Q&A Series: Donny Holaschutz Speaks on Renewable Integration in the Power Supply across Chile & Latin America

Renewable energy expert and consultant Donny Holaschutz has worked with Fortune 500 companies, NASA and the U.S. Department of Energy among others, helping to lead innovations in energy and sustainability projects for over a decade across North and South America. He holds graduate degrees in Aerospace Engineering from UT Austin and from MIT’s Engineering School and Sloan School of Management.  Mr. Holaschutz co-founded inodú, a company developing solutions and providing consulting services to improve the energy value chains in Latin America.  While at inodú, Donny has helped policy makers and companies find opportunities to integrate renewable energy for energy storage and flexible generation capacity.

 

Michael Levitin: Chile leads South America in integrating renewables into the power supply. So, what have been some important factors which have led to their rapid integration of renewable energy? Are there other regions that have experienced similar situations?

Donny Holaschutz: One thing that has helped Chile is it established an environment that truly attracts investment. Recently, Bloomberg New Energy Finance ranked Chile as the number one place to invest in renewable energy out of 103 developing countries in the world.

Proper transmission infrastructure planning is an important ingredient to integrate renewable energy.  A place where this has happened is Texas, which is a pioneer in using transmission planning as a mechanism to incentivize renewable energy integration. Texas today is among the U.S. states that have integrated the most renewable energy, and they lead in wind integration. In part, they did this by developing a transmission system and defining Competitive Renewable Energy Zones – areas identified as having high renewable energy potential – and then they made big investments to develop transmission to those zones. However, this policy has not been enough to completely avoid curtailment of renewable energy. Chile has faced similar challenges, even though it has significantly increased its transmission capacity over the last couple of years.

 

Levitin: Can you clarify the role of transmission in integrating renewable energy? Are we going to have to think of other elements moving into the future?

Holaschutz: There is a “10-2 Year Rule.” Essentially it can take up to ten years to develop a transmission project (it’s hard to permit); but it can take up to two years to build any type of wind or solar project. So, there’s a natural dynamic that takes place as soon as these transmission projects are built, developers see the transmission lines and start developing renewable projects in high resource areas where transmission capacity is available. Very rapidly the lines can become saturated. Even if you build very large transmission infrastructure, this creates challenges.

Thinking about the future, regulators, RTOs, and developers have to recognize there’s a paradigm shift happening in technology, and adjust their paths moving forward. Energy storage is becoming much, much cheaper, it can be installed with the same speed as renewable energy projects (two year or less) and is becoming an alternative to developing transmission capacity to continue the integration of renewable energy. But energy storage is energy storage, it is not a traditional component of the transmission system, it can be installed in front of the meter to provide services to the wholesale market, installed in conjunction with a renewable energy asset or even behind the commercial and industrial client’s meter.

When installed outside the traditional definition of the transmission segment, it can still provide services to the transmission system by, for example, helping defer the development of transmission infrastructure. So going into the future, you have to think about how to use energy storage across all segments and the specific services energy storage can provide to function as a transmission asset.

At inodú, we recently published a report for the GIZ [German Corporation for International Cooperation, Deutsche Gesellschaft für Internationale Zusammenarbei] where we looked at some of the challenges to address flexibility needs in the Chilean electricity market and some practices to define the role of storage in the market.  The report was generated to support a broader effort of how to incorporate flexibility into the system in order to continue to integrate renewable energy an accelerated rate. Defining such regulatory changes was identified as a priority in Chiles’s 2018-2022 Energy Road Map.

Similar discussions have been present in the United States through their Federal Energy Regulatory Commission [“FERC”] and other regulatory bodies. For example, in the U.S., FERC published Order 841 to amend regulations in the Federal Power Act removing barriers in energy storage systems in the capacity, energy and ancillary services markets. The FERC has also made definitions on how energy storage can be used as a transmission asset. Defining the role of storage across all segments is an important step which will support the integration of renewable energy in the future.

 

Levitin: What are some other strategies Chile and countries across Latin America are employing to boost renewable energy investment and production?

Holaschutz: A lot of governments have recognized the importance of power purchase agreements (PPA) and how to use long-term contracts to incentivize the development of renewable energy projects. For example, in Chile’s publicly regulated PPA auctions, where distribution companies buy energy for regulated clients, the establishment of the block scheme in the 2013/03 (second call) made it easier for renewable energy generators to participate. The public auctions encouraged a lot of development and construction projects that are driving the integration of renewables into the market.

Many countries in Latin America have taken similar approaches. Mexico, after its energy reform which was formalized with the passing of a new electricity law in 2014, created an opportunity through PPA auctions for renewable energy developers. In the last three auctions in Mexico, wind and solar developers won most of the contracts, and through those PPAs the country is creating mechanisms to rapidly integrate renewables.

