Chile’s Transition to Clean Energy Matrix

By Thomas Andrew O’Keefe*

Giant wind turbines in Northern Chile

Parque Eólico Canela in Coquimbo, Chile, one of many wind-producing farms in Northern Chile. / Wikimedia / Creative Commons

Since Michelle Bachelet’s return to the presidency in March 2014, Chile has aggressively pursued an ambitious program to transition the country’s energy matrix toward non-conventional renewable resources.  The emphasis on non-conventional includes mini-hydro facilities with a generating capacity under 20 Megawatts, geothermal, solar, wind, biomass, and potentially ocean currents.  Chile aims to generate 60 percent of its electricity from domestic renewable energy resources (including all forms of hydro) by 2035, and 70 percent by 2050.  To encourage that transition, Chile is one of only two Latin American countries (the other being Mexico) to establish a carbon tax, under which energy-intensive industries and utilities that exceed mandated emissions levels are charged US$5.00 per ton of CO2 emissions.  Chile’s drive to adopt a cleaner energy matrix is motivated as much by a desire to reduce greenhouse gas emissions as it is to enhance energy security.

  • During the mid-1990s, Chile faced consecutive years of severe drought that had hugely detrimental impacts on the country’s dams, responsible at the time for around 50 percent of the country’s electricity. An abundance of natural gas in neighboring Argentina led to the construction of pipelines across the Andes and new thermal generators in Chile, but Argentina began cutting natural gas exports in 2004 (and eventually stopped them altogether) because disastrous policies there had caused domestic shortages.  Bolivia, in turn, rebuffed Santiago’s entreaties to purchase its gas unless Chile granted it territorial compensation for the loss of Bolivian access to the Pacific after the 19th century War of the Pacific.  Chile had to build two expensive receiving terminals to import Liquefied Natural Gas (LNG) from East Asia as well as Trinidad and Tobago.  The Chileans were also forced to use more coal and diesel, exacerbating the already precarious air quality in many Chilean cities, particularly during the winter.

In recent years, more than half of all investment in non-conventional, renewable energy in Latin America and the Caribbean has been directed to Chile, primarily to build solar and wind parks to supply the mining industry in the north of the country.  The shift to renewable energy has largely been financed by the private sector, with no subsidies other than reimbursement for small-scale photovoltaic and other nonconventional contributors to the grid at the full retail price (and no transmission charge).  Chile’s antipathy to subsidies reflects the country’s market-based economic orientation and a conscious decision to prioritize state-of-the-art renewable technology sourced from elsewhere rather than encourage the development of its own industry.  The recent investment boom in renewables was driven by the business-friendly climate, the fact that Chile is not a significant hydrocarbons producer, and the inflationary impact of the last three years of drought on the price of hydroelectricity.

Chile has several other things going for it in achieving its goals, including a good regulatory framework and resources that are in growing demand.  Chilean regulators allow generators to sell electricity in only one of three time blocks during the day — giving solar and wind power a competitive edge in public purchase agreement auctions.  This more than halved the bidding price offered by generators and made solar power competitive with natural gas and even electricity sourced from hydro.  In the near future, as the country’s energy matrix shifts to greater reliance on solar and wind power, Chile intends to utilize hydroelectricity to supply peaks in demand for electric power (usually in the evening hours) to make up for intermittencies in sunshine and wind.  (At the moment, fossil fuels provide that function.)  New developments in storage technology will also help.  Chile is one of the world’s largest producers of lithium, needed to make storage batteries.  The interconnection of Chile’s northern and central grids in 2018 should also facilitate greater use of different renewables and redirect the electric power generated from them to where it is most needed.  Chile, already a leader in Latin American alternative energy production, is poised to enhance that position.

September 11, 2017

* Thomas Andrew O’Keefe is President of Mercosur Consulting Group, Ltd.  He taught a seminar on “Energy and Climate Cooperation in the Americas: The Role of Chile” at Stanford’s Santiago campus during the summer 2017 quarter.

Latin America: End of “Supercycle” Threatens Reversal of Institutional Reforms

By Carlos Monge*

Monge graphic

By Eduardo Ballón and Raúl Molina (consultores) and Claudia Viale and Carlos Monge (National Resource Governance Institute, América Latina), from Minería y marcos institucionales en la región andina. El superciclo y su legado, o las difíciles relaciones entre políticas de promoción de la inversión minero-hidrocarburífera y las reformas institucionales, Reporte de Investigación preparado por NRGI con colaboración de la GIZ, Lima, Marzo del 2017. See blog text for high-resolution graphic

Policies adopted in response to the end of the “supercycle” have slowed and, in some cases, reversed the reforms that moved the region toward greater decentralization, citizen participation, and environmental protection over the past decade.  Latin American governments of the left and right used the commodities supercycle to drive growth and poverty reduction at an unprecedented pace.  They also undertook institutional reforms aimed at improving governance at large.

