the potential contribution of non-conventional renewable...

Universidad Técnica Federico Santa María Universidad de Chile ______________________________________________________________________

Electronic documents, once printed, are uncontrolled and may become outdated of 1

The Potential Contribution of Non-Conventional Renewable Energy

and Efficient Use of Electricity in the Central Interconnected System (SIC)

for the period of 2008-2025

Consolidated Report

Prepared by

Programa de Estudios e Investigaciones en Energía del Instituto de Asuntos Públicos de la Universidad de Chile.

Núcleo Milenio de Electrónica Industrial y Mecatrónica y Centro de Innovación en Energía de la Universidad Técnica Federico Santa María

July 2008

(Translation of this page from the original Spanish by Alison Doyle, Probe International, November 2008.)

of 2

BACKGROUND

Study of renewable energy and energy efficiency

This study on the potential contribution of non-conventional renewable energies and energy efficiency to the electricity supply of the Central Interconnected System (SIC) for the period of 2008-2025, was done by the Millennium Nucleus of Industrial Electronics and Mechatronics and the Energy Innovation Centre of the Federico Santa Maria Technical University and the Energy Studies and Research Program of the Institute of Public Affairs at the University of Chile. The study was made possible with the support and backing of a Consultative Committee, established to incorporate the visions and experiences of relevant actors for the baseline and methodological orientation of the study. The Consultative Committee includes representatives from government entities: the Production Development Corporation (CORFO), the National Energy Commission (CNE), the National Energy Efficiency Program (PPEE) and the National Environmental Commission (CONAMA); from the private sector: the Chilean Association of Renewable Energy (ACERA); and from non-governmental organizations: Ecosistemas and Chile Sustentable. The information used in this report comes from various institutions, such as: the National Energy Commission (CNE), the Production Development Corporation (CORFO), the Chilean Copper Commission (COCHILCO), the National Environmental Commission (CONAMA), the General Water Directorate (DGA), the National Irrigation Commission (CNR), the National Institute of Statistics (INE), the Chilean Association of Renewable Energy (ACERA), Natural Resources Defence Council (NRDC), Energy Solutions, the Forestry Institute (INFOR), Fundación Chile, Gamma Engineers, Gesellschaft für Technische Zusammenarbeit (GTZ), as well as from interviews with relevant actors in the national energy sector, and data contained in sectorial studies of the Universities of Chile and Santa Maria which are the endorsement for this consolidated report. (Translation of this page from the original Spanish by Alison Doyle, Probe International, November 2008.)

of 3

INTRODUCTION 1 1.0 ELECTRICITY MARKET IN CHILE 1 2.0 DEMAND PROJECTION 6 3.0 ENERGY PRICE 7 4.0 FORECAST OF THE POTENTIAL CONTRIBUTION OF NCRE TO THE SIC SUPPLY 8 4.1 Physical availability of NCRE within our country. 8 4.2 Defining the scenarios for the development of NCRE 9 4.3 Technical penetration and economic feasibility potential of NCRE to SIC, 2008-2025 10 5.0 ENERGY EFFICIENCY: Potential Contribution to SIC (2008-2025) 12 5.1 Consuming sectors and the final usa structure 12 5.2 Determining the feasible economic and reachable potentials of the EUEE 13 6.0 POTENTIAL CONTRIBUTION OF THE EUEE TO THE SIC SUPPLY 14 7.0 TOTAL POTENTIAL SUPPLY OF THE NCRE AND EUEE TO THE SIC 2008-2025 15 8.0 MARKET & INSTITUTIONAL BARRIERS 18 9.0 POLICY PROPOSALS FOR THE DEVELOPMENT OF NCRE AND EUEE 20 10.0 CONCLUSIONS: A DIFFERENT FUTURE 22

of 4

INTRODUCTION Over the past 20 years, the electric power demand in Chile has increased steadily, at an average annual rate of 6.7%. Basically, the electric power offer has been generated from conventional power sources (fossil fuels and hydropower), whose timely inclusion has been affected by three diffrent variables: regulatory weaknesses (Decree Law Nº11), poorly attractive signals for investment in the electric power generation sector and an offer-oriented market. This situation has weakened the electric power supply which has worsened because of weather conditions (droughts) as well as natural gas supply restrictions from Argentina. All this has made the electricity prices be increased at a steady rate.

During the last years, the authorities have tried to correct the legal weaknesses by means of lowering the level of uncertainty in this sector, setting incentives to the investment in conventional sources as well as setting some benefits and participation shares to provide the introduction of non-conventional renewable energy (NCRE) (Laws 19.940 from 2004, 20.018 from 2005 and 20.257 from 2008 1). However, these measures have not been enough to accelerate the development of these energy source alternatives. Despite the fact that these same reforms have been intended to promote the efficient use of the electric energy, the norms, the insttitutionality, the budget as well as the roles played by the different actors involved in this, have not been enough to properly treat the leadership challenges required by the country (Chile) regarding the management of the enegy demand.

Chile should not see NCRE as a marginal resource but as a prime supply for the main network and end users in a distributed generation scheme. The country should also think about Efficient Use of Electric Energy (EUEE) not only as a saving strategy the times when the offer is low, but also as an energy resource produced by means of the rationalization of the demand and the efficient energy management for the different uses and production processes. International experience has shown that NCRE and EUEE provide the energy market with dynamism and diversification and they also reduce its vulnerability. Therefore, it is important to estimate the NCRE and EUEE potential for the country and define the public policies that will allow NCRE and EUEE to come to life and become a fundamental resource for the energy matrix of the future.

Having the above-mentioned objective in mind, this study offers an analysis of the technical, economically feasible and reachable potentials of the NCRE, the EUEE and their cogeneration as a contribution to the Central Interconnected System (SIC, for Sistema Interconectado Central) supply, identifying the obstacles that hinder its development and recommending policies that will allow such potentials to come to fruition. The horizon of this analysis is year 2025 and its structure distinguishes four main issues:

The functioning of the chilean electric power market and the estimation of the SIC demand for our time-study-frame year 2025.

The estimation of the NCRE and EUEE reachable potentials, on three different scenarios: the conservative, the dynamic and the dynamic-plus one (referential one)

Market as well as institutional barriers for a complete development of both NCRE and EUEE. Proposal of policies for the development of NCRE and EUEE.

