Attracting FDI: The Chilean Government's Role Promoting Renewable Energy

Transcription

1 Rutgers University From the SelectedWorks of Kyle Herman March 1, 2013 Attracting FDI: The Chilean Government's Role Promoting Renewable Energy Kyle Herman Available at:

2 Attracting Foreign Direct Investment: The Chilean Government s Role Promoting Renewable Energy Kyle Stuart Herman 1 Coalition for Renewable Energy Council on Global Security and Governance New York, NY 1 kyle@creee.org ( ). MA International Studies, University of San Francisco.

3 Abstract: The development and implementation of renewable energy power plants is important for Chile in order to increase energy security, supply remote mines with electricity, and eventually decrease energy costs. The Chilean government has promoted renewable energy and attracted Foreign Direct Investment (FDI) to develop large-scale renewable energy projects. However, the policies cannot sufficiently attract FDI in unproven renewable energies such as Concentrated Solar Power, though it is proven elsewhere. This paper examines the Chilean government s renewable energy policies, related government agencies, and the extent that these provide a stable backdrop for FDI in large-scale renewable energy projects. Following that summary, a multifarious analysis of the nascent renewable energy industry in Chile is presented, incorporating the need to develop a renewable energy technopole, which may spurn out increasing numbers of experts in the field. The creation of the technopole will encourage FDI in new renewable energy technologies (such as CSP and molten-salt storage), in particular venture capital in the early-stage financing phases. Avoiding early-stage financing problems, or the so-called Valley of Death, must be one of the primary policy focuses for the government to create a more robust renewable energy industry. 1.0 Introduction Foreign Direct Investment (FDI) has played a significant role in developing Chile. This is no less evident than in the energy sector, which has received $13 billion FDI in the period from (from , the sector garnered 43% of total country investments). However, much of this FDI is directed towards proven energy technologies, and sometimes fails to drive innovation in the renewable energy sector. Innovation in the renewable energy sector, including innovation in finance schemes and energy alliances, can only occur with a smooth triangulation between seed capital 2, government policy, and a skilled workforce. In short, the Chilean government does well to attract FDI in the energy industry, but there remain some pivotal gaps to fill before the country can scale up renewable energy. 1.1 Electricity Industry Overview Chile was among the first countries in the world to privatize electricity, which began on the utility scale in i As a developing nation at the time, this was an audacious and provocative government policy decision. In neighboring Bolivia, for example, such privatization decreed by government policy continues to plague the economy and propitiate social unrest. Not the case in Chile, a perfect free market case for any MBA program, where its government policies have been guided by Milton Friedman s economic theories since the early 1980 s. After being trained at the University of Chicago, Chilean graduates returned to Chile to embark on a systematic restructuring of government economic policy. This marked the beginning of Chilean government efforts to liberalize the Chilean economy in general, and began the slow transition to opening up Chile to Renewable Energy (Non-Conventional Renewable Energy-NCRE; also referred to in this paper as RE, or renewable energy). A small Latin American country with a population of around seventeen million people, Chile has strong commitments to climate change mitigation. This has created a palatable market for foreign investors. It ratified the UN Framework Convention on climate change and the Kyoto Protocol. In 2009 the president created an Inter-Ministerial Committee on climate change. Finally, in 2012 the government released its National Energy Strategy linking energy security with climate change. ii There has been a tacit understanding of energy supply risks due to its heavy dependence on imported energy, (75% of fuels are imported), and the government has thus pushed forward renewable energy and energy efficiency legislation. iii Lastly, Chile was a pioneer in employing renewable energy for industrial uses; in 1972 it installed a solar plant in the city of Antofagasta. iv 2 This paper uses the terms seed capital, venture capital, and early-stage financing interchangeably, though admittedly there are subtle differences between the three. Kyle S. Herman 2

4 1.2 Overview of Electricity Generation in Chile Ø 37% of the countries electricity is consumed by the mining sector. Ø Industrial sector consumes 31%. Ø Commercial and public sectors consume 14%. v Ø In 2006, 89% of SIC was owned by three companies. vi o Endesa (48%), Colbin S.A. (22%), AES Gener S.A. (16%). vii Ø Transmission system rates set every four years by the Study of the trunk transmission. viii The domestic energy market is divided into four main sectors. The two Northern sectors, SIC (Central Interconnected System) and SING (Northern Interconnected System), are the most important for the present analysis because these make up nearly 16,000 MW combined. SING is powered almost exclusively by fossil fuel and, interestingly, supplies nearly 90% of its electricity to mining and heavy industry (a point discussed later in this paper). SIC fires 51% of its energy through fossil fuel with the remaining created by large hydro (47%), wind energy (2%), and biomass (2%). ix Meanwhile the two Southern systems, the Aysen System (SEA) and the Magallanes System (SEM), only account for about 150 MW combined, most of which is natural gas, diesel, or large hydro. Map of Electricity Sectors in Chile Picture Source: GENI. Woodhouse 2011: 13 Kyle S. Herman 3

