Fostering Renewable Energy Sources in Chile: A crossroad approach between legal and financial incent

1
Fostering Renewable Energy Sources in Chile A
cross-road approach between legal and financial
incentives

• UNFCCC Workshop on Innovative Options for
  Technology Transfer Financing
  
• Bonn, 20-21 October 2005

Orlando Jiménez (Ph.D.) Deputy Head, Investment a
nd Development Division Economic Development Agen
cy (CORFO)
CHILE
2
Presentations Summary

• Context
• The Chilean Electric Market
• The amendments of the Electric law (2004 and
  2005)
  
• The CORFOs Agenda on Renewable Energies and the
  CDM

3
Energy Background
Chile has not achieved (and wont in the near
future) a decoupling between economic growth and
energy consumption
4
The Electric sector in Chile (1/3)

• Total installed capacity for grid connected
  systems 11.626 MW (source CNE 2004)
  
• Four main electric systems SING, SIC, Aysen and
  Magallanes. SING (29) and SIC (70) concentrates
  99 of total installed capacity.
  
• Generation, transmission and distribution
  operated by different enterprises to avoid
  vertical integration (legal requirement)
  
• Generation market highly concentrated and shared
  by 7 large companies. Small companies account for
  only 10 of installed capacity.
  
• Dispatch according to the rule of the least
  operation marginal cost.
  
• Energy (spot market) paid according to the
  operation marginal cost of the whole system
  
• 95 coverage for rural households demand, highly
  subsidized for investment and operation.

5
Electric sector (2/3)
No interconnection between systems.
Source Comisión Nacional de Energía, 2004
6
Electric sector (3/3) Central Interconected
System
Evolution 1992 - 2001
SIC annual gross electric generation
Drought
Source CDEC SIC
7
Situation of SM sized Non-Conventional Renewable
Energy Projects

• By default legal discrimination against small-and
  medium-sized projects.
  
• Historical context
• Loose planning approach
• Very little contribution nation-widewhy? Because
  there wasnt any market for them! Just, so many
  entry barriers
  
• Higher investment costs
• Difficulties to connect to the grid (access to
  the discretion of the grid owner)
  
• This situation created a de-facto system of
  discrimination against SM sized projects. This
  monopsonic relationship led to far below market
  prices paid to the generator.
• Hookup toll fee for small generators
• No recognition of backup generation capacity

8
Electric crisis

• 1998 Severe drought in central and southern
  Chile affecting SIC system (70 of installed
  capacity 85 of population). Electric supply
  shortages during 1998 and early 1999, affecting
  industries and households.
• 2004 and 2005 Natural Gas supply reduction from
  Argentina affecting both SING and SIC systems. No
  shortage on electric supply recorded but spot
  prices rose (4 to 5 times) due to generation with
  diesel.

9
Electric Law Amendments (Law 19.940, March 2004)
Article 91 (1/3)
Regardless its size, generation technology and
energy source, the generator is entitlement to

• Sell its energy to the system at the spot market
  price.
  
• Distribution grid owner is responsible for doing
  the additional work needed to connect the new
  facility and the generator pays the costs.
  
• Price paid for installed capacity or the backup
  capacity during peaks of demand.
  
• Possibility to sell to independent clients, to
  the distributor and to the spot market.
  
• No connection toll fee (fee (9 and
• Generators (all size) are free to establish
  energy supply contracts with any consumer with
  power demand over 500 kW. Before the law, this
  size was 2.000 kW
• ABOVE ALL IT CREATED CASH FLOW (Long-term
  incentive) for the projects.

10
Impacts of the Law 19.940

• The operation in the spot market, the
  recognition of installed capacity (backup
  capacity during peaks), and the actual
  possibility to sell the energy improved the
  profitability of renewable energy projects,
  making the most out of them.

