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6 May 2021

Chile’s mining and natural conditions could foster hydrogen giant

 

Population: 19,116,201 (+0.86% vs 2019)

GDP per Capita: $13,228 (-9.5% vs 2019)

Debt to GDP: 32.54% (+4.33 vs 2019)

Though Chile has only 19 million citizens, it’s become the second most active renewable energy market in Latin America after Brazil now that Mexico’s anti-renewable reforms have taken effect. In ease of doing business rankings, it’s a little ahead of Mexico as the best-performing Latin American country – on a par with Eastern European countries. But Chile’s natural conditions are what makes it really stand out for renewable energy development.

This article is the latest in Rethink Energy’s Country in Focus series, following recent coverage of Poland, South Korea, Australia, Saudi Arabia and Indonesia.

Solar in the north, Wind in the south

In the north of the country, the Atacama Desert has the absolute best solar resource of anywhere on the planet. The region is already a hotbed of solar investment because it is also home to an energy-hungry mining industry which produces a third of the world’s copper. Mining activity has also been growing rapidly, with growing demand in industries like the power sector, and those companies increasingly desire renewable credentials. In the far-south Aysen and Magallanes regions, wind speeds rival those enjoyed by offshore wind farms in the North Sea and the Taiwan Strait, though for now, Chilean wind farms are located in easier-to-reach locations and have unremarkable capacity factors.

So, Chile has two global hotspot regions for renewable energy’s natural resources, wind and solar, one at either end of the 2,700-mile long country.

A solar module in the Atacama will produce perhaps 50% more energy than it would if placed in California, and 100% more than if it were in Germany. The southern winds are even stronger compared to other regions according to the more relevant power density metric, but the windiest sites are out of reach of the grid, and transmission would have to be built through rugged mountain terrain. Water depths fall off a cliff away from the shore – Chile won’t see offshore wind until floating projects become a mature technology.

When that happens, Chile may also benefit from its role as the host of some of the remaining activity in the moribund wave power sector: Enel installed its PB3 PowerBuoy this year off the coast near Las Cruces. We expect wave power technology to eventually find an auxiliary role in offshore floating wind farms.

It remains to be seen to what extent the far south will be harnessed for wind, but there are plans afoot. The Ministry of Energy has suggested that Chilean wind power in the Magallanes could produce 13% of global hydrogen demand, though such a boast implies an underestimate of future demand.

2.2 GW wind and solar installed in a year, but so was some diesel

Such plans, combined with impressive progress on EVs and the presence of little-seen renewables such as CSP and wave power, make Chile something of a leader. But for the time being fossil fuels still make up 47% of Chile’s 26 GW grid capacity, and the majority of generation.

Chile has an unusually high proportion of diesel generation. These diesel generators have been kept alive economically only by capacity payments, and more have been built even as the pandemic suppresses demand and coal plants begin to be decommissioned. This despite the fact they are little used already, providing only 3.5% of generation in March.

Unusually, hydropower has not yet reached its practical peak – the current National Energy Strategy (ENE) sees hydropower growing to 12.5 GW, from the current 7 GW. A large part of this will come from small-scale hydro located away from the main grid.

Coal draw-down undercut by natural gas and transmission limitations

Chile previously set a 2040 deadline to close its last coal plants, ahead of 2050 net-zero. But it has run far ahead of schedule, at least on coal. Initial closure agreements between state and power companies, signed in 2019, would have seen 1 GW closed by 2024, but AES Gener, Enel, and Engie have all committed to close a further 1.9 GW by 2025. This coal phaseout was optional, but the companies must have seen the writing on the wall after a bill was proposed in October which would forbid construction or operation of coal-fired power plants from 2026 onward.

Chile signed a carbon tax into law in 2014 – the first in Latin America. It came into force in 2017, and along with new pollution and new-vehicle taxes brought in $300 million tax revenue in 2018. For now, the price remains too low, at $5 per ton, to push out fossil fuels, and is more of a sign of things to come.

However welcome coal closures may be, the National Energy Commission (CNE) and National Electric Co-ordinator (CEN) both reacted to the proposed coal ban by warning of higher levels of more costly gas generation. As reflected above, Chile still hasn’t entirely halted development of new fossil fuel development – the expectation for the decade is that only 70% of new capacity additions will come from wind and solar, plus 20% from hydro, leaving 10% to come from new gas and maybe diesel. Those expectations too will be surpassed. Already, right now, solar makes up 80% of the 1.7 GW under active development in the country, with another 12% coming from fossil fuels., the rest from hydro and wind.

