NON-CONVENTIONAL RENEWABLE ENERGY IN CHILE: GOOD NEWS FOR THE MINING INDUSTRY

• Jurisdiction: United States

International Mining and Oil & Gas Law, Development, and Investment (April 2017)
CHAPTER 6B
NON-CONVENTIONAL RENEWABLE ENERGY IN CHILE: GOOD NEWS FOR THE MINING INDUSTRY
María Paz Cerda
Of Counsel, Bofill Mir & Alvarez Jana
Santiago

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MARÍA PAZ CERDA is Of Counsel with Bofill Mir & Álvarez Jana in Santiago, Chile. Ms. Cerda has 20 years of experience advising clients in corporate matters and cross border transactions. For the last 10 years she has focused her practice in energy and natural resources projects development, construction, and operation. She has participated in private-public working groups on the proposal of regulations and self-regulation for the natural resources and energy industries. Prior to joining BMAJ, Ms. Cerda worked as General Counsel of the Chilean energy company MPX Chile Holding (currently Eneva a subsidiary of E.ON International), from 2008 to 2012, when she became General Manager until 2015. She also worked at Cruzat, Ortúzar & Mackenna, Baker & McKenzie and Carey y Cía law firms. Ms. Cerda was named one of "100 women leaders of Chile" in 2012 by El Mercurio and Mujeres Empresarias and has been recognized in the energy area by The Legal 500. She is a graduate of the Pontificia Universidad Católica de Chile and holds an LL.M degree in Corporate and Commercial Law from the London School of Economics and Political Science, United Kingdom, and a Diploma in International Business Law U.S. Legal System from the American University Washington College of Law, Washington, D.C. and Universidad Diego Portales. She is fluent in Spanish, English, and French..

I. Introduction .

Chile has seen an unprecedented and unforeseen growth in the development of Non-Conventional Renewable Energy ("NCRE").

Since 2010 a progressive target of NCRE generation has become mandatory for all generating companies, aiming to diversify the electricity matrix that, until then, had been limited almost entirely to fossil fuels and conventional hydroelectricity. NCRE as eolic, biomass generation and photovoltaic power generation represented only a minor share of the generation in Chile.

In order to promote NCRE, Chile opted for imposing progressive mandatory quotas of NCRE generation ("NCRE Requirement").¹ Under the NCRE Requirement, generating companies that withdraw energy from major electric systems to comply with their supply commitments must show that a certain percentage of their withdrawals has been injected by NCRE sources. This NCRE injection requirement may be complied with, alternatively, through the companies' own generation or by purchasing what has been named the "NCRE Attribute" from other NCRE generators. The acquisition of NCRE Attribute does not imply the actual acquisition of energy, but of the right to use the injected energy generated by a NCRE source, to comply with the NCRE Requirement associated to a certain supply commitment.

Chile has also promoted the elimination of entry barriers to new players and new technologies at legal, technical and commercial levels.

According to the last version of the Global Climascope prepared by Bloomberg New Energy Finance and the Inter-American Development Bank, Chile has become the number 1 one nation on investment in NCRE in Latin America and the Caribbean. This is mainly due to record investment, which jumped from US$1.3bn in 2014 to US$3.2bn in 2015.² Renewables have had a

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big impact on Chile's power sector, contributing to a drop of wholesale prices.³ Chile is also ranked second on a worldwide level after China and leads the solar infrastructure in Latin America. The current installed capacity of solar PV in Chile reaches 1.397 MW and 792 MW more are on the process of construction.⁴

As of November 2016, 2,961 MW of NCRE were in operation. This, corresponds to 13, .9% of the aggregate installed capacity in Chile in the same month. Also, during November 2016, 777.7 GWh of NCRE generation were recognized corresponding to 13% of the total energy generated in Chile during the same month and to 19.8% of the energy that is subject to the NCRE Requirement, which amounted only to 8% for 2016. Therefore, the legal target has been largely exceeded. In January 2017 the total installed capacity in Chile amounted to 22,031 MW, and the aggregate generation -in the same month-reached 6,308 GWh of which 15.06% were generated by NCRE sources, 27.0% by conventional hydro and 57.4% by thermal generators.⁵ As published by the National Energy Commission (Comisión Nacional de Energía or "CNE") the energy projects under construction as of December 2016 represented 3,455 MW, of which 751 MW correspond to thermal generation; 1,064 MW to conventional hydro and 1,0640 to NCRE.⁶

"Energía 2050",⁷ a statement of the long-term energy policy of Chile, sets as a goal for the year 2050 that 70% of the energy generation should be produced by renewable sources and complemented by energy generated by low emission and efficient thermal generation such gas and biomass.

