Renewable energy in Chile: Bright prospects on the horizon

Felipe Bahamondez of Bahamondez Alvarez & Zegers in Santiago explains the rich opportunities opening up in Chile’s renewable energy market

Renewable energy (‘RE’) is a powerful trend across the world. The need to reduce global greenhouse gas emissions and the risks to the environment and humans posed by climate change (‘CC’) has played a significant role in the increasing importance of renewable sources of energy. Governments in most of OECD countries are facing the conflict of growing electricity demand, on the one hand, and the urgency to reduce the emissions from fossil fuel generation to meet CC targets.

Renewable portfolio standards and renewable electricity standards

There is an urgent need for a more green balance with renewable energy sources. There are different techniques that have been developed to deal, from a legal point of view, with the reduction of the carbon content of energy sources. Among the most relevant ones is the obligation for regulated utilities to include in their portfolios a certain amount of renewable energy called renewable portfolio standard (‘RPS’s’).  In fact the RPS’s, also known as renewable electricity standards (‘RES’s’), are a consequence of renewable goals or mandates contained in statutes that are enacted as mechanisms to encourage the construction and development of renewable generating facilities. The basic idea behind the RPS is that defined electricity suppliers must have a certain percentage of their electricity from renewable energy sources or, alternatively, they must acquire renewable energy credits from others to meet the legal standard. Typically, the RPS’s programs establish an increasing mid or long-term mandate that has to be met, including as well the reporting requirements and the use of sanctions for shortfalls or failure to meet the prescribed RPS requirement. As the literature acknowledges, one thing is the mandate that RPS provides but in order to make it work appropriately it needs the development of other areas of the energy business such as the transmission infrastructure required to bring the renewable power to market, considering that they are normally located at a considerable distance from the energy consumption areas.

Background

The situation in Chile regarding its renewable energy policy follows basically the international trend in this matter, including the legal response of setting up renewable energy mandates. The energy matrix in Chile presents several features to consider i.e. a considerable dependency of imported fossil fuels such as oil and gas; very high marginal cost of electricity; increasing demand for electricity in a growing economy and the urgent need to diversify the energy matrix beyond generation based on fossil fuels. In light of the above, 2008 saw Law No. 20.257 enacted (subsequently amended in 2013 by Law No. 20.698) that expressly regulated the non-conventional renewable energy (‘NCRE’) in the energy matrix by way of facilitating the building of these projects and creating a forced demand by law through a kind of RPS mechanism that mandates all electricity companies selling energy to distribution companies or final customers to assure that a given percentage of the energy they sell comes from NCRE. The principles that inspired Law No.20.257 of 2008 were:

(i) the principle of efficiency and competition, that is, the most economic NCRE projects should be constructed;

(ii) the principle of effectiveness, that is, the NCRE projects should in reality start to be built in the country in the short term;

(iii) the principle of fairness, the introduction of NCRE should include both regulated and non regulated customers and;

(iv) the principle of simplicity, the statute must be compatible with the DFL No. 1 General Law of Electricity Services (‘LGSE’) and the overall electricity market in Chile. 

The main obligations arising from original Law No.20.257 and subsequent Law No.20.698 of 2013 are the following: 

1 Scope of the Non Conventional Renewable Energy Mandate.

All electricity companies obtaining energy from electricity systems with installed capacity greater than 200MW, namely in Chile the Northern Interconnected System  (‘SING’) and the Central Interconnected System (‘SIC’), in order to sell to distribution companies or to final customers either subject or not to price regulation, must demonstrate to a regulatory entity called CDEC’s Tolls Direction, that the equivalent of 20% of its energy withdrawals in each calendar year has been injected to the respective System by means of NCRE, either their own or contracted. Considering that originally Law No. 20.257 set a lower threshold of 10% that was later increased to 20% by Law No. 20.698, a distinction shall be made depending on the time of signing the respective contracts: (i) For contracts signed after July 1 2013, the obligation shall be 5% by 2013, increasing by 1% starting 2014 to reach 12% by 2020, and increasing by 1.5% by 2021 to reach 18% by 2024, and increasing by 2% in the year 2025 to reach 20% the very same year. (ii) For contracts signed between August 31 2007 and prior to July 1 2013 the obligation shall be 5% for years 2010 to 2014, increasing 0.5% annually starting in 2015 and reach a 6% by 2016 and so on, to finally reach a 10% by 2024.