1 Energy Law Nº 20.257 (March 2008) forces electric power generation coompanies, supply companies and distribution companies or customers to inject 5% of the amount of energy commercialized, from renewable sources from 2010 to 2014; and increase 0.5% of the amount of energy commercialized a year, from 2015 onwards, so as to reach, in 2024, as far as 10% of the total amount commercialized.

of 5

Although the analyses of this research are focused on the Central Interconnected System (SIC), which represents almost 70% of the local electricity market, the methodologies to estimate the NCRE and EUEE contribution could be applied and the results might be extrapolated2 to the Norte Grande Interconnected System (NGIS). We expect that the results of this work provide records and conceptual elements to the debate about and among the various actors who are responsible for the future development of the energy power market in Chile.

1.0 THE ELECTRICITY MARKET IN CHILE

Once the General Law of Electric Services (DFL Nº1) came into force in 1982, the electricity market was structured into three segments: generation, transmission and distribution of energy power; the last two segments were subject to price regulation because of the natural characteristics of a monopolized utility. At the same time, by means of a privatization process, the government delegated the responsibility of the local electric power supply to private sector agents which left the goverment the function to regulate, supervise and plan the activities concerning the investments related to the generation and transmission segments.3

The local electric power industry is constituted by a group of companies in charge of generating, transmitting and distributing energy power. These companies, altogether, supply an added local demand which, in 20064, reached 52.701 GWh. This demand is geographically divided into 4 electric power grids5: Norte Grande Interconnected System (NGIS) -with a 30,17% installed capacity; Central Interconnected System (SIC) -with a 69,01% of installed capacity6; Aysen System -with an 0,28% of its capacity and Magallanes System -with an 0,54% of its capacity.

Consumers, in the local electricity market, fall into three big groups:

Controlled /Regulated customers: whose connected power is up to 2.000kW; Non restricted customers: whose connected power is above 2000 kW; Clients with the right to choose between a fixed/controlled service and a non-restricted one,

(for a minimum period of 4 years for each of the two options) whose connected power is above 500kW and up to 2.000 kW7.

It should be noted that the electricity market in Chile is the most concentrated market in Latin America. A research study carried out by CEPAL8, making use of the USA Department of Justice

2 Consequently, an adaptation to the characteristics of energy resources and conditions of energy use in the geographical area of NGIS took place. 3 Nevertheless, the recommendations regarding transmission issues were of no binding origin for the companies, a situation which was modified under the Law Nº19.940 (March 12, 2004). The latest modifications established obligations to the main transmission and sub-transmission service suppliers regarding the development of the required investments for an increase in the capacity. This process has undergone certain difficulties as some discrepancies have arisen between the authorities and the criteria established by the transmission company. (N. de la A.) 4 National Balance of Energy, 2006. National Commission of Energy. 5 Source: National Commission of Energy, www.cne.cl 6 Regions III through X, supplied by the SIC, grouping 92,52% of the national population (Source: National Institute of Statistics, www.ine.cl) 7 As per the modifications made to the General Law of Electrical Services by Law 19.940. 8 Pedro Maldonado G. and Rodrigo Pama B, “Safety and quality of the electric supply 10 years from the reform to the electric industry in South America”, series 72, Natural resources and Infrastructure Division, CEPAL, July 2004. Herfindahl-Hirschman Index (HHI) which divides markets into three segments (non concentrated market, HHI below 1.000; relatively concentrated HHI between 1.000 and 1.800; highly concentrated, HHI above 1.800).

of 6

classification (which employs the Herfindahl-Hirschman Index, HHI), places Chile in first place of the “highly concentrated” category, (with a value of 3.541 HHI), followed by Brazil, with a value of 2.004 HHI9.

2.0 DEMAND PROJECTION

When the node-prices fixation for April 2008 was performed, the National Commission of Energy (NCE) estimated –for the SIC electric power demand– a more restrictive scenario than the previous one (October 2007), which is the scenario considered in the base studies which this work has been based on. The demand forecasted by NCE covers the period from 2008 to 2018. For the 2018-2025 time period, the authors of this study considered a growth average rate of 5.5% a year. This projection was used to define the base scenario against which the potential supply scenarios of NCRE and EUEE to SIC was compared to. Graph 1 shows the energy demand curve of the base scenario.

Graph 1: Global energy demand trend in SIC (in GWh)

Source: Definitive Technical Report,

Price Range Establishment April 2008; Own forecast

for 2018-2025

In relation to the consumption sectors, the National Balance of Energy (NBE) carried out by the NCE, shows that by 2006 the total consumption of energy power in Chile was 52.701 GWh10. Out of that total, the Copper, Industry & Varied Mining, Residential, Commercial, Great Industry and Other Mining sectors11 represent more than 90%, of the electric power consumption in our country. In order to evaluate the potential contribution of EUEE to the SIC supply, the same sectors and sub-sectors were taken into account.

9 Source: Series 72. Natural Resources and Infrastructure Division. CEPAL 10 Even though the NBE includes the Aysen and Magellan systems, its total representation is quite low (below 1%) therefore, this study assumes that NBE values correspond to the sum of SIC and consumption. NGIS. 11 Industrial sectors whose consumption is individualized in the NBE has been defined as Great Industry and Other Mining Industry as well as the Iron and Saltpeter Mining.

of 7

3.0 ENERGY PRICE

To estimate the NCRE and EUEE potentials, we took –as reference–, the SIC node-price fixation for October 200712 as a measuring base unit, due to the fact that these prices reflect the supply costs associated with a certain plan for the construction of generation-plants, and also, they internalize the different fuel costs which the present and future thermic plants operate with. Furthermore, the node prices reflect the minimum supply cost, (investment, operation and rationing), for the above-mentioned plan. These prices direct the development of the energy offer, providing the investor with the required information to select the most profitable and/or lowest in cost generating units.

Although the reference base is the same, in the case of NCRE, their prices must compete with the conventional generating offer prices, which bind them to the supply price of the main network. On the contrary, for EUEE, the reference price is the price paid by each of the different users: the one negotiated by the non-restricted client, the regulated one that the industrial, mining or large-scale commercial market user normally pays (tariff AT4-3) and the one fixed for the residential and small-scale business users (tariff BT1).

