatt plant.
Carl Weber HIDROMAULE S.A.
Chief Executive Officer
INTERNATIONAL INVESTOR: Please provide us with a snapshot of the company and your activities? CARL WEBER: Hidromaule started in 2006 as a start-up company. It was formed by Italian and Chilean investors, who owned 53 and 47 per cent of the company respectively. The Chilean investors were mainly professionals who had very little capital; the idea of starting this entrepreneurial venture was so we could look for banks that could provide us with project finance schemes. We had enough capital to start with the first of the three projects, but as a pure project finance scheme, and not providing any other guarantees to the bank. That was important at the time. We started with one company and developed very quickly, so we had the company up and running within about two years.
The experience in this country over the last few years shows that it is best for banks and investors to stay with spot prices We have three run-of-river projects, and in all three we team up with a local irrigation association called Asociación Canal Maule, which is the largest in the country. They have more than 3,000 km of irrigation channels, which provide many interesting spots that have potential. We developed a scheme in partnership with the association whereby we paid them a royalty for their water. So, they run their business and we run our business, and we pay for whatever water they can provide us. That has been a very good model for both parties. PROJECT FINANCE How has the financing environment for hydroelectric projects evolved? Financing has evolved very positively for hydro
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About eight years ago, I decided to quit as COO of Colbún and to start up this company, which was a big risk and a big challenge. We didn’t know how it would work out, but happily the story turned out very well, so today we have about 40 megawatts in three plants and very interesting EBITDA generation. LESSON IN BUSINESS
You have to have cash! projects in Chile. During our first project in 2006, the banks here had no appetite for hydro projects with a project finance scheme. We had to look outside Chile for funding and we obtained it from the Corporación Financiera Internacional. During the financial crisis of 2008 things got even more complicated; however, by 2010 the climate was a little better and, with the help of the German banking group KfW, we set up a financing line. Some other banks came into this scheme, primarily Banco BICE, who took a large share of the finances. We could then finance our second project with this combination of international and local financing. We signed our last project with BCI (Banco de Crédito e Inversiones) in 2011, which was a pure project finance scheme. So, within approximately five years, the banking industry in Chile set themselves up in such a way that they could come into this market. As far as investors and lenders are concerned, that relates more closely to spot prices and the dilemma of selling spot or selling with a Power Purchase Agreement (PPA). The experience in this country over the last few years shows that it is best for banks and investors to stay with spot. More recently, the impact of the drought has meant that prices in the market have skyrocketed, which investors like. When there is a drought and you are talking about hydro, obviously you have less material to produce
If we are talking about investors looking at this market, what do they need to understand about the associated risk of projects with PPAs as opposed to those without? In terms of hydro projects, but also for wind and solar projects, banks have to understand that in the hours when you are not producing and you have a PPA, you have to go to the market and buy the energy to resell it. The problem is that if spot prices are too high, you are running at a loss for those hours. Therefore, you have to account for the fact that you will lose money during this time. Having a PPA puts more risk into the project. Traditionally, a project finance scheme stipulates that you must have an EPC (engineering, procurement and construction) contract to have a PPA, as well as all other necessary guarantees in place. Furthermore, you have to turn all the assets over to the banks so that if something turns sour, they take over the project. Banks look at the PPA in a positive light because they see it as a form of safeguard, but this is only the case in markets that are very stable. It does not work very well when you have a hydro market that is about 50 per cent of the energy and, when there is a drought, it drops to 30 per cent, which then has an impact on spot prices. Many projects face a lot of problems because they forecast a probability of producing energy under certain climate conditions. This can create problems for many companies if the predicted climate conditions are wrongly forecast. For example, during the past four years we have faced a drought here in Chile. Sometimes, having a PPA doesn’t just cause you to think about how nice it would be to sell spot when the prices are high, because when you have to buy energy during the hours in which you are not producing, it has a big effect on the balance sheet. I think the banks understand the risks here. Thus, there are many thousands of megawatts that have environmental approval, many wind
energy interview
farms in the northern grid and many photovoltaic projects have approval, but they are not being invested in because the banks are not lending. So there is an issue related to how this problem can be overcome. Have you been able to successfully hedge these risks against? You can hedge some things, but it is difficult when the difference is so big. Today, in Chile, the long-term prices are around US$80 or US$90 per megawatt hour and the spot price is US$260. Thus, you can work out the relevant sums. If for four hours a day you make a loss of $180, for those four hours in which you make a loss, you need eight hours to compensate that loss. Therefore, there are 12 hours during which you are earning nothing. If you have designed your plant to have a load factor of 50 per cent and you are left with a plant that has a load factor of 25 per cent, you lose 25 per cent on the commercial side. That is dangerous.
