Energy, including renewable energy

Chile’s energy sector has distinctive characteristics (OECD/IEA, 2009) bringing challenges for energy production and distribution:

  • • First, unlike many of its neighbouring countries, Chile has limited fossil energy resources. Yet, fossil fuels account for almost 80% of the country’s total primary energy supply (TPES). As a result, Chile imports close to 75% of its TPES in the form of oil, gas and coal.
  • • Second, Chile’s unique geography - 4 300 km long and an average width of 175 km - possesses a variety of climates and geography (ranging from the world’s driest desert in the north, to fjords and glaciers in the south) and the high concentration of the population in the metropolitan region poses major challenges for energy production and distribution (see Chapter 1).
  • • Third, Chile’s economy is highly specialised in commodities, in particular copper, that are very energy intensive (e.g. large industrial customers, mainly mining companies, account for around 90% of the electricity consumption of the northern electricity system [SING] that comprises about one third of total installed capacity of the country).

While Chile has considerable undeveloped potential for expanding large-scale hydroelectric projects, their development can have side effects. In particular, the large developments planned for the south of the country could have important environmental impacts, making the kind of comprehensive economic and environmental assessment used by the government of Chile crucial. These effects include new transmission capacity that would connect generation in the south to the north and central parts of the country where most of the energy is currently demanded in large cities and in mining-intensive activities. In northern Chile, the energy needs are expanding through the mining sector, creating a demand for more generation capacity. These large-scale developments may come into conflict with preservation of protected areas and eco-systems, as well as the development of alternative economic activities such as eco-tourism. In addition, because Chile is a long thin country, transmission costs play a large role in delivered electricity costs. This reflects the great distance and difficult terrain when developing transmission lines. This situation points out the merits of considering how policies for one sector affect other sectors in rural areas.

The potential for renewable energy in Chile is diverse and substantial, thanks to the country’s unique geographical and natural conditions:

  • • Large- and small-scale hydro is, and will remain, a significant component of its energy mix.
  • • Strong winds throughout the country make wind another attractive energy source.
  • • Chile has 10% of the world’s active volcanoes, highlighting an abundant potential for geothermal energy.
  • • The north of the country is rich in solar and geothermal energy.
  • • Finally, Chile has more than 4 000 km of coastline, and possibly the greatest potential for ocean and wave energy of any country in the world (OECD/IEA, 2009).

Chile has a long history of developing renewable energy resources, specifically hydropower. In recent years, Chile has made efforts to develop “non-conventional renewable energy” resources, which refers to renewable energies but excludes large hydropower. The current state of development in this domain is limited. The government of Chile has identified renewable sources of energy as a key element of energy security and electricity diversification. The 2005 amendments to the 1982 law, the enactment in 2008 of a specific law to promote the development of non-conventional renewables, and various incentives offered by CORFO encouraged greater investment in renewable energy projects (OECD/IEA, 2009). On 14 October 2013, an additional law to promote non-conventional renewable energies was enacted. This law establishes that by the year 2025, 20% of the energy commercialised should come from non-conventional renewable sources. This doubles the target originally established in the 2008 law.

Between 2009 and 2013, there have been efforts to promote the use of non-conventional energy sources. Since renewable energy is located in rural areas, the deployment and implementation of renewable energy policies are critical for rural development. A recent report based on 16 case studies identifies a number of key areas to improve the benefits of renewable energy on rural development (Box 2.10).

Box 2.10. Linking renewable energy to rural development

Renewable energy (RE) is increasingly being championed as a potentially significant new source of job creation in OECD countries, as well as addressing concerns with energy security and climate change. In many member countries, governments have invested large amounts of public money to support RE development and are requiring significant quantities of it to be sold by energy providers. But what are the economic impacts of these policies on the rural regions where deployment takes place? How can RE bring the greatest benefit to host regions? These are some of the questions explored by a recent OECD study. Drawing on case studies in 16 regions within 10 countries, the research finds that while RE indeed represents an opportunity for stimulating economic growth in rural communities, its development benefits are not automatic. Realising them requires a complex and flexible policy framework and a long-term strategy, as well as a realistic appreciation of the potential gains from RE deployment.

