Cost Accounting for the Chilean Miracle

Presidio Graduate School’s Macroeconomics course for Spring 2012, is authoring a series of articles. The articles on this “micro-blog” reflect reactions and thoughts on news items, economic theory, and other issues as they pertain to the concept of sustainability.  Follow along here.

By Edgardo Le Blond

Chile is known as one of South America’s economic success stories. The so-called "Chilean Miracle" describes the rise of their economy giving this generation choices never available to their parents. The economy is one of the strongest in South America, but there are hidden social and environmental consequences behind the rising GDP.

Energy is a good example of unintended consequences. Chile has scarce fossil fuel resources. The Chilean crust only yields a coal capacity to meet 1/10th of current demand. This is limiting growth since Chile must double energy supply capacity in 10 years and triple capacity by 2025. To meet growing energy demands they import 75% of their energy, mostly coal and oil. These commodities are expensive commodities and oil is quite volatile. Their government is fighting battles with Argentina to regain natural gas rich regions in the Southern Andes.  Government studies recommend nuclear energy, however, the Fukishima tragedy makes fission politically unfriendly. Their remaining answer is renewable energy.

In 2010, the Chilean National Energy Commission began enforcing the Renewable Energy Law (20.257) mandating that 5% of the electricity come from renewable sources by 2010, increasing the overall goal to 10% by 2024. This was a victory for environmentalists as it was concrete action in response to commitments made in Copenhagen. However, an interesting result is that Chilean businesses and politicians now have mutual incentive to produce massive, centralized, renewable electricity projects.

Projects have sped through the approval process. HidroAysén , Chile’s largest state-capitalism partnership, may begin building two dams on the most voluminous river in Chile, the Rio Baker and three dams on one of the most bio-diverse waterways, Rio Pascua. HidroAysén is owned by Spain’s Endesa, which is in turn owned by Italy’s Enel. Italy’s Colbún is also a partner on the dams. The project is very attractive providing 20% of the nation’s energy, or 2,750 MW of domestic aggregate capacity.

There is much at stake. On one hand, this growth is necessary for Chile to ensure a degree of security and well-being for the majority of its people. With 9% unemployment and 20% of the population in poverty, growth is an imperative for Chile. The reality is that people need more energy to lift themselves out of poverty and into a stable economy.  A significant proportion of the electricity generated by the dams in southern Chile will power remote mines in northern Chile. Chile produces over a third of the world’s copper, resulting in $27.5 billion to bolster the country’s strong South American GDP. The metal is so essential to sustaining the value of the Chilean peso that there is a correlation between the two.

On the other hand, growth and development are compromising local resources. The proposed dam, which is downstream from the Northern Patagonia Ice Sheet, would be subjected to Glacier Lake Outburst Floods (GLOFs). This process is not well understood, but it makes the Baker River one of the most unstable rivers on the planet. The proposed dams do not account for these risks, endangering local communities. Nearby faults may be pressured into movement by the weight of the reservoirs, further complicating matters. The area cleared for the power lines, through 9 national parks, about two dozen national reserves, and other valuable lands will become part of one of the largest clear-cuts on earth, compromising sensitive endangered species.

Despite being driven by climate change legislation, this project has serious environmental costs. Environmentalists find themselves in a difficult position, supportive of regulating greenhouse gas emission regulations, yet generally against dam development.

This project is surrounded in social controversy.  Chileans from villages to Santiago are asking, “Whose interests are being protected?” Is this an example of a company that serves its own interest rather than their customers interests, or will investors in these companies keep them accountable? For Chile, where privatization of public services is the norm, these partnerships can be dangerous. Endesa procured 95% of the Baker River’s water rights as a result of a quick deal made by Pinochet one week before leaving office. Former Energy and Mining Ministers have been executives at private utility companies. The revolving door between the Chilean government and HidroAysén can hinder the free market.

There is precedent to Endesa’s dam building in Chile without the consent of the local populous. Farther north in 1997 the Ralco Dam built by Endesa was approved. Farther North, this dam on the Bio-bio River displaced the last group of the Mapuche Indians, rural farmers, and other rural residents. Now people in the region have some of the highest electricity bills in the nation. While the majority of people, primarily in cities, increase their quality of life, the public resources are compromised, most dramatically affecting the social livelihoods of the rural minority.

Rural Chileans need diverse sources of energy generation such as diesel generators, micro-hydro, geothermal, and wind power that can be implemented piecemeal to fit the needs of remote communities, without being prohibitively expensive to replace. President Piñera has “Non-Conventional Renewable Energy” as well as “Energy Conservation” as two important aspects of Chile’s future. This is an important step, yet the pursuit for centralized energy projects continues.

Diverse sources of energy can also power the country. Hydro is susceptible to drought and solar only works during the day. However, a mix of geothermal, solar, wind, and hydro projects will smooth power supply disruptions in the face of increasing demand. There are few remaining options for countries with scare domestic energy resources.

Throughout the last year, thousands have been protesting the proposed dams in Santiago, sometimes violently. Just as in the Occupy Movement, the conversations and protests broadened to question the entire system in which the people were not being heard. Now, enraged citizens joined in a dialogue and in Chile the debate turned into students occupying their schools and demanding affordable tuition. From dams to education the common theme is that people need to be able to influence the decisions made by well-connected politicians and well financed organizations. Growth is occurring, the majority of it in urban areas while the rural minority receives a small portion of the benefits yet the majority of the consequences.

The Chilean Miracle continues. The Chilean Miracle is a story of success, one that many countries aspire to. Yet many Chileans would argue that the distribution of wealth and the rate at which natural resources are being exploited to bolster this growth is a serious concern. There is a flaw in the implementation of the partnerships between the Chilean government and the businesses that run everything from their natural resources to their schools. Representation in government is a critical missing ingredient. The people have little to no input, beyond organizing in the streets. Unfortunately, there is little incentive for the Chilean government to slow this growth, especially with pressure from environmental law.

The Chilean Supreme Court ruled in favor of the HidroAysén’s 5 dams on the Baker and Pascua Rivers that will power Santiago and the copper mines in the far north of the country. This is the next in a sequence of questionable exceptions that have been made for HidroAysén’s approval. The massive project still needs government support of the transmission lines, which have received considerable criticism. HidroAysén will submit their 1,912 km power line Environmental Impact Statement for review this June.

There is formidable storm building over the Baker and Pascua Rivers. This is not an issue of fossil fuels versus hydroelectric dams, but an issue over the application and accounting of costs of the Renewable Energy Law to meet the needs of Chileans. Centralized dam projects are easy and fast, but are inflexible in application. They are huge projects that displace the minority for the benefit of the majority.  If these are the best choices we have to provide safe and reliable energy in a global crisis of climate change, then it is imperative to account for the true costs. This accounting will also help determine who benefits from these schemes. In a world of diminishing resources, with populations in poverty, we need to ensure that those in most need are also the beneficiaries of growth.

Edgardo is the Alpine of the Americas Project Founder and a student at Presidio Graduate School

edgardo@alpineamericas.com