Therefore, in order to estimate the potential contribution of the EUEE, the following tariffs are adopted as reference:

Single non-restricted price: 51,141 [$/kWh] AT4 Price: from 61,801 [$/kWh] to 71,967 [$/kWh]13 BT1 price: $93,823 [$/kWh]

Likewise, to estimate the potential energy contribution of NCRE, the following prices were considered as reference:

Energy price of US$ 75/MWh plus 1% annual growth on a conservative energy price scenario.

Energy price of US$ 102/MWh plus 1% annual growth on a dynamic energy price scenario. Energy price of US$ 102/MWh plus 3.5% annual growth on a dynamic-plus energy price

scenario.

The price of US$ 75/MWh is equivalent to the price that NCE estimates for the future, foreseeing a stable offer within SIC. The US$ 102/MWh represents such price plus the penalty for inability to comply with the quota injection demand of NCRE to the energy power network; and it is equivalent to the current values of the average market price.

It looks rather difficult –considering the present context–that the energy price decreases in the near future. Financial analysts such as Goldman Sacks from U.S.A. or CIBC World Market from Canada, state that it is most likely that the present trend of the energy prices remains unchanged and the market will probably have to deal with –in the short run, crude oil prices fixed at US$ 200/barrel14.

12 When the price range was published in April 2008, the work was practically finished. The use of the October 2007 prices reinforce the results obtained since the price increased between both range pricing periods. 13 The lowest value corresponds to the single price associated with an industry that does not show energy power consumption at peak hours while the highest value corresponds to an industry that shows energy power consumption during that same peak-hours period. 14 To date, the price of the crude oil is close to US$ 140/barrel. At the same time, the natural gas and coal follow the crude oil trend.

of 8

The above-mentioned pieces of information justify the US$ 102/MWh price as being consistent with the world energy power situation at present; and the US$ 75/MWh. as a conservative price.

Graph 2 Base Energy Price scenarios: (1) Conservative 2) Dynamic and (3) Dynamic -plus in US$/MWh

Source: PRIEN, U de Chile ; NEIM-CIE, UTFSM, June 2008.

4.0 FORECAST OF THE POTENTIAL CONTRIBUTION OF NCRE TO THE SIC SUPPLY

4.1 Physical availability of NCRE within our country

It has been estimated that the forecast of gross potentials or of physical availability of NCRE could range from 130.000 to 190.000 MW (Table 1), according to the information collected from various sources, among which, the most important ones are: CORFO, ENDESA Chile, National Commission of Energy, Hydraulic Works Division and academic institutions.

Table 1: Gross Potentials. Forecast to 2025

NCRE Resource Gross Potential- MW Hydraulic (1) 20.392 Geothermal (2) 16.000 Wind (3) 40.000 Biomass (3) 13.675

Escenarios de precios de energía US$/MWh

60

70

80

90

100

110

120

130

140

150

160

170

180

190

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

Año

Prec

io E

nerg

ía, U

S$/M

Wh

Escenario 1

Escenario 2

Escenario 3

of 9

Solar (4) 40.000 - 100.000 Photovoltaic (FV) (5) 1.000 Total, MW 191.067 SIC (2025), MW 22.736 % SIC 840%

Source: NEIM-CEI”Potential Contribution Forecast of NCRE to SIC 2008-2025”, June 2008

Notes: 1) Hydraulic energy: based on ENDESA statistics and NCE information. 2) Geothermal: information provided by NCE and A. Lahsen. 3) Biomass and wind power: based on information provided by CORFO, GTZ, CORMA, INFOR y NCE. 4) Thermo Solar: based on 0.5 MW/ha and a test drilling/penetration of 80,000 to 200,000 hectares. 5) Photovoltaic Solar: based on a test/penetration of 250.000 homes (2 kW/home) and 100.000 applications on companies, institutions and markets (5kW/installation)

4.2 Defining the scenarios for the development of NCRE

For the estimation of the NCRE potential, it was considered the functioning of the electricity market under the current regulatory frame and a market economy environment where energy power suppliers are companies belonging to the private sector which generate and commercialize the electricity directly to the end users and companies (customers), following various business models, prioritizing those of greater economical impact and profitability.

To calculate the potential of the NCRE penetration into the SIC, the energy sources considered were those that presented a higher technical and commercial development –in the local market and abroad: wind, hydraulic, biomass, geothermal and solar energy sources.

It was also considered in the scenario, the new NCRE Law provisions that introduce compulsory goals to the energy power generating companies which, from 2010, will have to generate a minimum of 5% of the power they supply to the distributors and non-restricted customers from NCRE sources, increasing such percentage 0,5% a year from 2015 on, in order to reach 10% by 2024. For the economic evaluation of different NCRE sources, we adopted the following suppositions for the projects: A 20-year-horizon and a 10% discount rate. Referential energy price in three scenarios: conservative with US$75/MWh, dynamic with

US$102/MWh and 1% annual growth15 and dynamic-plus with US$102/MWh and 3.5% annual growth (see Graph 2).

Energy price growth at a 1% annual rate. Power price of 8.97 US$/kW/month. Carbon bonds market access due to emission reduction.

To evaluate the economic feasability of these alternatives, an estimation of the Energy Generation Cost (EGC) was used, their physical distance from the consumption centers and their penetration level in time in relation to the relative profitability of the options, their contribution to source diversification, the access conditions for the implementation of the projects, inherent risks of the different alternatives as well as an incidental reduction of such risks in the future. 16

15The conservative scenario is developed in detail in the consolidated report. 16 ”Potential contribution forecast of NCRE to SIC 2008-2025”, NEIM-CEI, U.Sta.Maria; June 2008

of 10

Underway and representative projects of each of the energy sources were especially considered for the evaluation of the NCRE penetration possibilities. Sensibility analyses were performed over the different technologies regarding the price variation of the energy (for all scenarios, the conservative with US$75/MWh; and the dynamic and dynamic-plus with US$102/MWh), and the value of the investments.

4.3 Technical penetration and economic feasibility potential of NCRE to SIC, 2008-2025

In operational terms, the technically-feasible potential of the NCRE contribution (based on the cutting-edge available technologies, the average plant factors and the existing regulatory frame), is estimated at 10,800 MW, which corresponds to 48% of the SIC requirements by 2025. In terms of the economically-feasible potential, for the conservative (1), the dynamic (2), and the dynamic-plus scenario (3), the penetration rate ranges between 15%, 19% and 25.3%, respectively.

Table 2: Connecting Power, SIC (in MW). Period 2008-2025.