There are many thousands of megawatts that have environmental approval, many wind farms in the northern grid and many photovoltaic projects have approval, but they are not being invested in because the banks are not lending Could you elaborate on Hidromaule’s value proposition and how you differentiate yourselves in the market? Since the beginning, we had the difference between spot price and PPAs, and, in terms of our commercial area, we maintain our philosophy of selling spot. Of course, this has a lot to do with energy prices around the world because a thermal unit has a price in Chile, in Britain, in the Gulf of Mexico, and elsewhere in the world. A thermal unit is aimed to produce an amount of energy and the difference should only be transportation cost. At the beginning of 2000, we had a contract with Argentinean gas, which was fixed at a very low limit, and Chile had a couple of years of very low energy prices. In terms of Chile’s energy matrix, it has hydro, it has no coal and it has no oil, and so it was difficult to understand why we had such low energy prices. The reason for the low prices was due to the impact that the contract with Argentina had on spot prices. The marginal unit, the one that fixes the price, was totally distorted as a result. We looked at what was happening in Argentina and decided that the situation was
not sustainable. We knew, at some point, that we would face a scarcity of energy in Chile, which would mean that the marginal unit would then be oil and not subsidised natural gas from Argentina, because it would have run out. That was in our business forecast; we hit the point, and decided to build this project, targeting our objective to sell at spot price. If you look at the next four years, there are no big projects in the pipeline and Chile is growing at 5-6 per cent per year in the energy sector, which means that you should stay selling spot. Apart from drought-related risk, what would be the biggest challenges for your business going forward? The biggest risk in this industry is technology breakthrough, for example, if the ability to produce energy from hydrogen is developed. Also, our benchmark today is oil prices, and oil production every year is less and less. This will have an impact on spot prices. Moreover, we have these enormous reserves of shale gas in the US, which may produce a change, but it will not happen very quickly. The US have only issued two export permits at this moment, so it will take some time for them to adjust from being an import industry to becoming an export industry. Furthermore, a lot of plants must be built if Chile wants to profit from these developments in the US, which gives a window of opportunity to stay here and play the same game we have been playing for the last couple of years. RELULATORY EFFICIENCY Can you tell us more about the impact of water regulation on the hydro project pipeline, what needs to be done to create a more efficient and attractive environment for project development? Water regulation has not been changed for a couple of years. The only recent change is that you have to pay a patent if you don’t use the water. This is good for hydro project developers because speculators, who may own lots of water rights, have to decide quickly what to do in order to put them into production and not speculate with the titles. The problem for developers of mini hydro projects and small-size hydro projects is not with regulation related to water itself; it is more with the environmental regulation. When you have a water right, it has a specification of how much water you have to leave in the river as an ecological flow. That is standard all over the world. In Chile, the water authorities used the Swiss law as an example, and put the figure they used in the water rights title.
There are no big projects in the pipeline and Chile is growing at 5-6 per cent per year in the energy sector, which means that you should stay selling spot
In recent years, the environmental authorities have come with a new scheme that is not strictly law but it is used in practice. Now, when you apply for an environmental permit, you have another discussion about what the ecological flow is, which is very complicated. This puts a big question mark over the water rights of small size projects, many of which are then rendered unfeasible. My opinion is that these discussions should be had much earlier, not in the environmental feasibility analysis. What are the other problems relating to the regulatory framework in the energy sector? The problems in the regulatory area are important and relate mainly to the fact that we have not invested in generating projects. A lot has been done in the last three years in terms of competitive energy projects that have come to the market. As far as coal projects are concerned, in the last year 3 new projects have contributed 1,000 megawatts to the grid. Yet, these projects have not had an impact on the spot price because there is another component in this matrix, which is that transmission has not been up to the challenge. Transmission has faced many changes. There were amendments to the Electricity Law a couple of years ago, the Short Law I and Short Law II, which were aimed at transmission. They provided for exemptions in transmission charges for new renewable energy sources and simplified the legal procedures for projects below nine megawatts. What is surprising is that, after having passed these Laws, the investment in transmission has not been adequate in terms of what the country needs. We hope that there will be more new investment in transmission because that is a big part of the problem right now.
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Rudolf Araneda Kauert GASATACAMA S.A.
Chief Executive Officer
INTERNATIONAL INVESTOR: What were findings of the study your company commissioned, which investigated the Chilean public’s preferences towards new types of energy generation? RUDOLF ARANEDA KAUERT: We estimate that Chile will require around 8000 megawatts of additional capacity by 2020 and a further 15,000 by 2030. We wanted to understand the increasing resistance to the development of new power plants in Chile, in order to decide how we can expand the energy sector in a way that is acceptable for all parties. So we commissioned a study. It consisted of 2,500 one to one interviews, a number of focus groups, and we employed specialist companies to carry out the analysis of the results. The study found that around 90 per cent of Chileans would prefer the development of power generation to be based on solar and wind energy; that approximately 60 per cent of the people don’t want coal to be the basis of development; and that 76 per cent of the Chileans reject the use nuclear power as an option, as opposed to 11 per cent who support it. Interestingly, the study also suggested that 80 per cent of Chileans accept that the country needs to double or triple the total amount of power it generates today. They accept this notion, but they want future development to be based mainly on renewable and clean energy. Thus, it is very important to find ways to include renewable energy in growing percentages in a manner that allows us to serve power demand in cost competitive terms. Given these findings, and that renewable technologies are starting to emerge as competitive alternative to conventional energies, what role will gas play in Chile’s future energy market? There are many key factors that will dictate the role renewables and gas will play in Chile’s future energy market, for example, cost,
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When Argentinian gas stopped, by law we could not pass on the resulting increase in cost to our customers. We were serving all the cities in northern Chile, and we were close to bankruptcy. I had meetings with the CEOs whose mining company’s account for 85 per cent of total energy demand in northern Chile and we reached an agreement to share the losses. The company survived, and there was continuity of power supply to all residential users and the mining companies, which were able to obtain additional profits exceeding their essential contribution to this solution. LESSON IN BUSINESS
The most sustainable and personally rewarding way to make profit is the one that is consistent with the country’s interests. demand, access, public perception, regulation and many more. Given the findings of our study and the potential access to shale gas from the US, I think they could both be very important. As fracking and horizontal drilling technology has developed, the cost has been reduced to a fraction of what it cost before it has allowed gas prices in the US to decouple from oil prices and fluctuate around one quarter of gas prices in Europe and Asia. Therefore, US shale gas provides an opportunity to access gas at a price that is reasonably competitive with new developments based on coal. If this opportunity is realised, and power plants based on gas are developed in Chile using cutting edge technology, the inclusion of a significantly large percentage of renewables is feasible. This is because, in order for renewables to be included, you need equipment that gives the flexibility to provide power during the hours in which there is no sun or wind. Only gas plants and hydroelectric plants with water storage capacity provide the response time
