Decarbonization Tradeoffs: a Dynamic General Equilibrium Modeling

sustainability

Article Decarbonization Tradeoﬀs: A Dynamic General Equilibrium Modeling Analysis for the Chilean Power Sector

Shahriyar Nasirov * , Raúl O’Ryan and Héctor Osorio Facultad de Ingeniería y Ciencias, Universidad Adolfo Ibáñez, Avenida Diagonal Las Torres 2640, 7941169 Peñalolén, Santiago, Chile; [email protected] (R.O.); [email protected] (H.O.) * Correspondence: [email protected]

Received: 14 September 2020; Accepted: 2 October 2020; Published: 7 October 2020

Abstract: Medium size developing countries like Chile that commit to decarbonization goals need to carefully assess the trade-offs associated to their intensity and timing, since most of the technologies required will be absorbed, not produced, by these countries. A rapid expansion of renewables in the Chilean energy matrix, mostly thanks to exceptional solar and wind resources, combined with a rapid decrease in the cost of renewable energy technologies, intensified current policy debates to reduce the role of coal, which is the largest source of CO2 emissions in the generation mix. Recently, the main generation companies in Chile made a voluntary commitment to not invest in new coal projects that do not include carbon capture and storage systems. In addition, the Chilean government announced its plans to phase out coal plants completely by 2040. In this context, the aim of this research is to study the economy-wide and emission reduction impacts of different decarbonization paths in the Chilean power sector. For this purpose, we consider dynamic simulations using a new energy-oriented version of the Computable General Equilibrium Model (CGE)- General Equilibrium Model for the Chilean Economy (ECOGEM)-Chile which is soft linked to the bottom-up engineering energy model. The results show the major impacts under both the business as usual (BAU) scenario and the coal phase-out scenario. Additionally, the study discusses to what extent the ambitious decarbonization goals of the Chilean government are coherent with the current technological limitations.

Keywords: dynamic CGE models; decarbonization; Chile; power sector

1. Introduction

The Paris Agreement pushes countries to propose increasing ambitions related to CO2 emission mitigation. Developing countries must carefully assess these commitments ex-ante, especially those relating to the energy sector, since the resources required may compete with other development goals defined in the 2030 Agenda for Sustainable Development with importance of the energy sector in emissions of developing countries) [1]. A complete study of the links between the 169 declared sustainable development goals (SDGs) and actions relating to SDG7—ensure access to affordable, reliable, sustainable, and modern energy for all—identifies 65 trade-offs, nearly all related “to the tension between the need for rapid action to address key issues for human well-being (for example, poverty eradication, access to clean water, food, and modern energy, and so on), and the careful planning needed to achieve efficient energy systems with a high integration of renewable energy” [2]. Many other studies [3–5] conclude that there is a need to better connect and extend the evidence on trade-offs and synergies of the relation between renewable energy development and advancing towards sustainable development. There are multiple modelling approaches that allow for the systematic assessment of the trade-offs between renewable energy development and other societal goals. Horschig et al. [6] reviews the