Source: NEIM-CEI”Potential contribution Forecast of NCRE to SIC, 2008-2025”, June 2008 Notes: 1) Base plant factor: based on known(published) projects and international averages. 2) Actual connected power corresponds to the NCRE power connected i the SIC in 2007.

3) Gross potential: based on the physical availability of the NCRE in the SIC area. 4) Technically feasible potential: based on the operating conditions, cargo factors, current regulation, and

market trends. 5) Economically feasible potential, scenario 1: forecasted with an energy price of US$75/MWh (1% annual

growth). 6) Economically feasible potential, scenario 2: forecasted with an energy price of US$102/MWh (1% annual

growth). 7) Economically feasible potential, scenario 3: forecasted with an energy price of US$102/MWh (3.5% annual

growth).

The fact that the prices of conventional energy sources tend to rise along with the lower investment costs expected for NCRE technologies, and adding to the above-mentioned factors a clear and determined government policy for the promotion of NCRE, the result should be no less than a highly noticeable increase in the NCRE contribution to the SIC, taking advantage of the technically feasible potential that could supply almost 50% of the 2025 energy power demand. The key question that arises now is whether the country should wait until the moment the market conditions become so favorable that they are set by themselves or we, strategically as a country, should establish proactive

of 11

policies so that the process of inserting NCRE begins strongly from day one, allowing the development of a cleaner and less imported-fossil-fuel dependent energy power matrix.

As for the power generation potentials (GWh/year based on Table 2), it is estimated that it would be possible to supply the 2025 SIC electric power demand with approximately 17,700 GWh/year –in the case of a conservative scenario; with 21,900 GWh/year –in a dynamic scenario, and with 29,652 GWh/year –in a dynamic-plus scenario, representing 16.8%, 20.8% and 28.1% of the forecasted 2025 SIC electric power demand respectively. It is necessary to point out that the technically feasible potential is higher, as it could supply a 53% of the energy demand for SIC by 2025 (55.504 GWh). The above-mentioned figures and percentages may be reached only If the obstacles hindering its full development are removed and efficient policies are designed to allow its insertion in the electric power matrix.

Table 3: Connected production/generation capacity, SIC: period 2008 - 2025 (GWh/year)

Source: NEIM-CEI, UTFSM; June 2008

The starting-up of the energy power-generating centrals that make use of NCRE would allow us not only to gain experience but also to reduce the investment risks and increase the service capacity, facilitating the formation of specialized clusters around NCRE.

In any case, the forecasted potentials enable us to widely surpass the goals (%) defined by the Law 20,257 enacted in March, 2008. In the case of the dynamic scenario, it would reach an energy-power generating capacity of 7% in 2010, of 12% in 2015, of 18% in 2020 and of 21% in 2025. As for the dynamic-plus scenario, it would reach an energy-power generating capacity of 7.8% in 2010, of 13.8% in 2015, and of 21.5% in 2025.

The tables below show the structure of the connected power contribution and energy power-generating capacity of each of the different NCRE sources, for the above-mentioned years, under a dynamic scenario.

Table 4 Connected power capacity, in MW (Dynamic scenario) compared to the estimated SIC demand

year Hidraulic Geothermal Wind Biomass Solar PV Total NCRE SIC % SIC 2008 247 - 18 191 - - 456 8,931 5% 2010 289 - 98 200 - - 587 9,809 6% 2015 676 130 298 314 10 4 1,432 13,181 11% 2020 1,198 485 618 420 110 20 2,851 17,396 16% 2025 1,653 940 998 501 210 100 4,402 22,736 19%

of 12

Source: NEIM-CEI, U.Sta.Maria; June 2008

Table 5: Potentially feasible generating/production capacity, in GWh (Dynamic scenario), compared to the forecasted SIC demand

Year Hidraulic Geothermal Wind Biomass Solar PV Total NCRE SIC % 2008 1.298 0 47 1.339 0 0 2.684 41.464 6% 2010 1.519 0 258 1.402 0 0 3.178 45.542 7% 2015 3.551 911 783 2.201 18 5 7.468 61.195 12% 2020 6.298 3.399 1.624 2.943 193 26 14.483 80.768 18% 2025 8.689 6.588 2.623 3.511 368 131 21.910 105.560 21%

Source: NEIM-CEI, UTFSM; June 2008

5.0 ENERGY EFFICIENCY: POTENTIAL CONTRIBUTION TO SIC (2008-2025)

The process of forecasting the potential contribution of the EUEE for the SIC supply required: to make estimates for the main electric power consuming sectors, to define the energy use structures for those consuming sectors and sub-sectors, to identify the main technologies in use and their most efficient alternatives, to evaluate the profitability of introducing efficient technologies –energetically speaking, and to define the penetration rates of such technologies considering the characteristics of the different end users, their relative tendency to innovation, the life cycle of these technologies as well as the relevance of the required investments.

5.1 Consuming sectors and the final use structure

The forecast of EUEE potentials was restricted to the following consuming sectors: Copper Mining, Industry and Various Mines, Residential (differentiating urban from rural), Commercial (differentiating large from small-scale companies), Great Industry and other Mining (basically Saltpeter and Iron) based on the general categories defined by the National Balance of Energy prepared by NCE.

It was not possible to elaborate forecasts by sector based on econometric models, since there are neither: information available of the Product by region, or estimates of the future evolution granted for each of the consuming sectos by 2025. The sector-oriented structure of the demand falls within the bounds of a global projection of the NCE17 and it has been estimated in a simplified way.18 Under these conditions, the demand projection for most of the sectors and subsectors was based on their historical record trends as well as on the evaluation forecasted for the SIC global demand.

A special analysis was carried out in the case of the Copper Mining industry and the Residential sectors. First, the results shown in a Cochilco study was used to evaluate the copper mining industry demand in SIC and possible off-the-record estimations of copper mining projects until 2017. For the time period 2018 to 2025, the same tendency from previous years was assumed. For the residential sector, the considered demand was the one for the population and home projections set by NIE and CELADE, we also took into acount the tendency of having increasing specific consumption levels as a result of an increased family income. The forecast of the demand projection for these sectors and

17 To the exception of 2018-2025 period, which corresponds to a forecast estimated by the authors. 18 Consequently, the potential power derived from this structure vary greatly, similar to the way in which demand is experienced, meaning that total savings percentage will be maintained including, even if demand structure deviations are produced.

of 13

sub-sectors19 is shown in Table 6. The co-generation was dealt with separately because it was present in different consuming sectors.