5 1.3 Corfo (Corporación de Fomento de la Producción) Interview (June 2012) According to representatives of Corfo 3, the primary barriers to more rapid development of largescale renewable energy projects in Chile are corporate finance and knowledge-capital: Ø National Banks cannot assess the risks. Ø International loaners are reluctant to loan because market is unclear. Ø Loaners are also reluctant because the market is too small, therefore returns on investment will not reach a sufficient level to attract large investment. Ø In reality only Law 20,257, committing RE to 10 percent by 2024, guides RE implementation which, on its own, is not a significant driver. Ø With variable prices (e.g. the spot market) Power-Purchase-Agreements (PPAs) are difficult to structure. Ø Technology transfer: not enough confidence in the technology because of lack of experience and know-how. Ø There are only a few large-scale projects already in operation, making it nearly impossible for banks and international financiers to assess risks. In sum, international lenders want Power-Purchase-Agreements (PPAs) due to the lack of previously successful finance schemes in the sector. Without enough past successes, perceived risk remains too high while payback cannot cover risks. PPAs are not very feasible in the Chilean electricity market without distorting the market and causing more uncertainty for investors. Since the electricity market in Chile employs the use of spot and nodal pricing, the government faces difficulty structuring PPA deals. 2.0 NCRE legislation Several pieces of legislation guide NCRE in Chile. Many of these laws recently entered into effect. For a country in South America, the Chilean RE policy can be considered quite progressive. In comparison to European countries however, the legislation seemingly falls short, and does not have the effect of attracting certain kinds of investment. Specifically, the NCRE legislation does not effectively attract enough seed capital or early to mid-stage financing (a common occurrence in developing countries). The Law 19,940, March 2004 Ø Modifies aspects of the electricity market affecting all generators by introducing elements especially applicable to NCRE. x Ø It opens the spot market, guaranteeing small-scale plants (i.e., the size of many clean energy plants) the right to connect to distribution networks and exempting them from main transmission tolls (full exemption for plants producing less than 9MW and partial exemption for plants producing between 9MW and 20MW). Law 20,257, April 2008 Ø Establishes a renewable portfolio standard (RPS). It creates the obligation for generators to incorporate 5% of NCRE electricity into their energy mix. This percentage will increase gradually to 10% by Companies who do not comply with this request have to pay a penalty. xi Ø 40MW or less hydro powerplants will be recognized (although hydropower under 20MW is technically the threshold to be considered a NCRE source) Ø The RE obligation is 5% until the year 2014, and increases.5% per year to reach a total of 10% in the year xii Law 20,365, August 2010 Ø Creates a tax benefit that incentivizes the investment in solar thermal collectors for new constructions. 3 Interview with Pamela Moreno, Carolina Guerra Duran: Santiago, Chile. June 19, : Today the goal is 10 percent by 2024 and that is what we work towards, including knowledge-capital and investments... Kyle S. Herman 4

6 Ø The current administration is analyzing the first results of this law and improving this mechanism in order to apply it also for old installations. xiii Law (The Short Law) Ø Determination of nodal prices tends to stabilize values by diminishing the variation of the nodal price in relation to what is observed in the contract market with non-regulated customers. o Previously the nodal price was allowed to fluctuate within a band of 10% around the nonregulated price, but the band was modified by the new Law to around 5%. xiv Ø Expansion of the non-regulated market, lowering the threshold for non-regulated costumers from 2,000 kw to 500 kw. xv Ø Considerable improvements of conditions for the development of small non-conventional power plant projects, primarily renewable energy [ ] the establishment of the right to transfer their electricity through distribution systems and the possible exemption of charges for the use of the main transmission system. xvi The theoretical operation of the Spot Market in Chile. Source: GTZ/CNE, Non-Conventional Renewable Energy in the Chilean Electricity Market Supreme Decree No. 244 Ø Creates provisions for companies whose generation capacity surplus is less than 9MW and/or operate with a non-conventional energy source less than 20MW. o Exemption of payment for the use of main transmission systems. xvii Decree Law 600, The Statute on Foreign Investment Ø Since 1974, this law regulated the entry of foreign capital as foreign direct investment, using stable, transparent and simple rules. It applies to individuals or legal entities or Chileans who reside abroad and invest in Chile. xviii General Agreements and Actions Ø Ministry of Energy and Ministry of Environment created ( ) Ø Climate Action Plant Ø GHG emissions inventory Ø Second National Communication on Climate Change (2011) Ø Mitigation Options for Addressing Climate Change (MAPS) Ø National Energy Strategy. xix International Agreements Ø In the Copenhagen Summit in December 2009, the Chilean government made a unilateral voluntary commitment to reduce CO2 emissions by 20 per cent by 2020, 18 per cent of which is based on implementation of the Renewable Energy Law. xx Ø Establishment of Inter-Ministerial Committee on Climate Change. Kyle S. Herman 5

