Chile: A new age
ENSCONCED ON the western edge of the Andes, Chile is a country that is often forgotten.
This neglect is not due to any mismanagement or fault. On the contrary, the country is so well run that its assets do not provide the yields and returns that are commensurate with the rest of the asset class.
Nevertheless, Chile is a bellwether economy that often holds clues of what is to come in the rest of the region.
One of the trends that have been transforming the country over the last few years has been the dramatic shift towards renewable energy. Chile is blessed with a cornucopia of natural resources, from a treasure trove of metals to endless expanses of hardwood forests to verdant valleys that are perfectly suited for agricultural production, but the country is bereft of hydrocarbon deposits.
Except for a few fields in Patagonia, the country is short on oil and gas resources. At first, the government turned to hydropower, building a series of major dams and stringing transmission lines to improve interconnection.
However, Chile’s growing prosperity, environmental opposition to the projects and its heavy reliance on energyintensive sectors such as copper smelting, always left the authorities scrambling for other sources of electricity.
The problem was thought to have been solved during the 1990s, when a new pipeline was built connecting Argentina and Chile. As a result, Argentina could export gas to Chile. However, the programme crumbled under the Kirchner administration when high gas subsidies sent demand soaring in Argentina. Moreover, a collapse in Argentine investment, or capital expenditure, after the crisis of 2001 led to a gradual decline in gas output.
By 2004, Argentina abrogated its supply contracts and turned off the taps. This left Chile, which depended on Argentina for 90 per cent of its natural gas supply, scrambling for new
sources of energy. The most immediate response was to import liquified natural gas (LNG) and to move to renewable energy resources. In 2013, the Chilean congress passed a set of legislation, known as 20/25, which would convert
20 per cent of the country’s production non-hydro energy into renewable formats by 2025. At the time, Chile was highly dependent on diesel and gas turbine facilities, which produced a third of the country’s electricity.
Hydro produced another third, while coalpowered thermoelectric facilities generated 22 per cent. The rest was a combination of solar (six per cent), wind (five per cent) and biomass (two per cent). Chile has an abundance of geothermal potential, but the lack of interconnection and environmental opposition made it difficult to exploit. The 20/25 programme provided a set of incentives for the energy companies to replace one format with the other, and it was such a success that it is about to reach the 20 per cent target. Chile has one of the most optimal sets of conditions for solar and wind generation. The Atacama Desert in the northern part of the country is the driest location on the planet. This implies that it also has the least cloud cover, providing the perfect amount of sunlight to produce photoelectric power.
At the same time, the southern stretches of the country include the Straits of the Magellan, one of the windiest locations on the planet. The outposts of Tierra del Fuego and Patagonia are perfect for wind generation.
Some energy experts forecast that renewables will generate more than 90 per cent of the country’s electricity needs by 2050.
Chile, a county that was once threatened by blackouts, is now witnessing a plunge in electricity prices. This could be a parable for Argentina, which shares many of the same geographical features as its trans-Andino neighbour. Yet, not all of the trends in Chile are positive. The second administration of President Michelle Bachelet witnessed the growing power of the political left. The Concertacion once represented a rainbow coalition of centre and leftist parties, but it disintegrated into a small universe of mainly leftist factions.
As a result, the political spectrum has polarised. During Bachelet’s last term, the polarisation manifested itself into the introduction of several heterodox reforms.
There are good reasons for the frustration among the lower classes. Income inequality has grown. Social mobility has become more difficult, as the cost of education increased. At the same time, some orthodox reforms, such as the privatisation of the pension fund system, have failed to deliver on their promises.
Although Chile is considered to be the paradigm of macroeconomic orthodoxy, former President Bachelet has agreed to attend an upcoming summit of former Latin American leftist leaders that will include, among others, Cristina Fernandez de Kirchner, Dilma Rousseff and Rafael Correa.
This is not exactly the type of company that is normally associated with Chile. Therefore, interesting things are occurring in the far-flung country, but socioeconomic trends are also pushing Chile in an unexpected direction.
President of Chile, Sebastian Piñera.