Presidential support escalates wind boom in Chile

CHILE: When Michelle Bachelet took office as president of Chile in 2014 she promised to place energy at the top of Chile's political agenda and to prise open a space for renewables.

Agenda 45%… President Michelle Bachelet demands that 45% of new generation capacity must come from renewables (pic: Agencia Brasil)

The formerly sleepy pace of development in Chile's wind power market seems to have led to few people noticing what actually happened there last year. In the first nine months alone, Chile installed 382MW of wind capacity, tripling 2013's 130MW of new build, according to the state-run Renewable Energy Centre (CER). That brought the country's total wind power capacity to 737MW, more than double the 335MW cumulative figure at the end of 2013.

"We knew the take-off would come, and now it's finally happening," says Ramon Fiestas, chairman of the Global Wind Energy Association's (GWEC) Latin-American committee. Now GWEC and Chile's renewables trade body, Asociacion Chilena de Energias Renovables (Acera) expect a steady 300-400MW of new annual capacity to 2025.

"The annual figure is unlikely to go much beyond that," says Brian Gaylord of Make Consulting. The country might boast a healthy economic annual growth rate averaging 5.38% from 1987 to 2014, as well as enjoying good wind resources blowing in from its 4,000-kilometre Pacific coastline. But Chile is limited in size with a population of 18 million and current installed capacity from all generation sources of just 17.6GW.

Sun versus wind

Furthermore, solar PV, with 219MW online, is fast competing for space. CER identifies 160MW of wind projects under construction across the country, against 456MW of solar PV. A further 5.2GW of wind projects have environmental permits, topped cleanly by PV, with 7.8GW. Around 2.2GW of additional wind projects are under environmental assessment; solar PV has 2.5GW.

Given the current political and energy outlook, Carlos Finat, executive director of Acera, estimates the addition of 800MW new online renewable power annually to 2025, mainly from solar and wind capacity. "Wind should cover 50% of that in the long run, providing it works to remain competitive," says Finat. While not an immediate threat, biomass and geothermal could also get a boost in the future and eat into wind's share of the market, he adds.

Meanwhile, Chile's wind sector is humming, led mainly by foreign turbine makers and developers. Spanish turbine manufacturer Acciona brought online its 45MW Punta Palmeras wind project in the Coquimbo region last October, using its own 3MW machines. In August 2014 US utility Pattern Energy officially inaugurated the 115MW El Arrayan development, also in Coquimbo, using 2.3MW turbines from Germany's Siemens. This was a milestone for Chile, and one of the biggest wind farms in Latin America.

In the same month, Spain's Jealsa brought the 36MW San Pedro project online on the central-south island of Chiloe, using 2MW turbines from fellow Spanish firm Gamesa. Last October, Colombian utility Empresas Publicas de Medellin (EPM) commissioned another landmark wind project - its 109.6MW Los Cururos wind complex in Coquimbo, using 2MW turbines from Denmark's Vestas.

Commitment and stability

The main impulses behind the crank-up include the staying power of large developers, many of which recognised Chile's rich wind resources over a decade ago, as well as the country's political stability. A high electricity market price, hovering typically between $110 and $180/MWh offered good returns.

"Chile is our favourite nation," Pattern Energy CEO Michael Garland recently told Bloomberg. "It's got a good economy, a stable political environment and it's a bit of an energy island with few indigenous energy resources."

Chinese turbine manufacturer Envision, which brought online its 17.8MW Ucuquer project in the Libertador Bernardo O'Higgins region last September, has a similar verdict. "Chile is probably the best Latin-American country in terms of business and regulation," says Envision executive director Felix Zhang.

And now, spurring on the incumbents and newcomers alike, president Michelle Bachelet has boosted political commitment to long-term energy planning. On taking office last March, Bachelet and her industry minister Maximo Pacheco unveiled their energy agenda, which aims to slash Chile's 65% primary energy dependency on fossil imports. It orders government agencies to lift barriers to clean energy, and demands 45% of new generation capacity be sourced to renewables 2014-2018 to help Chile's legally binding obligation. That obligation, passed into law in October 2013 by the former administration, demands distributors include a minimum of 20% of renewables in their mix by 2025.

Finally, Chile has what GWEC's Fiestas describes as "a solid, long-term energy strategy", succeeding its mainly improvised policy. In September 2014, the government consolidated that strategy with new rules for electricity supply tenders, permitting renewables to make special offers within three blocks of hours during the day: in blocks 2300- 0800hrs; 0800-1800hrs; and 1800-2300hrs.

Finat sees this as the end to power tender discrimination against wind, as it enables producers of variable generation to offer output at the optimum time. It is a game changer that "will make renewables extremely competitive", he says.

Acera is already seeing a large amount of offers from wind and solar for the current power tender in which a group of distributors across the country are making a combined call for 15-year supply contracts totalling 2,000GWh of new capacity for 2016. The results of that tender (announced in late December 2014, after this issue went to press) will indicate wind's immediate future. The crunch comes later, as the government is preparing a 20TWh tender - also for 15-year contracts - divided into separate calls, starting in March 2015.

Finat prefers not to hazard a price estimate for wind contracts in the coming calls. He points out, however, that in the last two, conventional power sold at $129/MWh and $112/MWh. Meanwhile, power auctions in Brazil have long seen wind prices fall well below $100/MWh, so far bottoming at $50.2/MWh.

Chile has no turbine manufacturers, which is unlikely to change given the restricted size of its market, says Gaylord. That might make installed wind power costs higher than in Brazil, with its large local wind industry. Yet Finat believes prices will enable wind to stand on its own feet competing with conventional power in the Chilean tenders.

Outstripping obligations

Based on recent experience, distributors will buy wind even in excess of the statutory renewables obligation, says Finat. Chile's current wind boom comes largely from past development momentum. That, says Finat, continues now, long after surpassing the previous government's renewable electricity obligation, which had scheduled 5% for 2014 (on its way to 10% to 2024). "We are already at nearly 10%," he explains.

Chile has vast areas where wind capacity factors top 30%. But, until the new government's energy policy was implemented, there was little developer security to entice project financers. Developers staying the course over the past decade are mainly those with deep pockets, such as wind market leader Spanish utility Endesa, which is now controlled by Italian counterpart Enel. Another Chilean wind major, Ireland's Mainstream, sees the market as strategic and uses special financing strategies, such as partnering with Chinese turbine manufacturer Goldwind, which has a dedicated finance affiliate.

Up to now, successful wind operators have mainly sold power directly to the spot market, averaging prices at around $130/MWh. On a smaller scale, the more adventurous of Chile's mining groups have signed up for wind generation through long-term power purchase agreements (PPA), guided by the spot price. Yet PPAs are limited in number due to the conservative nature of Chile's power system, with large customers "wanting the usual one-stop shop suppliers, without needing to integrate different solutions", says Finat. Now, however, with the opening of distributor tenders to renewables, Finat believes Chile will surpass its 20% renewables target by 2020, five years ahead of deadline.