Taking Chilean energy policy public part II: energy companies' investment decisions keep steering the ship towards the rocks

In my last blog, I discussed how some of the ills of the Chilean electricity sector can be attributed to the privatization of public policy, which has effectively been entrusted to a small number of energy companies and their shareholders.  In the pattern I described, the companies make investment decisions in the absence of a substantive policy framework solely on their bottom line, which results in a poor allocation of resources, which results in high energy prices and periodic energy crises.  My blog focused electricity generation, but the recent blackouts in Santiago may indicate that the transmission sector suffers from similar ills.

Now, the pattern is repeating itself.  The top two generation companies, Endesa Chile and Colbún, have formed a joint venture to further privatize Chile’s national energy choices by proposing a massive investment that could skew energy investment for the foreseeable future. Specifically, they propose a single “silver bullet” to solve all the problems of Chilean electricity supply in the form of a massive (2750 MW) dam complex in Patagonia known as HidroAysén.  HidroAysén would flood about 6,000 hectares (1.5 times the size of Manhattan) and have to transport its energy from Patagonia to the main demand center around Santiago via a new transmission line at least 1500 miles long, making it among the longest in the world. 

The latest price tag for the dams and the transmission line is US$ 7 billion (twice what the company estimated in 2008).  My colleague Amanda Maxwell has blogged about the project extensively and my colleague Susan Casey-Lefkowitz blogged about what we learned on our most recent trip to Santiago.  

The idea for the project is not new – Chilean engineers have talked about it for decades.  The difference now is that the companies suddenly think it is economic in spite of ever rising construction costs.  Given the high electricity prices that already exist in Chile, the potential effect of the plant and its transmission line on costs should give one pause, particularly when, in an unprecedented move, the top two players in Chile’s electricity generation sector, normally archrivals, have teamed up.

The companies must believe that they will be able to harvest sufficient returns from the pockets of the people of Chile to make the investment attractive relative to other incremental investments.

It is very unclear that this investment decision makes sense for anyone in Chile, even in theory, except the companies’ shareholders.  Chile may not have significant hydrocarbon reserves, but it is endowed with nearly unparalleled, world-class sources of renewable energy.  We know that Chile has abundant largely unexploited capacity for generating the energy it needs in the area to be served by the proposed dams through clean energy sources—energy efficiency, solar, geothermal, wind and small hydro combined with optimized existing capacity—that could be developed before having to gamble on HidroAysén.

HidroAysén would lock Chile in to very expensive and irreversible course of action when what is needed in the current dynamic world of uncertain demand, falling renewables costs and climate change is flexibility. 

The dams would not be fully operational for at least a decade after construction begins whereas renewables and efficiency can be deployed now or in the near future and scaled as needed depending on how Chile’s energy needs actually develop.  During the decade of the dams’ construction, supply and demand estimates will change, the costs of renewable energy and efficiency technologies will continue to decline and new technologies will become available, but because the two biggest Chilean electricity companies will have invested billions in a dinosaur project, they might not have the funds or the economic interest to take advantage of the situation.   We can be certain that it will be in their interest to try to prevent others from doing so, too. 

Because HidroAysén’s shareholders have significant control over the structure of the electricity infrastructure investment in Chile, Chileans might not get the benefits of the green energy revolution starting in other parts of the world, but instead would be paying for the transformation of Patagonia into a massive hydro-engineering museum while others take the lead. 

But this does not have to happen.  NRDC has worked with Chilean non-profit organizations and leading universities to show renewable resource availability.  As mentioned above, the prices of renewable technologies like wind and photovoltaic solar are dropping rapidly so that it in many places around the world such generation is already cost competitive with traditional forms of generation, particularly when long term fossil fuel price volatility and the true costs of such generation, including the environmental costs and the subsidies received by traditional generation (like the free water rights granted to HidroAysén) are taken into account.  And Chile’s renewable resource quality means better baseline economics for renewable energy investment. With the right policies, Chile could build on this foundation to become a regional leader in renewable energy development.