The Importance of Developing Renewable Resources in Chile - Case Study Example

and Section # of INTRODUCTION What Chile was and what happened to Chile Chile was once predicted to be one of the most developed nations in the international arena. Economic prosperity had risen and the country`s GDP was going far ahead of its neighboring countries. It is still experiencing economic and population growth, however, one issue has thrown a hindering block that has avoided the self capability of Chile to become one of the most self fledged nations and that is its failure to meet up its existing growing energy needs. The nation has realized that its population is like an ever hungry beast whose wants are unlimited but there are limited resources to satisfy it. Speaking in terms of non-renewable resources these minerals take millions of years to form and are consumed within a year. Around 2011, around 10 million Chileans were worried because the country had become paralyzed as the population was stuck in darkness due to blackout of resources; furthermore failure to meet the requirements of the population posed a serious threat on the existence of the nation! Trends and developments Chile was the leader of reform in the Latin American region and the seeker of the initial FDI from across the world for its development. At present, Chile has become the third largest recipient of FDI in its region; receiving a large of investment for its energy sector. From 1990 to 2008, Chile received $13 billion in the shape of FDI for developing its energy sector. However, this investment is directed towards the proven technologies rather than to innovations in the renewable energy sector. This shows that Chile, despite being one of the largest recipients of FDI, still lacks the policy to direct it towards the renewable energy sector. IMPORTANCE AND BENEFITS OF DEVELOPING RENEWABLE RESOURCES Energy demand Over depending on imported energy and diversifying of imported resources has grown significantly over the last few years that has provoked the Chilean government to develop certain new renewable resources to feed its countries prolific ideas. Firstly let us consider some facts: In 2008, Chile consumed 56.35 billion Kilowatt-hours of electricity The total primary energy that Chile consumed in 2008 was 1.215 quadrillion Btu Chile has approximately 13,000 MW installed power capacity, which is expected to rise 6% annually Mining The mining in Chile has been increasing over the years. Chile has become the world leader in copper exports. This has resulted in a huge demand for energy resources as well as electricity. In depth analysis show that copper industry alone consumes 11 percent of the total energy resources of the country. Therefore, the country needs to develop renewable sources of energy to sustain the growing mining industry that is pivotal to the national economy. Actual Energy Sources At present, Chile uses coal, gas, oil, bio-fuels and hydropower and electricity trade as the main sources to satisfy its increasing energy demand. Around 80 percent of the main fossil fuels-oil, gas and coal are imported from across the world. Gas and LPG is heavily imported from Argentina. This huge dependence on the imported sources has negatively impacted the Chilean economy and increased the number of power outages. Likewise, the huge import cost has increased the energy prices in Chile by about six times. Similarly, the imports of energy sources have become unreliable and have caused potential damage to copper mining industry. The global world finds it’s riskier to invest in the copper mines with unreliable energy sources. It is predicted that mining industry will come to standstill if its energy demands are not met in near future. Therefore, it is high time for Chile to move towards it huge renewable resources and stabilize its energy demands and supply. ‘Every country that wants to be well-prepared for the next decade needs to have an important part of their energy needs coming from renewable resources,’ said Jose Ignacio Escobar, executive vice-president of the Chilean Association of Renewable Energy (ACERA). It is believed that the renewable sources will be cheap and reliable; that will strengthen the Chilean economy as well as mining industry. TRANSITION TO RENEWABLE RESOURCES Porter’s Diamond Model: Chile’s Potential in Renewable Energy In order to understand the potential of Chile in the field of renewable sources of energy, one can apply the Diamond Model of Michael Porter which believes that competitive advantage can be attained in a region if the factor conditions, demand conditions, industrial structure, related industries and government provide feasible conditions with an element of luck that also plays a key role in the success of an industry or a firm. (Porter 2000) Factor Conditions The factor conditions are the state of all the economic resources including land (physical resources and infrastructure), labor (human resource), capital and entrepreneurial skills (knowledge resources) that will make the conditions more conducive to the industry. In the case of Renewable energy industry of Chile, it is blessed with increased labor force which is skilled and yet demands wages that are not exceedingly high. Moreover, infrastructure is equipped with well developed communication systems, and ports that connect it to the global market via