and the ability to step in and out of production in a cost-competitive manner. In Chile, we have a high presence of industrial activities and the mining sector operates continuously. On a consumption graph, our energy demand looks significantly flatter than most other countries; we need to maintain consistent base load of power. Importantly, the output of gas combined with renewables complies with the shape of the Chilean demand. Furthermore, considering that the development cost of photovoltaic energy in Chile is currently lower than US$100 per megawatt hour due to high solar radiation read-outs. In the next three to five years, the development cost of renewable energy could drop to US$75 per megawatt hour and equal the cost of regasified LNG delivered to the gas plant. Thus, one could envision sites where you could have capacities of several thousand megawatts with this combination, making it possible to include 25 to 40 per cent of renewables at an overall cost of US$110 per megawatt hour. This will enable Chile to serve this predicted demand of more than 20,000 megawatts by 2030. Then, there is the issue of public perception. Currently, there is less active resistance to gas facilities than other options; the maximum level of opposition is about 40 per cent. Consequently, convincing the Chilean public that this particular option is preferable may be an easier task. Another key factor is access to price competitive gas. Interestingly, Chile is one of the few countries that has a free trade agreement with the US. Theoretically, this should facilitate our access. However, the terminals must receive the export and construction permits from the US government and we need to aggregate sufficient demand. In Chile, the Chilean government did not legislate for open access to the existing LNG receiving terminals. Therefore, the main power generators and gas distributors control the two LNG receiving terminals, making it difficult for their competitors. In my view, not providing open access to these terminals was a strategic mistake. As a result of this, other companies who also want gas are developing additional terminals, impeding the benefit of economies of scale. In a small country like Chile, everybody should have access and everybody should benefit from roll-in tariffs i.e. the more users in an existing infrastructure, the lower the tariff. This can only happen with proper regulation. What is GasAtacama doing to work around the access problem? We are developing another infrastructure, a floating terminal. We have hired the top company in the world, Golar LNG, to develop a floating, LNG receiving, storage and
energy  interview
re-gasification unit. Which is, basically, a specialised LNG transport ship that has all the re-gasification plant on top of it. This technology was developed six years ago, but there was a permitting issue and so it has only been fully accepted in the last four years. Now, it is available and proven. I predict it will be dominant technology in most of these small markets, like the Chilean market. In ultra-large markets, it is more economic to develop the onshore terminals. The advantage of these offshore terminals is that the CAPEX significantly less than what is needed for onshore terminals. The terminal in central Chile cost US$1.1 billion and the terminal in northern Chile cost US$800 million, ours will cost US$350 million.
It is very important to find ways to include renewable energy in growing percentages in a manner that allows us to serve power demand in cost competitive terms Furthermore, there is a high risk of a major earthquake in the future, which will also probably cause a tsunami. Another advantage of these floating devices is that they will not be affected by a tsunami. So we have an option that is cheaper and safer. We are developing a Floating Storage Regasification Unit (FSRU) as a solution because it provides us with the opportunity to grow. If we reach an agreement with one US export terminal to get access to LNG at a reasonable tolling fee charged on top of US gas price, then we have a competitive option on the table. We will then offer a power purchase agreement to the mines. It might be slightly more expensive than coal, but it is close enough to become a viable option for them and it is a cleaner and a more efficient choice. We have several mines that are interested, but they need to see the agreement with a US export terminal with permits and at the proper price. They also need to see a price competitive LNG transport agreement and that Panama has finished the canal expansion, so LNG carriers can pass through. The canal expansion will be ready by mid 2015. A lot of things need to happen, but you need to work with a long-term vision and you need to push for it. We will get there. If the decisions you mentioned, regarding access to US gas, do not have favourable outcomes, what are the other options? According to the US Energy Information Agency, there is shale gas in many other countries besides the US. China has shale gas, some
European countries have it, South America has huge amounts in Argentina, Uruguay, Paraguay, Bolivia and, potentially, in the south of Chile. However, despite having the recoverable shale gas reserves, you also need the technology, you need a lot of money, you need the teams, the equipment, the know-how; this alone may take ten years. Moreover, you need proper regulation and a reliable framework that allows investors to consider whether it is reasonable to invest large amounts of money. Thus, I think shale gas in this region will not be developed on a relevant scale during this decade, but it will rather happen from the mid-20s onwards. As transporting gas using pipelines from neighbouring countries is significantly cheaper than bringing it from further afield, converting it into LNG and regasifying it later, I think LNG receiving terminals can serve as a back-up to reduce the political risk associated with reliance on critical supply from neighbouring countries. This would permit Chile, and its neighbours, to benefit from existing and new connecting gas pipelines, as well as from price-competitive regional gas. Also, in 25 years from now, I would suggest that the development costs of renewables will be low enough and we will have found ways to combine different renewable energies and store them, either in newly-developed batteries, extracting hydrogen from sea water or pumping sea water. Consequently, we will be able to generate continuous power through renewable energy in a cost-competitive manner. This is technically feasible today, but it is too expensive. So, a transition involving gas allows this country to arrive at a future that is fully aligned with the preference of the people, at a reasonable cost, and with a significantly lower carbon footprint, giving its exports a sustainable competitive edge. What can be done by the Government to help make your vision a reality and how can it ensure Chile’s energy sector develops efficiently? First, it is important we have total clarification from the Government regarding where future developments are viable in terms of environmental and development concerns. This will reduce the conflict with communities and inspire investor confidence. We need to have a consultation with the public. We should invite the communities to have their say and allow them to give arguments regarding which sites should remain protected. There are valid reasons why we should keep some parts of the country free of large power plants and mega-industries, and once these decisions have been made we can move forward. I would guess that no less than 80 per cent
of the country’s seaside can be developed without major conflict, but the rest should be protected. We need to assure people that any new generation capacity will be subject to strict environmental regulations that are as comprehensive as those that are applicable in Europe or Japan. This will diminish the perception that the decisions are made in an opaque fashion and reduce a lot of tension between the companies, the Government and the local communities. Second, development of new fuel receiving and storage terminals should be facilitated and all the fuel receiving terminals should be open access, allowing power generators to import fuel from wherever it is cheapest. The most important impact on the price of power is the cost of fuel, and Chile is an importer of all conventional fuels, with the exception of the renewable ones. The regulations should allow whoever sells the cheapest oil, the cheapest coal, or the cheapest gas access to our market. Third, a company should be commissioned, once non-conflictive sites are selected, to obtain the necessary environmental permits and approvals to develop new power plants, transmission systems and fuel receiving terminals. Thus, investors and companies immediately know what options are available. Then, by means of an open bidding process, in which everybody knows the situation, whoever wants to develop a power plant at these sites and will provide the cheapest energy, will win the bid. Potential companies who want to enter the Chilean market should get all this support. Then, when they arrive, they will have a site, a permit, and customers willing to sign long term commitments. They just have to put up the money and begin; then we will have proper completion of projects, proper competition and lower prices. In this reality, one factor that could determine the outcome of the bidding process could be the percentage of renewables included in the proposal. Then, the inclusion of a large percentage of these cheap renewable energies would be necessary for bidders to compete. At this point, we would have a solution that does not require subsidy and is fully aligned with the preferences of the majority of Chileans. This is a realisable scenario in the future of the energy sector in Chile. We have an exceptionally high level of solar radiation and good geothermal, sea stream and wind generation potential. If we combine wind, solar, and gas, then bide our time until we have cheap gas in the region and cheaper renewable technology, we can tell the people that we have a solution. They need to be patient, it will not be in one year, but it can happen.
