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November 2008

Country Profile Chile

Flag Chile With a sharp rise in altitude from the Atacama desert to the peaks of the Andes and a North to South expansion stretching across 39 degrees of latitude, Chile is a country of geographic extremes.
Volcanic activity, strong winds in Patagonia and the coastal desert create favourable conditions for harvesting geothermal, wind and solar energy.
Human activity has caused an increase in severe El Niño events, causing disastrous floods and disruption to the fishing industry. Gas supply shortages and lack of rain during the winter months have led to an acute energy crisis.

Renewable energy and energy efficiency are of great importance to Chile due to the ongoing electricity supply crisis, shortfalls in natural gas supplies from Argentina, recent droughts and rising oil prices. Chile is therefore regarded as an attractive country for CDM project developers – a status that is further heightened by steady economic growth, a safe investment climate and renewable energy legislation that promotes small hydro and other renewable sources of energy.

Funding is also available for feasibility studies and PDD support for renewable energy CDM projects. However, the fact that hydro makes up a large portion of the country’s energy mix constrains the quantity of CERs that can be generated in electricity generation projects. There is strong resistance against large hydropower projects due to negative social and environmental impacts of large dams, many of which are proposed in areas where tourism and ecosystems would be affected. Also, hydro above 20 MW requires an additional approval process and compliance with the World Commission on Dams guidelines to qualify for the EU Trading Scheme. Just getting the water rights for a hydro project can also be problematic under current water law. Another complicating factor is that Chile has four separate disconnected regional transmission grids. This prevents renewable resources in the south of the country from being utilised in high-demand areas in the centre.

By 2012, however, some US$ 25 billion will be invested in the country’s electricity supply. Chilean building and construction regulations were amended to incorporate more stringent energy standards in 2005. A new environment ministry was established in 2007, helping to enforce environmental law and place greater focus on sustainability issues. With its thriving economy (5.1 percent growth in 2007), Chile is not a typical target country for development cooperation activities.

Germany nonetheless provides active support in restructuring the country’s energy sector. KfW, GTZ, CIM and the German-Chilean Chamber of Industry and Commerce in Santiago de Chile are all key points of contact in this regard.

Chile is an associate member of Mercosur and thus has been able to sign free trade agreements with the EU (the EU-Chile Association Agreement 2005), the USA and China. It has also signed a Country Strategy Paper 2007-2013 with the EU, which is designed to support Chile’s climate change adaptation and emission reduction efforts.

The most active investor countries are Great Britain and Japan, each with seven activities. Chile has signed MoUs with Japan, Canada, France, Denmark and Spain.

Chile already ranks first place in the DEG CDM Investment Climate Index (CDM ICI). Despite great social disparities across the country, other international indices (e.g. Bertelsmann, institutional investor) give Chile admirable reviews on democracy, the economy and investment climate and rank it number one in the region.

Growing climate change awareness and the acute energy crisis combine with good institutional and economic conditions to allow the Chilean CDM market to continue its dynamic course.

After Brazil and Mexico, Chile is the third Latin American country in terms of the number of CDM projects with 56 projects in the CDM pipeline. Among the 25 registered projects with total potential annual savings of 4,319 kt CO2e, eight projects are in the landfill sector – mainly landfill gas flaring plus some composting and landfill power projects. Six projects involve hydropower, which is traditionally the main electricity source in the country. These projects may have difficulty proving additionality in the future because of their prevalence. With four registered projects, another project type of importance is biomass energy, relating to the production of energy from wood and wood scraps at lumber mills in the Chilean Lake District and Patagonia.

The biggest reductions – 822,842 t CO2-eq. per year – come from an N2O abatement project in the fertiliser industry, the only project with German involvement. Four projects in the agricultural sector involve methane capture. Afforestation, energy efficiency, fossil fuel switch, fugitive emissions, N2O and wind energy have each only one or two projects in the CDM pipeline so far.

Founded in 1994, the National Environment Commission (Comisión Nacional del Medio Ambiente, or CONAMA) acts as the Chilean DNA. Project approval is, however, the responsibility of a steering committee formed by the Environmental Agency, the Energy Agency, and the Foreign Affairs Ministry.

The checking of the approval requirements and the development of further criteria, notably for cases such as reforestation and afforestation, are dealt with within the Steering Committee. The DNA aims not to bureaucratise the process but wants to be sure approval is consistent with other authorisations where CONAMA is involved. The DNA also offers help with determining baselines and deciding on CDM methodologies, and organises international seminars on the CDM.

PROCHILE, the government agency in charge of promoting export, communicates directly with private-sector companies in terms of supporting the development of CDM projects. It also publishes the Chilean CDM project portfolio.

The Chilean Economic Development Agency (CORFO) offers funding for feasibility studies and PDD support for wind, biomass, geothermal, and small-scale hydro. CORFO additionally offers soft loans, developer/investor matchmaking sessions, and equity funds to support renewable energy development in Chile.

Requirements for host country approval

The criterion for host country approval is that a project contributes to sustainable development. This evaluation is based on the environmental impact assessment (EIA) system according to Chile’s Environmental Framework Law, Act No. 19.300., Article 10.

The DNA office has a further requirement of voluntary participation which may prevent projects that qualify for the country’s renewable mandate from earning national approval. No CDM projects have yet attempted to qualify for both.

The process of host country approval should not take more than 1-2 months. PDDs have to be submitted in Spanish and be accompanied by the necessary permits/authorisations. Letters of Endorsement are not given because they might be thought to prejudge the EIA.

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