sea, land and air. Chile is among those developed nations whose universities are ranked in high esteem as the country was ranked top in the Latin America for its e-readiness and innovative skills. Chile has abundant and accessible renewable resources. Home to 10 percent of the world’s active volcanoes, Chile’s geothermal energy potential is still not exploited. Wind energy can be harnessed in the area, and the Atacama Desert in northern Chile has excellent conditions for solar energy. But these areas are far from urban centers and connecting them to the electricity grid is expensive. Furthermore, the intermittency of some non renewable resources combined with limited storage technology, necessitates backup fuels. Similarly, a law has been passed by the Chilean government that requires that the 5 percent of the energy sold by electricity companies must come from renewable sources of energy. Demand Conditions The topic has thoroughly discussed the conditions that induce the demand of renewable energy resources. First being the global factor that the fossil fuels are depleting at a very rapid rate. The demand of energy in Chile is high due to the dependency of many important sectors such as mining (copper), wine and fruits that derive the demand of energy. Moreover, Chile has become a centre of attraction for many Foreign Investor, thus with the increasing FDI, the demand is certain to increase. However, the cost of renewable energy sources is not only high but vulnerable to extreme shortage; it is mainly due to Chile’s dependency on Argentina for the fossil fuels. Thus the industry places higher demand to diversify its sources of energy to mitigate this vulnerability. Related and Supporting Industries In the field of renewable resources, the most important industry is the field of science and technology along with the innovative skills of its skilled class. Chile, whose students are considered most innovative of the Latin America, has therefore the potential to achieve competitive advantage in the field of renewable energy. Moreover one cannot ignore the achievements of its industries in the field of copper mining as well as wine which can play a key role in supporting the new industry. Government The government of Chile has played a supportive role in directing the country towards the projects that advocate for the renewable sources of energy. The government has not only ensured a country that is stable, both politically and economically, but, it has also started to attract FDI within Chile through its wise policies. It can also be applauded regarding the government’s gentle policies on the education which has resulted in the up-gradation of the skill-set of general population. Chance Despite the fact that the conditions are conducive for Chile to setup an industry in the field of renewable energy, one cannot deny the impact of variables that are beyond the control; for instance huge recession of energy demand or a natural disaster that may impact the potential of the sector, can occur at any instant on which one has no control. BARRIERS Every country that wants to be well-prepared for the next decade needs to have an important part of their energy needs coming from renewable resources. Chile is famous for its renewable resources like solar power, wind power, hydro energy, biomass energy, geothermal and ocean. But it even needs to invest in improving its renewable resources but there are series of stumbling blocks that have posed technological, social and financial barriers on his development and are causing massive disagreement on the expansion of the hydroelectric industry. But despite this increased momentum and a wide range of renewable resources, the road ahead for renewable energy firms is challenging. Political disruption Public opposition to coal and hydropower projects is strong, and Chile keeps on struggling to take advantage of its renewable energy resources. Against this problem, the government faces the challenge of building broad based support for a long-term energy policy. Obstacles include a consolidated market price-driven energy market, an expansive and rugged topography. Supply must be guaranteed and diversified, prices kept down, and energy needs integrated along with other demands on Chiles limited usable land. In the short term, it aims to limit demand to that which is strictly needed and ensure that the entire population has access to energy. One of the conditions making the transformation difficult is a lack of transmission capacity between remote areas which are most suitable for many renewable projects and densely populated cities. At present the legal obligations for electric utilities to invest in and supply renewable energy sources are lower still. The project requires the construction of dams in an area called Patagonia shared by Argentina and Chile but the construction of these projects could jeopardize the ecosystems. The area does generate higher industrial potential but it is disapproved by the protestors. Investment Foreign Direct Investment (FDI) has played a significant role in developing Chile. However, much of this FDI is directed towards proven energy technologies, and sometimes fails to drive innovation in the renewable energy sector. Innovation in the renewable energy sector, including innovation in finance schemes and energy alliances, can only occur with a smooth triangulation between seed capital, government policy, and a skilled workforce.  