Table 6: Energy Demand per Sector [GWh]

Year Copper Great

Industry and Mining

Ind. And various mines

Residential Commercial Others (*) Total

2008 6.886 8.086 9.993 8.614 6.197 1.688 41.464 2010 7.319 9.197 11.017 9.292 7.095 1.621 45.542 2015 9.521 12.731 14.061 10.988 9.951 3.943 61.195 2020 11.064 17.697 17.945 12.684 13.956 7.422 80.768 2025 13.140 24.689 22.903 14.379 19.574 10.874 105.560

Source PRIEN; June 2008 (*)Other sectors: consumption associated with the public sector, transport and other owned energy sectors. . For the estimation of the electric power efficiency improvement potentials, an approximate structure of final use consumption was established based on previous studies carried out by the authors as well as on pieces of information given by representative companies. Table 7 summarizes, in average figures, such structure.

Table 7: Energy consumption structure per sector and final use

Participation in electric energy consumption Sector Subsector Horse Power Illumination Climatization Refrigeration Others Copper(*) 75% 10% 15% Great industry and great mining ind. 70% 5 a 7% 23 a 25% Industries and various mines 75% 5 a 7% 18 a 20% Residential 40% 30% 30% Commercial Wholesale(**) 7% 29% 63% 1% Retail 10% 70% 20% Public 10% 60% 30%

Source PRIEN; June 2008- 2025. (*) The analysis of the saving potentials for the copper mining sector will be performed by area of production: mine, concentrator, foundry and refinery; (**) The structure that was presented represents that of the malls. In the case of supermarkets, refrigeration corresponds to a 45% of the total, illumination to a 24%, climatization to a 15% and the other uses to the rest.

5.2 Determining the feasible economic and reachable potentials of the EUEE

The process of choosing the alternative technologies was limited to the ones available in the country (defined as standard technologies) and considered the ones that are commercially available in the market which are easiliy incorporated by the users. Equipment in use was considered as non- replaceable, except when it has reached the end of its life cycle (change an old piece of equipment by a new one).

To make an estimate of the feasible economic potential, we evaluated the Energy Saving Cost (ESC) by means of comparing the annualized cost of the standard and efficient alternatives (depending on 19It does not consider Public, Transport nor Energy sectors, due to the fact that it was not possible to evaluate their potential to the EUEE, due to lack of adequate information or only because they did not represent a significant percentage of the total consumption.

of 14

their own life cycle), divided by the annual energy consumption levels difference (for the standard and efficient option), with the cost of electricity for the corresponding user.

In order to ensure an eventual decrease on the reference prices of the electricity in the future20, we considered as cut point 75% of such value.

The capital recovery factor considered a discount rate of 12%.

The estimation of the potentials was discussed considering:

i. Energy saving cost (ESC) for the great majority of the transversal technologies (that is those applicable to different sectors). ii. The “benchmarking” or referential specific consumption for the process assesments, especially in the copper mining sector.

6.0 POTENTIAL CONTRIBUTION OF THE EUEE TO THE SIC SUPPLY

The estimation of the potential contribution of the EUEE to the SIC supply was defined as a function of the market-penetration dynamic of energy-efficient technologies; that is, the level of commitment expressed in the public policies (including the control of its implementation); the disposition of the different sectors (consumers) regarding the innovation, complexity, cost and life cycle of such technologies.

The potential of total consumption decrease for the SIC, by 2025, was estimated as follows: 10,493 GWh, in the conservative scenario; 16,388 GWh in the dynamic scenario, and 24,647 GWh in the dynamic-plus scenario. This corresponds to a 9.9%, a 15.5% and a 23% of the SIC total electric-power consumption for that year. Table 8 shows the potentials for the dynamic scenario.

Table 8: Consumption decrease potentials (in GWh). Dynamic scenario.

Consumption decrease potentials, in GWh TOTAL

SIC Consumption Year Copper

Great Industry and

Mining

Industries and Various Mines Cogeneration Commercial

Sector Residential

Sector Base Line(GWh)

Total Savings(GWh)

% Savings

2008 32 29 30 242 30 990 41.464 1.353 3,26% 2010 102 82 77 408 143 1.299 45.542 2.111 4,64% 2015 372 363 308 1.228 581 1.692 61.195 4.544 7,43% 2020 672 1.010 780 2.958 1.462 2.452 80.768 9.334 11,56% 2025 1.100 2.305 1.609 5.550 2.552 3.271 105.560 16.388 15,52%

The total losses of the system, from the production stage down to the end users or final costumers, were calculated as being around 8.2% under the assumption that the regulated customers are connected to the distribution network while the non-restricted customers are connected to the transmission network21. The fact that the transmission losses as well as the losses in the energy distribution had been considered means that when there is a decrease in the energy demand on the

20 Although it may seem highly unlikely, as it has already been noted down. 21 This simplification is rather conservative, since the distributors supply some of the non restricted clients as well..

of 15

part of the end users (customers), there will necessarily be a greater decrease at the energy power generation level.

Table 9: Consumption decrease potential of the electric power at the level of the end user (customer)

and at the production level (in GWh).Dynamic Scenario. Dynamic scenario

Year Decrease Potential

at the level of final consumer (GWh)

Decrease Potential at the production level

(GWh)

%

2008 1.353 1,475 3,6 2010 2.111 2.301 5,1 2015 4.544 4.952 8,1 2020 9.334 10.172 12,6 2025 16.388 17.858 16,9

Source: PRIEN ,U.Chile, june 2008 The decrease potential of energy consumption at the generation level is 16,9% on the dynamic scenario and almost 25% on the dynamic-plus scenario; based on such potential, it is possible to calculate the mean reachable energy power demand decrease through energy efficiency policies, as it is shown in Table 10.

Table 10: Decrease potential of the mean power demand produced.

Dynamic scenario

Year Saving Potential at the production level

[GWh]

Decrease potential of the produced mean power

demand [MW] %

2008 1.475 226 2,5 2010 2.301 353 3,6 2015 4.952 760 5,8 2020 10.172 1.561 9,0 2025 17.858 2.740 12,1

Source: PRIEN, U.Chile, June 2008

The decrease of the mean power demand as a consequence of the energy consumption decrease at the production level, would approximately be around 1.700 MW, (for the conservative scenario) and 2.700 MW (for the dynamic scenario), by 2025.

