Market Assessment of Chile

3. Energy And Electricity in Chile

Government Policy

Like many other countries, Chile has an energy policy with a multitude of contradictions. On the one hand, the government has encouraged growth of energy supply and demand to fuel economic growth. Indeed, the current President, Eduardo Frei, has called for complete electrification of Chile by the end of the decade.

On the other hand, the government has called for a 10 percent reduction in energy demand over the next ten years. It has provided nominal support to this goal by introducing energy-efficient streetlighting and by promoting cogeneration among large industries. Chile's National Energy Commission (CNE) is also becoming increasingly involved in energy efficiency and alternative energy. It plans to introduce appliance and building energy performance standards over the next few years.

Nevertheless, the Chilean government is not yet fully committed to increased energy efficiency. It has a stated "non-intervention" policy in energy markets. This has meant that electricity prices are not subsidized but it has also meant that there is no government requirement for integrated resource planning or demand-side management among Chile's private electric utilities. These utilities have been privatized over the past 15 years.

Electricity Supply

Chile's installed electricity capacity has grown by 72 percent over the past twelve years. The government forecasts the addition of a further 2,000 MW by the end of the decade. Seventy percent of the country's current supply comes from hydroelectric dams and the rest comes from thermal electric plants, primarily coal-fired. Roughly half of the coal is imported. The installed capacity of the country's thermal electric plants is 1,920 MW with an additional 280 MW currently under construction.¹³

In its current plans, Chile will continue to supply all of its electricity with these resources. Non-conventional energy sources, such as geothermal energy in the Atacama desert and wind energy in the extreme northern and southern parts of the country, merit investigation but will not play a significant role in the medium term.¹⁴ The only potential for a switch to non-conventional energy sources is the CNE's Committee on Rural Electrification. This committee is considering the use of subsidies to develop isolated electrical systems using wind, solar and other non-conventional energy sources.

Natural Gas in Chile

The best short-term alternative to Chile's continued use of hydro dams and coal is natural gas. Chile does not yet have wide access to natural gas. However, it is almost certain that one of two natural gas pipelines will begin construction by 1997 or 1998. Two pipelines have been proposed to supply central Chile and Santiago from Argentina.¹⁵

The CNE anticipates that this natural gas supply will encourage the development of cogeneration in Chilean industries as well as gas-fired thermal electric generation. All of the companies proposing the pipelines are marketing their projects based on the potential economic and environmental benefits to the country.

Chile's Electric Infrastructure

Chile's electric infrastructure is divided into four separate systems:

The Central Interconnected System (SIC), extends from the city of Taltal in the north to the lake region, south of Santiago. The SIC contains about 80 percent of the nation's installed electric capacity and serves about 90 percent of Chile's population. The SIC's power supply is 75 percent hydro and 20 percent coal, with gas turbines and diesel motors, comprising the rest. The main consumers in this system include the mining, industrial, agro-industrial, pulp and paper and oil refining industries.¹⁶

• The Interconnected System of the Norte Grande (SING) covers two northern regions. Almost all of its electricity is supplied by thermal electric generation including coal, oil and diesel-fired turbines and motors. The main customers in this system are mining and fishing companies but many also generate their own power.¹⁷
  
• The Aysén system consists of five small isolated systems in the south with a total installed capacity of 1.5 MW, essentially to supply the cities of Puerto Aysén and Coyhaique.
  
• The Magallanes system is comprised of three small isolated systems in the south, supplying the cities of Puerto Porvenir, Puerto Natales and Punta Arenas.¹⁸
  

Electricity Demand

Although it is not the predominant form of energy in Chile, electricity is one of the two most rapidly growing energy sources in the country. According to the CNE, electricity consumption grew at an average annual rate of 8 percent between 1987 and 1992. In 1992, electricity accounted for 13 percent of Chile's final energy consumption.

