Chile: energy to regulate

Author: | Published: 24 Apr 2015
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Chile’s energy reforms are opening up the country’s energy market to investment and competition. And as the country strives for energy independence, the reforms are being clarified and new projects are being approved

During recent years, and as a result of its successful economic development, Chile has introduced several legal changes, which have brought new investment trends in the field of electricity generation. Chile was indeed one of the worldwide pioneers of the restructuring of a country's entire electrical system. In 1982 it replaced the exclusive state development initiative with a system based on a private initiative, where the government acts as a planner through the National Energy Commission, and as a supervisor through a dedicated energy superintendence. This structure enabled a steady growth of this industry in Chile through to the beginning of this century.

However, as expected after a country reached a certain level of economic growth and welfare, in the mid-1990s Chile began to adopt a programme of environmental regulation, that would allow a sustainable development of this industry over time. The new regulation has encountered constant challenges involving electricity generation development. This has led to higher levels of regulation, and environmental and social standards, and, in recent years, issues relating to indigenous communities. As a result, the development of large investment projects reached a crossroads. Electricity generating projects like the hydroelectric dam of Hidroaysen (which was to be executed in Patagonia, with a generation capacity of 2.750 MW), the thermoelectric projects of Barrancones, Castilla and Campiche, among others, were rejected by the government (for legal, administrative and, in the case of Castilla, social pressure) due to environmental, community and/or native opposition.

"One of the objectives of the latest reform was the rationalisation and diversification of the powers between the various environmental agencies"

Building on Chile's earlier progress, from the decade beginning in 1990, the country established the basis of its environmental regulation, starting with the enactment of the Law of Environmental Bases. Subsequently, the environmental assessment system was created, culminating with the establishment of the national environment commission, which might be regarded as the basis of the environmental institutions. However, it was only in 2010 that Chile started to institutionalise more sophisticated environmental regulation with the creation of the Environment Ministry, the Environmental Analysis Service and the Environmental Superintendency.

One of the main objectives of the latest reform was the rationalisation and diversification of the powers between the various environmental agencies. The National Environmental Commission was replaced by the Environment Ministry, which was responsible for the environmental policies; and by the Environmental Analysis Service and its Evaluation Committees, which were responsible for project evaluation. Finally, with the creation of the Environmental Superintendency dedicated to monitoring compliance with the environmental regulations, the regulatory and policy development role was separated from the management and oversight areas between different entities.

These reorganisations were complemented by the creation of the Environmental Courts under Law No 20.600 (2012), which are responsible for deciding disputes in this area.

The most important factor that has inspired the reforms of recent years has been the greater participation in public affairs and the increasing relevance of the country's citizens. Another important development in 2008, was that after 18 years of legislative process, Chile ratified Convention 169 of the International Labour Organisation (ILO) concerning the indigenous and tribal population. This introduced, among other things, the state's duty to consult and secure the participation of indigenous communities regarding administrative and legislative acts that may directly affect them. This meant that every project that directly affected indigenous people must comply with the process of indigenous consultation, before even being evaluated by the environmental assessment system. With this new requirement came uncertainties that led to litigation and the rejection of many investment projects in Chile, based on different interpretations of the new convention. The same year, Chile issued the Indigenous Consultation Regulation, which attempted, but without success, to regulate the application of the indigenous consultation process in the country. Subsequently, in 2013 the authorities issued a new regulation to improve on the old one, but this also met with implementation problems. The authorities continue to promote modifications (an Indigenous Ministry, a new Indigenous Consultation, regulation, amendments to the environmental assessment system, and so on), which promise to resolve, once for all, the uncertainties generated by the indigenous and environmental regulation.

"The new regulation has encountered constant challenges involving electricity generation development"

There have also been important changes in electricity legislation, such as the enactment of Law No 19.940 (2004) and Law No. 20.018 (2005), which improved the legal framework of the electricity industry enabling it to be more efficient and environmentally and socially sustainable. One of the major changes in this field has been the incorporation of non-conventional renewable energy (NCRE), which within only a few years has acquired an unexpected importance in Chile. Continuing this trend, Law No 20.257 (2008), defined what sources of energy may be considered NCRE and established benefits and incentives for its development. Subsequently, Law No 20698 (2013) continued the regulation of this type of energy to encourage greater penetration in the electricity market by setting a target of 20% of this type of energy by 2025.

This entire legal and regulatory boost has not been in vain, because between 2010, the date of enforcement of Law 20.257, and 2012, the built capacity of NCRE almost doubled, from 319 MW to 601 MW. Moreover, 70 out of 146 projects submitted for environmental assessment during 2012, corresponded to NCRE, while in 2013, 106 out of 196 projects issued through the environmental assessment system were NCRE. This trend has continued during recent years, with the number of projects in operation growing from 881MW in 2012, to 1.117MW in 2013, and to 2.097MW in 2014.

All the changes mentioned above have led to a new trend in the field of electricity generation, considering that every day there are fewer large generation projects, and more NCRE and small local electricity generation projects. This brings many benefits, but also new challenges for the electrical industry and regulation, in terms of integrating this new reality into the systems without creating any adverse impact and mitigating any instability that may arise in the electrical systems.

Taking everything into consideration, we believe that this new trend will continue for some time. Not only does it respond to the need for cleaner energy, but it has its origins in the configuration of the Chilean institutions in this field, which benefits projects with less impact, as opposed to larger projects that have tended to be the natural response to the increasing energy needs of Chile.

About the author

Arturo Le Blanc C.
Vice president of legal affairs, Transelec

Santiago, Chile
T: +56 02 24677163

Arturo le Blanc is the vice president for legal affairs, and secretary of the board of Transelec, the largest power transmission company in Chile. In March 2015, he took on the role of professor of regulation in the LLM program at Universidad Católica de Chile.

Before joining Transelec, le Blanc served as a senior associate for Barros & Errazuriz. His work focused on capital markets transactions, including structuring public and private placements. He managed cross-border transactions between Chile, the US and its regional neighbours.

Between 2006 and 2007 he was an international associate for Shearman & Sterling. He focused on drafting and negotiating banking documentation and agreements and participated in loan and structured finance transactions.

Le Blanc studied at Universidad de Chile in Santiago. He received an LLM from Duke University Law School.

About the author

Alfonso Alamos
Associate, Barros y Errázuriz

Santiago, Chile
T : +56 2 23788997

Alfonso Alamos is an associate lawyer at Barros y Errázuriz, one of the most prestigious Chilean law firms, having worked for the firm for three years. He has experience in tax, corporate, and capital markets law. Alfonso studied law at the Pontificia Universidad Católica de Chile, where he graduated with honours (summa cum laude).

He is an assistant professor in the LLM programme of the Pontificia Universidad Católica, having previously been an assistant professor in law and economics. Alfonso was an intern in the human rights office of the Chilean Legal Assistance Corporation, giving advice and arguing before the appeals courts of Chile.