The report contains seven key policy recommendations for putting renewable energy to work in rural areas:

  • 1. Spatially blind policies may reduce the opportunities to link RE to rural development. Too often RE is deployed without sufficient attention to the milieu in which projects will operate. Generic national criteria without particular attention to the suitability of local conditions reduce the possibility of integrating RE into the existing productive fabric (spillovers).
  • - Public subsidies should be able to adjust to the quality of the RE resources available at the local level. Supporting RE deployment in low-capacity energy sources, which can arise when spatially blind incentives encourage such development, results in both high-cost energy and a limited quantity.
  • - Subsidies to RE should take into account the current cost of energy at the regional level. In general, RE is more expensive in the market than conventional energy, but there are regions where the cost disadvantage of certain renewables is relatively small, or non-existent. In these regions, where conventional energy is relatively expensive, it is much easier for RE to be competitive.
  • - Subsidies should be limited in scope and duration, and should be used as a means to induce RE projects that are close to being viable in the market. If subsidies are too high, they tend to encourage RE projects that are designed to capture the maximum amount of subsidy. This sort of rent-seeking behaviour can lead to high-cost energy that is only viable as long as high levels of subsidy are sustained.
  • - Subsidies to RE often affect relative prices at regional level in unintended and sometimes undesirable ways, and can intensify competition for natural resources and other inputs. Large subsidies RE can have a negative impact on land use and displace agricultural activities, particularly if they are spatially blind. Moreover, the structural changes that occur may prove unsustainable as the subsidy is phased out, and yet may also be expensive to reverse. In the same vein, RE installations can impinge upon landscape amenities, negatively affecting tourism and overall regional attractiveness. Subsidies can also cause RE to involve inputs that have high opportunity costs in current use.
  • 2. Job multipliers associated with RE deployment are higher the more embedded RE is in the local economy. The narrative presenting RE a panacea for job creation is not reflected in reality: RE is, in most instances, a capital-intensive activity, and energy as a whole represents a small share of employment in regional economies. Since labour, like capital, is a cost of production, efforts to increase either direct or indirect employment via subsidies or other policy interventions will increase the cost of the resulting energy. Better results in terms of job creation are obtained when RE is not a stand-alone activity but is integrated within larger supply chains within rural economies, such as agriculture, forestry, traditional manufacturing and green tourism.

Box 2.10. Linking renewable energy to rural development (cont.)

  • 3. There is no first-mover advantage in adopting technologies that are rapidly evolving. Newer technologies are almost certain to be more efficient and have lower costs per unit of output. When a technology becomes more mature, its unit costs are likely to be both lower and more stable over time, making investments less risky. Efforts to build local manufacturing capacity for future exports may drive up the cost of the installed local energy and still fail to generate future sales of components, because local firms have high production costs and may quickly be overtaken by competitors who enter the market later.
  • 4. RE should be integrated within an energy framework that facilitates dispatch and integration into the grid. Policy should take into account backstop technologies for intermittent power sources. RE should be linked to large hydropower or conventional sources to lower operating costs.
  • 5. Heat energy is an untapped opportunity for RE. Renewable heat is systematically ignored by RE policy, despite it being the most competitive with conventional sources. The direct conversion of a renewable power source to heat involves a relatively cheap transformation, and in many cases it offsets a relatively high-cost fossil-fuel source.
  • 6. RE should be deployed taking into account the transmission infrastructure. In several regions, the capacity to deploy RE is constrained by grid limitations; however, there are no incentives to improve transmission infrastructure. In regions where new capacity has to be created - such as electricity transmission lines, pipelines, rail lines - these add to the associated capital costs of a project. In more remote regions, the cost of transport infrastructure may be several times larger than the cost of the RE project.
  • 7. Local social acceptance is crucial and should be supported by RE policy. Local opposition can slow construction and may increase the difficulty of subsequent efforts to introduce RE projects both in that region and in other places. Every RE project has adverse impacts on the community in which it is located. If the community sees net local benefits from the project, and is engaged in the process, it still may be willing to support development. This is one of the main drawbacks of spatially blind incentives: they are often perceived as benefitting outside developers while communities bear the local adverse impact.

Source: OECD (2012), Linking Renewable Energy to Rural Development, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264180444-en

Water

During the last decades, water demand has increased in Chile, linked to the period of dynamic economic growth and the high specialisation of the economy in water-intensive sectors including mining, agriculture and forestry, and fish farming. The increasing demand is expected to increase further in the future: the mining sector alone is estimated to increase its demand by 45% in 2020 (World Bank/Chilean Government, 2013). The increased demand is geographically concentrated in mining-intensive regions and urban centres, in contrast to the supply and availability of water mainly located in southern regions (Figure 2.12). This increased demand brings two challenges: matching supply with demand geographically and maintaining water sustainability in the future. Chile’s National Water Resources Strategy issued in March 2013 (updating the National Water Policy of 1999) foresees a set of measures to mitigate water scarcity in the face of climate change.

