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Making Renewable Energy More Competitive in Chile

Chile is facing a major challenge within its power sector over the next decade. Increased demand for power is putting the country on to a high carbon trajectory if capacity is expanded using coal-fired power plants. On the other hand, Chile has incredible potential for expanded renewable energy through solar and wind power production. However, in the current Chilean power market the intermittency of renewable energy is not always competitive.

Through the Mitigation Action Implementation Network (MAIN), CCAP is supporting developing countries in both Asia and Latin America in the design, development and implementation of Nationally Appropriate Mitigation Actions (NAMA). As part of the second Asia Regional Dialogue being held in Vietnam this week, CCAP’s Director of Finance and Operations, Anmol Vanamali is providing an overview of CCAP’s close work with the Chilean government in their NAMA design.

In an effort to make Chile’s electricity supply less dependent on imported fossil fuels and to encourage development of nonconventional renewable energy (NCRE) sources, Chile has proposed a NAMA in the form of a Price Stabilization Fund (PSF).

As of 2011, Chile has a total installed domestic electricity capacity of 17 GW through various sources. As seen clearly in the graph at left, Chile is highly dependent on fossil fuels and hydropower, which are influenced by factors beyond Chile’s control, such as international commodity prices for coal and rainfall levels.

Chile’s energy demand is projected to increase by an additional 8,000-10,000 MW by 2020. In order to avoid locking into a high-carbon energy infrastructure (such as coal) and to increase energy security, it is essential that Chile focuses on developing the NCRE potential available in the country. At this moment, about 3 .3 – 5.8 GW of NCRE potential is estimated to be economically feasible while only 0.76 GW has been exploited so far. Despite Chile’s growing energy needs and resource potential, NCRE development has not taken off – despite considerable NCRE potential and a 10 percent NCRE penetration target by 2024 – due to drastic spot-market price fluctuations that constrain NCRE investment. Such spot market fluctuation creates a lack of revenue predictability from NCRE projects that dissuades investors.

The PSF NAMA may be the solution to this barrier that would provide certainty to investors by guaranteeing a floor price to NCRE projects and assuming the spot market price risk. The PSF would initially be funded with international climate assistance and domestic funds. This NAMA would result in significant GHG benefits, strong local health impacts, and significant leveraging of private investment at low cost to donors. This NAMA will also be consistent with the overarching principles of NAMA design such as Leverage, Sustainability, Affordability and Private Sector Inclusion.

As CCAP continues to work with Chile to develop the PSF, examples of NAMA concepts and best practices will be provided not only on the CCAP website but via Facebook, Twitter and the CCAP blog.

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