It is noticeable the high impact that a determined energy efficiency policy could have on the SIC power requirements for the time period 2008-2025. By 2025, the energy requirements reduction would be equivalent to the power of several thermic and hydropower centrals built in Chile by that date22.

7.0 TOTAL POTENTIAL SUPPLY OF THE NCRE AND THE EUEE TO THE SIC, 2008-2025

The total potential contribution of the NCRE and the EUEE23 to the electric power supply of the SIC –in accordance with the methodology used in this study and the economical feasibility presented– is almost 30.000 GWh/year, in the conservative scenario; almost 40.000 GWh/year, for the dynamic

22 For example, Ralco is the biggest central in Chile, it alone produces 690 MW of power (Endesa, 2008). 23 Considering the potential of the electric energy consumption decrease at the production level.

of 16

scenario; and 56,500 GWh/year, for the dynamic-plus scenario, all of them by 2050. The following table shows the total potential contribution of NCRE and EUEE for the dynamic scenario.

Table 11: NCRE and EUEE total potential contribution of energy to the SIC electric power supply.

Dynamic scenario Year NCRE

(GWh/year) EUEE

(GWh/year) TOTAL

(GWh/year) %

2008 2.684 1.475 4.159 8,1 2010 3.178 2.301 5.479 12,0 2015 7.468 4.952 12.420 20,3 2020 14.483 10.172 24.655 30,5 2025 21.909 17.858 39.767 37,7

Source: Prien -UTFSM, July 2008

Likewise, the connected capacity contribution of the NCRE and the decrease in the power demand of the EUEE is 5,086 MW, on the conservative scenario; 7,142 MW, on the dynamic scenario; and 9,874 MW, on the dynamic-plus scenario by 2025. This is equivalent to 22.3%, 31.4% and a 43.4% , respectively, of the connected capacity scheduled by 2025, thus, presenting a completely different future compared to that of the conventional projections on the electric power development of our country (Chile).

Table 12: Mean power potential contributable to the SIC by the NCRE and the EUEE in MW

Dynamic scenario Years NCRE

(MW) EUEE (MW)

TOTAL (MW) %

2008 456 226 682 7,6 2010 587 353 940 9,6 2015 1.432 760 2.192 16,6 2020 2.851 1.561 4.412 25,4 2025 4.402 2.740 7.142 31,4

Source: Prien -UTFSM, July 2008

7.1 Total NCRE and EUEE potential contribution to the SIC on 2025 and conventional electric power supply needs.

In order to present the high relevance of total NCRE and EUEE potential contribution to the SIC in relation to the total needs of the SIC on 2025, and the amount of conventional sources; the following tables shows the percentage of both kina of energy sources in the context of the new generation and capacity needed in the SIC, between 2008 and 2025. As is presented in table 13, due to the high potential of NCRE and EUEE, only 49 % (in the dynamic scenario) or 30% (in the dynamic -plus scenario) of the new installed capacity need to be conventional sources. In terms of the new generation, as is presented in table 14, only 39% in the(in the dynamic scenario) or 14% (in the dynamic -plus scenario) of the new generation need to other sources than the solar, wind, geothermal, mini-hydro and biomass included in this study.

of 17

Source: NEIM-CEI, U.Sta.Maria; July 2008

Source: NEIM-CEI, U.Sta.Maria; July 2008

Table 14: Total conventional new electric power supply needs in the SIC on 2025. (GWh)

ableResumen de Participación de ERNC y UEE en Aumento de Demanda SIC al 2025

Table 13: Total conventional electric power supply needs in the SIC on 2025. (MW)

of 18

8.0 MARKET & INSTITUTIONAL BARRIERS

The potentials determined by this study refer to the NCRE potential that start being competitive with conventional energy sources and they also refer to the efficiency improvements in the use of electric power by means of implementing technologies that are clearly profitable for the users. However, the materialization of these potentials has been hindered by a set of institutional and market barriers which are not only general but also specific. Renewable Energy Based on the studies that support this document, it can be established–in the case of NCRE, that most of the barriers are highly similar among them and can be summarized as follows:24: Lack of surveys accounting for national resources: Even though the country has a great

potential of NCRE, there are neither exhaustive studies nor researches that can quantify their available potential which hinders the formulation and development of projects for the use of NCRE on a solid base25.

Geographical conditions and SIC structure: The geography of our country and the main

transmission lines of the SIC lay out hinder the incorporation of the NCRE to the system, due to the fact that their location is far from the consumption centers and also because the SIC transmission system presents power restrictions for the incorporation of NCRE into the system.

Lack of experience and technological maturity: These limitations slow down the development

of NCRE technologies and increase their development costs. This is also true for the EUEE. Examples of the above-mentiond are: the lack of specialized human resources, the weak technological infrastructure, the poor manufacturing capacity and associated services as well as the lack of local industrial capacity (energy cluster), etc.

Lack of financial incentives: The current regulatory system does not allow enough economic

incentives to stimulate the investment in the use of NCRE, therefore, as NCRE are innovative energy sources, have a higher initial investment cost.

The energy prices do not reveal the effective costs for society: The fact of not considering

external elements o variables derived from the exploration, exploitation, transformation, transport and use of the energy, constitutes a market distortion that restricts the competitiveness of the renewable energies.

It may be pointed out that in the specific case of geothermic energy whose main barrier is given by the high initial investment cost to begin the geothermic resource explorations, raises not only the cost, but also the uncertainty level and the financial risk level of this energy source.

24 The Consolidated report includes the specific barriers for the various NCRE sources. 25 This barrier is applied to almost all possible uses of the NCRE, mainly the hydraulic energy in run-of-the-river and eolic.

of 19

In relation to EUEE, if we compare the results of the national public policies to the strategies of countries with a greater trajectory and better results in this matter, it seems to be evident that the end users or agents in Chile –who are responsible for making investment decisions in equipments, buildings or facilities– have not fully internalized the option related to the efficient use of the energy. Unlike NCRE, most of the existing barriers put to give no way to the full market for allotting or allocating investment resources for EUEE are associated with the typical characteristics of the main agents involved. Some of these barriers are: a) Energy industry: Overcoming the “sales-profit” vicious circle: Traditionally, energy power companies have

based their actions on the premise “higher sales, higher profits”, neglecting the idea that energy service sales may be a more profitable business than that of energy sales, because of the higher added value of the services over the gross resource.