Water in Chile is allocated through a system of property rights. This generates social and environmental challenges, particularly in rural areas. The market for water rights

(Box 2.11) has been quite effective in allocating water resources under market principles to major categories of water users and consequently has supported the expansion of some key economic sectors, such as the mining sector, export-oriented agricultural activities and forestry. However, there is some market imperfections related to information asymmetries and lack of market transparency, the system has concentrated water rights in few stakeholders resulting in problems of water accessibility by vulnerable groups as small farmers and indigenous peoples (World Bank/Chilean Government, 2013). There are several and distinct tensions in this area including water allocation between mining and agriculture in the North of Chile, the ownership and use of the so called “no consumptive rights” by hydroelectric projects and very limited water right transaction in the south of the Biobio river. The tension generated by water allocation trade-offs between mining and agricultural activities undermine sustainable economic development. Current legislation does not set the priority use of drinking water over other uses, or mechanisms to consider the country's strategic use. Furthermore there are insufficient mechanisms and resources to regulate the unsustainable exploitation of water resources once they have been granted, which has led to critical situations for supplying basins such as the Copiapo River, where there has been overexploitation of water resources. In sum, the current model of the water market poses some limitations for an integrated water resources management.

Notwithstanding this fact, there are benefits not necessarily captured in market transactions through the water rights allocation system. This is the case with the environmental uses or ecosystem services of the water (e.g. biodiversity conservation, water as source of nature-based tourism or recreational fishing) as well as hydropower. Place-based or regions-specific policies can help alleviate these tensions, given that the nature of the issues is quite specific to regions and sectors. As a result of this, there is a need to further develop more studies about watershed hydric balance.

Figure 2.12. Water resources available among Chilean regions

Note: This map is for illustrative purposes and is without prejudice to the status of or sovereignty over any territory covered by this map. The maps depicting the borders of Chile are for illustration purposes and do not engage the state of Chile according to Article 2, letter g of DFL 83 in 1979 from the Foreign Ministry.

Source: Chilean Ministry of the Environment.

The 2005 reform helped the transition to a new water rights regime, stating that a sufficient amount of water has to be retained when new water rights are allocated. It also pointed out the need for proper calculation of the minimum ecological water saving amount. But challenges remain regarding the monopolistic concentration of water rights and speculative hoarding, insufficiency of penalties for unused water rights that do not stimulate trading, and limited incentives to retain water to safeguard the health of ecosystems in case of over-allocation (OECD, 2013d). Mechanisms such as buying-back or forfeiture of unused water rights should be considered to optimise water use in areas where water rights have been over-allocated, as the Australian experience shows.

Intensive water usage may also represent a challenge for sustainability and the environment in the long term for activities such as mining, agriculture and forestry. Examples of this include water pollution brought by agricultural run-off and intensive use of pesticides (OECD, 2008), deforestation of native forest resources with adverse effects in the medium and long run on water retention and water availability, particularly in the south of the country (see section above on forestry).

Box 2.11. Water management in Chile

Water management in Chile is regulated by a 1981 national decree. Water rights are allocated by the national government to private users at their request. The rights of water access were delivered free of cost, and for life. In case there is more than one request over the same water source and not enough resources to satisfy them all, the right is allocated following a call for tender process. Finally, this right is tradable, looking to assign the right of water access to those initiatives with greater market value. One of the main objectives was the creation of a water market, which could efficiently set a price that reflects the real opportunity cost of the resource. The system of rights must also have the flexibility to adapt to the availability of the resource in the short and long term, without undermining the property right. The most important reforms to the Water Code were introduced in 2005 with the establishment of a water flow restriction according to an ecological minimum; hence the state could reject granting rights to preserve environmental minimum values. In addition, the reform included the possibility of creating water reserves under exceptional circumstances, the need of a justification in the water rights application, a fee in the case of non-use of water rights, and the obligation to report transactions on water rights. More recently there have been some reforms to improve the environmental management of the resources and to improve the efficiency of the system. There have also been some regulations and reforms to improve the social access to water (e.g. to small farmers), However, these reforms do not change the basics of the model of allocation and trade of water rights defined in the 1981 code.

Source: World Bank/Chilean Government (2013).

