Low energy prices and the struggle of Chile’s geothermal energy sector

Drilling rig at Tolhuaca, Chile (source: GeoGlobal)
Alexander Richter 21 Mar 2016

Without the right support and future vision by government, Chile's geothermal energy sector is struggling and promising projects and companies are giving up.

The low price of energy has a rather negative effect on renewable energy development and the sector in general. This can also – or maybe in particular – be felt by the geothermal sector, as a news outlet from Chile reports.

After more than 15 years of exploration and development work, companies are ceasing their operations, with only one project being actively developed at this point in time.

Commenting on the state of the industry, Rüdiger Trenkle, general manager of New Zealand’s Mighty River Power, said that “the numbers just don’t add up”, and are the reason for the company leaving Chile permanently.

In a similar situation is Energia Andina, a joint venture by Antofagasta Minerals and Australian Origin, which will also close down in April after eight years of cooperation without a specific project ongoing.

Jose Manuel Soffia, the general manager for Energia Andina says that “Geothermal energy is over,” adding that with more than US $ 300 million invested, particularly in the last eight years, pretty much all is lost and all that will remain is the knowledge and information that arose during this period.

One of the four geothermal projects that were relatively well advanced was the project of EDC from the Philippines, which acquired a majority stake in the company from Canadian Alterra Power (formerly Magma Energy), but also this project is currently on hold, following the drop in oil prices. Both partners talk about a professional analysis being undertaken, but the outlook is not good.

Against all odds

Along with the “normal” industry challenges in Chile, for geothermal projects the exploration costs and greater exploitation of international reality (for logistical and climatic conditions), is now added the drop in energy prices, which decimated the possibilities for development of these projects.

Soffia, who also chairs the Geothermal Council explains that to cover all such risks and get a profit margin, projects require power purchase contracts with prices around US $ 120 per MWh ($0.12/ kWh), well above averages around US $ 50 per MWh ($0.05/ kWh) today.

He clarifies that the cost of geothermal energy are high in the initial phase, but then tend to decrease due to its baseload capacity nature, ie, it is available for more than 90% of the time, unlike what happens with solar and wind, whose drivers are also going complexities due to low energy prices.

He adds that other attributes of this energy source are its low emissions and autonomy offered with respect to imported fossil fuels, such as liquefied natural gas and coal.

Future crisis

According to Energia Andina’s CEO the low prices are counterproductive to helping Chile achieve a diversification of its energy sector getting other forms of energy to contribute, including geothermal energy.

The executives agree that subsidiaries are not necessarily the right way to promote geothermal energy, but still a more active role of the Chilean govermnent is required, e.g. through a risk sharing element in the initial stage of exploration, applying tax discounts, boosting transmission infrastructure or giving space in the bidding process for residential customers, because although a benefit that allows them to return the blocks awarded in the event of failure, it required drilling wells at the production stage something only Mighty River Power managed.

At this point authorities rather think of providing the lowest possible price, something that discourages the development of alternatives to a possible scenario of crisis, which would force resorting to diesel that produces the most expensive energy.

Only one project

In December Enel Green Power and ENAP began work on the first and only geothermal power project in Chile. It is Cerro Pabellon, which faces the same challenges as other projects, but has the support of the Italian company that has financial backing and a geothermal portfolio of projects and plants, unlike companies that don´t have that strong backing.

Another point in favour of Cerro Pabellon, which requires the same level of prices than other developers, is that it managed to sign a contract with though no details available.

“Apacheta demonstrates the potential of this energy and break down some myths about its benefits,” says the general manager of MRP Chile, adding that before leaving the country made a final investment of US $ 10 million to the closure and abandonment of their Tolhuaca project, following the standard of its parent, although local law does not oblige.

The danger of speculation

The law governing geothermal energy dates from the year 2000. The law followed a decade of discussion and much time was spent after its enactment before regulations were available. The law was modified during the government of Sebastian Pinera, eliminating some requirements to move from an exploration concession to exploitation. This, according to sources, resulted in a large number of applications and speculation. To  avoid speculation new regulations clarified those conditions.  The changes included tools to better consider the territorial characteristics in activities authorized in those awards.

Last year, the processing of up to 69 applications for exploration that were accumulated between 2009 and 2013 were completed and resulted int the consultation process for eight concessions.

The state has to create a land and energy policy

Managing 45 employees previously, Rüdiger Trenkle, CEO of MRP in Chile now is winding down the business with only four employees, directing the work of closing and the abandonment of Tolchuaca, which would have been the first foreign project for New Zealand’s Mighty River Power in Chile.

He said it was regrettable that the outlook for geothermal development has been complicated to the point of forcing the company to leave the country, but as far as he’s concerned will continue in Chile trying to push the changes you make feasible this form of generation.

What it is needed for the commercial development of geothermal energy a reality?

It needs a comprehensive take by decision makes of the country, that recognize the existence of this resource and its attributes of sustainability and future price stability, unlike gas or coal, so projects can develop. To this date no decision seems to give the notion of support. We also must be clear about the real cost of having coal plants much longer and who pays for those costs.

The last three governments announced initiatives to support geothermal development, do you feel that there was a broken promise? 

No, I can not say that there were promises. I will not accuse any of those governments, because we well aware that we were running a risk, but we have come to the conclusion that geothermal development cannot take place without the support of the State with the price level that we have today, for example in the development of transmission lines to help reduce the cost. There needs to be a willingness of the state to say “I want that energy and will give the kick to development” because I want to make a change to decarbonise the energy matrix … that is needed.

The good news is that the resource will not leave, it will be there, but development and utilisation will only work only if the State develops a concise energy policy and includes geothermal energy in the matrix.