Market Assessment for Chile


Summary

The Assessment of the Chilean Market
for Energy Efficiency

Chile holds a number of promising opportunities for the US energy efficiency industry. High electricity prices, rapid economic growth and a dynamic private sector are driving investments in energy-efficient products and processes. Chile's economic stability and location also make it an attractive base for export production.

This summary briefly reviews Chile's economy, electricity sector and energy efficiency potential. It also summarizes market opportunities by technology. More detailed information is contained in IIEC's companion report.

The Economy

Chile has a population of 14 million people and a Gross Domestic Product of US$40 billion. It is one of Latin America's economic leaders with a rapidly growing economy and a high degree of economic stability. Between 1987 and 1992, the economy grew by 26 percent. In 1993, GDP grew by 6 percent. Principal industries are copper mining, pulp and paper, industrial products, seafood and fruit.

Chile's economy is beginning to diversify into manufacturing, driven in part by record foreign investment in the country and favorable government policies. For instance, Chile does not restrict foreign ownership in companies, imposes relatively low tariffs on imports (11 percent) and permits invested capital to be repatriated after only one year. Chile's dynamic private sector is capitalizing on these growing opportunities.

Chile is also an excellent base to access South America's rapidly growing consumer market of 300 million people. This status was recently confirmed when Chile became the first South American country to be invited to join NAFTA, the North American Free Trade Agreement.

Financing for US business in Chile is available through the Inter-American Development Bank, the International Finance Corporation, the Export-Import Bank, the Overseas Private Investment Corporation and other public and private financial institutions.

The Government

While Chile's government is openly supportive of economic growth and foreign investment, it has yet to make improved energy efficiency an official policy. Chile does not have energy performance standards or utility incentives for demand-side management, although performance standards are planned for introduction in the next few years. The government has supported selected efficiency projects like improved streetlighting and large industry cogeneration.

The Electricity Sector

Most of Chile's electricity is supplied by the private sector. The government regulates electricity prices but does not subsidize them and has a policy of non-intervention in energy markets. Wholesale markets and retail markets for large customers (> 2 megawatts) are largely deregulated. Electricity prices are relatively high (as shown in the following table) and offer a strong incentive for energy efficiency improvements.

TABLE 1: ELECTRICITY PRICES IN SELECTED CITIES
(US CENTS PER KWH)

City Node Price1 Residential
(<100 kWh/mo)
Street Lighting Commercial/
Industrial,
Low Tension
Commercial/
Industrial,
High Tension
Aysen

Antofagasta

La Serena

Punta Arenas

Valaparaiso

Santiago

Concepcion

Puerto Montt

7.78

7.19

4.87

4.62

4.05

4.05

3.85

3.31

19.52

16.33

13.69

11.32

11.54

10.97

10.50

11.19

14.85

12.21

9.27

7.71

8.23

7.81

7.51

7.86

18.70

14.70

11.76

10.33

10.55

10.15

9.59

10.15

11.64

10.30

6.87

5.76

5.98

5.68

5.61

5.68

Electricity Consumption

Chile consumed roughly 23,000 GWh of electricity in 1994, about the same as West Virginia. Electricity consumption grew by 8 percent per year between 1987 and 1992. Annual growth in consumption is forecast to average 5 percent through the year 2004.

The industrial sector consumes 59 percent of Chile's electricity. Copper mining alone consumes 26 percent while pulp and paper consumes 11 percent. All other sectors together consume 26 percent of the nation's demand. Transmission and distribution losses total 14 percent.

Motors are by far the largest end-use in the country, consuming 61 percent of the country's electricity. Lighting consumes 18 percent.

The Industrial Sector

Chile has the potential for profitable energy efficiency improvements in all sectors of its economy. The greatest potential is in the industrial sector, the country's economic foundation. In the last 10 years, this sector's electricity consumption has increased by 30 percent while its energy intensity has increased by 5 percent. Chile is planning to invest US$25 billion by the end of the decade in new mining, industry, energy and forestry infrastructure. Since much of this investment will be in motors, industrial controls and other energy using equipment, this represents an excellent opportunity for the installation of energy-efficient equipment.