7 2.1 Government Agencies Responsible for NCRE Several different government agencies support the wide scale development of NCRE in Chile. These include CORFO (Economic Development Agency), CER (Center for Renewable Energy), CNE (National Energy Commission) and AchEE (Chilean Energy Efficiency Agency). CORFO is involved mostly in finance activities and fostering innovation. The CER is focused specifically on renewable energy and provides resources for developers and investors to ascertain available instruments (though the agency is still in its infancy stages). The CNE sets and monitors electricity prices, based on nodal price ( spot market ), updated every six months. xxi Finally the AchEE focuses specifically on energy efficiency. 4 This paper is predominantly concerned with CER and CORFO, because these agencies deal with seed capital and the direct promotion of renewable energy investments Center for Renewable Energy (CER) The mission of CER is to ensure the participation and optimization of NCRE in the energy matrix in Chile, in order to contribute to the sustainable development of the country. 5 Ø The CER aims to help initiate as many NCRE projects as possible, of both large and small scale power generation facilities, in addition to inside the fence 6 projects. xxii Ø CER does this by marketing Chile s renewable energy law, providing consultative duties for companies and investors, and preparing seminars to present technical documents for project developers and investors. xxiii Ø It has created the Acceleration of Projects to streamline large-scale RE plants already in a mature stage (Late-stage) of development but still lacking critical resources. xxiv o Some elements absent from such projects are local support, government permits, and a proper market for the sale of energy to be produced. The Acceleration Unit develops an action plan to realize the barriers inhibiting the project and to provide assistance in the o final stages of development. 7 CER creates a Plan of Action to reduce or eliminate barriers to implementation of renewable energy projects. xxv Eventually the CER will be responsible for supplying all relevant NCRE data, alleviating the burden on investors to acquire expensive data through other means. Below are two examples of data supplied by CER. 4 Establish the institutional foundations and regulatory framework for energy efficiency Develop incentives and support tools for energy efficiency. Prepare useful and accessible information for making public and private decisions, as well as collective and individual decisions. ( 5 Authors translation: Asegurar la participación óptima de las ERNC en la matriz energética de Chile, para contribuir al desarrollo sustentable del país. (CER website) 6 Inside the fence projects refer to self-supply meaning the power produced is strictly used for one, off-grid, entity. 7 Author s translation: [...]Para ello esta unidad genera un plan de acción que incorpora una estrategia de ayuda y acompañamiento para disminuir o eliminar barreras para concretar estas iniciativas. (CER website) Kyle S. Herman 6

8 Source: CER January 2013 report: Estado de proyectos ERNC en Chile (State of renewable energy projects in Chile) Source: CNE 2009 Kyle S. Herman 7

9 2.22 CORFO: The Chilean Economic Development Agency The task of Corfo is to assist business development in Chile. It accomplishes this by helping entrepreneurial and innovative companies become marketable in Chile, assisting with entrance into the commercial market by opening up specific windows of opportunity. 8 Some significant projects Corfo has aided since 2005 xxvi are: Ø Credit lines to commercial banks for on-lending to RE projects. These include a thirty month grace period and repayment up to 12 years with a maximum of $5-13 million to individual projects. Ø Project Preparation matching funds for early stage development activities including resource assessment, feasibility and environmental studies, and Clean Development Mechanism (CDM) documentation. Ø Cost-sharing up to 5 percent of estimated investment. o Over 100 such projects have been supported. Ø Loans are guaranteed up to 50% pari-passu, with a maximum terms of 12 years, and the guarantee fee is 1% per year 2.3 Discussion of the Policy Though the progressive liberalization of the energy sector, beginning in 1982, is admirable the proper functioning of the spot market invites both government interventions (though the prices are set by an entity separate from the government) and monopoly control over power transmission and production (the latter particularly evident in SIC). The imposition of monopoly control is evident today and inhibits the proper inflow of capital for NCRE. Privatisation included open access to the wholesale electricity market. But although the wholesale market is theoretically open, it is relatively small and large companies constitute a virtual monopoly. xxvii This virtual monopoly is a problem for the government, and it must be addressed if the goal of the latter is to significantly increase the share of NCRE. In 1999, a modification to the Electricity Law eliminated the concept of force majeure that had, until then, protected the electricity generating companies in periods of supply deficit. This change obliged companies to compensate their clients for power shortages brought about by natural phenomena such as drought. Generating companies were discouraged from signing contracts with regulated clients leading to a fall in investment in the sector. xxviii The goal of this legislation in 1999 was to protect customers from natural disaster, or natural gas shortages from Argentina, which led to energy shortages. However, the major pitfall of this alteration to the law, in respect to renewable energy, is that renewable energies frequently succumb to environmental intermittencies (lack of sustained wind, for example). 9 Another impediment for renewable energy installation is the electrical transmission system. The transmission system is technically open and NCRE are guaranteed access to the grid (Law 19,940). Theoretically, renewable energy plants will have no problems connecting to the system and, in the event of fuel shortages should in fact compliment the conventional energy power plants. In reality the system, operating under an apparently liberalized electricity sector, is a regulated market sector that presents significant economies of scale and a lack of transparency for investment, having the tendency to act as a natural monopoly in its operation. xxix Since the electricity providers are only currently required to supply 5% of their power from NCRE (Law 20,257), any substantial increase in 8 Authors translation: Corfo es un organismo ejecutor de las políticas gubernamentales en el ámbito del emprendimiento y la innovación, a través de herramientas e instrumentos compatibles con los lineamientos centrales de una economía social de mercado, creando las condiciones para lograr construir una sociedad de oportunidades. (Corfo website) 9 Under current conditions if [the NCRE project] fails to generate the stipulated quantity of energy it must purchase the shortfall on the spot market [ ] thus exposing the purchaser to the risk of variability in the spot market price. (Dufey 2010: 40) Kyle S. Herman 8