Table 2 shows the breakdown of electricity consumption by sector. The copper industry alone accounts for 26 percent of Chile's electricity demand while the pulp and paper industry accounts for 11 percent. The commercial, public and residential sectors together account for 30 percent of total electricity demand.

TABLE 2: ELECTRICITY CONSUMPTION BY SECTOR, 1982-1992

Source: Balance de Energía, Comisión Nacional de Energía, 1992.

Future Electricity Supply and Demand

The most recent projection of electricity consumption is shown in Table 3.²¹ The CNE forecasts electricity consumption to grow by 7 percent and 9 percent, respectively, in 1994 and 1995, and 5 percent per year thereafter. By 2004, electricity consumption is forecast to be 70 percent higher than in 1994. The CNE estimates that the country will have to invest US$400 million in generation, transmission and distribution to meet this growth in demand. It is considering 24 electric projects for implementation over the next ten years. Fifteen are hydroelectric projects and nine are thermoelectric plants.

TABLE 3: PROJECTED FUTURE ELECTRICITY DEMAND²²

Source: Balance de Energía, Comisión Nacional de Energía, 1992.

The CNE's Energy Efficiency Program estimates that improved energy efficiency in the industrial sector could reduce its electricity demand by 4,924 GWh by the year 2002. Realization of this potential would reduce Chile's total projected demand in 2002 by 13 percent and industrial demand by 23 percent.²³

Electric Utility Regulation

Current regulation of utilities in Chile provides them with little incentive to implement demand-side management programs. Utility profits grow with sales of electricity. In addition, Chilean utilities are not required to conduct integrated resources planning. There is no sign at this time that the government plans to reform utility regulation.

Recently however, distribution utilities began offering incentives to municipalities to install energy-efficient street lights. This came in response to municipalities' contracting out to private companies for installation and maintenance of streetlighting equipment. Utilities had traditionally provided this service to municipalities. The possible loss of utility revenue compelled utilities to play a more active role in the implementation of this successful energy efficiency project.

Electricity Prices

Electricity consumers have been divided into two different categories for the purposes of prices. Small consumers, with demand of less than 2 MW, pay for their electricity according to a regulated tariff based on the marginal costs of electricity generation. Large consumers (> 2 MW) are free to negotiate price contracts directly with generating companies. There is no indication that the government plans to implement retail wheeling among small customers.

The National Energy Commission (CNE) regulates electricity prices by setting the "node" price of electricity in various parts of the country every six months. This is the price that distribution companies pay for electricity and is based on the marginal cost of energy and capacity. Node prices have varied widely over the past ten years.

The structure of electricity prices is determined every 4 years by the CNE and distribution companies. These tariffs give distribution companies a 10 percent real annual income, based on investments and the costs of "model" companies. Analyses of the model companies are conducted independently by the CNE and the distribution companies. To ensure fair price setting, the CNE's study results are weighted by a factor of two-thirds, while the distribution companies' results are weighted by one-third. The resulting tariff prices for different cities in Chile in 1992, as well as their corresponding node prices, are shown in Table 4 (in US cents per kWh).²⁴

TABLE 4: ELECTRICITY TARIFFS IN VARIOUS CHILEAN CITIES, OCTOBER 1992. (US¢/KWH)

Source: Balance de Energía, Comisión Nacional de Energía, 1992.

Large consumers, as mentioned earlier, do not follow the regulated tariff structure. These consumers can enter into contracts and pay the negotiated price or build their own generation facilities.

Government Agencies

Chile's National Energy Commission is the primary government energy agency. It regulates the electric power sector, forecasts electricity demand and coordinates planning for new supply. It also plans to introduce appliance and building energy performance standards in the next few years.

There are also other government agencies that may play a role in hastening the development of greater energy efficiency in Chile. At the present time, however, they are largely inactive in this area. They are described in the following textbox.

