Chile is considering a number of options to boost energy production and preserve the growth of its mining industry. However, hydroelectric power, natural gas, oil and nuclear power all have significant drawbacks that make them unsuitable for Chile's situation. Coal is perhaps the most practical source for cheap energy, but it is also the electricity-generation method that has triggered the most public resistance, galvanizing protests and leading to political challenges for outgoing Chilean President Sebastian Pinera. Whatever its ideological composition, Chile's next government after the December 2013 presidential election will be under pressure to find a way to keep feeding Chile's energy needs.
Chile relies on thermoelectric plants powered by natural gas, oil or coal for 60 percent of its domestic electricity production. Natural gas-fired power plants account for 18 percent of Chile's electricity output, coal-fired plants for 28 percent and oil-fired for 14 percent. Hydroelectric power also satisfies a relatively high share of Chile's energy needs at 36 percent. However, hydroelectric power generation is ill suited to meet the requirements of the growing mining sector because all of Chile's hydroelectric plants are located in the south, nearly 1,600 kilometers (1,000 miles) away from the nearest mining sites.
Chile has considered constructing massive power transmission lines from the hydroelectric power-generating region of Patagonia in the south to the Atacama Desert in the north, but costs and environmental concerns have so far proved prohibitive. High costs have also hampered the development of other potential sources of renewable energy sources like solar and tidal power. Chile's frequent earthquakes are also a major deterrent for the construction of new nuclear power plants, especially since the 2011 Japanese nuclear disaster.
Unlike hydroelectric plants, thermoelectric plants can be placed near mining sites, but require a stable supply of oil, natural gas or coal to produce energy. Chile's indigenous reserves of those hydrocarbons are not nearly sufficient to meet its domestic needs, leading the country to import nearly 75 percent of its energy.
Natural Gas
Natural gas-fired power plants would seem to be an ideal choice for Chile to bridge its industrial energy demand gap. They are generally more environmentally friendly than coal-fired plants — a political priority in Chile — and cheaper to operate than oil or hydroelectric plants. However, Chile is in a difficult position regarding this particular commodity because its lack of indigenous reserves means it must import more than 65 percent of the natural gas it consumes, and its sources for natural gas may be drying up.
The major natural gas producer in the Andean region is neighboring Bolivia, which has refused direct sales of natural gas to Chile since a public referendum in 2004. The ban stems from a long-standing dispute between La Paz and Santiago over Bolivia's claim to sea access. Chile's victory in the 1879 War of the Pacific gave it control over Bolivia's entire coastline, depriving Bolivia of any ports — with dire consequences for its economy. Chile has had to rely on Argentine re-exports of Bolivian natural gas to gain access to the commodity.
However, rising domestic demand from Argentina has reduced the volume and reliability of natural gas exports to Chile, prompting Santiago to turn to liquefied natural gas as an alternative. Between 2008 and 2010, Chile built two LNG import terminals, with a maximum regasification capacity of 5.9 billion cubic meters per year. As a measure of how aggressive the Chilean government has been in pursuing the LNG alternative, by 2010 LNG accounted for 97 percent of Chile's natural gas imports. But LNG-sourced natural gas is problematic because it is one of the most expensive fuels available for power generation. In addition to the high costs of the LNG itself, the specialized infrastructure needed to import LNG sharply adds to the downstream electricity price.
Electricity prices on the Sistema Interconectado Norte Grande network, which supplies the mining operations in the north, more than doubled since it has had to replace Argentina's piped natural gas with LNG, making it far less competitive than other destinations. Despite some progress in the past two years, Sistema Interconectado Norte Grande spot prices have increased more than twentyfold, from $0.043 per kilowatt-hour to $0.96 per kilowatt-hour between 2006 and 2012.
Chile cannot allow high energy prices to make its main revenue source uncompetitive on the international market against rising major copper producers like Mongolia and Peru. Barring a dramatic decrease in global LNG prices, Chile knows it must look to another fuel for cheap and reliable energy generation.
Considering Coal
Currently coal is the most economical source of energy for Chile. The import infrastructure for coal is much cheaper than that of LNG, and coal-fired plants are generally cheaper and faster to build than hydroelectric plants. Coal already supplies the majority of the energy production in the Sistema Interconectado Norte Grande network, but heavier reliance on the commodity is proving to be difficult. Coal has a much higher environmental impact than natural gas — a problem that plays into Chile's current troubled political outlook.
Chile's political opposition to potentially environmentally damaging projects won its first major victory in June 2012 with the successful popular campaign against the construction of a hydroelectric megaproject in Aysen, Patagonia. The project would have flooded some of Chile's most distinctive landscapes and displaced local populations.
Following the protesters' victory against the Aysen hydroelectric project, the Supreme Court issued its ban on the coal-fired E.On/MPX Energia project. Local communities around the planned Central Castilla challenged the conclusions of the environmental impact assessment presented by the multinational consortium, and the Supreme Court ordered a revised study before the project could proceed.
Looking Ahead
The high costs of natural gas and the political obstacles to developing coal and hydroelectric power are Chile's main challenges to providing enough energy to feed its growing mining sector.
The outlook for large-scale hydroelectric projects in Patagonia feeding into Chile's northern mines at present seems dubious for technical, economic and environmental reasons. Additionally, Chile has no control over global LNG prices, and can only hope the burgeoning shale gas industry makes natural gas converted from LNG a competitive fuel option.
The outlook is not much better for piped natural gas imports. Chile's relationship with Bolivia has deteriorated since Pinera assumed the presidency, and there is no indication that Bolivia needs Chile as an additional customer for its natural gas, especially since demand from Brazil and Argentina continues to increase. It is unlikely that Chile will be able to rely on piped natural gas imports unless Argentina becomes a major producer itself.
Though Argentina has significant conventional and shale natural gas reserves, this option is unlikely to produce sufficient volumes of natural gas in the next five years given the extremely hostile business investment climate in Argentina. The YPF nationalization in April was only the latest in a series of populist moves that have deterred foreign investment in Argentina's energy sector. Even under the most optimistic estimates, Argentina will not be a significant natural gas exporter within this decade, long past Chile's time frame to boost its energy production.
Adding more coal-fired power plants is by far the most logical path for Chile, but has been hamstrung by political gridlock and the current administration's unpopularity. Given the importance of developing more electricity generation capacity, it would seem surprising that Santiago has not pushed most strongly on the issue. However, the Pinera administration, the first conservative government since the end of Gen. Augusto Pinochet's dictatorship, has been heavily constrained on the issue due to his lack of political leverage.
While Pinera is constitutionally barred from seeking a second consecutive term, his party's chances at holding the presidency against the opposition Socialist Party in December 2013 seem unlikely based on current polls, which put his approval at a record low of around 30 percent. His administration also faces growing popular unrest on other fronts, including education reform, in addition to the environmental concerns about the country's energy future. Pinera's administration has always had a fraught relationship with the Congress, and at this late point in his presidency they see no reason to work with him on legislation regarding incentives for coal plant development.
While environmental opposition to coal-fired plant development is likely to continue, the strategic importance of Chile's mining sector and providing it with the necessary energy will remain a priority for the next government, no matter its ideological orientation.