10 NCRE transmission constitutes a liability. However, the Chilean government has understood this policy failure and has vowed to address it. 10 A liberalized electricity system cannot function properly with virtual monopolies. Such a monopoly renders an inability of non-integrated generators to gain access to the distribution network. xxx The system then functions under the auspices of an open market yet in fact lacks a competitive market for the provision of energy services to large users. xxxi The end result of this is that there are customers who receive supply from their incumbent supply company on the basis of an energy price which is set in the power pool ( free customers) and regulated customers who pay the regulated node price for energy. xxxii This is an unnecessary distortion in the market and effectively sidelines NCRE generation. Furthermore the onus lies on the generating sector for fulfilling the quota, rather than the distribution (transmission) sector because the latter holds the virtual monopoly. xxxiii This type of quota system severely increases investor risk because, in a sense, the market price is set by the State; in proper accord, the quotas are more costly and mostly fail to drive innovation in incipient renewable energy technologies. xxxiv In addition, the system uses smoothing of prices, which relies on a four-year average of electricity prices. This smoothing remains problematic because the smoothed price resets every six months. xxxv Here investors are presented with a duality of market representations: a Stateinduced resetting of prices bi-annually and a spot price adjusted in current time. 3.0 Investment in NCRE Ø Total FDI investment in Chilean Energy system from was $13,182 million (representing 20% of all FDI over that period). xxxvi Ø Total investment in energy sector estimated to be $24,459 million (equaling about 43% of total country investments). xxxvii Ø Subsidies for preliminary studies for NCRE: Programs are eligible under the Clean Development Mechanism (Kyoto Protocol), with investments over $400,000. xxxviii Ø Program for basic engineering studies: This subsidy covers up to 50% of engineering, electrical connection, or environmental impact studies up to $160,000. xxxix Ø Parallel to the scheme included in the laws in this area, and with the goal of attracting investors interested in developing NCRE projects xl, open tenders will be carried out by NCRE block, in which the generators who participate could be awarded a State subsidy to improve the conditions of energy sales. xli 3.1 Investment Trends in NCRE Considering the Chilean electricity market operates under spot market pricing, the theory of marginal cost applies. Marginal cost pricing theory proposes that an electrical grid adjusted sufficiently to demand (demand being income from both marginal energy sales and electricity sales, and after factoring in the cost of innovation), equals investment plus energy producer costs. xlii The application of marginal cost pricing to the Chilean market, which is based on economic efficiency (i.e., operating safely for the lowest possible costs) with investments wholly determined by the private sector, renders the electricity development [ ] based solely on traditional generation technologies. xliii In other words, due to the quota system implemented by the government (Ley Corta III), conventional energies are substantially more lucrative investments than NCRE. In addition, authorities setting the quota system increases investor risk 11, and subsequent volatility in the NCRE market. xliv 10 Law to promote Non Conventional Renewable Energy sources sets the target of 10% for NCRE by 2024 (in the nominal frameworks included in this law). Our Government regards this target is inadequate. (National Energy Strategy : p. 12) 11 Contracts have been given to the big conventional generators and distributors, excluding the new and smaller generating companies. A high level of concentration in the electricity sector has been identified in the literature as one of the conditions that might lead to the risk of the market being hampered or losing transparency. (iisd: Opportunities and Domestic Barriers to Clean Energy Investment in Chile. Dufey 2010: 41) Kyle S. Herman 9

11 3.2 Subordinated Debt Financing A problem in the NCRE investment market cited by both the Chilean Government xlv and private analysts is the domestic finance sector s lack of knowledge of differing clean energy technologies. The general lack of knowledge 12, or knowledge-capital, results in a sluggish investment environment for NCRE; ultimately this leads to higher interest rates, extra required guarantees, and an overall shortage of funding alternatives. xlvi The Chilean Government should encourage the use of use of subordination debt financing in large-scale NCRE projects because this would allow for a reduction of the amount of equity required and therefore avoid the additional costs of equity. xlvii As opposed to senior debt, subordinated debt can better bridge knowledge gaps by scaling up at a faster rate. 4.0 Discussion: The Valley of Death or Chilecon xlviii Valley? The Chilean Renewable Energy industry has great potential to become a Silicon Valley for RE technology. By following the lead of Silicon Valley, which had unprecedented success conjoining university, government, and private capital to drive innovative industries, Santiago could one day be considered Chilecon Valley. Yet two crucial impediments exist (or three if government policy is considered inadequate). The first is knowledge capital, and the second is early stage financing. Without early stage financing (venture capital, seed capital), the Valley of Death looms over Chilecon Valley. 4.1 Pre-Commercialization The Valley of Death is a term that refers to new technologies unable to become marketable because they lack early stage financing, which is usually supplied by venture capitalists. The Valley of Death precludes innovative technologies from reaching development stages because projects cannot scale up and become marketable. xlix A project or company that falls into the Valley cannot be rescued without some other form of intervention in the market. Such projects have the characteristics of proven and demonstrable technology with low market demand. The perceived risk equates to an unmarketable early to mid-stage investment. l Innovative RE technologies, or even unproven technologies in a certain geographical area, may remain in the Valley of Death because investments are even too risky for venture capitalists. 12 Lack of specific knowledge on new technologies, such as clean energy production, and poor coordination between the different national and local organizations involved. This problem raises the costs and risks perceived by investors and project developers. (iisd: Opportunities and Domestic Barriers to Clean Energy Investment in Chile. Dufey 2010: 47) Kyle S. Herman 10