A recent study of energy efficiency potential among 6 industries that consume almost half of the country's electricity identified potential savings of 28 percent or 2,614 GWh per year, equal to over 10 percent of national electricity consumption. Twenty percent of these savings were expected to have a payback time of less than one year. The other 80 percent would pay back over a three to seven year period.

The Codelco copper mining company examined the energy efficiency potential at the world's largest open-pit copper mine. It identified potential savings 77 GWh per year, mostly from the installation of new energy-efficient motors.

Another study looked at the country's textile industry. It found that minimal energy efficiency investments in this industry could realize significant energy savings with a pay back of less than one year.

The Commercial and Residential Sectors

In the commercial sector, energy efficiency is not yet integrated into building and systems design. Nevertheless, the installation of energy efficient lighting and energy management systems is growing. Further, insulation improvements in Santiago's commercial buildings would pay back within one year.

Opportunities also exist in Chile's public sector although no studies have yet identified the total potential savings. Over 150 municipalities throughout Chile participated in an efficient streetlighting program that has offered a payback of two years. The residential sector also offers opportunities given its high electricity prices (11 cents per kWh in Santiago) but without utility DSM programs, this sector is currently difficult to access.

Industry Summaries

The following pages summarize market opportunities for the US energy efficiency industry in the following technologies or activities: motors, ESCOs, industrial controls, transformers, lighting, windows, refrigerators, and cogeneration.

Motors

Motors are the major end-use for electricity in Chile and annual sales are growing rapidly. Chilean industries are increasingly interested in energy-efficient motors, all of which are imported. Chilean industry prefers US motors, making this an excellent growth opportunity for US manufacturers of energy-efficient motors.

Motors currently consume 61 percent (15,000 GWh) of the country's electricity and 85 percent of industrial electricity. All of Chile's motors are imported. Motor sales have been growing by 15 percent per year. One study estimated that Chilean industry could reduce electricity consumption by 28 percent through energy efficiency improvements, mostly in motors.

In addition, Chile's public, industrial, energy and forestry sectors are planning to invest US$25 billion by the year 2000, and US$8 billion in the mining sector alone. Much of the latter will be in new motors. This represents an excellent opportunity to market energy-efficient technology. One step in this direction is a US$2.8 million Global Environment Facility project, to begin in May 1995, that will retrofit electric motors in the mining industry and raise awareness about energy efficiency.

Chile imported $13 million worth of US motors in 1993. Chilean industry prefers US motors, a fact that is important given the high level of competition in the market. Thirty of the world's 45 motor manufacturers sell motors in Chile.

Standard motors make up roughly 80 percent of the Chilean motor market with high-quality motors making up the other 20 percent. Energy-efficient motors cost 25 percent to 40 percent more than standard motors in Chile. High-performance, energy-efficient motors represent less than 1 percent of the total market. Most of these come from the US and Europe.

One barrier to the increased sale of energy-efficient motors, in addition to the normal problems of higher capital costs and the lack of consumer awareness, is a preference among copper mines to rewind failed motors instead of purchasing new ones.

Energy Service Companies

US energy service and management companies have an immediate opportunity to develop projects in Chile. Relatively costly electricity, the progressive nature of the private sector, significant potential for improved energy efficiency in buildings and industry and a supportive investment environment make Chile an attractive market.

Chile does not yet have a market in energy service companies (ESCOs). The country does not have any energy performance standards or utility DSM incentives. Two US ESCOs have begun to investigate opportunities in Chile and at least one company is expected to develop a project in 1995.

There exists in Chile, however, the demand for ESCO services. The country's energy-intensive industries are becoming increasingly interested in energy efficiency. High electricity prices and energy efficiency potential coupled with a dynamic private sector provide a receptive setting for the entry of ESCOs. Chile has a strong engineering industry that can support ESCOs. Energy-efficient products are either manufactured locally or can be imported with low import tariffs.

