Chile Trade Overview – Renewable energy as an economic development strategy

Chile has intelligently pursued development in solar energy technology, a technology that has some of the greatest knowledge spillovers towards external fields outside of power generation. Such a move, aids Chile in efficiently transitioning away from being heavily dependent upon commodity exports, and towards developing its technological capabilities to participate in more sophisticated activities.

Chile’s push to be a renewable leader

Recent years have seen Chile rapidly scale up its investment in renewable technologies, particularly so in solar, enabling it to become one of the region’s renewable leaders. The nation’s motivations behind the move are diverse. Having experienced threats to its energy security first-hand in the early 2000s when Argentina abruptly cut off natural gas supplies during the Argentine energy crisis, domestic production of energy has been high on the agenda for some time. Since then, the nation has rapidly ramped up development, ending 2018 with 20.8% of its power sourced from renewable energy. What’s been the most interesting with Chile’s renewable investments, however, is the manner that the nation has aggressively pursued renewable investment primarily as a development strategy to help advance the productive capabilities of the nation.

The strategy has seen the country consistently beat previously set energy targets such as the 2013 target of having renewables account for 20% of the energy mix by 2024, a target that was beat six years early in 2018. Similarly, Chile’s “National Energy Policy 2050” in 2015 set a target for renewables to account for 60% of electricity by 2035, and 70% by 2050. Last year, the Chilean government announced a dramatic change in plans with the 70% goal now being for 2030. A major portion of this growth in renewables will continue to come from wind and solar, with Bloomberg NEF in its joint report with energy operator Acciona predicting that the current 13% combined share in the power mix will surge to 40% by 2030. The country’s growth in the two areas has been massive, with wind generation growing by 153%, and solar growing by an astounding 1016% between 2014 and 2018. 

The Middle-Income Trap: The current plight

Though Chile is typically classed as a high-income country based on its high GDP per capita, it suffers from the issues of having a primarily resource-based economy with low levels of innovation and thus suffers from the “middle-income trap”. The middle-income trap is characterised by the situation where countries have developed enough so that wages within the country are too high to compete in non-advanced labour-intensive businesses. At the same time, such countries do not have high enough productive capabilities to compete on higher value-added activities such as the production of technological goods. It’s a common situation to find oneself in as countries like Chile can attribute much of their current development to their fast growth in previous years from commodity booms. However, such growth can only be sustained for so long as in order to develop further, production must shift towards more sophisticated activities. It’s only through reorienting the economy towards a greater percentage of technologically advanced and productive activities that a country can escape the trap as the Four Asian Tigers did.

Solar as a Saviour

Chile’s natural advantages in the production of solar energy make it the perfect policy choice for advancing development. Northern Chile is home to the Atacama Desert which boasts the highest solar irradiance of any place on Earth thereby giving the country the opportunity to benefit from cheap solar electricity. But what makes solar energy production truly valuable for the Chilean economy is that it involves high value-added activities which are in direct contrast to the nation’s commodity-based activities. The value chain for solar energy production runs much further than Chile’s extractive industries as primary materials must be put towards producing components such as steam generators and solar cells, followed by the actual development of plants. Overall, the solar value chain involves an immense amount of operations, ranging from the primary materials, to the manufacturing of components, to system installation and maintenance. This presents opportunities for learning amongst the working population through participating in a value chain consisting of sophisticated activities that can all be done locally. This is especially important as a common misconception about Chile is that there’s a lack of qualified workers, believing that low innovation stems primarily from an undereducated population. The reality is that countries such as Chile that have rapidly increased rates of tertiary education have been shown to suffer more from skill underutilisation than skill gaps as the creation of skilled jobs hasn’t been as rapid.

Solar energy is further fantastic in this regard as it has a widespread benefit upon the general technological capabilities of a nation. Knowledge created in the development of solar technologies has been found to benefit even technologies unrelated to power-generation. A study by Joëlle Noailly and Victoria Shestalova showed that solar technologies were frequently cited in patent applications from across multiple external industries, particularly in the spheres of semiconductors, thermal processes, and apparatus and civil engineering, sectors key to the advancement of a nation’s productive capabilities.

Sectors that spillover make funds stretch

Overall, Chile’s choice of renewable energy as a vehicle to propel economic development was an ideal choice. It combines the natural competitive advantage that the nation has, with a sector choice that has been shown to have significant technological spill over to multiple industries. The concept of technological spillover is key in the development discourse, as naturally it isn’t possible to have enough funds to advance every single industry simultaneously. It’s for this reason that governments attempting to upgrade their economy ought to direct focus towards areas that have a knock-on effect on other sectors, allowing for widespread development for a fraction of the price.