CHILE'S ENERGY HIGHLIGHTS -- MAY 2009

UNCLAS SANTIAGO 000535

STATE FOR WHA/BSC, WHA/EPSC AND EEB/ESC/IEC

SIPDIS

E.O. 12958: N/A
TAGS: ECON ENRG KNNP SENV TRGY PGOV CI
SUBJECT: CHILE'S ENERGY HIGHLIGHTS -- MAY 2009

REF: (A) SANTIAGO 496; (B) SANTIAGO 349; (C) SANTIAGO 189


1. SUMMARY: This cable provides highlights of activity in the
Chilean energy sector during May 2009. The Ambassador participated
as a panel speaker at the 8th annual ElecGas conference in Santiago.
At the event, experts noted new generation projects may create
transmission bottlenecks for Chile's central grid and result in
higher electricity prices in Santiago. In response to Santiago's
poor air quality, the GOC ordered utilities and industries in the
capital to stop using diesel fuel and replace it with natural gas by
August 2009. On May 13, the bill to create an Energy Ministry was
unanimously approved by Chile's Senate Mining and Energy Committee;
it now faces a full Senate vote. The most recent Chile Oil and Gas
Report forecasts that the country will account for 4.55 percent of
Latin American regional oil demand and 2.95 percent of gas
consumption by 2013. On May 21, President Michelle Bachelet
announced a lowering of the maximum fuel tax. April electricity
demand in Chile's central and northern grids was higher compared to
the same period last year. END SUMMARY.

Ambassador Speaks on U.S. Policy at Energy Conference
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2. Ambassador Simons gave a speech entitled "The State of Energy in
the World and the Policies of the United States," at the 8th annual
conference of ElecGas Energetico in Santiago on May 26. The purpose
of ElecGas is to share information and "know-how" aimed at
addressing the energy sector's challenges. Other sessions covered
the economics of energy, Chile's electricity sector, renewable
energy options, electricity transmission technologies and
challenges, energy efficiency, and nuclear energy. The seminar was
attended by hundreds of executives, professionals, and technicians
from Chilean companies, government representatives, academics, and
market analysts.

Chile's Central Grid May Face Transmission Bottlenecks
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3. The ElecGas conference also featured discussions about whether
Chile will be able to transmit enough electricity to meet its
expanding energy needs. According to several experts, new coal and
wind generation capacity set to come online before 2013 could face
transmission bottlenecks in the northern part of Chile's central
grid (Sistema Interconectado Central or SIC). These bottlenecks
create local power markets, which can lead to higher prices.


4. The principal concern is that, due to fixed transmission
capacity, thermal plants may have to reduce output to allow new
renewable capacity to enter the grid. If there is not enough
transmission capacity to handle all the new generation capacity,
higher electricity prices for Santiago may result. [Note: As of
December 2008, SIC managed 9,800 MW of installed generation capacity
or about 70 percent of Chile's total installed power (53.9 percent
hydroelectric, 45.9 percent thermal, and 0.2 percent wind),and more
than 15,000 km of transmission lines. End note.]

GOC Issues an Ultimatum on Diesel Use in Santiago
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5. Chile's use of diesel fuel has increased dramatically over the
last few years in the wake of natural gas cuts from Argentina. In
response to weeks of poor air quality, in mid-May the GOC ordered
utilities and industries in Santiago to stop using diesel fuel and
replace it with natural gas by August. By that time, construction
of a re-gasification terminal in Quintero will be complete and
liquefied natural gas (LNG) shipments should be arriving in Chile.



6. Environment Minister Ana Lya Uriarte stated that all enterprises
must now comply with the environmental requirements of their
operations or face fines and revocation of their permits. There has
been a deterioration in air quality and an increase in environmental
alerts in Santiago since 2004 (4 alerts in 2005, 14 in 2006, 22 in
2007, and 14 in 2008). According to Uriarte, "With the return of
natural gas there will be a substantial improvement of air quality,
we will recover the environmental gains we had before the [natural
gas] cuts."

Law Creating New Energy Ministry Moves to Senate
-------------- ---


7. The bill to create an Energy Ministry was unanimously approved
by Chile's Senate Mining and Energy Committee on May 13. The
proposed legislation has been submitted to the full Senate for a
vote, which may take place in June though no date has been set. The
legislation outlines the role and functions of an Energy Ministry,
including setting policy, managing the gas stabilization fund, and
regulating the electricity sector.
Chile's Oil and Gas Report -- Second Quarter 2009
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8. The 2009 second quarter Chile Oil and Gas Report forecasts that
the country will account for 4.55 percent of Latin American regional
oil demand by 2013, while making no meaningful contribution to
supply. Chile's share of gas consumption in 2008 was an estimated
2.84 percent, with a significant share of production. By 2013, its
share of gas consumption is forecast to be 2.95 percent.
GOC Reduces Maximum Permitted Fuel Tax
--------------


9. During her May 21 State of the Nation address, President
Bachelet announced that the maximum specific fuel tax would be
$295/m3. The tax is currently $230/m3, but by law it could have
been increased to $390/m3. [Note: This tax applies to gas and
diesel; higher taxes equate to higher fuel prices for drivers. End
Note.] The announcement was applauded by parliamentarians of all
political parties and by Energy Minister Tokman, who lauded
President Bachelet's support of all Chileans during the global
financial crisis.

April Demand Higher in SIC and SING Grids
--------------


10. The April demand for electricity in the SIC grid (serving
Chile's Central and Southern regions, and predominantly private
consumers) was 2.1 percent higher year over year (YoY); April demand
in the SING grid (Northern Chile, mainly industrial users) was 4.1
percent higher YoY. Demand in the SING is up 6.9 percent for the
year, driven by the needs of the region's mining industry. At the
end of April, using YoY comparisons, demand had increased in all
sectors (residential, commercial, industrial). Notably, demand in
the mining and agriculture sectors grew 4.7 percent and 5.6 percent,
respectively.
SIMONS