The regulators also warned of new congested zones in the transmission network – since replacement renewables can only be built where’s there’s room and proper conditions. If the ban isn’t put through yet, it is only because the transmission system isn’t considered quite there yet – although loss of carbon tax money must also have been considered.

 

Transmission network expanding outside the heartlands

There are three regional energy markets in Chile – the SEN in the north and center, which holds the vast majority of all generation and population. Not pictured here are the SEA to the south and the SEM in the far south Magallanes region, whose grids each consist of under 100 MW of hydro and gas. Chile’s 2021 transmission expansion plans will involve $717 million investment into 128 projects, with fully $302 million going outside of the SEN. The five-year plan from 2021 will involve $3.2 billion in tendered projects.

Because of the thousand-mile distances involved, Chile is developing High Voltage Direct Current (HVDC) and Ultra High Voltage Direct Current (UHVDC) lines. Of these the first and most significant so far will be the 2,000 MW, $1.2 billion Kimal – Lo Aguirre project, running from Antofagasta – the capital of solar-rich desert Antofagasta province – to the national capital, Santiago. This project is out for tender and will be awarded in October, and is expected to take seven years to complete. With voltage of at least 600 kV, transmission losses over 1,500 miles should be around 6%. This line will run parallel to the existing HVAC Kimal-Cardones-Polpaico corridor line, which is 500 kV and insufficient for the scale of solar development planned in the north.

Especially with energy storage to smooth the flow, a 2 GW transmission line will be able to serve much more than that in solar capacity. Antofagasta Province uses a lot of energy by itself but this sort of expansion will still enable vital solar development.

EVs promoted in the capital, but rooftop solar needs new rules

Besides national targets, there are also city-led initiatives. Santiago, the capital, has brought in EV buses and taxis. With 4,250 electric buses, the capital has perhaps the largest city fleet outside of China, and a 2019 agreement will see over a hundred 22 kW charging ports installed.

Antofagasta, Caldera and Coyhaique are among the ten cities which have their own solar targets – not all of these are in the sunny north. Recoleta municipality brought in its own Feed-in Tariff in 2019; a significant step considering that rooftop solar accounts for just 3% of the total, with utility-scale plants of over 9 MW making up two-thirds. Chile introduced new “energy community” rules allowing systems of up to 300 kW to supply multiple consumers in September 2020. Chile has a net billing system, under which rooftop solar is only cost-effective if you plan to use most or all of the output yourself, and there is no simplified process for domestic-scale installations compared to commercial-scale.

Chile’s electricity grid is in the middle of liberalizing market reforms, with three bills under prolonged examination by lawmakers, all part of the broader Ley Larga de Distribucion agenda. Two of these bills concern service quality and coverage of distributed energy. The Ley del Portabilidad Electrica proposes that consumers will be able to choose between different energy bidders competing to supply them with electricity. While the generation and transmission electric power market segments have already been reformed, distribution has not undergone a structural reform since 1982. Four groups of distribution companies hold sway over 95% of consumers. This law would separate distribution from commercialization of electricity, which would perhaps make it a more competitive market.

In a country that’s building diesel plants for capacity payments, but not rooftop solar, clearly there is much work to be done moving away from the traditional centralized system.

Tumultuous politics won’t disturb renewable development

There will be elections in November for the Presidency, the majority of Senate seats, and all House of Representatives seats, with the new President to rule from 2022. Since the pandemic took hold, or perhaps since the cost-of-living riots which began in 2019 (see here), the ruling UDI has fallen in the polls while the Communists and the Humanists have risen.

It’s still unclear whether the left or the right will win in 2021, or what precise form they would each take – Chile’s voting system uses Proportional Representation, resulting in most instances in coalition government. There will be no fewer than 16 presidential candidates, and some politicians run as independents to test the waters and only form a political party later. Since the 2017 electoral reform, smaller parties have been able to make headway against the traditional groupings of left and right. The new shape of Chilean politics has yet to appear.

Another political shift will begin in earnest this month, with elections for a constitutional convention. The practical consequence of a new constitution – the current one was established by Pinochet on his way out – will be to shift Chile towards socialist policies. Last year’s referendum approved the holding of a constitutional convention with 78% of the vote, but the wealthiest parts of the capital, Santiago, still voted against.

Whoever wins, they will not stifle renewables. The left, no matter how populist, does not have a massive state-owned fossil-fuel industry to protect as in Mexico. And the center-right has shown itself well-disposed towards renewables – and at this point, the private sector needs no direct encouragement from the state to invest in green energy in a place with good natural resources like Chile.