Mining companies are the most relevant group of electricity consumers of Chile and in particular the largest consumers in the Northern Interconnected Electricity System ("SING"). As such, the future performance of the mining sector their investment decisions and their election of power

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suppliers and energy sources is of extreme relevance for the development and diversification of the electric system in Chile.

II. Energy and Mining .

The total energy demand from mining clients in 2014 amounted to 21,783 GWh, which represented 31% of the aggregate energy demand of Chile for the same year.⁸ In 2015 mining companies' demand represented 79% of the total demand in the SING and 19% in the SIC⁹ which correspond to an aggregate percentage at national level similar to the 2014 amount.

According to the forecast of the Chilean Copper Commission (Comisión Chilena del Cobre or "COCHILCO") the electricity demand from copper mining is expected to increase from 2016 to 2027 by 34.4%, this at an annual rate of 2.7%.¹⁰

Traditionally, large scale energy consumers, such as mining companies, entered into long term power supply agreements securing long term energy prices. In 2009, Codelco (Chile state-owned company and the world's largest copper producer), after an international tender process, awarded 15 and 30 years power purchase agreements ("PPAs") to local generator Colb?n, for a total demand of approximately 510 MW. However, Chilean mining companies had to pay energy prices which were among the most expensive in the world and substantially higher than those prevailing in neighboring countries. Although mining companies carried out international bidding processes, PPAs were finally executed with a reduced number of incumbent energy companies in Chile, which transferred all the risks of the business to the mining off-takers. Energy cost represented 10% of the operational cost of copper mining in 2014.¹¹ The average prices paid by mining companies since 2009 until October 2016 are shown in the following chart:¹²

US$/MWh	2009	2010	2011	2012	2013	2014	2015	2016
SIC	91	103	120	127	126	110	95	92
SING	130	125	129	116	104	100	87	78

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For several years, particularly since 2008, conventional energy developments have faced considerable opposition from the communities and local authorities, which have challenged their environmental approval resolutions or their environmental assessments processes. Landmark cases are the suspension of the construction Gener's Campiche power plant (coal, petcoke-270 MW) in 2009; the presidential request to Suez Energy to refrain from building the Barrancones project (coal-540 MW) in 2010; the annulment by the Supreme Court of the environmental license of MPX's Castilla power plant (coal-2,100 MW) in 2012:, the revocation of the environmental license of Endesa and Colbun's Hidroaysen project (hydroelectric-dams of aggregated capacity of 2,750 MW) in 2014 and the recent annulment in 2017 of the environmental license of the Terminal Penco-Lirquen, LNG terminal for the reception and regasification of liquefied natural gas that would supply the Central El Campesino (natural gas-fired, combined-cycle-640MW).

Such high energy prices and the increasing community opposition to fossil fuels and hydroelectric projects, with the consequent difficulty in obtaining and maintaining environmental approvals for energy projects, motivated in past years mining companies to participate in the design and development of power plants. Major companies such as Codelco,¹³ BHP Billiton¹⁴ and Antofagasta Minerals¹⁵ have either developed or invested in conventional energy projects. BHP's natural gas combined cycle Kelar power plant is the only one of such power plants to have achieved commercial operation and one of the few gas fire power plants that has been environmentally approved and commenced commercial operation in the last years. Mining companies have also engaged in the development of NCRE

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power plants, among others: Pelambres (Antofagasta Minerals) with Parque Eólico El Arrayán (wind-115 MW), Collahuasi (Anglo American, Glencore, Mitsui) with Planta Fotovoltaica Pozo Almonte Solar (solar - 25 MW), Codelco with Calama Solar 3 (solar-1 MW), Barrick with Parque Eólico Punta Colorada (wind-20 MW) and CAP with Amanecer Solar CAP (solar -100 MW). CAP's Amanecer Solar CAP solar power plant with 100MW of installed capacity, became the largest solar plant in Latin America and one of the largest in the world. The power plant will supply 15% Grupo CAP's demand, through a PPA.

Although the obligation to comply with the NCRE Requirement is a burden of the generation companies and not of the clients, the cost of acquiring NCRE Attribute is passed through to clients. Therefore, the tendency among large consumers has been to secure directly the compliance with the NCRE Requirement in order to avoid the cost of acquisition of NCRE Attribute. However, the...