In Chile there are a significant number of central agencies involved in water policy design, implementation and monitoring (Box 2.12). Water policies in the agricultural sector are designed by two separate ministries with different interests: the Ministry of Public Works, through its Directorate of Hydraulic Works (dams, irrigation, etc.) and General Directorate Water and the Ministry of Agriculture’s National Irrigation Commission, whose main constituencies are farmers and local irrigation organisations’ members, both strong lobbyists. The wide number of agencies and lack of a clear delimitation of roles presents important coordination challenges (OECD, Water Governance in LAC, 2012). At the same time the highly centralised policy for water management makes is particularly difficult to tailor policy to the particular needs of the different regions, integrate economic, social and environmental key aspects involved in water management and benefit from complementarities.

Through the creation of an inter-ministerial committee in 2009, Chile has taken steps to better co-ordinate water policies. The committee aims to co-ordinate actions between departments and agencies involved in the National Water Strategy. It also advises on strategic planning of water policy in the long term; makes proposals for institutional mechanisms, incentives and guarantees towards the implementation of water policies in rural and urban areas; and adopts the necessary agreements for the implementation of the national integrated water strategy. The committee is led and co-ordinated by the Ministry of Public Works and has representatives from the General Secretary of the Presidency, the Ministry of Economy, the Ministry of Agriculture, the Ministry of Mining and the National Energy Commission, as well as the National Environment Commission (OECD, 2011b). Adopting a more holistic approach is a positive development that should be further enhanced by introducing flexibility to the policy in order to better respond to the different needs and challenges of regions, better allocate the demand and supply across the territory, and better balance economic with social and environmental goals. A national rural policy framework can help with the latter.

Box 2.12. Involvement of Chilean public institutions in water policy

  • • The Ministry of Health is responsible for overseeing water quality standards and environmental regulations in the industrial sector.
  • • The General Directorate of Waters (DGA) is responsible for water resources administration and management for sustainability, public interest, efficient allocation and information dissemination. According to Section 299 of the Water Code, the DGA also has the functions and powers for planning resource development in natural sources in order to make recommendations for their use, investigate and measure the resource; implement policies and surveillance of water in natural channels, and supervise the operation of water user organizations.
  • • The Directorate of Hydraulic Works of Public Works Ministry (Direction de Obras Hidraulicas, DOH) provides irrigation infrastructure services Office provides water infrastructure to efficiently exploit water resources and protect populations against floods and other extreme events In addition to, aims at supplying drinking water to rural areas through the Rural Potable Water Programme. The Superintendent’s Office for Sanitation Services decides on tariffs for drinking water and sanitation services. For concessions, the Superintendent’s Office works with the private sector service provider to assure service quality and monitor industrial sites producing liquid wastes.
  • • The National Commission for the Environment works closely with other ministries and agencies in developing environmental laws and criteria, particularly on natural resources (including water) management, use and exploitation.
  • • The Environmental Ministry works closely with other ministries and agencies in developing environmental laws and criteria, particularly on natural resources (including water) management, use and sustainable use. It also develops policies, programs and actions that establish the basic criteria and measures including preventive measures to promote the recovery and conservation of water, genetic resources, flora, fauna, habitats, landscapes, ecosystems and natural areas.
  • • The Chilean Commission on Copper develops, implements and supervises natural resources’ exploitation policies, including for water management in the mining sector.

Source: OECD (2012), Water Governance in Latin America and the Caribbean: A Multi-Level Approach, OECD Studies on Water, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264174542-en.

Through the creation of an inter-ministerial committee in 2009, Chile has tried to advance in better coordinating water policies. The committee aims to co-ordinate actions between departments and agencies to face drought. The committee is led and co-ordinated by the Undersecretary of Interior Ministry, and has representatives from Public Works Ministry, the General Secretary of the Presidency, the Ministry of Economy, the Ministry of Agriculture, the Ministry of Mining and the National Energy Commission, as well as the Environmental Ministry (OECD Water Governance in OECD Countries, 2011).

Environment

Safeguarding environmental sustainability is crucial for the development of the country, and in particular environment protection which is a key asset for growing economic sectors like tourism, and for the economic subsistence of rural communities. As a result, ensuring environmental sustainability is one of the key characteristics of a modern rural economy. As outlined by a recent OECD publication (OECD, 2011a), over recent decades, environmental challenges in Chile have been closely associated to rapid export-led economic growth. While economic development has been supported by sound macro-economic policies, it has put considerable pressures on natural resources and biodiversity, particularly in booming sectors such as mining, forestry and aquaculture (OECD, 2012a). Environmental degradation in the past contributed to undermine the traditional economic sources of rural communities and to propel rural to urban migration.