GOVERNMENT AGENCIES WORKING IN THE ELECTRICITY SECTOR

COMISIÓN NACIONAL DE ENERGÍA--NATIONAL ENERGY COMMISSION (CNE)

CNE was established in 1978 with a law decree in the Ministry of Mines. It is charged with coordinating the plans, policies and standards of the energy sector and in particular the electricity subsector. CNE has also created three committees to work on Electrification of Rural Zones, Energy Efficiency and Energy Alternatives.

COMISIÓN NACIONAL DEL MEDIO AMBIENTE--NATIONAL ENVIRONMENT COMMISSION (CONAMA)

CONAMA is an inter-ministerial body responsible for the coordination of all environment-related activities in the diverse ministries. It became a political body de jure with the passage of the Environment Law in March 1994. While CONAMA will coordinate environment-related activities, other ministries such as the Ministries of Health, Transport and Mines will be responsible for the investigation and enforcement of environmental regulations. CONAMA has no authority to set policy related to energy. Its powers are restricted to coordinating the implementation of the Environmental Law.

CONAMA views energy efficiency as an important part of its activities. The Climate Change division within the agency is currently compiling an inventory of greenhouse gases (carbon dioxide and methane) and is looking to reduce carbon dioxide emissions through an increase of energy efficiency in Chile. CONAMA is joining with the CNE to implement a project funded by the Global Environment Facility (GEF) to improve energy efficiency in the mining sector through the use of high performance motors.

SUPERINTENDENCIA DE ELECTRICIDAD Y COMBUSTIBLE--SUPERINTENDENT OF ELECTRICITY AND FUELS (SEC)

SEC was created by a law decree in 1985 within the Ministry of the Economy, Promotion and Reconstruction. It is charged with investigating and supervising the compliance with regulations and technical standards for generation, production, storage, transport and distribution of liquid fuels, gas and electricity with respect to the quality and security of loans secured by users of these energy sources.

CENTROS DE DESPACHO ECONÓMICO DE CARGA--CENTER OF ECONOMIC LOAD DISPATCH (CDEC)

Each electricity system with a capacity greater than 100 MW (the Central Interconnected System and Interconnected System of the Norte Grande) has its own CDEC. In 1985, the Ministry of Mining created the CDECs, giving them the authority to regulate coordination of the operation of generating centers and transmission lines.

Environmental Legislation

Chile's first environmental legislation passed into law in March 1994. The law is based on the United States' National Environmental Policy Act (NEPA). It sets standards for various air and water emissions and directs industry and government to complete environmental impact assessments on projects over a certain size. The law does not set any standards for energy efficiency but it may have an indirect impact on efficiency via the air emission standards.

The law has raised the interest of foreign environmental technology firms. In November 1994, a group of leading US manufacturers of environmental technology visited Chile. Chile annually imports an estimated US$800 million of environmental goods and services and about 45 percent of this comes from the US.

One political force that may result in government action on energy efficiency is increasing opposition to hydroelectric projects. Recently, Chilean environmental groups staged a high-profile, though unsuccessful, challenge against the construction of a major dam in the south of Chile.

Despite the lack of a strong regulatory setting, Chile's growing demand for energy, high electricity prices, the desire to improve competitiveness, an aggressive and savvy private sector and a secondary interest in environmental protection make Chile's market for energy efficiency very promising.

Notes:

¹⁵. Two consortia are currently competing to build this project from the Neuquen region of Argentina.
¹⁶. Antonio Bacigalupo, "Electrical Power Systems Economic Report," Embassy of the United States, July, 1991, p. 10.
¹⁷. Bacigalupo, p. 9.
¹⁸. CNE, p. 45.
¹⁹. Disaggregated data for these sectors was not available.
²⁰. The total includes an additional 2 percent of electricity that is consumed by the transportation sector.
²¹. Excluding self-generators.
²². Excluding self-generators.
²³. "Potencial de Ahorro de Energía Electrica: Gran Industria y Minería", Comisión Nacional de Energía, Chile, 1993, p.36.
²⁴. These prices were the latest available at the time of this report's preparation. They have subsequently increased slightly.

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