Highly Anticipated Chilean Government Report on Energy Fails to Ask the Big Questions So Mostly gives Small Answers

Last May, in the middle of increasing public concern about energy mega-projects, particularly the proposed mega-dam complex called HidroAysén, President Piñera appointed a multi-disciplinary panel of experts to a special advisory body called La Comisión Asesora para el Desarrollo Eléctrico (CADE) (in English, The Advisory Commission for Electrical Development).  The CADE was charged with analyzing Chile’s current energy challenges and developing proposals for Chile’s energy future based on the goals of 1) security of supply, 2) quality of service, 3) sustainability and 4) efficiency.  In addition, the CADE was tasked to consider the role of Non Conventional Renewable Energy (NCRE) which in Chile means wind, solar, geothermal, biomass, small hydro (less than 20 MW) and ocean energy technologies.  The CADE report is available at the Ministry of Energy’s website, and references to the report in this blog refer to the sections and page numbers in the downloadable pdf.  The Chilean daily El Mercurio summarizes the report in Spanish here, and Greenpeace and Sara Larraín of Chile Sustentable have published excellent Spanish language summaries and critiques of the CADE report here and here, respectively.  I agree with their critiques that many of the CADE’s recommendations miss the mark and are inconsistent which much of the CADE’s analysis.  In this blog, I first dig a bit deeper into some of the inconsistencies in the CADE analysis and then, instead of focusing on the weak recommendations, suggest a few areas where the CADE’s analysis is useful in understanding Chile’s energy dilemma, even if the CADE itself did not emphasize this information.

The CADE is a wide-ranging report in conflict with itself…

The report covers a lot of ground.  As background to the CADE’s reform proposals, it discusses, in varying degrees of detail, current electricity policy, the relationship between energy and the environment, scenarios for the future generating plant mix, competition in the wholesale and retail electricity markets, challenges in the transmission and distribution sectors and the role of large hydro, NCRE and nuclear energy in Chile’s energy mix.

The CADE is in some ways informative, but is in most ways a flawed and conflicted work.  On the positive side, it provides new, up-to date data on renewable energy resources in Chile and compiles it in one place, a useful and necessary resource.  It pulls together some very interesting polling data on Chileans’ attitudes about energy, development and the environment.  It also generally makes an effort, however uneven, to address some of the most pressing energy issues in Chile.  In particular, there are useful proposals on creating an independent system operator, establishing a permanent long-term transmission planning body, reforming the way the long term contracts with distribution companies are tendered, increasing citizen participation in energy policymaking and designing risk sharing instruments to lower the cost of transmission.

But on most of the big issues, the CADE report fails to address basic weaknesses that exist in the current system.  For example, the report:

• assumes that the design of the marginal cost system is fundamentally sound and that any central planning of electric generation development (such as routinely occurs in most of the world’s advanced economies) is inefficient when compared to private generating companies acting independently without any guidance or supervision;
• asserts that lack of competition is not a major cause of high electricity prices in Chile in spite of the evidence of market concentration contained in the report and without any quantitative competition analysis justifying this conclusion (Section 4.3, page 79);
• fails to include energy efficiency as a resource in any of its numerous future energy scenarios after acknowledging that energy efficiency is eminently doable and that “all efforts must be made to achieve the most efficient development possible” (Section 3.2 page 48);
• states on page 160 that, as of the date of the report, 8 solar plants have received their environmental approvals (with 5 more in the pipeline) but does not discuss solar as a resource that can be deployed economically right now or how solar (grid connected or located at large industrial or mining clients) can displace high-cost diesel plants during times of peak demand and avoid the cost of building new ones; and
• concludes that “forcing” 20 percent NCRE by 2020 would be low cost (Appendix 3, Section 1.6), but then does not recommend changing the renewable energy law to make it happen.

…that nevertheless contains some hidden gems.

In spite of its failure to delve into the heart of the energy crisis, the CADE report does contain some important information that provides answers to key questions about energy in Chile, even though the CADE itself failed to draw the right conclusions from it.  Some of this information follows.

