The future is now: Chile's long-term energy expansion strategy has global financiers and investors hopping southbound planes.

Chile's economic growth is expected to post more than 5% this year, a rate expected to stay steady or increase in the coming years. Accordingly, the government is moving to fix one of its main stumbling blocks: foreign energy supply. Instead of waiting for a crisis to start looking for answers, the Southern Cone country is bringing in private capital now to satisfy demand forecast through 2024.

The alarm bells first went off in 2004, when Argentine authorities decided to make domestic gas supply a priority, cutting back on gas it had been sending to combined-cycle electricity plants across the border. Chile had been enjoying cheap energy, thanks to Argentina, since 1997. Regulated power prices paid by distributors to the generators fluctuated between US$20 and $30 a megawatt-hour from that year until 2004, but by the following year supply fell and prices rose to more than $40 a megawatt-hour.

Facing a scenario of scarcity, Chilean politicians decided in 2005 to legislate incentives for foreign investors, setting up in the process an international auction system. The program obliges electricity distributors to establish long-term contracts that honor future power needs for their clients for at least three years in advance. Today, the price of energy is set by those auctions. The government hopes the system will bring in generation investments on the order of 300,000 gigawatt-hours, valued at $10 billion, a level of supply that would support the country's energy needs from 2010 to 2024.

In October of last year the first block was bid out, after a presentation of the system to generators, investors and financiers in New York and Paris, held in September. Chile's President Michelle Bachelet led the New York meeting, in part to make clear the priority the country places on the subject in terms of its strategic importance.

Both distributors and the government were happy with the results of the first auction. "The average price for electricity at the close of the first bidding, which will be in force beginning in 2010, was $53 per megawatt-hour, considering that the highest theoretical price companies could have offered was $62 per megawatt-hour," says Rodrigo Castillo, executive director of Empresas Electricas, a trade group for power distributors and transmission companies in Chile.

Although the contracts were awarded to generating companies already in Chile, the next block to be auctioned in July, for contracts through 2024, will attract international bidders. "Senior executives from [foreign] companies of the first rank have come by and at the New York meeting we had more attendees than we had expected," Castillo says.

Even more important, according to Castillo, than new providers is the signal sent by the prices set by the auctions. "The sole fact that the companies in Chile know that major global companies are looking at these bids has created a competitive effect," Castillo says. In addition to energy companies, investment funds and many banks have been looking to invest in the sector, he says. "They've taken the generators aside and said, 'I'll loan you money to go get this business,'" Castillo says.

Advantages. "We see a very active market coming up and a lot of opportunities to do business," says Pablo Massera, energy area manager for U.K. global bank HSBC in Chile. "The current regulatory framework for the electricity system guarantees projects a certain stability in terms of cash flow. This alone makes them profitable."

Electricity demand in Chile has grown on average by 6% to 7%, suggesting a need calculated by business leaders and financiers to be 700 additional megawatt-hours per year. Meeting that demand would require investments on the order of up to $1 billion a year. Along with these factors, it would also seem to be an ideal time to be seeking financing. "There is a hunger among financiers for these kinds of projects. Even more so considering the environment of high global liquidity, where you have exceptionally low interest rates and long repayment terms," says Francisco Cuesta, managing director of HSBC in Santiago.

The favorable environment, along with the opportunity to sell energy long-term and higher prices for generation, convinced Pacific Hydro, an Australian generator that focuses on renewable energy, to increase its presence in Chile. It plans to invest $1 billion in the Alto Cachapoal basin, in central Chile. (A "passive" hydroelectric plant needs no dam.) "Our idea is to develop five passive hydroelectric plants, with an installed capacity of 650 megawatts," says Jose Antonio Valdes, general manager of Pacific Hydro Chile.

Work will begin in 2008, and the plants should be operating by 2014. By that year, Alto Cachapoal would contribute 8% of the energy on the country's main electrical grid, making it the No. 4 provider to the system. "We will be a medium-sized presence, but our target is to be the renewable-energy leader in Chile," Valdes says.

To achieve this goal, the company is beginning work on a wind-generation project on Chiloe Island in southern Chile, and it also expects to develop geothermal projects. But Pacific Hydro wants more. The positive business outlook in Chile and the quality of the human capital led the Australian company to decide to use the country as the platform for its investments in Latin America. Its next objective is Brazil. "We have a four-year plan to produce up to 300 megawatts of wind energy in Natal," says Valdes. That would mean an investment of $600 million.

Since Chile is opening the doors to various sources of energy, some say that the country should also seriously study the idea of building nuclear plants, as have other countries in the region, including Argentina and Brazil. "Several domestic generators have demonstrated their interest in the nuclear option and there are foreign firms that have formally offered to provide nuclear technology, including operational technology," says government consultant Julio Vergara.

"Nuclear plants are, along with renewable sources, the lowest external cost choices," says Vergara. This is because nuclear plants generate large amount of power on very little combustible matter. "That's what makes it possible to confine the reaction through the design of the plant, with the appropriate technology," he says.

EDUARDO CORONADO, SANTIAGO