Copper mining powers solar investment

Chile produced 28.5% of global copper in 2020 – 5.7 million metric tons, an export worth $33 billion, which is an eighth of the entire national economy. In total mining represents half of the country’s exports, and the state had to set up a Copper Stabilization Fund to store money when copper prices are high, and draw money out when they are low. Chile expects to see $74 billion invested in mining projects in the 2020-2029 period, 89.4% of it for copper, although as lithium demand rises, the country will also want to support this industry.

The electricity demand of the mining sector is already a third of national total demand – it’s not for nothing that there is a “Minister for Mines and Energy.” According to Cochilco, the copper commission, mining electricity demand will increase by 34% to 33.4 TWh in 2031. To fully supply that with solar plants located in the favorable conditions of the Atacama, you would need 13 GW of capacity, assuming total coverage of energy storage. Because photovoltaics are and will remain cheaper than batteries or CSP storage, probably in excess of 15 GW of solar would be used, in this theoretical example, just to meet the electricity demands of the mining sector alone. Solar development in Atacama is owed just as much to power purchase agreements with mining companies as to natural conditions.

It should also be noted that a third of the Lithium Triangle, a geological area in the Andes with half the world’s lithium reserves, lies in Chile’s Atacama Desert. As EVs spread worldwide, this will become a new focus of mining development.

Atacama is the perfect place for CSP plants

For photovoltaics, a highly irradiated desert is an improvement, but for Concentrated Solar Power (CSP) it is a step change. CSP plants depend on remaining above certain temperatures, primarily to keep salts in a molten state, but also for the sake of the efficiency of their steam turbines and the ease of reaching high temperatures for industrial processes, where applicable. Under prolonged cloud cover, such plants may even have to temporarily shut down. They’re a far more centralized design than photovoltaics and thus far more sensitive to any conditions outside the ideal. But the Atacama is also the driest place on earth, not just the sunniest. As pictured on the Chilean Renewable Energy Association (ACERA) website, these are almost all clustered in inland Antofagasta.

According to the Chilean Association of Renewable Energies and Storage, 2,132 MW of CSP projects which have been approved, along with another 1,140 MW awaiting approval. The first CSP project in the country, the 110 MW Cerro Dominador, was commissioned earlier this year. A 3 GW pipeline marks Chile as a massive global leader for CSP – China’s pilot project portfolio is 2 GW, and world installed capacity is just 6 GW, most of it old designs from the previous decade, much of that in Spain. In contrast, Chile has only 64 MW of battery energy storage in operation, 112.5 MW under construction, and 32.5 MW proposed.

CSP is often seen as an auxiliary to photovoltaics, because of its long-duration (often 12-hour) thermal energy storage. Many planned Chinese renewable complexes at the GW scale envision just a few hundred MW of CSP each for such purposes. The Minister of Mines and Energy in Chile, Juan Jobet, stated in September, that he expects CSP plants to reach 20% of the energy matrix in 2050, and Fraunhofer’s Chilean branch has published an analysis showing that CSP-PV hybrids have a lower LCOE than gas; it found that the ideal combination had 13 hours of thermal energy storage.

But as the Heliogen plant announced for Rio Tinto’s Californian borates mine has shown, advanced CSP designs can reach 1,000-degree temperatures suitable for the industrial processes of a mine. This will doubtless come into play – it’s not all about the grid.

Chile plans to be one of the world’s hydrogen leaders

Electricity is 60% of the cost of producing green hydrogen, so Chile’s superior capacity factors for solar and potentially for wind, will help make it competitive. Initially the big boost to the industry will be the mining industry, which will use green hydrogen to decarbonize, and will foster hydrogen projects in the same way it has already boosted solar investment.

The government is also involved, with the Mines and Energy Minister, Juan Jobet, stating that the country will produce green hydrogen at $1.5 per kilogram by 2030. His Ministry also produced a study claiming that Magallanes wind could produce 13% of global green hydrogen, with hydrogen produced from either the Magallanes or the Atacama enjoying the lowest prices worldwide. Minister Jobet has also cited a McKinsey consultancy study which saw Chile making $30 billion per year in liquified exports, capturing half the South Korean and Japanese markets and 20% of the Chinese market. So far the Minister has signed MoUs with Singapore and the Port of Rotterdam concerning future hydrogen exports.

The Chilean Economic Development Agency has committed $50 million as grant funding to early projects, and will fund the Clean Technologies Institute, which is to have green mining and hydrogen as its main order of business. The Agency has also reported eighteen expressions of interest in its Request for Information issued concerning the development of green hydrogen projects on government land.

So far one of the most significant projects of this type is Haru Oni Highly Innovative Fuels (HIF), which will use wind power to produce methanol. Another is Engie and Enaex’s 1 GW ammonia pilot in Antofagasta.