  • Even before demand and prices for Latin American energy and minerals began to rise in the early 2000s, some Latin American countries launched processes of decentralization (Colombia and Bolivia); started to institutionalize mechanisms for citizens’ participation in decision making (Colombia and Bolivia); and built progressively stronger environmental management frameworks (Colombia and Ecuador). Peru pressed ahead with decentralization and participation at the start of the supercycle, and when it was in full swing, created a Ministry of the Environment.
  • Implementation of the reforms was subordinated by governments’ overarching goal of fostering investments in the extractive sector. Indigenous consultation rights in Peru, for example, were approved in the second half of 2011, but implementation was delayed a year and limited only to indigenous peoples in the Amazon Basin.  President Ollanta Humala, giving in to the mining lobby, claimed there were no indigenous peoples in the Andes and that no consultations were needed around mining projects.  Local pressure forced a reversal, and by early 2015 four consultation projects on mid-size mining projects were launched.

These reformist policies have suffered setbacks since the decrease in Asia’s and particularly China’s appetite for Latin American energy and minerals has caused prices to fall – and the value of exports, taxes, and royalties, and public incomes along with them.  The latest ECLAC data show a decline in economic growth and a rebound of poverty both in absolute and relative figures.  The gradual fall in the price of minerals starting in 2013 and the abrupt collapse in oil prices by the end of 2015 reversed this generally favorable trend.

The response of the governments of resource-dependent countries has been “race to the bottom” policies, which included steps backward in fiscal, social, and environmental policies.  Governments’ bigger concern has been to foster investments in the new and more adverse circumstances.  In this new scenario, the processes of decentralization, participation, and environmental management have been negatively impacted as local authorities and citizens’ participation – as well as environmental standards and protocols – are perceived by companies and rent-seeking public officials as obstacles to investments.

  • Peru’s Law 30230 in 2014, for example, reduced income tax rates, weakened the oversight capacity of the Ministry of the Environment, and weakened indigenous peoples’ claim public lands.

The correlation between the supercycle years and the progress and regressions in reforms is clear. (click here for high-resolution graphic).  During the supercycle – when huge amounts of money were to be made – companies and government were willing to incorporate the cost of citizen participation, decentralization and environmental standards and protocols.  But now, governments are desperate for new investments to overcome the fall in economic growth and extractive rents, and extractive companies are not willing any more to assume these additional costs.  Those who oppose the “race to the bottom strategy” are fighting hard to restore the reforms and to move ahead with decentralization, increased participation, and enhanced environmental management, to achieve a new democratic governance of the territories and the natural resources they contain.

April 7, 2017

* Carlos Monge is Latin America Director at the Natural Resource Governance Institute in Lima.

Mexico: Environmental Initiatives Likely to Stir Things Up

By Daniela Stevens*

mexico-environment

Mexico City’s Reforma axis under a blanket of smog / Lars Plougmann / Flickr / Creative Commons

Mexico has made a big push on climate issues over the past month that could have far-reaching consequences internally and in the hemisphere.  On August 16, it announced a pilot Emission Trading System (ETS), also known as “cap-and-trade,” that will begin a simulation in November and officially initiate trading carbon permits in 2018.  Two weeks later, at the second Climate Summit of the Americas (CSA), the Mexican federal government signed a joint declaration with the Canadian provinces of Ontario and Québec to advance “cooperation activities on carbon markets.”  Mexico’s motives are not immediately clear.  For a middle-income nation, with annual growth (around 2 percent) compromised by the crash in oil prices, an ETS represents a potentially significant economic burden.  Mexican officials have not explained, moreover, how they might link their cap-and-trade to the Canadian provinces’ systems and to the Western Climate Initiative (WCI), North America’s largest carbon market and the second largest in the world.

The moves may be driven by increasing Mexican belief that more assertive, market-oriented approaches are necessary to meet its international commitments.

