Chilean Government Takes Step Forward in Climate Mitigation with Unilateral Renewable Energy NAMA

A major victory for mitigating climate change worldwide, Chile recently proposed Price Stabilization Fund (PSF) can serve as an example of how developing countries are pursuing ambitious unilateral NAMAs in additional to supported NAMAs. With financial support from the Chilean government, the PSF is not only ambitious but transformational in its ability to reduce greenhouse gas emissions, leverage investment within the private sector and increase public health benefits.

Chile’s power sector is on a trajectory to add between 8,000 and 10,000 megawatts of new capacity by 2020, from the current 16,000. If all of this new demand was met through additional coal-powered generation, carbon dioxide emissions could increase by 32 to 40 million tons over current levels.

Preparing for this increased demand, Chile took several actions over the past few years to promote renewable energy deployment. A Renewable Portfolio Standard Law, which requires 10 percent of energy sold to come from renewable sources by 2024 is now in place, along with several programs from the Chilean development agency, CORFO, to promote renewables, including soft loans, financing for pre-investment studies, and subsidies for the installation of a concentrated solar power plant in the north as a model project. None of these programs, however, fully address the financing barriers for renewable energy projects, and although they have had some success, there is still much room for growth in this sector.

The deregulated Chilean power market is subject to wide fluctuations in its spot market price for electricity, ranging from as low as $30/MWh to nearly 10 times that price. Intermittent renewable energy projects that cannot obtain power purchase agreements thus face particular risks given this wide variation in price, making banks reluctant to invest. This is one of the main reasons for the delay in developing renewable projects.

In this context, the Chilean government and the Congress agreed a few weeks ago on a legislative proposal to establish a government-mandated PSF in conjunction with a substantial increase in the renewable portfolio standard. The proposal is in its last stage of approval, and will most likely be turned into law in the following weeks.

A PSF would address the financial barrier to investments in renewable energy by executing long-term, fixed-priced payment contracts with renewable project developers to overcome the price fluctuations. It would provide certainty to investors by guaranteeing a price for renewable energy prices and assuming the spot market price risk. Additionally, a renewable portfolio standard requires a certain percentage of the electricity sold to come from renewable sources, setting a market “premium” for renewable energy, based on a fee for not meeting the goal.

Discussions of the PSF have advanced in parallel with efforts to increase the existing renewable portfolio standard to include more aggressive targets. Over the last year, a group of Chilean congressmen have pushed for legislation to increase the current renewable portfolio standard of 10 percent from renewables by 2024, and the government recently agreed to support this legislation.

The new renewable portfolio standard agreement mandates that 6 percent of electricity sold must come from renewable sources by 2014. This target rises each year until 2025, when 20 percent of the electricity sold must come from renewable sources. This new target applies only to new contracts to sell electricity that were signed after July 1, 2013. Existing contracts must still comply with the previous law’s targets until the contract expires. It is estimated that the new renewable portfolio standard will effectively result in renewable generation of approximately 17 to 18 percent by 2025.

It was in conjunction with the new renewable portfolio standard targets that the government and Congress agreed to create a PSF by law. Under this provision, the government is mandated to call for a tender (up to twice a year) whenever the annual renewable portfolio standard target has not been met. The tender will contract energy, at a stabilized price for a 10 year period, to cover the block of electricity required to comply with the annual target. The renewable projects selected under the tender will sell the electricity to the spot market. If the spot price is below the stabilized price, the generators who have to comply with this law (i.e., those who have signed contracts) will have to cover the difference between the stabilized price and the spot price for up to $32/MWh. If the spot price is higher than the stabilized price, the generators will receive the difference, up to $32/MWh. If the difference between the spot price and the stabilized price is greater than $32/MWh, the profit/loss will be assumed by the renewable project developer.

This is a major achievement for the Chilean government and Congress, and is a great step forward for climate mitigation. The PSF will serve as a great example of an ambitious, transformative unilateral NAMA for other developing countries. CCAP is very pleased with these results and believe that the analysis, discussions and studies produced in support of the PSF within our NAMA initiatives and MAIN program contributed to the government supporting a mandatory PSF in the RPS bill. CCAP looks forward to monitoring this process as it unfolds and utilizing it as an example moving forward.