CHILE 33
interview energy
Alberto Shilling Banco BICE
Chief Executive Officer
INTERNATIONAL INVESTOR: From a commercial banking perspective, what are the most exciting sectors in Chile’s economy today? ALBERTO SHILLING: There has been lots of activity in the real estate and infrastructure sectors; growth in these areas has been very strong. Moreover, as these sectors are not too big or too international, they primarily get there financing from commercial, Chilean banks. It is an important area from a commercial banking perspective. In terms of the energy sector, when projects get approval they are very important, but recently many projects have stalled before they get going. Nevertheless, the sector always gives the appearance of activity and velocity, and always takes up a large amount of newspaper copy. The retail sector has been performing very well. In fact, some Chilean retail companies have outgrown the country’s market and have become regional players. Chilean banks are still important in this sector to an extent, but they have lost a degree of intimacy with the industry as the major retailers have tapped into international capital markets for their financing needs. The mining sector is certainly booming; however, Chilean commercial banks are outside of the centre of activity of the big mining companies. We have little direct exposure to the Chilean mining sector, large Chilean mining developments generally belong to big, internationally listed companies, which raise their project finance or corporate funds for development internationally. Consequently, Chilean banks have not become experts in mining and do not have the knowledge to really get into mining project finance. Instead, we have concentrated on the prodigious growth of the local second and third ring companies that supply and provide services to the mining industry. These companies all rely on Chilean commercial banks to
34 INTERNATIONAL INVESTOR
CAREER DEFINING MOMENT
After four years with Banco BICE, I had a chance to work with Rothschild’s in London. The experience of working in the City, for a bank that for generations has been so successful, allowed me to understand the value of being a long-term banker; it encouraged me to continue my career in this business. LESSON IN BUSINESS
To realise the importance of completely understanding your client and their business. Lending, collecting interest and getting your capital back is, at the end of the day, the ABC of banking, which no banker should forget. It is the same ABC and thought process needed as an investment banker, an equities dealer, or an investment adviser. provide financing, so indirectly we have been benefiting from the growth in this sector. Future Growth Can you elaborate a bit more on your strategy and how you intend to drive the bank’s growth in the next five years? We have outlined a five-year plan. Broadly speaking, we aim to double the bank’s size in that time. We will do this by continuing to focus on the sectors in which we have a competitive advantage, without losing sight of our main goal, which is to give the best quality of service to our customers. We do not set ourselves targets in terms of market share; we want to continue to be considered the bank with the best quality of service in Chile. We started in Chile as a corporate bank solely focused on providing services to Chilean corporations. Approximately 15 years ago, we began providing services to retail clients, which were mainly the owners and managers of these corporate companies. Over time, we have developed our banking model, and now we have three clearly identified divisions of clients: the traditional corporate clients with which we started; medium-size Chilean com-
panies; and affluent retail clients who require personal financing solutions. In the near future, we are probably not going to change our focus dramatically; however, we are slowly but surely evolving into a more balanced bank. We want to be less dependent on big international and Chilean corporate clients and focus on a larger number of smaller clients. Thus, a greater proportion of our income and profits can be derived from this more balanced portfolio. In terms of specific sectors, we will concentrate on; real estate and infrastructure concessions, which have been and will continue to be our main field of expertise; agri-business, where we provide long-term financing solutions for Chilean growers and investors in dairy, cereal, olive oil etc.; the energy sector, specifically renewable energy; and the financial sector. In the energy sector, we will focus on smaller or medium-size renewable energy projects. We have the capital and the necessary knowledge of the business through our shareholders, so we understand the risks involved. Consequently, we have created a portfolio of approximately smaller 20 projects, from 1 megawatt up to and including 100 megawatts. However, our focus is projects from 1 to 50 megawatts. Historically, another area of expertise has been the financial sector. We have always been a very liquid bank and being liquid helps us provide services to other banks or to work in the capacity of a financial intermediary. We have been involved in servicing stockbrokers, mutual funds, life insurance companies, leasing companies, factoring companies, other banks, and this will continue in the future. The plan involves working on a mixture of objectives that are aggressive, but well considered; they are realistic. Fundamentally, a financial services company needs a staff that has a good understanding about the projects they are financing. Our plan is a combination of old-fashioned commercial banking, significant objectives related to growth, and the best possible returns for our clients and shareholders. There are two drivers of a commercial bank: efficiency (your cost to income ratio) and the quality of the loan book. That is what is important for our shareholders and for us, the managers. Therefore, moving forward, we will not compromise the quality of our loan book, we will continue growing without putting efficiency at risk and we will try to double the size of the bank. Is asset management part of the bank? Yes, Banco BICE has four subsidiaries. We provide commercial banking, cash management services, savings products and investment products. Through the subsidiaries of the bank, a stockbroker, an asset manager,
energy  interview