12 Source: Source: Ritchie et al. In the absence of a more dynamic set of policy tools, increasingly more RE projects in Chile will fall into The Valley of Death. The government cannot expect that a few targets along with several agencies can build the Chilecon Valley, which would ideally invite venture capitalist and stimulate innovation. As the case in the San Francisco Bay area proves, Silicon Valley is fundamentally tied to knowledge-capital, stemming from prestigious Universities tabbed with carrying out collaborated research easily disseminated through local companies. 13 Via a triangulation between government, private capital, and knowledge capital, burgeoning industries such as renewable energy can flourish. Although the government is not required to intervene in the financial market to garner venture capital, it must be responsible for intervening in other areas such as University curriculum and tax incentives for private enterprises disseminating renewable energy knowledge. The Chilean government needs to understand the value of its knowledge-capital. Increasing the number of local renewable energy finance experts will increase the confidence of private equity investors. In San Francisco, for example, local Universities upset about knowledge-capital flight (exodus of intelligent students after University) sough out private enterprises and government to remedy the problem. Government policy incentivized certain research at public Universities, while private funds created industry offices adjacent 13 As a strategy for fostering economic development, public investment in education may greatly facilitate the import of human capital from the rest of the world. (Huffman and Quigley 2002) Kyle S. Herman 11

13 to local Universities. This led to the creation of strong bonds between the computer industry and top engineering students nearby, resulting in countless innovative technologies in that industry. li The Chilean government can potentially have similar success by understanding the specific renewable resources in Chile, such as Concentrated Solar Power, and connecting its Universities to private enterprises exploring these specific renewable energies. It must be noted that the government has made strides in creating this type of environment, but it appears the policies are too broad and seek to incorporate too many technologies. The government cannot attempt to integrate all renewable energies into its knowledge-capital because this will create an abundance of moderately skilled workers (rather than experts), and will not lead to an innovative culture based around several very specific technologies. The government must make it a priority to incentivize innovation to allow focused learning in the renewable energy technology. lii Diagram showing the importance of private investors in developing innovative technologies. Source: Nassiry and Wheeler The Valley of Death and Spot Prices Employing spot prices, which cannot distinguish between conventional energies and renewable energies, exacerbates the Valley of Death in Chile. Early stage financing is mostly unavailable for untested renewable energy plants (though they may be proven in other countries). This propels investors to sink money into conventional energies instead. Therefore proven, conventional energies are more attractive. This technological neutrality favors conventional energy and will not stimulate NCRE investment unless it is reviewed periodically as the technology curve progresses [for NCRE]. The surcharge established is too low to act as an incentive to fulfill the quota. liii A periodic reevaluation of renewable energy technologies will be pertinent to fostering the Chilean technopole because as some technologies progress, nascent technologies must garner seed capital. Although the CER offers assistance in large-scale projects near commercial development, it does not help burgeoning projects requiring early-stage financing (only.5% of early stage financing is sourced publicly, worldwide). Similarly, the CER offers some help with the prospecting (initial project phases) but not to extent that would result in proper levels of confidence to an early-stage private investor. Corfo does this to some degree, but it appears incapable of attracting large amounts of seed capital in the absence of international loaners. The amount of seed capital Corfo can leverage is rather small, and follows the trend of only investing in proven NCRE. Kyle S. Herman 12

14 Although CORFO provides renewable energy prospecting data 14, it is not of sufficient quality for investors because it lacks basic technical studies which forces developers to dedicate time and resources to carrying out their own individual studies. liv In other words, early-stage private investment must be used to pay for this technical data, which venture capitalists are not intent on paying for. It would be more prudent if the government provided adequate data. Clear data includes not only technical feasibility studies but also long-term access to the grid and public electricity demand forecasts. Though the government created similar data for decades, including solar irradiation throughout the country the data is mostly inapplicable for most RE. Private investors need technical data juxtaposed to demographic and industrial data. One example is the overlap of mining electricity demand in the North with sustained solar irradiation data. 4.3 Averting the Valley of Death At the crux of RE promotion on the utility scale is government incentives guaranteeing private investors there will be a market whether sustained through subsidy or not is of little importance. What is required is government policy to bridge the Early-stage Financing Gap and subsequently avert the Valley of Death. Whereas Silicon Valley doesn t rely on private investment alone, (for example, Berkeley, San Francisco State, and UC Davis are all publicly funded Universities driving innovation), neither can RE in Chile rely on private investment alone. The lack of early stage financing from both public and private sources, or some form of guarantees therein, presents a critical market failure in most developing economies one that the private sector has been unable to resolve on its own [ ] While public funders currently provide about $3.9 billion of financing for renewable energy power generation in developing countries (excl. China), most of this money is targeted at the late-stage construction phase once most of the project development risk is removed. Only 0.5% or about $18 million of this public funding targets the early-stage financing gap. lv Thus it is clear the Chilean government must focus on attracting early stage investment, rather than late stage. Evidently, the Chilean government overestimates the degree of financing available for early stage because even in spite of CORFO instruments (early-stage financing for geothermal projects, for example) private financiers continue to be reluctant to invest unless another multinational, institutional investor such as the IFC is involved. 15 Most of the large-scale investments in RE in Chile to date are only possible because large international loaners (such as the World Bank or IFC) provide a the majority of project equity in addition to early-stage finance. 4.4 The Synthesis between Society, Innovation, and Implementation On its own, RE policy cannot develop large-scale RE power plants. Neither can finance schemes for RE, or private investor s aspirations. Developing and integrating RE technologies requires a certain innovation pathway consisting of: (1) R&D, (2) demonstration, (3) deployment, (4) diffusion, and (5) commercial maturity. lvi Human capital is an integral component of each of these five steps. Such capital is needed immediately in Chile. There is a limited window of opportunity to capture the benefits of clean energy, which would include the development of a technopole and quality workforce, thus helping Chile to establish itself in the knowledge society one of the country s biggest challenges. lvii A technopole will attract venture capital because knowledge-capital must be present before early-stage financiers are assured projects will reach completion. 14 A geo referenced platform will be created that will compile dynamic information so the viability of an NCRE project can be assessed. This will include a portfolio of NCRE projects; a database of potential resources and State land available for the development of such projects; detail of energy demand at an industrial, commercial and residential level; information on roads and electricity infrastructure; environmental protection areas and available information on land planning so as to identify the availability of compatible lands with other productive uses. (National Energy Strategy : 21) 15 Enterprises with moderate government venture capital (GVC) support outperform enterprises with only private venture capital (PVC) support and those with extensive GVC support, both in terms of value creation and patent creation. (World Economic Forum 2009: 37) Kyle S. Herman 13