The energy prices do not reveal the effective costs for society: The fact of not considering

external elements o variables derived from the exploration, exploitation, transformation, transport and use of the energy, constitutes a market distortion that restricts the competitiveness of the energy efficiency technologies.

Lack of acknowledgement of the investments in EUEE: The tariff system does not consider

the investments that the energy-industry companies may make in order to improve the efficiency with which users make use of the energy.

b) Industrial and mining sectors Lack of information inside the companies on the potentials and the benefits of investing in

energy efficiency; limited availability of relevant data and lack of skills to collect, to elaborate and to analyze this information (if available).

The tendency of the different companies to make investment decisions favoring the

immediate investment lower costs, instead of considering the life cycle cost of the equipment. Resistance to adopt new technologies, which are barely known within the country, without

proven or verifiable experience at a local level. Priority of the tariff negotiation or supply contracts over the investment on equipment

improvement for gain more efficiency, despite the fact that their performance is similar to those of less efficient pieces of equipment.

c) Residential sector A tendency to acquire more economic equipment units at their initial sales price, instead of

considering the operational and maintenance costs along their useful life cycle. A cultural issue concerning energy efficiency, which is associated with shortage, restriction

and lack of comfort and thus, it end up being not attractive for the end users. Limited offer of efficient pieces of equipment from abroad, and even less in terms of local

production. Slow rotation of electric appliances and the obsolescence of its energy-consuming systems,

which generates higher consumption levels.

of 20

d) Commercial and public sectors Slow rotation of equipment and facilities prevent the quick introduction of energy efficient

technologies. Lack of consideration of the energy efficiency concept when making decisions that affect the

use of energy, such as construction criteria, equipment purchase, components y materials, etc. The decisions on energy matters are usually made by people who are not going to make use of the facilities themselves.

9.0 POLICY PROPOSALS FOR THE DEVELOPMENT OF NCRE AND EUEE

Just like the present study has shown, NCRE’s and EUEE’s may become relevant components with a high potential to diversify the local energy matrix, contributing to the safety and autonomy of the electric power supply. In order to fully develop and make the best possible use of these resources, it is highly recommended to consider them as a strategic alternative where authorities should design and apply research and development programs related to NCRE and EUEE, to prepare human resources trained to deal with them and to make technological adaptations as part of the national energy regulations strategy. Some of the options for the promotion of these alternatives are:

Renewable Energies

Reinforcement of institutions: it seems to be essential the creation of a National Office of Non-Conventional Renewable Energies which should have enough autonomy as well as enough human, technical and financial resources to allow it strengthen and make more dynamic the development of this alternative among public institutions.

Generation of information: the development of surveys, measuring instruments and

exploration of natural energy resources. Establishment of a computerized geographical administration system which could

manage the technical information about energy resources and that could also offer its services to potential investors.

Integration of the regional energy projects into the regional strategic development

plans (tourism, agri-industry, mining, fishing). Improvement of regulatory mechanisms and instruments to facilitate the exploitation of

the NCRE’s. Generation of the infrastructure necessary to incorporate the NCRE’s to the Central

Interconnected System (SIC) and to the distributed generation systems as well. Energy Efficiency Contrary to what happened in those countries where energy efficiency was assumed as part of the energy policy of the country, (incorporating aggressive or “voluntary” regulaory schemes to face their energy and environmental challenges), Chile left efficiency aside over the past 30 years and focused its efforts on trying to respond to the energy challenges from the perspective of the offer. Despite recent efforts made by the goverment implementing the National Energy Efficiency Program (NEEP),

of 21

these efforts represent the beginning of a process that requires institutional consolidation, mainly in those areas concerning political support as well as human, technical and financial resources availability. Some of the options in order to promote this strategy at a general level and by consuming sectors are:

a) Institutional structure for implementing an energy efficiency policy26:

International experience has proven the convenience of designing laws to ensure the efficient use of energy by the different economic sectors. Most importantly, it is to establish specific regulations for the energy-intensive companies (EIC). Also, it is central the existence of an Energy Efficiency Center or Agency or an Office, authorized by the State, which depends on the Ministry of Energy, but having operational autonomy and enough technical, administrative and financial resources, along with clear performance goals.

b) Conceptual structure for energy efficiency:

Given the significant potential supply contribution of the EUEE to the national energy matrix, a set of measures should be designed so they become the framework of an energy policy whose main goal should be fulfilling such potential, eliminating an important part of the above-mentioned barriers. Specifically, the following is required:

Inclusion of environmental externals to energy projects. Promotion of the technologic innovation. Assimilation of the ‘efficient use of energy’ concept by the society: dissemination and training. Educational and cultural policy that incorporates the EUEE concepts and generates a culture

around energy efficiency and its importance to the environment. Access to energy-efficient technologies at competitive prices.

c) Residential sector: It has been proposed to continue with the second phase in the labeling of refrigerators and light bulbs; and the introduction of minimum acceptable standards, (that is, prevent the market sale of refrigerators and light bulbs whose characteristics make them fall below a given cathegory, for example, D or E). Along the same lines, currently unlabeled electric appliances should be classified and labeled, and eventually introduce minimum-standards policy to be applied on them as well.

d) Large Industry and Mining Sectors or Energy-intensive Companies (EIC): As part of the energy-efficiency legislation proposed, an important part of this regulatory body should be assigned to norms, mechanisms and incentives that regulate the use of energy at the EIC companies and at the large-scale market as well.

e) Mining and other industries: Besides the existent Energy Efficiency Pre-investment Program of CORFO for the small and medium-size mining companies, it is required to implement a program with enough resouces to cover, at least, 4,000 companies within a 10-year period at the most. At present, there is a loan from the KfW27 (US$ 50 to 60 millions) at the government disposal, which could be used to develop a pilot

26 Based on the document prepared by Pedro Maldonado, “Study of energy-intensive companies and its possible contribution to energy efficiency programs”, CEPAL, Natural Resources and Infrastructure Division, 2008, in printing process. 27 KfW: Kreditanstalt für Wiederaufbau. German Cooperation Bank.

of 22

program devoted to assess both the institutional functioning and the instruments to make the best use of the funds available.28

10. CONCLUSIONS: A DIFFERENT FUTURE

The significant contribution of the NCRE’s and the EUEE’s to the SIC electric power supply, estimated around 40.000 GWh/year (7.100 MW) under the dynamic scenario; and around 57.000 GWh/year (9.800 MW) under the dynamic-plus scenario by 2005, implies a tremendous support to the security and sustainability of the local electric power system in Chile. This means a reduction in the vulnerability level and an improvement in the quality of the energy services; a lowering in the energy dependence level, an increase in the competitiveness and productivity of the companies; a reduction in the local environmental impacts associated with the production and use of energy, an increase in the level of employment and a decrease of the social inequity, as well as improvements in the accomplishment of the local and international environmental agenda. In short, we are looking for a different future regarding the development of the energy market.