 We have the ability to wait, the capacity to fund and experienced bankers that have the proper approach to clients. That makes us stand out as financiers for renewable energy projects an insurance broker and a securities dealer, we provide a complete product offering. In terms of wealth management, we offer this directly through the bank. Through our subsidiaries, BICE Inversiones Corredores de Bolsa and BICE Inversiones Administradora General de Fondos, we provide stockbroking and mutual fund management or asset management with an orientation to retail clients. A sister company to Banco BICE is BICE Vida, a life insurance company. Both are held by a common holding company which is called BICE Corp, which has two legs, a commercial bank with subsidiaries in the asset management business and the life insurance business, started approximately 20 years ago, in partnership with Allianz. Investment in Renewables What are the particular characteristics that make Banco BICE a good partner for renewable energy projects in Chile? We are a bank that is owned by three families; therefore, the overall approach that has been advocated by the shareholders and passed down to management has always been to think long-term. With regard to renewable energy projects, this approach is very conducive to that because it can sometimes take four to six years to get from the idea stage to the production stage. These projects require a bank with patience. They require an executive staff with patience, and the capacity to deal with people that sometimes have a lot of passion, but lack a well designed engineering plan. They also require an executive staff with the ability to clearly and precisely outline what you can offer as a bank from the beginning, in a totally transparent way. So, we have the ability to wait, the capacity to fund and experienced bankers that have the proper approach to clients. That makes us stand out as financiers for renewable energy projects. The combination of these factors has proven to be an almost magic trilogy and has allowed us to take a leadership role in renewable project finance in Chile. We have learnt a lot through our experiences. Now, we are much more selective
regarding with whom we make a partnership, but this learning cycle has allowed us to approach project financing in a much more strategic manner. Furthermore, we have gained in-depth knowledge about the different subsectors within renewable energy, for example, in the hydroelectricity subsector, run-of-river plants and dams developed for irrigation. Currently, we are starting to go through a similar learning curve with wind energy projects. However, we are still in the initial stages of our development into this area. Thus, we currently prefer to work together with international banks that have more expertise, due to the number of wind energy projects in Europe. This way, we can gain a better understanding of the key questions and decisions. Then, after two or three times working in partnership, we can continue alone. Are you evaluating solar energy or any other sources at the moment? Yes, we are currently studying and evaluating the potential of photovoltaic projects. Some of our people have been flying around the world to see solar plants. I am convinced that the solar potential in northern Chile is huge, but has to be combined with other more permanent sources of energy. In the next couple of years, we are going to see a lot of capital going into solar projects. However, we still have to understand how well solar panels function in extreme conditions, such as high altitude or salty climates with lots of wind and sand. We will go through the curve here too in order to get involved in solar energy; it is a process. We feel we understand hydro relatively well by now, and we are starting to commit an important amount of money to wind. Geothermal is further away for us and the initial investment is too risky; we just don’t understand enough about it at the moment. With regard to Biomass, we have a more knowledge. Chile produces a lot of biomass in the south as a result of forestry and wheat production. There are some projects that are being designed and some clients are already burning biomass to reduce their energy costs. The other more exotic renewable is wave energy from tidal waters, but that too is far away. We aim to continue our involvement in the renewable space, ideally doubling or tripling our exposure over the next couple of years. However, Chile will continue to construct traditional coal burning thermal capacity. If we can participate in some of those projects by joining with other banks, that would be fantastic. Conventional energy projects in Chile have traditionally raised the debt they require from large international banks, at terms and costs that were not possible for Chilean banks. While this has been happening, we have concentrated on the spaces in between. However,
many of the big international banks are no longer interested because they are looking to reduce their balance sheet or they have funding problems themselves. Therefore, conventional energy projects in Chile do not have the same options for financing and they are coming to Chilean banks instead; there is temporary space for Chilean banks to be more active in the traditional energy business. It is worth noting that, although conventional energy projects are less costly to construct, they are more expensive to run. If you construct a two megawatt run-of-river plant, the amount of dollars you invest per megawatt installed is much higher than a traditional coal plant. Yet, once constructed, the running cost is practically zero. With a coal plant the investment per megawatt is smaller, but you have to purchase the material you burn. This potential conventional energy opportunity notwithstanding, we will not reign in our enthusiasm for renewable energy. However, the challenge in renewable projects has been to obtain a proportion of the equity. The sponsors are normally the owners of the water rights or of the terrain where the project will be constructed. These projects typically obtain 65 per cent to 80 per cent of their capital from banks and the balance needs to be funded by equity. Sometimes, it is this part that is the most difficult to get because the owners believe they are sitting on a pile of gold, which they want to sell at an outrageous value and this creates problems with their equity providers. Do you have any fund-based products in the pipeline at BICE Inversiones aimed at investors interested in these types of projects? Yes, we are thinking about that. However, I would say the Chilean financial community has seen this equity gap in many projects and there are now more visible family offices and investors who are starting to put money down. It is becoming less of a challenge for the sponsor to raise the equity required. Clearly, once these groups have designed their project, they need a bank that is able to lend and, for this reason, we are thinking about launching our own Banco BICE fund to go into this asset class or risk. We are having talks with investors that are willing to invest, as well as with targets that are willing to receive the investments. Thus, during 2013, we are going to raise some funds to direct that. We have yet to decide how public this will be or whether it will be aimed at specialised investors. We also have to determine further what types of investors we are going to target, foreign or Chilean. In terms of project finance, there are advantages and disadvantages to both.
CHILE 35
interview energy
need for investment, but also directly reduces greenhouse gas emissions.