15 Chile has begun to take steps towards incubating this technopole. Programs such as Startup Chile, which promotes global entrepreneurship, finds seed capital for innovative companies after approval by Silicon Valley experts. 16 However, there is an apparent oversight in this program s implementation. Several reasons were cited for the lack of efficacy of this program, the foremost of which is lack of venture capitalists 17 and weak corporate connections (including no connection to the mining industry which imports nearly 100% of its technology); conflation of small business, startup, and corporate entrepreneurship (venture capital usually eyes startup, for example, and different regions require different businesses); talents needs to be attracted in targeted sectors (Chile must be clear about where it is focused). lviii The lack of connection of Startup Chile to the mining industry is a severe pitfall in the government program. Such oversights continue to impede the growth of the Chilean technopole and consequently, RE innovation. 5.0 Conclusions: Policy Recommendations to Encourage Large-Scale RE Projects in Chile To encourage investment and implementation of large-scale renewable energy projects is an arduous task for any government. An array of policy tools and incentives must be in place before private capital can begin injecting finances into the system. An evolving mix of policy and support instruments are needed to help technologies progress down this pathway, including regulations and codes, fiscal incentives, [private finance mechanisms], market mechanisms, voluntary agreements and information dissemination [ ] During the initial deployment and early diffusion stages, policies are needed that foster an initial demand for the technology and bring down barriers to its market entry. Once the technology is ready for wider diffusion, including transfer to other countries, policies are needed that put a price on carbon and address other market failures such as perverse subsidies. lix The government should consider economies of scale while developing programs and legislation to promote NCRE in the future. By taking a step back and assessing the great resources Chile does have, it becomes easier to distinguish the gaps in policy. Clearly, there are gaps between the mining industry and renewable energy. The country is on the brink of many technological breakthroughs if it can only realize the potential for cross-sectoral integration. Several points should be considered here. Ø The Chilean Mining industry (ranked first in the world for copper production, and fourth for conditions for mining investors lx ), which makes up the majority of its GDP, will grind to a halt if the country s energy needs are not soon addressed. lxi o Where a majority of mining operations are, in the North of the country within and around the Atacama Desert, solar irradiation is nearly the highest on the planet. Ø The mining industry uses many of the same technologies as geothermal energy. o Geothermal energy is also abundant in areas surrounding the main mines. Ø Molten salt 18, a vital component of Concentrated Solar Power (CSP) which allows solar energy to be stored overnight, is abundant in the North of the country Start-Up Chile is a program created by the Chilean Government, executed by Corfo via InnovaChile, that seeks to attract early stage, high-potential entrepreneurs to bootstrap their startups in Chile, using it as a platform to go global. The end goal of the accelerator program is to convert Chile into the definitive innovation and entrepreneurial hub of Latin America; this is a mission shared by the Government of Chile and is a primary focus of the Ministry of Economy. (Startupchile) 17 There are not enough private venture capitalists to support young firms with money and advice. Nor do Chile s universities spawn start-ups nearly as fast as America s do. Many ambitious start-ups in Chilecon Valley hope to graduate some day to Silicon Valley. (economist.com) 18 Molten salt is used to store electricity from Concentrated Solar Power using a heliostat reflectors and a central tower. When electricity is required, salt is pushed into a steam generator which can thus provide energy around the clock. (SunShot Vision Study February 2012: 102) 19 CSP is also of particular interest in the SING region because by using energy storage it can better meet the particular demand profile of consumers on that grid (24-hour flat demand). Therefore this more flexible technology has a better chance of getting a power purchasing agreement with an off-taker. (Investment Plans for Chile: 26) Kyle S. Herman 14

