IEEE Power & Energy Magazine - November/December 2014 - 38

States at around US$4-6/million Btu, the value at the end
of the liquefaction-transport-regasification chain would be
between US$9 and US$14 (see Figure 5). Shale gas from
the United States is seen in Chile as a promising alternative for gas supply in the long term, but Henry Hub gas
price forecasts generally point to a gradual increase in the
price level. The considerable uncertainty regarding gas
prices adds to the risk that would accompany any eventual
decision in this direction. In contrast, coal price forecasts
tend to be more stable, given the abundant coal resources
distributed worldwide.
Besides the cost competiveness of natural gas combined-cycle plants compared with coal-fired plants and
hydro projects, there are other important issues that affect
the integration of the gas and electricity markets. It is well
established that electricity markets require capital-intensive
investments with long payback periods, sometimes extending to more than 20 years. Long-term PPAs are required to
reduce the spot market volatility. This results in a stable cash
flow that would allow financing structures such as project
finance, being the most common nonrecourse loans. This
financing structure is becoming increasingly common, especially in projects developed by newcomers to the Chilean
market, where the assets and cash flows produced are used to
secure the loan. Under this financing structure, the electric
energy taker needs to subscribe to a forward contract that
usually matches the duration of the financing loan.
This structure is common regardless of whether the
plant's source of energy is coal, natural gas, or hydro.
There is a substantial difference between coal and natural
gas, however. Coal can be supplied from a great number of
providers around the world and stored at the power plant
facility at relatively low cost, discounted for financial costs.

Coal supply contracts can therefore have a shorter duration, can be renegotiated several times over the lifetime of a
power plant, and can incorporate flexibility due to the coal
storage available at the power plant.
The integration of natural gas with electricity generation
marries two capital-intensive industries that often use the
same type of financing structure; both industries therefore
require long-term gas supply contracts to finance both the
liquefaction and regasification infrastructure. And given the
geographical location of Chile, all LNG shipments are committed from the supplier with little or no alternative market
for the gas. To summarize, efficient LNG supply to Chile is
based on long-term supply contracts with important take-orpay clauses. The possibility of acquiring LNG in the shortterm spot market exists but the resource must be purchased
at a high price.
Electricity supply based on LNG requires strong linkages
between the two industries that include a number of participants: the electricity energy taker; the power plant; the
land transporter of the gas; the providers of regasification
and gas storage; the LNG maritime transporter; the liquefaction owner; and the producer of the gas. This structure has
become very relevant for supply based on shale gas from the
United States, with whom Chile has a free-trade agreement
that would facilitate the potential importation of gas.
In particular, to develop the required infrastructure there
must be a close match with regard to several aspects of the
supply chain. These include quantity, take-or-pay provisions, contract duration, and creditworthiness, among other
elements. This situation has become a major barrier for
new projects because the only way to make such a supply
chain possible is with a long-term purchase agreement that
meets all of the required conditions. It must also be timely

Production
Shale Gas, Tight Gas
Conventional Gas
US$4-6/MMBtu
Liquefaction
US$3/MMBtu

s
Ga sin
a
B
Maritime Transport
US$1-2/MMBtu

Regasification and Transport
in Chile

US$1-3/MMBtu

Consumption

Generator

Total Cost Generator US$9-14/MMBtu

figure 5. Supply chain for natural gas to Chile.
38

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