Greg Holland
British Chilean Chamber of Commerce Managing Director
INTERNATIONAL INVESTOR: How important is this particular period in the development of Chile’s energy market? GREG HOLLAND: Chile has arrived at a point of inflection; if the current rate of economic growth is not accompanied by an equivalent growth in electricity supply capability, energy supply shortages are a real possibility as early as 2015. This situation is now pressuring the decision makers to quickly decide on how to address the problem. There is a real danger that decisions made now will focus on the short-term needs of security of supply and price and not on the mid to longer term imperatives of autonomy, community and environmental impact. I see four potential options for Chile: one, decide to address the immediate issues with diesel, coal, and gas-fuelled generation, which means “go dirty”; two, “go green” and put huge effort into renewable energy sources such as hydro, geothermal, wind and solar, which are all locally present in plentiful supply; three, “go wrong” continue debating the problems of environmental approvals and indigenous property rights and take no action; and four, “go right”, which is a sensible combination of the previous three, combined with energy efficiency. The government produced a comprehensive National Energy Strategy in 2012. It has all the right components of renewables, energy efficiency, hydro etc. and addresses the network issues, the market pricing issues and even talks about sensible regional solutions. The problem is, it doesn’t seem to have gone anywhere. They put a lot of effort into coming up with a good plan, but things need to happen. Investors need to be given confidence to invest in renewables and people need to be encouraged to take a realistic position. Could you give us your view on the SIC and SING connection issue? Chile has two principal yet unconnected electricity networks. Currently, there is a reason-
36 INTERNATIONAL INVESTOR
CAREER DEFINING MOMENT
In 1998, I enrolled on a program at Cambridge University called “Business in the Environment”. Instead of just focusing on environment, we spent the majority of the time talking about social issues and communities, which influenced my thinking regarding the importance of inclusivity. It radically changed my thinking and way of doing things. LESSON IN BUSINESS
In a big company, you know where you stand and fit; when you have a problem there is someone to help. In a takeover, merger or sale situation, all that substance and security evaporates. You have to work more independently, define your own values and loyalties, and continue trying to do your best to deliver. After experiencing this situation you work more independently and, if you don’t compromise teamworking skills, much more effectively. able amount of spare capacity in the Sistema Interconectado del Norte Grande (SING) and very little spare capacity in the Sistema Interconectado Central (SIC). If the two were connected, there would be more options to manage the peaks and allow maintenance to be carried out when necessary. To use a simple British term, it is a no-brainer. Moreover, it would solve some of the infrastructure access problems for renewable energy. Renewables like solar and wind can only provide intermittent power, but if there is a more flexible conventional installed capacity on tap, as a result of joining up the networks, supply can be managed more effectively. The sensible thing to do is join them up and, at the same time, make the networks more efficient, more intelligent, and ensure proper access for renewables. Energy efficiency still has great potential to reduce energy consumption in Chile. It keeps disappearing off the agenda because of the focus on creating more power and generation capacity, but efficiency not only reduces the
You can’t talk about energy in Chile without talking about water, what are the problems that Chile faces regarding to this issue? Climate change is happening, global warming is happening, this issue will continue to seriously affect water supplies. Chile has had 10 years of the driest weather on record. The last three years have been officially classified as drought; the reservoirs are at record low levels, some are completely dry. Another drought year will be disastrous. There will be less hydroelectricity and it will put huge demands on the other sources, prices will rocket. The last time it rained hard for two days the electricity prices dropped five per cent overnight because installed hydro is the cheapest form of electricity production. However, as climate change accelerates there will be less rainfall in parts of Chile and the investment put into the central region’s hydro capacity will consistently under produce. How can the issues related to community involvement in energy projects be solved? Chile is one of the few nations that have signed up to Convention 169, which protects indigenous and tribal people’s rights. This has given more opportunity to those communities in the areas affected by major projects to object and the result is that many of the previously approved environmental permissions have been put aside in the high court. My view is that, if companies really take their ‘triple bottom line’ seriously i.e. profits versus environmental versus social issues, then the issues affecting local communities would have already been taken into consideration earlier in the process. One important issue that has arisen from this debate is the need to define specific areas where major conventional power plants can be located, so that the inevitable impact on the environment and communities can be localised and contained. Clearly, capital cost and, therefore, unit price may be higher by not building in the optimum location, but this will be greatly offset by avoiding the current delays and uncertainties created by the permitting process. To be fair though, many of the bigger companies are trying very hard to do the right thing. They are putting great effort into their sustainability agendas and it is difficult to see how these businesses can do more without the arrival of new technology or without affecting production. Yet, there is a whole mass of other commerce that doesn’t even know what sustainability means and where there is untapped potential to become more efficient, more responsible and, ultimately, more successful.
energy interview
Francisco Alliende GRUPO SAESA
Chief Executive Officer
INTERNATIONAL INVESTOR: What do you believe are the biggest challenges facing the energy industry today? FRANCISCO ALLIENDE: There is a lack of investment in new generation and transmission projects. If we want more generation capacity, there has to be more investment in transmission. The reason we don’t have more generation investment is because of environmental and community concerns. The challenge is to define what we want in terms of the energy matrix; environmental impact; foreign energy dependency; and the best way to take advantage of the potential of hydroelectric, wind, geothermic generation etc. So, there is a big discussion. We need to be sure that we have a long-term plan that ensures the country has competitive energy prices. This requires investment. How do you think industry, Government and the environmentalists can come to an agreement about these concerns? There needs to be a lot of dialogue. I think it is really a political discussion more than a technical one. Many people would like to have the majority of new generation capacity based on renewable energy. It is true that the investment level for renewables is going down, but almost all these energies will require back up. We need to be honest about this if we want to invest in renewable energy. We require a lot of energy and we don’t have a lot of new projects; the country requires a solution. We need to be sure that proposed projects will be developed. Confidence in environmental regulations and a considered approach to the way companies work with local communities is key to the long-term solution. At SAESA, we have experience that shows when you work with the community you can end up with a very good project.