16 o Currently there are no Chilean CSP companies, and the government has not recognized this as a potential driver for innovation. Ø Chile boasts one of the longest coastlines in the world, and therefore has a vast potential for offshore wind power. o The government has done little to attract FDI into the offshore wind industry. 5.1 Specific Policy Recommendations Ø The Government should stipulate that the mining sector is required to source up to 20% NCRE by the year 2020 (increasing 1% annually), matching European country commitments and adding to investor confidence. Ø Targeted innovation research in Concentrated Solar Power for Universities. 20 o Research in molten salt energy storage technologies Ø Substantially ease geothermal exploration regulation. Promote exploration and innovation through mining company s expertise, capital, and know-how. Ø Utilize international lenders for technology transfer and knowledge transfer. 5.2 Concentrated Solar Power Source: U.S. Department of Energy: SunShot Vision Study February 2012: 5. (BrightSource (2010) International lenders have already taken notice of the dual characteristics of high energyintensity in Chile in connection with high solar irradiation. In Northern Chile, where most mines are in operation, the potential for CSP is highly promising. One of CSP s fundamental costs, storage using molten salt, could be subsidized by the government because this salt is abundant in Chile. Yet there 20 Molten salt technology is critical for CSP because it may provide the window for significant reductions in investment costs by improving thermal efficiency (SunShot Vision Study, 2012: 107). Kyle S. Herman 15

17 remains a lack of demand, and thus a market failure here; therefore, it is considered that public support is appropriate in order to facilitate a transition to widespread commercial implementation [ ] to de-risk this proven technology for the Chilean market and reduce its costs. lxii The government could offer domestic CSP developers substantially reduced mining concession fees and drive innovation in this storage technology, which will certainly be critical for the development of renewable energy on the large scale. Similarly, the government should encourage implement specific research centers tasked with storage technology, funded specifically for developing renewable energy storage. Mining requires flat demand, but around the clock energy. This is precisely the role CSP could fill for mining operations. CSP is of particular interest in the SING region because by using energy storage it can better meet the particular demand profile of consumers on that grid (24-hour flat demand). Therefore this more flexible technology has a better chance of getting a power purchasing agreement with an off-taker. lxiii Presently the government only requires 5% of the energy transmitted in the SING region to derive from NCRE; however, this law could be changed to require at least 10% and, in collaboration with offering subsidies and incentives for CSP, could lead to a rapid uptake of the technology by mining companies. Mid-sized CSP plants can be highly competitive in remote facilities (such as mines) where significant quantities of electricity or high-temperature thermal energy are needed, especially if these energy needs are met with heavy fuel oil transported to the site by single truck loads. lxiv One example of this uptake is already evident. SunDeison signed an agreement with CAP (Chilean Mining Group) for the construction of a 100MW photovoltaic power plant. lxv Similarly the Swiss firm Etrion has committed to building an 8.8 MW PV plant to supply power to the Aguas Blancas mine. lxvi 5.3 Geothermal Energy The potential for geothermal energy in Chile is widely known. Some estimates put its potential at 16,000 MW. lxvii The government is expected to invest $200 million into the sector within the next decade. lxviii The promise of geothermal energy in Chile has already attracted many multinational companies including ENEL, Geoglobal Energy, Energia Andina (founded by Antofogasta minerals), ENAP (state-owned), Magma Energy Chile, Hot Rock Limited. Interestingly, Energia Andina was founded by a mining company; this is precisely the kind of energetic-mining solutions the Chilean government should encourage. However, as supported by interviews with Chilean government officials, there is the burden of high risk with geothermal exploration and development. This is especially true with early-stage finance for geothermal energy which, in the event the exploration yields no positive results, leaves financiers with no investment return. This results in increased perceived risk in all future geothermal investments in Chile. The drilling of test wells is very expensive, and the risk of failure is very high. lxix Yet the government does foresee great potential in geothermal investments. From this perspective, and recognizing the great attraction of geothermal energy for our country due to its potential and high plant factor, we are preparing a new regulatory base to encourage investment based on this renewable resource. lxx In addition, the government has created several laws to promote geothermal investments (Decree No. 142: Sources of Geothermal Energy; and Law No. 19,657: Geothermal Concessions). Still, similar to CSP and storage technology, the government should consider incorporating geothermal research into its knowledge capital. 5.4 Concluding Remarks The Chilean government has done very well to encourage FDI in the energy industry. Yet the uptake in large-scale renewable energy projects is still lacking, despite the country having promising geographical conditions for the incubation of RE. Very specific national policies should focus on creating a Chilean technopole based on two RE technologies: Concentrated Solar Power and Molten Salt Storage. Since both technologies are bound together by virtue of their mutual dependence, the development of a technopole should be natural. The government can create policy to encourage the mining industry to work alongside this technopole so that all parties may enjoy the financial benefits of sustained energy through CSP in the future. Kyle S. Herman 16

