The Chilean Government's support for new renewable energy sources took an important step forward in March 2008. President Michelle Bachelet signed a bill into law that requires new energy contracts to include 5% of their energy from non-traditional renewable sources. The Government has also paved the way for up to US$400 million on renewable energy projects.

But despite this increased momentum and a wide range of renewable resources, the road ahead for renewable energy firms is challenging. Obstacles include a consolidated market price-driven energy market, an expansive and rugged geography and a lack of direct subsidies.

To better understand these challenges and opportunities, Renewable Energy Focus attended the Government's Third International Conference on Renewable Energy and CDM, held in the Chilean capital of Santiago late last year. The conference demonstrated the Chilean Government's focus on energy security and improvement as a top tier agenda item in the last year. But while it believes renewable energy resources are an important asset for the future, it takes a pragmatic view of the near term possibilities.

“When compared to the rest of the world, Chile is slightly behind, but we have great potential in terms of natural resources for renewable energy,” said Energy Minister Marcelo Tokman, who officially opened the event.

Tokman sees several key challenges in Chile's energy future. Supply must be guaranteed and diversified, prices kept down, and energy needs integrated along with other demands on Chile's limited usable land. In the short term, he aims to limit demand to that which is strictly needed and ensure that the entire population has access to energy.

Currently Chile receives a small share of its power from non-traditional renewable sources. The country produces only 347 MW from renewable sources, or 2.7% of its energy supply, according to the National Energy Commission (Comision Nacional de Energia, or CNE).

Of this 347 MW of installed capacity, the largest share comes from biomass, which accounts for 55%, followed by mini-hydropower (39.2%) followed by wind power (5.8%). This will likely change however as several large scale wind parks become operational in 2009 and 2010.

Many new projects are entering the construction phase, some sponsored by Chilean investment promotion agency Corfo, and some privately financed. These could significantly augment Chile's installed capacity as Corfo's portfolio alone includes 1000 MW of projects being studied or constructed.

However, according to Pedro Maldonado, professor of energy policy at Chile's largest university, Universidad de Chile, privatisation of the market has created an added barrier to renewable energy generators that want to enter the market. This barrier sees renewable sources having to compete on a purely economic basis – without the help of any significant subsidies or fixed rates to make them more economically feasible.

Maldonado also believes that the high concentration of the market makes it harder for smaller companies to enter the market without some sort of Government assistance.

But this situation has spurred the Government into action, and Corfo – which started giving financial backing in 2005 – now supports more than 120 projects.

What about legislation to push renewables?

In addition, a new law of March 2008 obliges new energy projects to generate an escalating percentage of total energy from renewable sources – or face fines. This initiative follows the so called 'short law' passed in 2004, which set standards and allowed small generators to connect to the national grids.

The new law requires new energy generation contracts to include 5% generated from renewable sources starting in 2010, with possible fines in place starting in 2014. That quota of renewable energy will then increase, starting in 2014, by 0.5% each year through to 2025, when generators must secure 10% of power generated through renewable sources. The law gives a fairly broad definition of renewable energy, and includes hydropower projects under 40 MW of installed capacity.

Some, however, believe that more aggressive measures must be taken. According to Marcelo Banto, South America manager of UK-based wind energy developer Seawind, to further promote investment in renewable energies the Government must take a more direct approach and either subsidise renewable operations directly or develop a fixed rate for renewables entering the main grid.

And according to Maldonado, the new law – and growing interest in renewables in Chile – constitute an important first step, but a larger Government programme is needed, one that shares the financial risk in order to develop new projects. Indeed a joint study between the Universidad de Chile and the Universidad Federico Santa Maria and published by sustainable development NGO, Chile Sustainable, came to a similar conclusion. Its report argues that Chile must see renewable energy as more than just a complementary measure to the main grid, and that more leadership – and stronger incentives – are needed.

Looking forward, the study estimates that using a conservative model, Chile could receive 16.8% of its energy from renewable sources by 2025, with mini-hydropower the leading source. However, if geothermal and wind energy are used more aggressively, the study estimates that 28.1% of energy could come from renewable sources, in a 'best-case' scenario, by that same year.

Energy sources in Chile

The study also recommends several other actions that if taken would benefit the renewable energy sector in Chile:

• A large round of feasibility studies needs to be funded to map out the resources available at a national scale;
• The potential of the human capital at a local level needs to be evaluated and developed. For example, determine where and to what degree the scientific, operational, and technical know-how exists, and then improve on it. Also study the impact that renewable energies could have on employment and job development;
• Ways to increase energy efficiency on all levels in Chile needs to be researched;
• Investments in energy infrastructure need to be incorporated into the tariff scheme. Find ways to encourage greater investment in both renewable energy and energy efficiency on the part of energy companies.

Can foreign investment play a part?

In order to achieve this potential growth, Chile is looking to foreign firms to invest in local projects.

Chile has long been a favourite destination for companies of varying sectors, and renewable energy is set to be no exception. According to the World Economic Forum's Infrastructure Private Investment Attractiveness Index, Chile is the top country for foreign investors in Latin America for electricity, roads and communications.

