Chile's energy consumption is dominated by its mining sector, which accounts for about 35 percent of total consumption. Mining is the country's main source of income, and copper is by far the most important ore mined in Chile; the country possesses nearly 30 percent of the world's reserves and is the foremost global producer.
The copper industry alone represents 13.5 percent of the Chilean gross domestic product — a figure that has more than doubled in 10 years, mainly due to East Asia's sharply increasing demand for the commodity. To match the expected growth in global demand and to counterbalance the rising competition from regional and international producers, the Chilean government has set the goal of producing 7 million metric tons of copper annually by 2020, up from 5.3 million in 2010. However, this goal may prove to be overambitious because of the shortage of cheap energy.
The lack of corresponding plans to develop the electricity generation sector poses a serious challenge as Chile tries to consolidate its position as the world's premier copper producer. The Chilean Mining Ministry estimates the country will need an additional capacity of 8,000 megawatts by 2020 to meet the mining sector's rising demand. This represents a 50 percent increase over current production capacity.
Foreign investors' interest in Chilean mines had already been declining due to the shortcomings of the country's energy sector, but more than $19 billion worth of potential investments in Chile's north are now being reconsidered after the Aug. 28 ruling against the joint venture by German utilities giant E.On and Brazil's MPX Energia. The proposed $4.5 billion Central Castilla facility would have been the country's largest coal-fired plant, with a projected power output of 2,100 megawatts.
The main concern for foreign investors is not so much that the electricity will be unavailable or that the grid itself will fail and cause blackouts, but rather that the lack of new facilities coming online amid increasing demand will make energy too expensive and thus make Chilean ore uncompetitive. Copper mining is already the second-most energy-intensive ore industry after aluminum, and energy costs are a significant factor in determining additional investment.
Compounding the problem, Chile's geography makes it very difficult to develop and strengthen an integrated national electricity grid. The country effectively has two major separate electricity grids: one in the center, the Sistema Interconectado Central; and one in the north, the Sistema Interconectado del Norte Grande.
The Sistema Interconectado del Norte Grande network is overwhelmingly dedicated to powering the mining operations in the sparsely populated north, specifically the Atacama and Antofagasta regions. The Sistema Interconectado del Norte Grande network has an installed capacity of 3,700 megawatts, 87 percent of which is derived from coal, oil or natural gas thermo-electric plants. The largest centers of energy generation and consumption in Chile are located in the populous center of the country and rely on the Sistema Interconectado Central network, which can generate up to 11,700 megawatts. This network provides power to the bulk of Chile's businesses and its public, and half of its capacity comes from hydroelectric and renewable sources.
Both networks are under tremendous stress to supply Chile's economic growth and have experienced several disruptions in the past. The most severe disruptions to the Sistema Interconectado Central network have occurred after natural disasters such as a major drought in 2008 and an earthquake in 2010.
Until 2010, Chile relied on Argentina to supply up to 15 percent of the electricity used on the Sistema Interconectado del Norte Grande network, but regular electricity imports into northern Chile have all but stopped due to Argentina's own rising domestic demand, and it is under even more pressure.
In order to preserve the growth of its mining sector, Chile is considering all the available options for producing electricity, including hydropower, oil, natural gas and coal, though each has drawbacks. It will also have to contend with a protest movement against electricity generation methods potentially harmful to the environment and an increasingly gridlocked political system unable to push through economically necessary, if controversial, energy projects.