11
CORFOs Actions to Foster the Renewable Energy
Sector

• Feasibility Fund (1,5 US million annually)
• Call for tenders on Renewable Energy projects
• Launched on July 2005. 77 developers presented
  proposals. Currently in the assessment process to
  allocate resources to the best ones.
  
• Up to US 50.000 per project
• Matching fund nature of the scheme has a
  filtering effect
  
• Assessment criteria Aimed to buy certainties on
  the profitability and the risk of the projects.
  
• Use the CDM to improve the financial conditions
  of the projects.
  
• Carbon Market Program
• Launched in June 2005, intended to support
  projects in order to overcome main barriers
  identified.

12
CORFOs call for tenders (1/4)
Portfolio so far (out of the 77)
13
CORFOs call for tenders By source (2/4)
14
CORFOs for tenders Investment by source(3/4)
15
CORFOs call for tenders Generation (4/4)
16
Thank you!!
17
Assessment Criteria
18
The program for rural electrification

• The government invests when private investment is
  not profitable, but social economic assessment is
  positive
  
• The investment decision is decentralized. Each
  region decide where to do the electrification
  projects.
  
• Operation, maintenance and administration costs
  are paid by users through a fee.
  
• Up to day, 95 of coverage for rural households.
• First option for electrification is connection to
  the grid. When this is not economically feasible,
  in situ generation is used.
  

19
Renewable Energies in Chile and Europa
Although it is very likely that globally, the
renewable share will diminish, comparatively, it
is highly probably that the relative share for
non-conventional renewable will grow.
Source CNE, CDECs and EU Directive 2001/77/CE
20
CDM situation in Chile (1/3)

• DNA established in May 2003
• First project portfolio (20 projects) in
  September 2003
  
• 30 projects presented at Carbon Expo I, on June
  2004
  
• 47 projects presented at Carbon Expo II, on May
  2005
  
• Small Hydro 17
• Eolic 3
• Biomass 5
• Cogeneration 3
• Transport 2
• Landfill (Biogas) 7
• Reforestation 4
• Others 6

21
CDM situation in Chile (2/3)

• 11 Endorsement letters given by the DNA
• 4 registered projects (3 Agrosúper, 1 Nestlé)
• 3 methodologies developed and approved, 2 other
  in process
  
• 3 projects in validation process (using already
  approved methodologies)
  
• 7 projects that have already sold CERs (3
  Agrosúper, Nestlé, Watts, Chacabuquito,
  Hornitos). Main buyers from PCF, Japan and
  Canada.
• Source Conama, Prochile and UNFCCC

22
CDM situation in Chile (3/3)

• Small- and medium-sized projects face several
  barriers
  
• Transaction costs
• Financial barriers
• Energy Market barriers
• Information Asymmetries
• CDM Market barriers (most projects account for
  less than 20.000 tons of CO2 eq. per year)
  
• Methodologys development

Currently, many small- and medium-sized projects
have not been able to overcome some of these bar
riers
23
Electric Law (Nº 19.940) Special rules for
generation facilities whose installed capacity is
less than 9 MW (2/3)

• Generators must accomplish quality and safety
  standards.
  
• Access to grid is guaranteed in order to bring
  the energy to the system.

Right to be connected to distribution grids

• Predictable Market Prices to assess expected
  profitability for projects.
  
• Reduce the variability of the spot marginal
  costs, stabilizing projects income.

Selling energy at the marginal stabilized cost
CDEC Dispatch and coordination with special
procedures

• Fixed cost reduction for Systems Coordination,
  Control and Administration for small generators.

24
Electric Law Special rules for generation
smaller than 9 MW (3/3)

• Distribution Grid Owner is responsible for doing
  the additional work needed to connect the new
  facility. Small generator is responsibly for the
  connecting costs.
• Economically Recognized benefits of small
  generators connected at the distribution levels
  (avoiding transmission losses)

Additional Investment to secure connecting of
small generation and Connecting Costs
25

26
(No Transcript)