The finding of the project requires strong infrastructure, massive labor, perfect information, geothermal exploration and research that have put a financial constraint on the discovery of the resources. The first thing any project requires is immense capital. Chile has though succeeded in attracting investments from the Foreign Direct Investment (FDI) but the uptake in the project is still lacking as the favorable conditions are still uncertain. ADVANTAGES Growing skills However these problems could be overcome because the nation is a prolific economy. Though the idea is costly to implement but the skills within the nation is rising. The labor force is growing as the minimum wage rate is also rising. World Organization Affiliations Chile is a member of several worldwide organizations like The Asia Pacific Economic Corporation (APEC), World Trade Organization (WTO), Organization of Economic Cooperation and Development (ODEC) and many more that supports Chile in attaining sustainable solutions to achieve an attainable goal and also assists it in designing policies. The strong ties with the organizations have helped Chile become accessible in the international arena and make it easier for it to achieve foreign ties and strong foreign partnerships for economic investments. Stable and Transparent Legal Framework for Foreign Investment The stable international policies of Chile have designed a clear legal framework that is characterized by its non- discriminatory and non-discretionary rules. This has boosted up its economic potential that has made the foreign investment flexible enough to contribute because it recognizes the long term potential. Government Agencies Responsible for NCRE Several government agencies also support the innovative wide scale development of Chile where their main focus is primarily to pool in investments to provide resources for the developers to sustain renewable growth. SOLUTIONS The Valley of Death or Chile-con Valley The Chilean government has done very well to encourage FDI in the energy industry. Yet the uptake in large-scale renewable energy projects is still lacking, despite the country having promising geographical conditions for the Development of Renewable Energies. Without efficient function and lack of capital knowledge and ill planning of utilization of resources the Valley of Death looms over Chilecon Valley Corporate Connections Chile is a nation that has planned and designed its economic potential that can create a monopoly in the globe; however the nation is still in its infancy stage. Thought the investors are willing to pool in but the core entrepreneur skill is still absent to encourage the industry work in addition to achieve the financial benefits of the sustained energy. Knowledge Capital The government also needs to realize the art of effectively utilizing the resources raising the investors is no big deal but the way these financial input is utilized that matters. The utilization of resources also depends upon the factor conditions and every nation will formulate those policies for which the particular set of factor conditions is optimal. They can improve their products or services through innovation, quality improvement, and so on. Even though government can impose policy on each of the four factors, it still has limited control over their performance, to improve the relative competitive advantage of the nation. The Chilean government still lacks knowledge in utilization of venture capital. Specific Domains Such oversights continue to impede the growth of the Chilean techno pole and consequently, renewable energy innovation. CONCLUSION In order to reach to some effective conclusion it is highly recommended that Chile should amalgamate its energy project approval process to boost up financial investment in the renewable sources of energy sector. Chile should involve and increase nationalization and prioritize public engagement in the energy sector in return for a good substitute in terms of cost coverage. It should upgrade and expand its energy infrastructure, particularly its transmission system. It should set and prioritize efficiency measures to help attain demands, lower emissions and decrease costs. Chile should take the initiative and seek to strengthen energy interconnection with its neighbors so that it can take advantage of regional energy sources and economies of scale. Similarly, it must move towards the renewable sources of energy as keenly supported by factor and demand conditions. Therefore, the future of Chilean economy must be based on sustainable and renewable sources of energy. BIBLIOGRAPHY Journals Porter, M. (2000). Location, Competition, and Economic Development: Local Clusters in a Global Economy. Economic Development Quarterly, 14 (15), 15-34 Porter, M. (2003). The Economic Performance of Regions. Regional Studies, 37 (6), 549-578 Websites Bennett, C. (2009) http://www.renewableenergyfocus.com/view/1802/renewable-energy-rising-in-chile/ CONICYT. National Commission for Scientific and Technological Research. http://www.conicyt.cl/wp- content/uploads/2012/07/Brochure-Institucional-2011-Ingl%C3%A9s.pdf   Doing Business in Chile (KPMG) http://condor.dgf.uchile.cl/EnergiaRenovable/Chile/ FDI Intelligence. (2012). 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