February 10, 2011 / 3:13 PM / 9 years ago

UPDATE 1-ANALYSIS-Costly Chile power may jolt renewable energy

 * Drought-driven price spike makes renewables more viable
 * Record copper prices have miners exploring new energies  (Updates with government seeks to head off energy squeeze)
 By Brad Haynes
 OVALLE, Chile, Feb 10 (Reuters) - A long drought has dried up hydroelectric power production in Chile, sending electricity costs soaring and making renewable power sources like wind, solar and geothermal more attractive, particularly to energy-hungry miners reaping a copper windfall.
 "Renewable energies require a greater investment but they have low production costs," said Mabel Weber, an energy analyst with Banchile Investments. "The more prices rise, the more viable alternative energies look."
 Scarce rains from the La Nina weather pattern have slashed hydroelectric output in Chile, the world's top copper producer. Generators must rely on plants powered by costly imported oil and gas, compounding inflation risks in the booming economy.
 Energy prices have nearly tripled in five years, leading companies to covet the cost stability offered by wind, solar and geothermal power.
 Chile's mining sector in particular, which consumes a third of the country's power, has the means and motive to stabilize its energy costs by investing in new technology now that copper prices are at record highs.
 State miner Codelco has committed $700 million to a 250 MW wind farm that may be the largest in Latin America when finished, and world No. 3 copper mine Collahuasi is exploring geothermal energy to tap Chile's immense volcanic activity.
 > Graphic on energy matrix   r.reuters.com/qeq87r
 > Chile seeks to head off energy squeeze [ID:nN09226155]
 "With copper at $4 per pound, you can pay what you want," said Francisco Aguirre, executive director of Santiago engineering firm Electroconsultores.
 "So miners have the luxury of paying more for energy, including the development of renewable sources."
 If Chile recovers quickly from its energy crunch, though, experimental energy may soon be priced out of the market.
 Visiting the expansion of Chile's second-largest wind farm, the 48 MW Monte Redondo complex 200 miles (325 km) north of Santiago, Energy and Mining Minister Laurence Golborne said on Tuesday that an end to Chile's drought could end the current spike in power prices.
 Golborne suggested electricity costs could soon subside from $150 per MWh to roughly $90 per MWh in the long term, but he said wind power remains a promising resource given Chile's extensive wind-swept coastline.
 "The investment costs are high for renewable energy," Golborne said. "But this installation shows that it is possible to turn this energy alternative into a competitive option."
 President Sebastian Pinera said on Wednesday the government had readied measures to avoid energy rationing if drought conditions continue, sapping the hydro power that generated most of the electricity in the country's central grid until last year. [ID:nN09226155]
 Analysts in Chile play down the risk of energy shortages, but warn of higher prices and the possibility of blackouts given reliance on backup generators and imported oil and gas. Chile was hit by several blackouts last year after a massive earthquake damaged transmission infrastructure.[ID:nN03272253]
 Chile's central grid supplies more than 90 percent of the population and is most likely to be hit by the energy squeeze because of its reliance on hydro power. The far northern grid, which powers miners in the copper-rich Atacama desert, relies on thermoelectric plants fired by coal, gas and diesel.
 But key copper mines in central Chile, like the 400,000 tonnes per-year El Teniente mine owned by state giant Codelco, and Anglo American's (AAL.L) Los Bronces, rely on the country's main grid and were briefly hit by blackouts last year, at times slowing output.
 The extended drought has also hurt the bottom line of major energy players like regional power group Enersis ENE.SN ENI.N and its local generator Endesa Chile END.SN EOC.N, which reported last month that their bottom lines suffered in 2010 due to reliance on fuel-driven plants.
 The sector is currently supported by Chile's requirement that generators incorporate non-conventional renewable energies in their output, beginning with 5 percent last year and rising to 10 percent in 2024.
 Chile's previous energy minister discussed strengthening the law to require 20 percent alternative energy by 2020, but the government appears to have backed off that goal amid the spike in energy prices.
 "Today there is no country in the world with 20 percent of its power produced by renewable energy. However that is the long-term aspiration of our country," Golborne said on Tuesday. "Most countries that approach that ratio also count on coal, fossil fuels and nuclear energy."
 Chile's alternative energy law counts output from hydroelectric plants smaller than 40 MW along with sources like wind power, which has grown to around 170 MW capacity in Chile since the first turbines were installed in 2008.
 Environmental concerns have snagged mega-projects like the 2,750 MW Patagonian dam project HidroAysen and the 2,350 MW coal-fired Castilla plant proposed by Brazil's MPX Energia. [ID:nN30138247] [ID:nN15275276]
 GDF Suez GSZ.PA had to back off a planned 540 MW power plant in August after Pinera urged its relocation amid public outcry over fears the project would harm an endangered penguin reserve. [ID:nN26201975]
 Last year's devastating earthquake also pushed back completion dates for two new 340 MW coal plants.  (Editing by Simon Gardner and David Gregorio)   

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