1.            Chileans strongly support clean energy.

It is clear from the report that Chileans want a clean energy future.  The report cites polls dating back 15 years showing strong support for clean energy and prioritizing the health of the environment. It also highlights a recent poll by the Comisión Nacional de Energía (CNE) showing that, by a wide margin, (the actual figures are in 2 below) Chileans value the protection of the environment over energy independence or the final price of electricity.  (Section 6.2, page 139)

2.            Chileans want more renewables soon and that desire is not irrational.

The CADE report says (based on the CNE survey mentioned above) that most Chileans want to prioritize the development of non-fossil sources, with solar leading the pack (41 percent), followed by hydro (22 percent), wind (19 percent) and fossil fuels (2 percent).  (Section 6.2, page 139).   The authors of the CADE report think that these preferences reflect “ignorance in respect of the real costs, local impacts and operating restrictions of many of these technologies….”  Section 6.2, page 139).  This is an unfair way to interpret this polling data.  At best, the responses can be fairly interpreted as expressing a preference that the government prioritize the rapid deployment of NCRE and de-emphasize fossil fuels, so that investments in pro-NCRE policy and infrastructure can be made now to ensure a clean energy future.  If that is irrational, then what is going on in much of the world, including Germany, China, California and other US states and Australia is also irrational. 

3.            Deploying 20 percent of renewable energy by 2020 is not too expensive for Chile.

Based on numerous computer-generated modeling scenarios run for the CADE report, the authors conclude that achieving 20 percent NCRE by 2020 would be low cost. (Appendix 3, Section 1.6).  Yet, strangely, especially given the strong public support for renewable energy evidenced by the CNE survey, the report does not call for this simple reform which was has broad public support.  It should be obvious and sound public policy to call for passage of this simple amendment, but the CADE timidly recommends increasing the current goal of 10 percent in 2024 to 15 percent in the same year.

4.            There are strong indications that a lack of competition in the electricity market is a major cause of Chile’s well-known high cost of energy and its deficit of renewable energy.

The CADE report confirms the oft-quoted facts that Chile has high prices, and that three companies own 75 percent of the generating capacity and possess 90 percent of the long term contracts (Section 4.2, page 78).  It further acknowledges that since the same generating companies control the dispatch system, they are able to manipulate which plants are operated (Section 4.5.2, page 84) and can influence what transmission gets built (Section 4.6.1, page 92).  The report further points out that the distribution companies (who purchase most of the energy in Chile for resale to final customers) use bidding rules and procedures that favor the incumbent companies (Section 4.7, page 100) and fewer NCRE plants are being built than suggested by prices signals (Section 7.3, page 158).   After presenting this evidence, the CADE (or perhaps their lawyers) somehow concludes: 

“Even though the Commission analyzed the conditions of concentration and vertical integration of generation and distribution, it did not consider it necessary to make proposals in this area insofar as concentration and vertical integration do not necessarily imply market power and through the Free Competition Court, the country has institutions competent to detect and supervise the market and transactions between related companies, be they integrated horizontally or vertically” (Section 4.4, page 81).

In Section 2.3.2 of the report, the CADE similarly concludes that high fuel prices, not lack of competition are the main cause of high prices.  The CADE fails to provide empirical analysis to back up these assertions, however. Fortunately, Sara Larraín did do such an analysis and has shown that a large portion of the cost of electricity is attributable to profits, not operating costs, which also suggests that abusive market power is being exercised.  The CADE needs to directly respond to this analysis.

5.            Chile has the means to create a future with clean, low impact energy.

The path has been clearly laid out by La Comisión Ciudadana Técnico-Parlamentaria para la Transición hacia un Desarrollo Eléctrico Limpio, Seguro, Sustentable y Justo (CCTP) (in English, the Citizen Technical and Parliamentary Commission for the Transition to Clean, Secure, Sustainable and Just Electrical Development) which recently issued its own report that calls for fundamental reform of the energy sector.  My colleague, Noah Long, gives an overview here.  It is a path that that seeks, though sound energy planning and rules that direct market forces, to build a stable, diversified generation fleet connected by a modern, optimized grid with efficient operating rules. It is a path that prices pollution by fossil fuel plants, reforms market rules to create a level playing field for new players and clean energy technologies, assures that all Chileans have affordable access to energy and incentivizes energy efficiency and distributed generation as means of lowering prices and demand.  

This isn’t a fantasy nor is it expensive or impractical.  Rather, it is consistent with emerging best practices around the world and moreover it is what Chileans have said that they want. 

I urge President Piñera to fulfill his mandate for a clean energy future by integrating the work of the CCTP with the best parts of the CADE.