Corfo takes a lead role in attracting foreign investors and matching them with compatible projects. The agency is focusing on funding feasibility and pre-operation studies, as well as guaranteeing credit from banks – rather than directly funding or subsidising operations. This approach, resulting from Chile's ultra free market thinking, tends to make the country attractive to foreign investors.

And then there's the Kyoto Protocol's Clean Development Mechanism (CDM). This provides a framework for investors to support renewable projects in certain countries, and Chilean officials and project managers have traditionally been interested in meeting CDM investors.

Corfo has been quick to grasp this investment opportunity. As of October 2008 Chile had 56 CDM projects in the pipeline, 28 at validation, 2 requesting registration, 25 registered and one with correction requested. Moreover Chile's attractive investment climate extends to the CDM, where it is ranked the third most attractive CDM market globally – according to carbon trading research firm Point Carbon.

A climate for renewable energy?

Chile's diverse geography provides good renewable resources. An extremely dry and hot desert with year-round sunlight in the north, and a vast coastline of some 4300 km provide viability for both wave and wind technologies. The south of Chile also offers sites for mini-hydropower, and is home to thriving forestry and agriculture sectors that are suitable for biomass energy generation.

Wind power

Wind energy's largest potential is in the south of Chile, in the remote area of Patagonia. However, the distance to the central SIC energy grid makes a large windfarm unprofitable as local demand is still low. Most projects in this wind-rich area are geared towards industrial and remote sites, and do not feed directly into the main grid.

The most viable locations for windfarms are along the coast to the immediate north of the capital, Santiago, and two Spanish firms, Endesa and Enhol, are targeting this area with wind energy projects due to enter the construction phase over the next two years. These will be the largest in the country. Endesa owns Canela, currently the largest wind park in Chile, with 9.9 MW of installed capacity. The wind park is located approximately 300 km north of Santiago. Through its renewable subsidiary, Endesa Eco, the company also plans to build a 60 MW windfarm, Canela II, which will come online in 2009.

Fellow Spanish energy group Enhol is also aggressively investing in Chilean windfarms and mini-hydropower. The group will start construction in 2009 on a 500MW (nearly US$1 billion) windfarm in the north of Chile. The windfarm will house 243 wind turbines, producing 2–3 MW each.

Geothermal energy

A high level of volcanic activity makes geothermal energy an attractive renewable source. However, this resource has received very little attention and focus from feasibility studies. The high cost of geothermal exploration has kept most potential investors away, according to Corfo.

For the Universidad de Chile's Maldonado, this is one area in which the Government must develop more aggressive measures to fully benefit from available resources.

The CNE has identified 115 potential sites for geothermal exploration. Almost half of these are in either the far north or extreme south.

Solar Power

The Atacama Desert provides Chile with some of the strongest solar radiation on the planet, with rays well over 4000 Kcal/(m²/día) common in the Atacama. To date, the Government's efforts have focused mainly on providing remote locations with solar panels.

Due to the small nature of these remote solar projects, there is more room for smaller companies to operate, but also fewer funding opportunities from Government agencies like Corfo.

The mining industry has already shown interest in getting a higher proportion of its energy from solar power. The natural gas supply crisis in Chile has affected the industry deeply, and miners have had to turn to diesel to meet energy needs.

Mini-hydropower

The vast network of lakes and rivers in Central to Southern Chile makes mini-hydropower projects a promising renewable energy source. According to Corfo, there is a potential for at least 850 MW of mini-hydropower from more than 290 channels (or small dams owned by agricultural channel management associations).

A recent change in water regulations has relaxed the requirements for hydropower projects, and led to an increased number of mini-hydropower and run-of-river projects. For its part, Corfo is funding more than 50 feasibility studies that could yield more than 300 MW, with an investment of around US$400m.

Biomass for power

Chile's logging industry and the waste that it generates makes biomass an option in the south of the country. Corfo, citing numbers from a study by German development agency GZT, believes that this industry alone could generate up to 470 MW of power. A separate study by the Chilean Government's Forestry Institute, Infor, estimates the industrial sawmill industry alone could generate up to 900 MW.

Biogas projects are already underway with 150 MW currently available from landfills and sewage treatment plants. Power generated from biomass projects in Chile are currently added directly to the grid, mainly through electrical co-generation plants that use industrial waste from the pulp and paper industry.

Marine sources of energy

Chile's vast coast makes it a prime location for wave generation projects. However, in Chile this resource has received scant attention. Corfo does have plans to launch a feasibility study for wave power in the short term, but as yet there is no solid delivery date or plans to finance projects.

Despite this apparent lack of interest from Chilean parties, foreign firms are showing interest in developing wave energy projects. For example, speaking at the conference, Carl Reiff, president of California-based wave energy firm Elgen Wave, sees the south of Chile as being a potential source of wave energy due to the high swells that the area experiences on a regular basis. Moreover, investing in Chile is also attractive due to the stable political environment and lack of any developed competition from other wave energy initiatives, Reiff added.

The potential for renewable energy to play a crucial role in Chile's future energy is, as in many countries, wholly apparent. The interest exists and, despite limited progress in the past, the country now appears to be taking its first fledgling steps towards a more renewable future.