  • Mexico is dependent on fossil fuels for over a third of its total energy production, wreaking havoc with the country’s air quality. Over the last few months, Mexico City decreed several “environmental contingencies,” situations of abnormally high concentrations of ozone in the atmosphere.
  • Moreover, Mexico may be seeking the advantage that increased regional cooperation represents. Its international commitments on emission reductions are very ambitious, and a linkage to its North American partners lends itself almost as a natural solution to help in the advancement of its pledges.  Mexico could export sectoral offsets that American and Canadian partners need – contributing to Mexican revenues and to market stability.  Mexico would also benefit from the resulting transfer of information expertise, technology, training, and methodologies.
  • An important first step for the Mexican authorities would be to commit the resources to establish the robust institutional mechanisms and capacities to launch, monitor, enforce and sustain a system as intricate as a national ETS, and only after that, lend itself as a reliable partner in an internationally linked market.

The details of the pilot ETS have not been publicized, and the agreement with Québec and Ontario does not establish commitments beyond “identifying opportunities for linking systems as much as possible.”  Mexican companies already voluntarily buy and sell carbon bonds on a small national market – a system complemented by a carbon tax in place since 2013 – but an enforced and internationally linked market would highlight the disparities among the North American nations – and represent a challenge to Mexico.  Unlike its partners, Mexico is still an industrializing nation, with a thriving motor vehicle industry, and industrializing nations have traditionally been reluctant to pricing emissions.  Industrialized countries are the highest historical emitters and reached that status of development by polluting without paying the price.  Although the need to prioritize economic growth does not exempt Mexico from fulfilling its commitments as the eleventh highest global emitter, it does signal that besides opportunities, Mexico faces challenges with trading partners at different stages of development.  The Climate Summit of the Americas showed, however, that regional fora and of subnational partnerships can further environmental commitments beyond the global and national summits.  The CSA signaled an opportunity for the region to develop North American or, more ambitiously, hemispheric solutions to climate change.

September 15, 2016

* Daniela Stevens is a PhD candidate in the American University School of Public Affairs.  Her research focuses on national and subnational policies that put a price on carbon emissions.

Mexico: Reform Promises Boost in Energy

By Amy Ruddle

Photo credit: Wonderlane / Foter / CC BY

Photo credit: Wonderlane / Foter / CC BY

Landmark reforms passed by the Mexican Congress last month – amendments to three articles of the Constitution – allow private investment in the country’s energy industry for the first time in 75 years. They open the door for international companies to enter into joint ventures with Petróleos Mexicanos (PEMEX), with the first round of contract bidding slated for 2016 – and increased oil and gas production as soon as 2018. PEMEX will remain state-owned and all hydrocarbons in the ground will continue to belong to Mexico, but private companies will gain rights to oil at the wellhead and be permitted to participate in site exploration, gas and oil production, seismic analyses, and the transportation, marketing and refining of these resources. They will also be allowed to bid for rights to conduct offshore and shale exploration.

Although the oil industry is expected to attract billions of investment dollars – PEMEX signed a cooperation contract with Russia’s Lukoil last week for an undisclosed amount – Mexican officials say they’re not rushing into deals. Undersecretary of Hydrocarbons Enrique Ochoa Reza recently said that the government is proceeding carefully, taking cues from Brazil and Norway as examples of how energy reform can be executed successfully. “In order to do it right – and we are committed to doing this – we need to do it one step at a time,” he said. The Mexican government’s hope is to return oil production (roughly 3 million barrels per day in 2012) to its 2000 levels (3.5 million) by 2025, and possibly 4 million barrels in the distant future.  In addition to creating jobs, the government projects the reforms will increase GDP by 1 percent by 2018, and by 2 percent by 2025. Increased revenues should stabilize budgets, fund a long-term savings mechanism, and eventually support long-term projects including the universal pensions system, scholarships, and science and technology research.

The next hurdle in energy reform will be passage of secondary legislation over the next five months — and faithful implementation. The transparency mechanisms written into the constitutional reforms, including public bidding rounds, transparency clauses in energy contracts, external industry audits, and the full disclosure of all payments related to oil and gas contracts are essential to success, but overcoming the corruption and inefficiency that have plagued PEMEX will require sustained effort. In addition, President Peña Nieto still has to sell these changes to the Mexican people. Tens of thousands of citizens took to the streets to protest the changes in early December, and opinion polls show that many, if not most, Mexicans are not in favor of them. Polls conducted by Vianovo in September (still deemed to be among the most accurate) show that only 33 percent of respondents favor profit-sharing contracts between the government and private companies to explore and produce hydrocarbons, although 53 percent were at least somewhat in favor of the energy reforms overall. Unions are upset too, as the union representing PEMEX’s 140,000 employees has now been eliminated from the company’s board, and private firms benefiting from the reforms may create labor contracts without union involvement.