Chile’s experience transitioning from an energy supply crisis to major investments in renewables

BY MIGUEL SCHLOSS*

January 18, 2024

There are times when crises can provide a sober warning about unaddressed problems than all discourses and learned studies. The crisis detonated almost 15 years ago by the gas supply cutoff from Argentina awakened Chile to its vulnerability, resulting from its excessive dependence on a single source of energy supply, natural gas. This crisis also provided an opportunity to start addressing emerging issues, particularly environmental concerns.

To this end, a simple “benchmarking” exercise was undertaken to enable Chilean power sector stakeholders to learn from what other countries have done with their energy programs in terms of their: (i) impact or results; (ii) all-in costs; and (iii) the required institutional arrangements for implementation.

The results were eye-opening. Whereas countries like Germany embarked on an ambitious recasting of their energy matrix, other countries followed a more gradualist approach to increase their share of renewables. The former approach required a top-down, disciplined investment and tracking effort, resulting in a significant change in the energy matrix, though at a major cost and increased energy risks. This became evident early on during the Ukrainian war, when imported gas supplies were significantly curtailed, triggering an energy crisis. Other countries acted more gradually, hedging, through fuel diversification, the risks of misjudging demand forecasts.

When discussing these outcomes with Chilean civil society organizations, environmental NGOs, and utilities, most stakeholders, particularly final consumers, centered their concerns on affordability (fancy programs being OK, but “not with my money”), energy security and compatibility with the institutional capabilities in the country. In contrast, with the top-down framework implied in international environmental meetings, the approach chosen in Chile centered on “crowding in” the private sector for investments, rather than stretching an already overextended (and consequently slow and ineffective) public sector for such task.

This approach, in effect, encouraged government authorities to center their attention on creating investment conditions through pricing, taxation, and other conditions that would attract financial and human resources from the private sector to finance and manage investments that otherwise would be difficult to handle, given institutional limitations and fiscal constraints.

In the end, progress made spoke for itself.  While it does not provide for longer-term assurance of continued enhancement, its very success “crowds in” new players and solutions.  This generated new competition that require further adjustments in the enabling and regulatory environment, which becomes difficult to accommodate when vested interests constrain adaptation of governance arrangements defended by incumbents.

Overall, Chile has been ranked among the five best performing countries worldwide in terms of increases of renewables in overall energy supply, though leaving a more complex road ahead. Over the last 10 years, the sector has added 14,000 MW in installed capacity, evidencing a favorable investment climate to meet energy demand. Of this, 63% is in renewables, and 75% if hydro and geothermal are included. Another 7000 MW are currently under implementation will enter into service in the near term. In all, CO2 emissions in Chile amounted to 4.96 metric tons per capita in 2022, down from 5.27 tons a year ago.

In conclusion, and at the global level, bottom line seems to be that to keep to 1.5 degrees warming established in international agreements, the world needs to cut emissions in half by 2030.  Currently we are adding emissions. If the top 10 polluters (70% of total), or better the top 20 (80%), agreed to halve by 2030 or before, and could deliver like Chile, there would be real hope of coming closer to the agreed goals.

 

* The author is President, Surinvest Ltda. and member of Bretton Woods Committee; former Executive Director of Transparency International and Director of Corporate and Budget Planning in the Bank.

Disclaimer

Member’s blog posts reflect the views of the author(s), drawing on prior research or personal experience. Freedom of expression is an essential part of the 1818 Society’s culture. The 1818 Society® is a nonpartisan, independent organization and does not take institutional positions.


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