2 NCRE’s mandate time period

The obligation lasts for 25 years and started in January 1 2010. Therefore the obligation lasts until 2034 and thereafter 2025, the year of mandate’s completion, the companies will need to demonstrate fulfillment of the 20% from NCRE. For contracts to which the original 10% applies, as explained above, companies will need to demonstrate the fulfillment of that percentage between 2024 and 2034.

3 Public registries

The CDEC’s Tolls Directions of the SING and SIC shall act coordinated among themselves and carry a consolidated public registry regarding the obligations, injections and transfers of NCRE of each electricity company, as well as all information pertaining to compliance with the mandate. In addition, Law No. 20.698 includes the obligation to carry a public registry in order to reflect the transfers an values of NCRE’s certificates issues by said entities.

4 Sanctions or penalties

There are monetary sanctions or penalties in the event of noncompliance. In the first place, there is a penalty proportionate to the company’s obligation equivalent to 0.4 UTM for each MW/h of NCRE’s deficit. The UTM is a local monetary unit and 1 UTM is equivalent to approximately $75. The penalty shall be increased to 0.6 UTM for each MW/h of NCRE’s deficit if the company, within 3 years, is again in a noncompliance situation.

5 Use of the proceeds 

The proceeds obtained through the sanction’s application shall be used in favour of companies’ customers that have fulfilled the obligations and final customers as well, in proportion to their energy consumption during the year of noncompliance. The respective CEDEC shall calculate the amounts involved and manage the pertinent payments by the companies. Any potential conflict related to this particular matter shall be decided by the Expert Panel of the LGSE, an expert tribunal for conflicts related to the electricity sector in Chile.

6 Permission or waivers for temporary noncompliance

There are a few permissions or waivers for temporary noncompliance of the mandatory percentage such as the alternative given to the companies to demonstrate compliance by way of NCRE injections done in the immediately prior calendar year, provided they have not been used for compliance in that particular year. Additionally, any company with a deficit of NCRE, with a limit of 50% of it, may postpone its obligations for that calendar year provided that it informs the issue to the Superintendency of Electricity and Fuels (‘SEC’) prior to March 1 of the next calendar year.

7 Flexibility to achieve the NCRE ‘s mandate

The statute provides some flexibility to the companies to facilitate compliance such as the alternative for companies that have exceeded in a calendar year the required percentage, either by way of its own generation or contracted energy, they may agree to transfer that excess of generation to other companies, including the chance to transfer it to a company that operates in a different electricity system. 

8 Public bids for NCRE

In order to foster the development of NCRE projects, Law No. 20.698 includes the NCRE’s annual bid process. In this regard, the Ministry of Energy (‘ME’) shall lead the bid and it may call for up to two bids per year in the event the first bid is not successful. The main purpose is to fully satisfy the mandated percentage that will be required in the three years ahead that will not be satisfied by operating projects or projects currently under construction. There are detailed rules that regulate the entire bid process, including who may participate, price, award of the bid process, among others. The general and declared purpose of this mechanism is to provide support for the development of NCRE projects by means of facilitating the demand for that energy.

9 Conclusions

In recent years Chile has taken serious steps to incorporate NCRE into it energy matrix and it should reach 20% of NCRE by 2025. It is a very ambitious goal. The road to achieve that is not simple at all, but the minimum necessary incentives are already in place. Additionally, our territory has probably several competitive advantages to implement RE technologies that are mature in the world taking advantage of lower market prices such as solar and wind technologies. In particular, it is worth noting the recent interest that solar energy has created among the major energy players around the world who are looking to the north of Chile, with very favorable solar radiation conditions, as the perfect site to develop new solar projects that will serve a growing demand of renewable energy.

Felipe Bahamondez

Partner

Bahamondez Alvarez & Zegers

Santiago

About the author

Mr Bahamondez is the partner in charge of the areas of energy, natural resources and regulation at the firm, advising local and international clients in energy projects to be developed in Chile, including non-conventional renewable energy, water, natural gas and LNG, environment, competition and regulated markets, and corporate matters related to above issues. He has also published in various journals specialising in the areas of energy and infrastructure.