The main opportunities for ESCOs in Chile are in the country's major industries and in the new commercial building sector. Chile's copper mining giant, Codelco, is in the process of investigating the ESCO concept with the help of IIEC. Also, a current Global Environment Facility project to increase the energy efficiency of motors in Chile's copper mining industry will highlight ESCOs.

Industrial Controls

Chile's industrial diversification, modernization and investment in new infrastructure make it a good market for industrial process controls. Sales of industrial controls are growing rapidly and will continue to grow with planned investments. US companies can enter the market immediately through exports. The size of the local market warrants the eventual establishment of a local production facility.

Sales of industrial controls totaled US$120 million in 1994 and are growing by 20 percent per year. Sales will continue to grow with the planned US$25 billion of investment in Chile.

Industrial controls are currently imported and industry experts do not expect local manufacture for at least several years. US and European companies are the main competitors in the market. Key products are programmable logic controllers, display systems, communication systems, instrumentation and adjustable speed drives (ASDs). ASDs have been in Chile for only 3 years and sales are growing by 10 to 15 percent per year. Attractive end-uses for ASDs in Chile are conveyor belts, pumps and fans, direct current motors and AC wound rotor motors.

In installing industrial controls, Chilean industry seems to be motivated more by the desire for modernization than greater energy efficiency. In response, the industrial controls industry has conducted training courses to educate customers about the variety of benefits of industrial control technology.

Transformers

Significant investment in new infrastructure in the electricity and mining sectors will provide opportunities for the export of transformers to Chile, particularly for power distribution. These industries are increasingly concerned with reducing electricity losses by installing energy-efficient transformers. Electricity losses currently average 14 percent in Chile.

Sales of transmission and distribution transformers totaled roughly 800,000 KVA in 1994. This is estimated to have doubled over the past 6 years. Four Chilean companies make transformers, both standard and high-efficiency models. These local companies dominate the market but compete with foreign manufacturers on large projects, such as those in the mining sector. The US exported almost $6 million worth of transformers to Chile in 1993, more than three times more than in 1990.

A barrier to the purchase of more energy-efficient transformers in the past has been the reluctance of customers to consider life-cycle costs. As noted above, this is beginning to change.

Lighting

The US lighting industry has an immediate opportunity to increase sales of electronic ballasts in Chile and South America. The commercial building industry is growing and lighting designers and building developers are increasingly specifying advanced technologies like electronic ballasts. These conditions, coupled with high commercial electricity costs, will also create longer term market opportunities for efficient luminaires and controls.

Chile's lighting market is currently worth US$25 million per year. Philips and General Electric are already well established in Chile and Philips has been aggressively marketing energy-efficient lighting.

Lamps: Chile's lamp market is currently very competitive and does not hold much promise for any new US players. Seven million fluorescent lamps are sold each year, worth US$8 million. Compact fluorescent lamp (CFL) sales are estimated at 200,000 units per year and worth $2 million per year. Sales of CFLs have doubled in the last two years. There are also an estimated 716,000 public lights in Chile.

Ballasts: Two million ballasts are sold every year in Chile, worth US$5 million. Eight million are sold every year in the Southern Cone region (Chile, Argentina, Brazil, Uruguay, Paraguay), worth US$24 million. While magnetic ballasts make up most of these sales, high electricity prices make the market ripe for energy-efficient electronic ballasts. There are two local players in the ballast market: one manufactures magnetic ballasts and the other imports ballasts, including a small number of electronic ballasts. GE and Philips both import ballasts and purchase them locally. Chile's primary ballast manufacturer, B y P Limited, is interested in a joint venture to manufacture electronic ballasts for the Chilean and regional markets. The company is ready to market electronic ballasts based on their electricity savings. Philips is already preparing to expand its sales of electronic ballasts in the regional market.

Luminaires: Two million fluorescent lamp fixtures are sold each year in Chile. The demand for high quality luminaires is growing. The best opportunity for US luminaire manufacturers is in the high-quality fixture market. After the initial success of the country's streetlighting retrofit program, another opportunity is in high-intensity discharge luminaires.

Controls: Advanced lighting controls are currently imported to Chile from the US and Europe. Honeywell and Lutron sell in the Chilean market and Johnson is scheduled to enter in 1995. The growing commercial building market is a good opportunity for these energy-efficient technologies, especially given Chile's high commercial electricity prices.

