In 2007, Chile was as dependent on natural gas imported from Argentina as Germany is today on natural gas from Russia. But faced with a sudden supply crisis, the Chilean government managed to mitigate the economic damage and lay the groundwork for the country’s switch to renewable energy.
LONDON/SANTIAGO – In mid-2007, while serving as ministers in the Chilean government, we received the kind of phone call now feared by all German politicians and businessmen. We were told that imports of natural gas from neighboring Argentina, Chile’s only supplier, would be cut off overnight. Like Germany today, Chile relied overwhelmingly on imported gas to generate electricity, power industrial plants, and heat homes. Therefore, the potential impact was devastating, but thanks to a battery of emergency measures, Chile came out ahead.
The episode holds useful lessons for Germany and other European countries that may soon stop receiving Russian gas, either because they oppose Russian aggression or because the Kremlin decides to send its gas elsewhere.
In the 2000s, Chile considered the use of imported natural gas as the first stage of a transition to a green economy. Following a 1995 deal with Argentina, Chilean companies and government agencies spent tens of billions of dollars to restructure the economy to run on natural gas instead of dirty power sources like coal and diesel. . These investments resulted in the construction of seven gas pipelines across the Andes and gas distribution infrastructure in most major cities. Soon after, gas-fired combined cycle power plants sprang up across the country.
All went well until politically motivated lawmakers in Argentina allowed the domestic price of natural gas to fall below inflation. The consequences were predictable: Argentine oil and gas companies cut investment and supply, and consumption by factories and homes soared. For a time it was said that gas was so cheap that people would open windows instead of turning down the thermostat when a room overheated.
But Argentina soon found itself without enough gas to meet local needs, prompting the Peronist government to do what Peronist governments do: renege on an agreement. Shipments from Argentina had been oscillating since 2004, the year in which internal supply difficulties began. But by mid-2007, more than 90% of the agreed deliveries simply stopped flowing.
Chile found itself in a perfect storm. A drought had left its reservoirs empty, so it couldn’t harness hydropower, and oil was trading at about $140 a barrel, so burning diesel and other petroleum products to power factories and heat homes was unusually expensive. . And this was also the first year of the global financial crisis, which meant that Chilean exports to North America and Europe would soon take a hit.
The Chilean government went into full crisis management mode. The obvious first step was to end Chile’s dependence on Argentine gas. We accelerated the construction of a liquefied natural gas terminal and began the construction of a second facility. LNG storage capacity could not be built overnight (the first Chilean facility would not be completed until 2009), but once the vaporizers were installed, regasification could continue while ships provided temporary storage.
We are also accelerating the expansion of solar and wind power. When the Argentine gas shock hit, what had been seen as an opportunity to be seized in the future suddenly became an urgent imperative. The government passed the first law in Latin America regulating renewable energy and began providing risk mitigation guarantees to new private providers so that smaller hydro, solar and wind projects could come online.
But because not all new energy supplies could be green, the government also reluctantly pushed for some industrial plants and power generators to convert to diesel. This was dirty and expensive, but was seen as acceptable as a short-term measure to close the supply gap while new hydro, solar and wind facilities were built.
Even then, the new sources of supply were not enough to keep total energy consumption at pre-crisis levels, so the government launched a national energy efficiency campaign. It distributed low-consumption light bulbs, provided funds to improve the insulation of homes, extended summer hours and worked with electric companies to grant temporary subsidies to companies that reduced consumption. Total electricity use fell 10% over the course of 2008.
Crucially, the Chilean government was able to resist political pressure to cap the domestic price of electricity and oil. Trying to reduce consumption by keeping prices artificially low would have made no sense. To offset the impact of higher energy prices on household budgets, we provide poor households with cash transfers and subsidies roughly equivalent in value to their additional energy expenses. Because the Chilean public sector had very low public debt and massive dollar reserves, these additional expenses did not imply any macroeconomic or financial dislocation.
Apart from its greater economic power, Germany today has three advantages that Chile lacked. It may rely on LNG facilities in neighboring countries, such as the Netherlands. You can temporarily turn to coal and nuclear power plants that have recently been closed or listed for closure. And it can import power if its neighbors have a surplus, because its power grid is connected to the rest of Europe.
There may be life without Russian gas, but it will not be free. During the Argentine gas cut, we estimate that, even with all successful mitigation measures, Chilean production growth fell significantly. Germany could plausibly face similar costs. But this price may well be worth paying if the reward is freedom for Ukraine from Russian oppression and freedom for Europe from Russian energy blackmail.
There is also another potential reward. Chile’s emergency measures helped boost solar and wind generation, making the country a world leader in clean energy, with 43.5% of its power in 2021 generated by renewables. Additionally, LNG terminals have had lasting value, allowing Chile, a country that does not produce natural gas, to export gas to Argentina through the same pipelines that were once used to bring Argentine gas to Chile.
Since Russia’s invasion of Ukraine, EU gas purchases have provided the Kremlin with an additional $37 billion to finance its aggression. The case for stopping these purchases is primarily a moral one.
But Europeans need not “freeze for freedom”, as former German President Joachim Gauck recently put it. Instead, they can do the right thing and position their economies for a greener, more resilient future. Chile has shown how.
The authors
Andrés Velasco, a former Chilean presidential candidate and finance minister, is Dean of the School of Public Policy at the London School of Economics and Political Science.
Marcelo Tokman is a former Minister of Energy of Chile.
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