CAREER DEFINING MOMENT
In 2012, I became the CEO of SAESA and I needed to make big changes. I changed two third of the management team, and after these changes the year 2012 was a much better year for this company. It was a big risk, but it worked. LESSON IN BUSINESS
Do not give second chances. It sounds very brutal, but if something is not working, then change things straightaway. Don’t provide second opportunities. Alberta Investment Management Company acquired a 50 per cent stake in SAESA in 2011, how has this change in ownership influenced your strategy? Now, we are a company that has a long-term view. We want to be an important player in the industry, but also good citizens in the country. For the owners, the key issue is the relationship with the country and with our customers. In general, we have increased our investments almost three times since the Canadians acquired their stake in the company. We are making investments in quality of service, in new lines, growth and new solutions. We want to be a strategic partner for the country and we want to invest. We are in all the energy chains in terms of generation and, in almost all those sectors, we are trying to play an active role in finding solutions for the country. The owners are in this for more than just a good return. In your opinion, what is the most exciting growth area for SAESA? We are a transmission and distribution company. Almost 90 per cent of our business is related with transmission. Chile requires a lot of investment in transmission not only to connect the new projects, but also to improve the standards of the actual network. There are good opportunities and big challenges; it
is something that has a reasonable risk profile, and our owners like this challenge. The key opportunities in transmission are in the construction of new lines. In Chile, transmission has three different branches and we are involved in all three; trunktransmission, the trunk-system, which sends energy in both directions and is regulated; sub-transmission, which deals with the connection from the trunk to the distribution areas, which is also regulated; and the third branch is additional sub-transmission. Additional sub-transmission lines connect new generation facilities to the trunktransmission system and this branch is not regulated. It is a private line business in which new energy generation capacity links up with the transmission system. The fact it is a private agreement is important in terms of revenues for those who invest. It is a key area for us. Our concession area has opportunities for hydroelectricity, some geothermic, and wind projects. So, companies develop projects that have to be connected and we develop the best way to connect them. In Puyehue and Rupanco, almost 12 runof-river projects were developed. Previously, these projects would have been connected with three or four different lines. We found a unique solution to connect them with only one main line and other small lines. Fewer lines meant this method was cheaper and it also reduced the environmental impact. Thus, the generators knew they had a cheaper solution, the environmental impact was lower than the original plan, we defined the layout with the community early on in the project and we developed the project in such a way that we can increase generation in the area by more than 100 per cent and connect new generation to the same line. In sum, we did a good job and everybody was happy. We considered the long-term solutions and were able to discuss the returns beforehand to be sure that the long-term solution was better. These solutions are better for the country and we are working in a way that promotes our business. Is there ambition to expand outside and move into other projects outside of the concession zone that you are in at the moment? Yes. We like to invest in transmission and distribution, but we are also able to analyse opportunities in generation, in the case that our participation is required to develop a project, to obtain the financing. We are able to help with something that is not our core business in order to ensure it will be developed, but this is something additional.
CHILE 37
focus energy
Focus: THE FUTURE OF THE LNG MARKET Chile has to make important decisions regarding its energy matrix; one option is to increase the participation of natural gas. There are many benefits to this eventuality, but the role it will play in Chile’s energy future depends on several factors. General Overview Chile is currently going through a severe energy crisis. The current electricity supply cannot cope with demand and, as a consequence, prices are very high. The major industry players in generation (both conventional and renewable), transmission and distribution have all voiced concerns about the situation. Furthermore, the gravity of the situation is clearly demonstrated by the political debate that surrounded the 2013 presidential and parliamentary elections. Chile is a net importer of energy. By 2012, almost three quarters of the country’s energy came from imported sources, almost double the amount imported in 1988 (see fig. 1). With average marginal costs in the Sistema Interconectado Central (SIC) reaching almost US$250 per megawatt hour in June 2013, energy prices in Chile are expensive, among the highest in Latin America and above the OECD average. Furthermore, the carbon emission indexes are high, which is caused in part by an energy mix that is still very dependent on coal. During the last decade, the country has been active in introducing regulation regarding its energy industry, especially from an environmental point of view, seeking to reduce the carbon footprint associated with its exports. In this context, the role of alternative energy sources, LNG included, is crucial. Chile’s relationship with natural gas has had some defining moments, particularly when, in 2004, the Argentine government issued a ruling that forced their
38 international investor
gas suppliers to cater to internal demand before complying with foreign contractual commitments. Thus, gas dispatches to Chile from Argentina started reducing until they ceased completely. Moreover, at that point, Chile did not have LNG terminals. Chilean industries had relied on Argentine gas almost exclusively since 1997. Before the cuts began, Chile imported more than 90 per cent of its natural gas from Argentina and heavily depended on the resource for purposes of electricity generation. The Argentine gas crisis ensured an important lesson was learnt in Chile regarding reliance on one source for gas imports. This lesson, combined with the significant growth of the worldwide LNG market, which grew by approximately 50 per cent in the period of 2006–20111, created an important opportunity for the Chilean 1. IMPORTED ENERGY 80 70 60 50 40 30 20 10 0
1988
1998
2012 Source: The World Bank
energy focus
Strengths ■■ There are many LNG-exporting countries, including the recent shale gas revolution in the U.S. ■■ Chile has signed many Free Trade Agreements, including some with countries that export LNG. ■■ Producing energy by means of natural gas has less environmental impact and reduces the carbon footprint of Chilean exports. ■■ The LNG industry has entered a consolidation stage worldwide. ■■ The development of gas infrastructure (1997 to 2004) means some initial investments have been already made. ■■ Most Chilean industries are technically prepared to receive gas.
opportunities ■■ Fast growth in the internal electricity demand. It is projected that 100,000 gigawatt hours more will be required between 2012 and 2020. ■■ Current high energy prices means there is the opportunity and the will to diversify the energy matrix. ■■ The development of the shale gas and tight gas industries in the U.S. may provide interesting investment opportunites. ■■ Chile may modify its technical standards regulation in order to open markets and lower costs. ■■ Mining companies, both private and state-owned, represent a huge market for gas-produced electricity. ■■ Peru is Chile’s nearest LNG exporter and is not currently selling LNG to Chile, but with the Pacific Alliance in place, this could change. ■■ The Panama Canal expansion could result in less expensive routes to bring LNG from the Gulf of Mexico and other regions to Chile.