It is necessary to have a stronger focus on the interactions between environmental protection and rural development. In the past, environmental policies were strongly influenced by concerns over human health in the main cities of the country (e.g. with regard to poor air quality in the metropolitan region and around copper smelters in northern Chile) and international trade regulation (Chile exports principally to OECD countries), but probably overlooked the interactions between environmental sustainability and rural development. All sectors of the rural economy have an impact on sustainability and some sectors, especially tourism, rely on a high quality environment for their viability

Since the 1990s, Chile has advanced in the implementation of environmental policies. However, further efforts are necessary to integrate the environmental dimension in sectors such as energy, mining, agriculture, forestry, transport and tourism (OECD, 2011a). Challenges include the important reduction of the native forest, which implies an important loss in biodiversity and affects the economic sustainability of rural areas (see above), advancing towards a sustainable management of water in the context of a growing demand for agriculture and for urban areas, overexploitation of the ocean ecosystem and the challenges it generates over artisanal fishing, the erosion and desertification of national soils, further reducing the environmental impact of the mining sector, and the high environmental costs in energy production (Sotomayor, 2007; OECD, 2008, 2011a).

Rural policy can have an important role in further integrating the environmental dimension in rural development. While the primary goal of environmental policy is to protect the environment, it is often possible to achieve this goal and at the same time allow environmentally appropriate economic development functions to take place. For this to happen there clearly has to be more than co-ordination among actors, there has to be a clear understanding of which actions are acceptable and which are not. As mentioned above, rural policy could provide a forum for co-ordinating the actors and for considering the importance of sustainability and environmental protection for rural development. The Council of Ministers for Sustainability could also play a role. This institution is a high- level organisation chaired by the Ministry of Environment and is made up of 11 ministries, most of which have a strong rural presence.

High-level policy has to be translated down to an operational level because actions that are acceptable in one place and its environment may not be acceptable in another. This means that outright prohibitions or permissions for certain activities may not be the correct policy. In this situation, while national policy can set general standards for outcomes, it may be necessary to take into account the opinion of the local or regional level, where there is a better understanding of the actual consequences of a decision. Chile may want to draw on the EU experience in this area (Directive 2000/60/EC) and also the recent OECD report on water governance that analyses how to identify and address governance gaps in the water sector (OECD, 2011b).

Manufacturing

The role of manufacturing in rural Chile is difficult to determine at present because of the current definition of rural, which classifies virtually all settlements and any directly connected adjacent territory as urban. Further, the treatment of manufacturing in the national accounts can further complicate the task. Consequently, it appears from statistics that manufacturing in Chile is almost exclusively an urban industry. Nevertheless, as depicted in Chapter 1, the size and weight of manufacturing more than doubles in the revised definition; from 10% of total manufacturing according to the official definition to 20% according the revised definition.

Box 2.13. Council of Ministers for Sustainability

The Chilean Council of Ministers for sustainability is chaired by the Minister of Environment and composed of the Ministers of Agriculture; Finance; Health; Economy, Development and Tourism; Energy; Public Works; Housing and Urban Development; Transport and Telecommunications; and Mining and Social Development. It is a political body that reviews and recommends to the President of the Republic any matters concerning environmental policy or any sectoral policies with environmental implications. The council advises the President on the following areas:

  • • policies for the sustainable use of natural resources for renewable energy
  • • the criterion that should be incorporated in the design of policies of any ministry and their corresponding agencies concerned with sustainability
  • • the creation of protected areas including parks, marine reserves, natural sanctuaries and coastal marine protected areas
  • • identification of sectoral policies should be subject to a strategic environmental assessment
  • • the criteria and mechanisms by which public consultations should be carried out that concern environmental impacts as stated in the law (Article 26, Law No. 19 300)
  • • recommendations on legislation and bills that concern the environment as stated in Article 70 (law #. 19,300).

Yet in reality, virtually all of the first-stage transformations of primary products take place in close proximity to where the natural resources are found. This means that most of the first-stage processing would be a rural industry under a more expansive definition of rural. Beyond first-stage processing, there are many small-scale manufacturing firms in Chile that produce mainly for local markets and if these are located in small settlements, they too would become part of the rural economy under a more typical definition of rural.

 
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