Chile's new carbon tax set to make fossil fuels uncompetitive

ONES TO WATCH | Major utilities will be hit hardest as government earns $100m a year from levy

Chile introduced the first carbon tax in South America on 1 January, charging power generators and other large polluters $5 per tonne of CO2 equivalent — a move that is expected to give a significant boost to the already fast-growing renewables sector.

In the sunny, windy country, renewables projects have recently been offering historically low prices at national technology-agnostic tenders, winning the lion’s share of capacity up for grabs.

The carbon tax is expected to increase wind and solar’s advantage, making it almost impossible for new-build fossil-fuel-fired generation to compete. This hypothesis will first be tested in a 3.8-terawatt-hour tender that is due to be concluded by December.

The carbon tax will be paid by 85 companies that generate more than 50MW of fossil-fuel-fired power, with the biggest utilities — including the local units of AES, Enel and Engie — set to be the hardest hit. AES Gener, for example, has about 2.5GW of fossil-fuel generation — roughly 15% of the country’s installed capacity.

Chile seen adding 1.5GW of new renewables in 2017

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A recent study by the Pontifical Catholic University of Chile showed that the tax would raise power prices by about $2/MWh. And with fossil-fuel generation still providing almost 90% of Chile’s electricity, the university warns that the carbon tax could reduce GDP by 0.4% by 2030.

The government wants to increase the share of renewables in its electricity mix from just over 10% today to 20% by 2025 through annual tenders, and expects the carbon tax to reduce CO emissions by three million tonnes per year by 2020. It is also expected to raise $100m a year, which will be spent on improving Chile’s education system.

Chile is due to hold a tender this year for the lease of 7,900 hectares of government land for the construction of new wind farms in the northern province of Antofagasta.

The leases will be able to support an estimated 500MW of capacity, and the minimum project size will be 100MW.

ONES TO WATCH is Recharge’s exclusive series of insights into the trends, policies, companies and individuals that will shape wind and solar in 2017. The full series can be read online here

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