economy that was seized upon by the government with timely sponorship initiatives. The two GNL regasification terminals currently operating in Chile are joint investments between foreign partners and state-owned companies. The terminal in Quintero (GNLC), which has supplied natural gas to the central region since 2009, was built with the participation of the state-owned oil company ENAP and the terminal in Mejillones (GNLM), which has supplied natural gas to the northern regions since 2010, is partly owned by the state-owned copper company CODELCO. These two projects together represent an investment of more than US$1.6 billion, excluding the expansions that are now under construction. One of these expansions, at the Quintero LNG terminal, is a project to expand the regasification capacity of the terminal from 10 million cubic metres per day to 15 million cubic metres per day. The additional LNG regasification capacity is expected to come on stream during the first half of 2014 and will cost of around US$300 million. Chilean LNG terminals operate using both gas sales agreements (GSAs) and terminal use agreements (TUAs). The latter contract type, employed by GNLM and under which the client is responsible for importing
weaknesses ■■ Chilean ports and regasification terminals are located far from the main international LNG trade circuits, resulting in higher prices. ■■ In the internal market, in the short-term, coal-based generation is still more competitive. ■■ Chile is a relatively small market; hence, it has a little purchasing volume. ■■ There are not many stakeholders large enough to require deliveries in volumes of the size arriving in LNG tankers.
threats Chile does not produce LNG, so it depends on imports. ■■ Legal issues could hinder the development of the natural gas facilities, as has happened with other large energy projects, which have been opposed by local communities and environmental NGOs. ■■
The development of shale gas and tight gas industries in the U.S. may provide interesting investment opportunities
the LNG and delivering it to the terminal, is likely to gain greater prevelance over the next years as the industry continues to develop. Future development Ostensibly, Chilean industry will once again have to rely on natural gas to generate electricity. There are many positives to this development; besides the environmental advantages of natural gas, it will help Chile to achieve a degree of energy independence. Regarding future development, there are already some projects to build gas-based thermoelectric power plants, but there are two main issues that should be thoroughly considered: LNG SUPPLY AND MARKET POWER All the main LNG exporters from which Chile is currently importing: Qatar, Yemen, Trinidad and Tobago, Egypt, Nigeria, Equatorial Guinea, and others, are located in the northern hemisphere or countries from which the cargoes must travel long distances; thus, the high transport costs are reflected in the price of these imports. However, this problem may be partially solved once the expansion to the Panama Canal becomes operational in 2015.
CHILE 39
focus  energy
In the short term, there are other import alternatives for Chile. These may be importing LNG from Peru in the context of the Pacific Alliance formed by Chile and Peru, together with Colombia and Mexico, and the impact of the recent discoveries of shale gas in the U.S., a country with whom Chile as a free trade agreement, which could provide a very interesting opportunity for the country. However, in the context of the global LNG market, Chile is relatively small. Therefore, in order to bring LNG to Chile at competitive prices, the country must increase its demand for natural gas and, in all likelyhood, it may be necessary for industry players to group together to obtain more comptitive natural gas contracts. A recent study, by the Chilean thinktank Libertad y Desarrollo, suggested this would require plaintiffs to bring together at least 3,500 megawatts of installed capacity.
It is likely natural gas will become an important industry in Chile because of the economic, geopolitical and environmental benefits
AVAILABILITY AND DISTRIBUTION In order to increase demand for natural gas, it is necessary to guarantee that LNG will reach all corners of the country and ensure availability is facilitated for all industries and economic sectors. Chile already possesses a certain amount of infrastructure that will enable this aim to be realised, namely the different pipelines that were built to import gas from Argentina. Still, significant further investment in infrastructure is needed to ensure that LNG can be distributed throughout the country and is a competitive alternative to other energy sources; increasing the pipeline infrastructure costs money and takes time. LNG players and related industries are starting to implement and consider new ways of delivering LNG in the near future. Transportation throughout the country on the road network via trucks and transportation by means of small vessels along the Chilean coast are methods that are becoming more widespread. This development allows for greater flexibility in the transportation and delivery of the product and, at the same time, makes natural gas available to small and medium-sized enterprises that normally would not have access to small quantities of LNG. In 2011, GNLC started to operate a truck yard and is delivering LNG in trucks as a complementary service for its clients with contracted capacity. GNLM is also developing a project to operate a truck yard, which has been approved by the respective environmental authorities. In addition to this, some companies are looking at the possiblilty of installing floating storage and regasification units (FSRUs) off the coast of Chile. These units in general provide a faster return on capital, as the outlay is less and they can be constructed in a shorter time frame. The technology may provide an interesting avenue for the development of the Chilean gas market. In 2012, GasAtacama, a Chilean gas company, submitted an environmental impact assessment regarding a floating terminal that is to be situated in the bay of Mejillones. The US$350 million project can receive and store up to 170,000 cubic metres of LNG and produce up to 10 million cubic metres of natural gas per day. It has been reported it will offer at least 500 megawatts to various mining projects in the north of Chile. The project is expected to commence operations in late 2015 or 2016.
40 international investor
Natural gas is poised to play a bigger role in generation
If this infrastructure development and organisation continues, natural gas could become into a very important energy resource for Chile. Conclusion Strategic decisions will have to be made with respect to the development of Chile’s electricity market. The goal is to achieve some degree of energy independence, ensure economic competitiveness and lower the current electricity prices. It is likely natural gas will become an important industry in Chile because of the economic, geopolitical and environmental benefits. Chile was the third largest importer of natural gas in Latin America in 2011 and the country is an attractive LNG market for a number of reasons: it has low levels of natural gas reserves and relies heavily on significant volumes of gas imports to meet domestic demand; seasonal increase in demand for natural gas in Chile runs counter to the demand in Northern Hemisphere markets; and, due to the difficulties developing large hydro projects and the perinneal problems with drought, the southern region of Chile is a potential gas demand centre that is currently underserved. Furthermore, opportunities are avaliable because of the suitable conditions that Chile, as a country, presents to investors. Chile is a good country in which to invest, not only because of its economic and political stability, but also due to the responsible legislation that regulates foreign investments and an independent judiciary that guarantees the application of the rule of law. Moreover, there is a well developed legal industry and solid and transparent institutions. All these factors make Chile an attractive place to do business in any field, and the energy sector in particular represents an excellent opportunity for investors. REFERENCE 1
Source: Cedigaz, Waterborne LNG Reports, US Energy Information
Agency (EIA), US Department of Energy (DOE), PFC Energy.