In relation with the reduction of greenhouse gases, (estimating an emission of 400 tons of CO2 per GWh)29, the materialization of the estimated NCRE’s and EUEE’s potentials would allow us to reduce around 16 million tons of CO2 a year, under the dynamic scenario, and 22 million tons of CO2 a year, under the dynamic-plus scenario.

The materialization of the above-mentioned potentials requires overcoming the obstacles hindering the full development of the NCRE’s and that the market operates openly in relation to the allotment of technical, economic, institutional and cultural resources especially to the EUEE’s. The efforts made, in both fields, to date, are clearly insufficient and it is necessary to firmly continue establishing policies that promote both NCRE and EUEE which have the necessary political support and the human, financial and technological resources that our country needs to face and overcome such a challenge.

The above-mentioned policies should aim at establishing a robust institutionality for both the NCRE’s and the EUEE’s which not only involves, in this, the ruling institutions but also a set of regulations and incentives of different kinds, whose effectiveness guarantees the synergy established among themselves. Usually, these policies should include the following: programs for making these policies known as well as training, pre-investment and investment financing mechanisms, subsidies, government measures, quotas and/or tariffs, demands to energy-intensive companies, voluntary agreements and minimum standards, among others.

Establishing a proactive policy for the NCRE’s and EUEE’s requires the creation of National Renewable Energy and Energy Efficiency Centers or Agencies, dependent on the Ministry of Energy, but operationally autonomous and with enough technical, administrative and financial resources that enable the country to face, systematically and continuously, the challenge imposed by the fulfillment 28 For further information: Feasibility Study for Chile’s energy efficient promotion through KfW funds, prepared by the Energy Study & research program of the Universidad de Chile the German Bank of Cooperation, KfW, July 2007. 29 Should the generation projects based on conventional coal centrals for the SIC expansion be executed, this emission factor will be significantly higher.

of 23

of the energy power requirement levels of our country and give a step forward setting and fulfilling long-term goals. This policy should promote the development of the technologic infrastructure, human resources and service capacities to manage or make the best use of the energy natural resources as well as the necessary technological innovation for the transference and adaptation required by the development of clean energy.

At present, there is still a debate in the Congress on the Government’s latest Energy Ministry Bill to create this new Ministry, this is the right time to include these institutional proposals related to the NCRE and EUEE in the future Ministry of Energy.

Important short-term recommendations

Instead of determining absolute figures, this study aims at estimating trends, feasible goals, and required commitments to improve safety and sustainability of the power energy. Its preliminary conclusions evidence the need to go deeply into the knowledge of the energy resources available within our country, especially the renewable ones; also to develop the technological capacity at a local level, to support the research, the development and the knowledge on: the structure of the energy final use, the technologies in use in our country (Chile), the age of the pieces of equipment in use and the cultural aspects which determine the way in which the energy is used. One of the main obstacles for the assessment of the NCRE power potentials and of the improvement of the efficiency in the use of energy use is related to the lack of detailed information regarding resource surveys, local capacity, production externals and energy use in each of the end user sectors, likewise, the existence of regulatory frames that hinder the full expansion of both energy sources.

In this context, and without excluding the recommendations of this study as well as its supporting studies and research, we propose some central and necessary measures to be taken, in the short term, in order to take a step forward and reach the objectives set.

a) Allotment of resources to carry out an in-depth evaluation of the existing NCRE

sources within our country. b) Preliminary assessment of the externalities at the levels of production and use

of energy.

This requires organizing a highly-qualified multidisciplinary team and spending two or three years for its execution. A preliminary study would allow us to allot resources to those alternatives whose positive-negative balance of externalities is more favorable.

c) Evaluation and development of local capacities. It is central to generate human resources whose assignment will be the development and use of both, the NCRE’s and the energy efficiency, at the different levels required: scientific, professional, technical, operational and maintenance personnel.

d) Increase the knowledge about the structure of the energy consumption by energy source and by user.

Generate statistically representative samples of each of the main sectors and sub-sectors dealt with in this study, identifying the main user equipment units, their technical characteristics, their conditions of use, their age, production data, etc. Based on the previously mentioned background

of 24

information, we should prepare a balance of available energy and net energy consumption at user level.

e) Study the inclusion of the NCRE and Energy Efficiency investments in the tariff

scheme.

This measure, though complex, is essential for the incorporation of the NCRE’s, at a profitable return, to the market so as to accelerate the dissolution of this sale-profit relation within the electric utility sector. At the beginning, it requires to determine the profit margin (profitable price) and their impact on the total price of the electricity, and also to acknowledge the investments that the energy-power companies could make to improve the efficiency with which their customers use the energy.

f) Study the impact of a proactive policy on NCRE and EUEE concerning

employment:

There is a relative concensus about the fact that lowering the consumption levels by means of implementing efficient energy use measures or by a major inclusion of NCRE’s in the electric power market, would enable us to generate, significantly, more permanent and higher quality jobs, rather than building and operating conventional electric power centrals of similar size. The country needs accurate studies to be carried out which discard or confirm that this would be as positive in Chile as in other countries in the world.

g) Perform a cost study of the different resources alloted to the electric power

generation: It is also central for Chile to carry out a study to define the average value of the different available resources and/or technologies used to generate electric power. The objective of this exercise would be to set the basis for a shift of focus in the development of the electric power sector which favours the evolution of the sector at the lowest relative cost for the generation of electric power, considering, obviously, EUEE as one of the alternatives of electric power supply30.

30 A tool of this nature may work if adopted as a sale-profit disconnecting strategy.

the potential contribution of non-conventional renewable...

Documents