18 References i (Government of Chile 1982) ii (CTF Investment Plan for Chile. 2012: 5) iii (ibid: 8) iv (GEF: Chile: Barrier Removal for Rural Electrification with Renewable Energies. 2001: 4) v (CNE, 2008) vi (Dufey 2010: 3) vii (Valdivia, Casar 2009: 23) viii (ibid: 25) ix (ibid: 8) x (CTF Investment Plan for Chile: 2012) xi (CTF-IDB Concentrating Solar Power Projects in Chile. 2012: 10) xii (Behnke et al. 2009: 116) xiii (CTF Investment Plan for Chile. 2012: 31) xiv (Behnke et al. 2009: 121) xv (ibid: 121) xvi (ibid: 121) xvii (ibid: 123) xviii ( Legal Framework. Ministry of Finance). xix (Fayet, 2012: 8) xx (Dufey 2010: 19) xxi (ibid) xxii (CER, 2012) xxiii (ibid) xxiv (ibid) xxv (ibid) xxvi (Maclean et. Al 2008: 15) xxvii (Reegle. Clean Energy Information Gateway) xxviii (Dufey 2010: 5) xxix (Valdivia, Casar 2009: p. 23) xxx (ibid) xxxi (ibid) xxxii (Pollitt 2004: 14) xxxiii (Dufey 2010: 39) xxxiv (ibid) xxxv (Pollitt 2004: 21) xxxvi (Dufey 2010: 15) xxxvii (ibid: 17) xxxviii (ibid: 33) xxxix (ibid: 33) xl (CORFO: Innovation in Energies) xli (National Energy Strategy : 21) xlii (ibid: 21) xliii (ibid: 21) xliv (Dufey 2010: 40) xlv (Interview: Moreno 2012) xlvi (Dufey 2010: 42) xlvii (CTF-IDB: Concentrating Solar Power Projects in Chile. 2012: 24) xlviii ( The Lure of Chilcon Valley. 2012) xlix (Maclean et. al. 2008: 15) l (ibid: 15) li (Huffman and Quigley 2002) lii (Pollitt 2004: 23) liii (Dufey 2010: 38) liv (Dufey 2010: 43) lv (Ritchie et al. 2011: 5) Kyle S. Herman 17

19 lvi (Maclean et al., 2008: 13) [Haites et al, 2008] lvii (Dufey 2010: 42) lviii (Basecamp Business) lix (Maclean et al., 2008: 13) lx ( Mining in Chile: By the Numbers. 2012) lxi ( Chilean Mining Looming Crisis. 2012) lxii (CTF-IDB: Concentrating Solar Power Projects in Chile. 2012: 25) lxiii (CTF Investment Plan for Chile. 2012: 26) lxiv (CTF-IDB: Concentrating Solar Power Projects in Chile. 2012: 13) lxv ( Essential Industry Insights. 2012) lxvi (ibid) lxvii ( Geothermal Energy in Chile: Market Profile. 2012) lxviii (ibid) lxix (Pollitt 2004: 9) lxx (National Energy Strategy : p. 22) Bibliography Agencia Chilena De Eficiencia Energetica. Government of Chile, n.d. Web. 23 Jan Behnke, Rodrigo P., Dr., Guillermo J. Estévez, and Ignacio A. Arias. Las Energias Renovables No Convencionales En El Mercao Electrico Chileno. Santiago: Government of Chile, n.d. Print. Chile. Inter-American Development Bank. Social Sector Science and Technology Division. IDB. By Mario Pezzini et al. OECD, IADB, CNIC, Mar Web. 4 Sept Chile. Latin American Energy Organization. UNIDO. Final Report Component 3: Financial Mechanism. Observatory of Renewable Energy, Nov Web. 3 Oct Chile. Ministerio De Energia. Energy for the Future: National Energy Strategy Gobierno De Chile, Feb Web. 26 Dec Clean Technology Fund: Investment Plan for Chile. Climate Investment Funds. CIF, n.d. Web. 1 Feb Cole, Matthew A., and Robert J.R. Elliott. Determining the Trade environment Composition Effect: The Role of Capital, Labor and Environmental Regulations. Journal of Environmental Economics and Management 46.3 (2003): Print. Concentrating Solar Power Projects in Chile. NREL: Concentrating Solar Power Projects -. IDB, n.d. Web. 4 Feb "Corfo Suena Emprende Crece." Government of Chile, n.d. Web. 13 Jan Dechezleprêtre, Antoine, Matthieu Glachant, and Yann Ménière. The Clean Development Mechanism and the International Diffusion of Technologies: An Empirical Study. Energy Policy 36.4 (2008): Print. DFL-1 13-SEP Ministerio de Minera. N.p., n.d. Web. 2 Feb Duffey, Annie. Opportunities and Domestic Barriers to Clean Energy Investment in Chile. International Institute for Sustainable Investment, Jan Web. 1 Feb "Essential Industry Insights." New Energy World Network NewNet RSS. NewNet, 1 Feb Web. 4 Feb Gobierno De Chile. Centro de Energias Renovables. Government of Chile, n.d. Web. 14 Jan Huffman, David, and John M. Quigley. The Role of the University in Attracting High Tech Entrepreneurship: A Silicon Valley Tale. The Annals of Regional Science 36.3 (2002): Web. International Energy Agency. IEA, n.d. Web. 6 Feb Legal Framework. Ministry of Finance. Government of Chile, n.d. Web. 5 Feb Lessons from Chile's "Chilecon Valley. Basecamp Business. Basecamp Business, Web. 4 Feb < The Lure of Chilcon Valley. The Economist. N.p., 13 Oct Web. 4 Jan < Mielnik, Otavio, and José Goldemberg. Foreign Direct Investment and Decoupling between Energy and Gross Domestic Product in Developing Countries. Energy Policy 30.2 (2002): Print. Mining in Chile: By the Numbers. Mineral Rights For Sale. N.p., Web. 8 Feb < Kyle S. Herman 18