Yet another example is Argentina, where renewable developers participated in PPA auctions which were quite successful. Colombia recently started down this path, with an auction currently being conducted by the UPME – in this auction, only non-conventional renewable energy generation projects can participate.

Across Latin America, renewable energy integration will be positively impacted by access from renewable energy developers to these public PPA auctions.

 

Levitin: Recently three of Chile’s largest mining companies signed long-term PPAs to supply themselves with 100% renewable energy. How much is the message of zero-emissions electricity catching on in both corporate and government sectors in Latin America?

Holaschutz: By observing the results of the public PPA auctions, large commercial and industrial (C&I) clients are noticing how cost effective renewable energy is – plus they’re also feeling more pressure from investors to go into more sustainable practices, so a lot of companies that operate across the region are putting out private PPA tenders where they are demanding 100% renewable energy.

The mining companies in Chile have done this because it makes economic sense. It also adds to their sustainability goals; they’re able to satisfy some of the demands of their investors who care about these sustainable practices. If the trend continues and most C&I clients start demanding this in Chile, it means we’re at a huge renewable energy deficit because they’re demanding the system provide 100% renewable energy but the system as it stands today is only producing (on an average monthly basis) 13% with wind and solar. So, if this trend continues there’s going to a huge need for renewable development and investment.

A main reason why renewable energy makes a lot of economic sense in Chile, where is the variable cost of producing energy through coal or natural gas is much higher than the levelized cost of solar in many regions.  Hence, installing solar is an energy-efficiency measure—it’s much cheaper to be supplied by a solar energy project than to burn coal to satisfy your demand, and these trends are becoming more common across Latin America.  C&I customers are looking at these economics and demanding cheaper renewable energy.

 

Levitin: If renewable energy is integrated at a rapid rate, can the required flexibility come from natural gas generation or hydroelectric generation? Let’s start with hydropower, a key source of energy across many Latin American nations with tremendous water resources. How can flexibility be incorporated into energy economies that are heavily dependent on hydro?

Holaschutz: Hydro projects weren’t built originally to supply flexibility to the grid; they were built to supply energy. But dams have storage capacity, so those hydro projects that are already built can provide a lot of flexibility to the grid. Countries like Brazil, Colombia, Chile, Peru, Costa Rica already have a significant amount of hydro capacity installed in their systems which can provide this flexibility. The challenge these markets will face as they integrate more renewable energy is: how are you going to pay for flexibility (beyond just supplying energy)?

One of the big issues facing hydro in the region is the changing climate. Due to reduced snowpack and rainfall, there has been a significant reduction of hydro potential. In Chile, for example, if one looks over the past 50+ previous hydrological years, the previous 10 years have consistently been significantly below the average observed from the previous half century. Dryer hydrological conditions is something Colombia and Brazil are experiencing as well, and this trend is important because these are the sources that traditionally provided energy and have the potential to provide flexibility into the future. Dryer hydrological conditions will create incentives for new capacity that can provide that flexibility if these trends continue.

 

Levitin: Lots of cheap natural gas is starting to come from Argentina, making it a great option for neighboring economies like Chile. What could be the role of natural gas in providing flexibility to the power market in the future?

Holaschutz: Flexible gas technologies allow you to essentially complement the integration of renewable energy. These generators are flexible because they can start and ramp up quite rapidly, which allows the system to better deal with the variability and uncertainty faced when renewable energy is integrated. The question is natural gas’ sustainability over the long term and whether it will be available and (if so) at what cost.

Countries such as Chile – which are affected by Argentina’s shale gas production in Vaca Muerta – are looking closely at this as an opportunity not only to supply the existing gas generation capacity, but also to evaluate investments in flexible generators. Looking at gas exports from Argentina to Chile, generators with existing assets today are signing contracts priced as low as $3 and $4 per MMBTU. So, while there’s uncertainty around how long [cheap gas] will remain in the future, the low prices are creating a short-term market signal that is prompting actors to think about how to use this cheaper natural gas.

 

Levitin: Finally, how do you see Chile and its Latin American neighbors competing, and leading, on the path to 100% renewables?

Countries in Latin America are certainly looking at what other countries are doing. The long-term commitments that governments are making provide signals to the market for when it is acceptable to reach 100% renewable energy. Renewable energy integration depends a lot on regulation, opportunities and costs in the markets, but long-term goals defined by governments have an effect in terms of providing direction.

Recently, Chile announced it wanted to reach carbon neutrality by 2050 and made commitments with other countries that participated in the most recent G7 summit. It set a direction and an example that other countries are going to look at across Latin America. You also have countries like Costa Rica that are committed to reaching 100% carbon neutrality by 2030. There’s an effect of, “This other country is doing it, so I should think about doing it, as well.” I think countries are looking at these examples and as they make more aggressive commitments moving forward, it’s going to have an impact on the region. It is important to consider that in Costa Rica 98.6% of its energy in 2018 came from renewable sources (if you factor in hydropower), so their path to 100% is easier than Chile.