Windows

Growth in Chile's construction industry and the high potential for improved building efficiency make it a good market for manufacturers of high performance windows. Opportunities for the US window industry are in the export of low-emissivity glass to Chile and in the establishment of a joint venture to produce low-emissivity glass in Chile.

The demand for windows in Chile has been growing at 7 percent per year, driven by the growth in new commercial buildings, especially in Santiago. Four local window manufacturers operate in Chile; they all use imported glass. A new float glass factory is scheduled to open in late 1995, but it will not produce low-emissivity (low-e) glass. All low-e glass is imported to Chile and most comes from the US.

Most windows sold in Chile are aluminum-framed and single-paned without glazing. Twenty to thirty percent of windows are sold with reflective coating. Very few low-e windows are currently sold in Chile. Most low-e windows in Chile are sold to foreign companies with international building specifications (e.g. McDonald's).

Energy-efficient windows in Chile currently cost 30 to 40 percent more than standard windows. Many consumers are unaware of the return on investment from energy-efficient windows. One local window manufacturer, Vidropar, has aggressively marketed energy-efficient and higher quality windows. It is interested in a joint venture to produce low-e glass.

The government of Chile is currently considering the expansion of a pilot program to provide builders with an incentive to use energy-efficient windows.

Refrigerators

Sales of refrigerators in Chile have grown by an average of 40 percent per year since 1985 yet the market is still only 55 percent saturated. A number of factors make the export of energy-efficient refrigerators to Chile a good market opportunity for US manufacturers.

Two Chilean companies make refrigerators locally and a variety of foreign manufacturers export models to Chile. The majority of annual sales are domestically-produced, manual-defrost models.2 Automatic defrost models cost two to three times more than manual defrost models. Imports make up ten percent of annual sales and are more energy efficient than domestic models.

Refrigerators are now the second-most prevalent home appliance in Chilean households after a radio. They consume 25 percent of residential electricity (lighting consumes 30 percent) for which many households are paying as much as 11 cents per kWh. Higher-income Chilean consumers prefer larger refrigerators, thus favoring US brands over their European or Chilean competitors. In response to NAFTA, the government plans to introduce an appliance performance standard and testing program over the next 3 years. The government has also committed to the phase-out of CFCs under the Montreal Protocol.

In sum, high residential electricity prices, Chilean consumers' increasing buying power, their appreciation of US technology and the likely implementation of energy performance standards all contribute to a good opportunity to increase the export of energy-efficient refrigerators into the Chilean market.

Cogeneration

Cogeneration project development is a good medium- to long-term opportunity for US industry. Chile has an estimated potential of 340 MW of cost-effective cogeneration. There are currently 261 MW in operation. Chilean industry requires technical and financial assistance to implement cogeneration projects.

The technical potential for cogeneration in Chile is estimated at 1,000 MW while 340 MW of this is estimated to be cost-effective. Cogeneration potential exists in a variety of industries from mining to manufacturing to hospitals. Many industries will be responding to recently introduced national air quality legislation by converting from petroleum to natural gas between 1997 and 2000. This will provide opportunities to incorporate cogeneration into industrial retrofits.

Chile's cogeneration fuels are biomass and, soon, natural gas. Three pipelines have been proposed to sell Chile natural gas from Argentina or Bolivia. The expected price of natural gas from these pipelines will be roughly US$2.70 per MMBtu for thermoelectric generation. This price is lower than all other fuels except coal for thermoelectric generation.

A variety of barriers to cogeneration development still exist in Chile, including regulatory constraints, access to financing and the need for technical assistance. The European Community is helping to develop Chile's cogeneration industry but this should not preclude the involvement of US industry.

Notes:

1 The node price is administratively set every 6 months based on short term marginal costs and is used to determine regulated prices for small customers (< 2 MW). Prices for large customers are negotiated but must be within 10 percent of the node price.
2 Fifty percent of sales are 6.7 cubic foot, single door, manual defrost models.


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