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Chile's wind challenge

Chris Matthews

Development manager/Mainstream Renewable Energy

Published  Thursday, October 1, 2009

In 2008, Chile's President Michelle Bachelet signed into law a bill to promote renewable energy in the country. According to the legislation, 5% of all power supplied by distributors will have to come from non-conventional renewable sources during the period 2010-14.

After that, the rate will rise 0.5% a year to reach a total of 10% in 2024, when Chile should have about 4.2GW of installed capacity from non-conventional renewable sources. Distributors will be fined if they fail to comply.

According to most renewable energy experts, however, the support mechanisms put in place by Chile do little to encourage investment in the renewable industry. The quota system picked by Chile is often seen as being not as effective as a feed-in tariff that sets minimum prices for different renewable power sources and forces distributors to purchase all the power produced.

Chile's renewable potential is unquestioned, but is the state doing enough to support its desire for a diversified energy matrix?

In last week's Perspectives, BNamericas focused on the development of geothermal capacity in Chile. This week, BNamericas spoke about these issues and more with Chris Matthews, the local development manager at Irish firm Mainstream Renewable Energy.

BNamericas: Can we briefly go over Mainstream's projects in Chile? Is the 36MW Laguna Verde wind farm under construction?

Matthews: Laguna Verde is not in construction yet. There are some remaining issues being resolved. The EIA has not yet been resolved, for example. That should happen fairly soon. There are some remaining issues which are affecting the whole area around Valparaíso regarding land zoning issues which have to be resolved.

Our Alcones project is progressing well. We are measuring wind data. We are aiming for a financial close towards the end of next year.

There is a pipeline of greenfield development projects with about 600-800MW of capacity. We are currently in a campaign of erecting net masts.

Being very speculative, a first project would go online in 2011 or 2012.

BNamericas: What kind of power price do you need to make wind profitable?

Matthews: We can't give a dollar number per megawatt hour. It all depends on the tenure, the length of time that we get the price, the indexation applied to it, whether or not that includes capacity payments, green certificate payments and CERs. So this is a very difficult question to answer in a short way.

Some wind projects have sold their electricity to the regulated market through an auction and the prices that those wind projects got would roughly work for us. But I haven't actually seen the indexation applied to those deals, so it's a tentative answer. There are numerous factors involved, as I said.

Spot market prices are currently not high enough. But in the recently held auctions on the regulated market we saw the Monte Redondo wind farm achieve a price that would be viable.

BNamericas: Can Chile expect to have serious renewable capacity without a feed-in tariff?

Matthews: Some sort of support mechanism other than the one currently in place needs to be introduced, yes. If that is a feed-in tariff, that would be a huge shot in the arm for the industry here. We prefer to call it a support mechanism.

If the current system persists, in my opinion it is not going to encourage the competition from the independent developers and even some of the large vertically integrated developers. Chile needs and deserves this competition in order to get an efficient wind industry in the country.

The problem with the structure now is that an independent wind power developer has to sell electricity to its competition in order to realize the value of its output. And the competition has shown no inclination to do that. In fact, what we've seen recently is the large generators are lobbying the government to include co-firing of biomass in the definition of non-conventional renewable energy, so they're obviously trying to self supply. You can't blame them.

But if you're trying to design a support mechanism which encourages competition, which Chile is normally very good at doing, you won't achieve this by forcing independent entrepreneurs like us to sell to large vertically integrated utilities who have no interest in buying our power.

BNamericas: What should the state do then to support renewable capacity?

Matthews: A tariff system would help. A support system of the variety that guarantees a certain level of income for a wind farm, not one which is overly complicated like a production tax credit. A feed-in tariff is generally in our view the ideal. It's the simplest way of doing it.

But what we are trying to do here in Chile is tell people that a feed in tariff is not a subsidy. In our view, it's not a subsidy but a way of correcting a market designed 20 years ago for fossil fuel.

If you look at the benefits of a feed-in tariff - the reduction of marginal electricity prices - it pays itself back quite quickly. The evidence of Spain, Germany and Denmark is what we base that on.

Again, we think the feed-in tariff is the best way of doing this, but we don't think that a feed-in tariff should be viewed as a subsidy but rather as a correction of a market that doesn't work for renewables.

BNamericas: We've been hearing a lot about transmission bottlenecks with renewable projects in Chile. Has this been a concern?

Matthews: Transmission is a problem in certain areas in Chile, but the solution is to stick to areas where this is not a problem. We've picked our areas accordingly.

BNamericas: What about environmental opposition to wind?

Matthews: There is no environmental opposition to wind farms in Chile; none that we've seen.

BNamericas: How do you view Chile's wind potential? What kind of capacity can we expect to see in the coming years?

Matthews: I can see a developable 2GW in the next five years in the country, either built or on the way to being built.

BNamericas: What about financing for wind projects?

Matthews: Financing is harder than it was, but not impossible; having said that, it has not been an issue on any of our projects.

BNamericas: And access to turbines?

Matthews: We have very good relations with our turbine suppliers.

BNamericas: Is Mainstream looking at other renewable sources?

Matthews: In Chile we're only focusing on onshore wind. Solar doesn't have a support mechanism that works yet in Chile.

BNamericas: What is the greatest challenge to wind in Chile?

Matthews: The wind industry in Chile is at a tipping point. If the elections produce a president who is ready to modify the current support mechanism for one that works, Chile will have a vibrant wind industry.

It has a good resource. Chile has the potential to be the first mover in this region of Latin America. It has the potential for building up a domestic industry for wind farm support, in turbine manufacturing and ancillary manufacturing.

But it is very much at a tipping point. If the current regime isn't fixed, wind will be a niche play for vertically integrated utilities and done for PR purposes rather than with any view to introducing a vibrant competitive industry.

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