Fostering Renewable Energy Sources in Chile

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					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 and Development Division Economic Development Agency (CORFO) CHILE

Presentation’s Summary
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Context The Chilean Electric Market The amendments of the Electric law (2004 and 2005) The CORFO’s Agenda on Renewable Energies and the CDM

Energy Background
Chile has not achieved (and won’t in the near future) a decoupling between economic growth and energy consumption

400 Energía y Crecimiento: Chile 1970-2002 350 300 250 200 150 100 50 0 1970 1974 1978 1982 1986 1990 1994 1998 2002 Años Consumo energético PIB

Indice (1970=100)

The Electric sector in Chile (1/3)
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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.

Electric sector (2/3)
Electric Systems in Chile -Installed Capacity, 2004System Hydr3 MW 13 4619 17 0

% 0,4 59 50 0

Renewables1 Eolic MW %
0 0 2 0 0 0 6 0

Thermal2
Biomass MW % 0 153 0 0 0 2 0 0 MW 3620 3108 15 78 % 99,6 39 44 100

SING SIC Aysén Magalla.

Total

4.649

40

2

0,0

153

1,3

6.822

58,7

No interconnection between systems.
Source: Comisión Nacional de Energía, 2004

1. Include all kind of Renewable 2. Without biomass 3. Mainly big dams, 100 MW of small run-off-river (<20MW)

Electric sector (3/3): Central Interconected System
Evolution 1992 - 2001
SIC: annual gross electric generation SIC: Evolución de la generación anual
35000 30000 25000
GWh

20000 15000 10000 5000

Drought

0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
HIDRAULICA
Source: CDEC SIC

TERMICA

Situation of S&M sized Non-Conventional Renewable Energy Projects
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By default legal discrimination against small-and medium-sized projects.
 Historical context  Loose planning approach

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Very little contribution nation-wide…why? Because there wasn’t 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 S&M 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

Electric crisis
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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.

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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.

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.

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

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.

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 

Possibility to sell to independent clients, to the distributor and to the spot market.
No connection toll fee (< 9MW) or partial toll fee (>9 and <20 MW ). 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

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ABOVE ALL: IT CREATED CASH FLOW (Long-term incentive) for the projects.

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.

Project
Small Hydro


Generation (MW)
3,5

Location
Region IX

IRR (before law)
5,8%

IRR (after law)
16-18%

Before law: Only generation regulated price + toll  After law: Mg cost rule + regulated price for installed capacity – less toll  No carbon credits included

CORFO’s Actions to Foster the Renewable Energy Sector
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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.
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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.

CORFO’s call for tenders (1/4)
Portfolio so far (out of the 77):
Typology
Mini Hydro

No. of Projects
19

Investment (MMUS$)
178

Generation Capacity (MW)
113

Eolic Biomass
Total

13 6
38

371 76
625

107 19
239

CORFO’s call for tenders: By source (2/4)
Quantity of Proyects by Kind of Energy
19 20 18 16 14 13

QUANTITY

12 10 8 6 4 2 6

er

as s

Po w

W

Bi

Energy

H

yd ra

om

ul ic

in

d

po w er

po w

er

CORFO’s for tenders: Investment by source(3/4)
Investment by Kind of Energy
371
400 350 300 250

MMUS$

178

200 150 100 50 -

36

Po we r

po we r

m as

Bi o-

Energy

H

yd ra

W

uli c

s

in d

po we r

CORFO’s call for tenders: Generation (4/4)
Power by Kind of Energy
107.500 120.000 113.086

100.000

POWER KW

80.000

60.000

40.000

19.965

20.000

-

Po we r

po we r

m as

Bi o-

Energy

H

yd ra

W

uli c

s

in d

po we r

Thank you!!

Assessment Criteria
1. Project developer strengths: Key competences, financial status, commercial strategy.

2. Technical-financial analysis: Business model, feasibility, profits. 3. Economic impact in the region/country: Territorial development, market access to other activities, labor creation.
4. Capacity of the consulting firm: Implementation of the feasibility study.

5. Quality and consistency of the proposal: Phases, gantt map, costs. 6. Level of project’s development: Maturity of the project, pre-investment analysis already done.
7. Reduction potential of GHG: Key consideration to improve the financial condition of the projects.

8. Time-frame: Estimated time to operation
9. Funding requested: Measures the degree of commitment since it is a matching fund scheme.

10. Study’s market price: Consistency with market prices of the proposal.

The program for rural electrification
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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.

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 nonconventional renewable will grow.
Electric Generation with Renewables: Europe v/s Chile
90 80
70 60

%

50
40

Chile 2004 Chile 2010

1997 Situation 2010 TARGET

30 20
10 0

Luxemburgo

Países Bajos

Source: CNE, CDECs and EU Directive 2001/77/CE

Reino Unido

Dinamarca

España

Irlanda

Portugal

Grecia

Alemania

Finlandia

Francia

Bélgica

Austria

Suecia

Italia

UE

CDM situation in Chile (1/3)
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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

CDM situation in Chile (2/3)
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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

CDM situation in Chile (3/3)
Small- and medium-sized projects face several barriers:
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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) Methodology’s development

Currently, many small- and medium-sized projects have not been able to overcome some of these barriers

Electric Law (Nº 19.940): Special rules for generation facilities whose installed capacity is less than 9 MW (2/3)
Right to be connected to distribution grids
 Generators must accomplish quality and safety standards.  Access to grid is guaranteed in order to bring the energy to the system.  Predictable Market Prices to assess expected profitability for projects.  Reduce the variability of the spot marginal costs, stabilizing project’s income.

Selling energy at the marginal stabilized cost

CDEC: Dispatch and coordination with special procedures

 Fixed cost reduction for System’s Coordination, Control and Administration for small generators.

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

Additional Investment to secure connecting of small generation and Connecting Costs

 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)


				
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