Sustainability 2020, 12, 8248; doi:10.3390/su12198248 www.mdpi.com/journal/sustainability Sustainability 2020, 12, 8248 2 of 19 strengths and weaknesses of three quantitative (ex-ante), three qualitative (ex-post), and more recent hybrid approaches. Ex-ante evaluations include input-Output (I/O) modeling, computable general equilibrium modeling, and system dynamics modeling, models that are more useful for policy evaluations because they are inter-sectoral and distinguish different options of production and consumption [7]. They conclude that CGE modeling has its strengths in economy-related policy evaluation issues—that relate to different SDGs—and for analyzing long term effects, but it struggles with a usually low level of technical detail. Besides, over the last decade there are growing number of literatures using CGE models to examine the impact of renewable energy development [8–11]. To overcome in part the lack of technological detail, hybrid modelling approaches that combine different models are now currently being used, in particular technology rich “bottom-up energy systems models” or engineering models together with “top-down” CGE models. The literature distinguishes in this case between hard and soft linking of models [12–14]. Usually, under soft linking, the information transfer between the models is directly controlled by the user, whereas in a hard-link approach integration is carried out without any user control. In a recent study, Delzeti et al. [15] distinguish between one-way linkage, in which outputs from one model (i.e., the engineering model) are used as exogenous parameters or variables in the other model (i.e., the CGE model), and a two-way linkage, that considers the feedback between models to obtain better convergence of similar variables. After a review of the literature, they propose that one-way linking is sufficient if the focus is on an economy wide picture based on a given pathway/constraints. In this context, one-way linkage seems to be an adequate approach to examine different decarbonization paths for the energy sector and the impact on some relevant SDG variables. Over the past few years, the Chilean power sector has experienced rapid changes with the extraordinary growth of Non-Conventional Renewable Energy Sources (NCREs) in the energy matrix. The share of NCREs in the total installed energy capacity increased from only 5% in 2014 to 23% by May 2020. An accumulative investment in large-scale renewable energy projects amounted to $14.8 billion between 2010–2019 [16], making the country one of the most attractive clean energy markets in the region. This has been possible thanks to the country’s exceptional resources, the rapid reduction of costs of renewable energy technologies and coherent policy frameworks. Chile ranked second in the Climatescope survey in 2018 [17], thanks to its overall attractiveness for foreign investment, solid public policies on clean energy and a proven track record of overall economic stability. As of 2019, NCRE projects with environmental approval accounted for 33 GW, which is even higher than the total current installed capacity of the power sector [18]. This shows a promising prospective for these technologies in the country’s future energy matrix. Increasingly ambitious targets for renewable energy combined with rapidly falling technology prices could result in record installations of these technologies in the near future. The promising future of renewables encouraged the government to expand its efforts to decarbonize the power sector by phasing out its fossil-fuel infrastructure. In terms of overall greenhouse gas (GHG) emissions, 78% of CO2 emissions in Chile comes from the energy sector, where the power sector is the main contributor with 41.5%. For this reason, the power sector remains the main policy focus for the implementation and compliance of the NDC in the rapid decarbonization. In particular, coal-fired power plants have been considered to have one of the largest potentials, as this sector emits the largest share of emissions. In mid-2019, the government announced its plans to close 8 (out of 28) older coal-fired power plants by 2024, and the rest by 2040. Moreover, the government has adopted recent ambitious targets in its National Energy Policy 2050, aiming to meet 60% of national electricity generation with renewable energy by 2035 and 70% by 2050. Although examining the impact of renewable energy development using a dynamic CGE model has been tested in the context of various countries, mostly developed ones, a few studies have been found about Chile and the South American region. For Chile, a previous study by the authors [8] presents an initial one-sided soft link model using the general equilibrium General Equilibrium Model for the Chilean Economy (ECOGEM)-Chile model to build a more realistic baseline scenario for Chile Sustainability 2020, 12, 8248 3 of 19 up to 2050. This is a recursive dynamic model with a significant sectoral, labor market, and external market disaggregation. Sixty sectors are included in the dynamic version, and to better characterize the expected development of the electricity generation sector, it considers seven different subsectors (coal, hydroelectric, solar, wind, gas, oil, and wood). Using a soft link with an engineering model of the energy sector, a baseline has been proposed up to 2050 for Chile. This is a novel approach for Latin American countries and mid-sized developing countries in general. Another recent paper for Chile by [19] uses a general equilibrium approach to examine green growth opportunities for Chile. Using a 15-sector dynamic stochastic general equilibrium (DSGE) model that includes non-renewable and renewable electricity generation, they examine the macroeconomic changes due to a mitigation package with 15 measures proposed for Chile, including coal phase out. This DSGE model cannot simulate the detailed sectoral impact of the ECOGEM model because it has only one electricity generation sector so it does not incorporate solar and wind generation separately. It does not incorporate the expected dynamics of these two key electricity generation sectors, nor the potential impact of this on the baseline up to 2050. Its main aim is to model the impact of the CO2 mitigation intervention package on the economy, particularly for aggregate macroeconomic indicators. However, to the best of our knowledge, few similar studies can be found in international literature [20–23] and none at all for the Chilean and Latin American region, focusing on the economy-wide assessment of the decarbonization goals. Besides, an application of the methodology which links the CGE model with an engineering model allows for more realistic technology-based scenarios. In this context, the aim of this research is to study the economy-wide impacts, particularly the important tradeoffs related to the SDGs under the decarbonization scenario for the Chilean power sector. Additionally, it aims to study the potential impact of decarbonization on the country’s CO2 emissions baseline. For this purpose, we developed an advanced version of the computable general equilibrium (CGE) model—ECOGEM-Chile model (General Equilibrium Model for the Chilean Economy). Following best practices, we use the one-way linkage approach to propose a more realistic energy baseline. This baseline is then shocked with different decarbonization options. The main purpose of this study is to develop and implement a climate policy simulation and modelling tool to evaluate policies’ economic and environmental impacts to meet the climate change mitigation objectives and to assist decision-makers by offering recommendations for the development of a combination of efficient climate policies. In particular, the development of this tool aims to quantify the economic impact and emissions reductions generated by the different policy alternatives proposed, and/or possible policy combinations, and to help the key private and public stakeholders understand and evaluate the potential impacts of the policy options proposed. This paper is organized in the following way. Section2 provides an overview of the Chilean power sector and the role of the coal plants in the generation mix. Section3 discusses the major features of the newly constructed ECOGEM-Chile model and details how the outputs from a bottom-up engineering model are linked into our ECOGEM-Chile. Section5 provides the model results for business as usual (BAU) and coal phase-out scenarios and discusses the major variations. Finally, Section6o ffers a discussion on whether or not the ambitious decarbonization goals are coherent with current technological limitations in Chile.

2. The Chilean Power Sector: Role of Coal Plants Chile has been a pioneer in the introduction of comprehensive market reforms to its power sector in the early 1980s [24]. The main objective of these reforms was to break down the traditional structure of the vertically-integrated monopoly into three main segments: generation, transmission, and distribution, and begin the commercialization and privatization of the existing state-owned electricity system. Thus, the role of the State has been minimized, and has only been in charge of performing regulatory and control functions. The Chilean power sector has historically been divided into two major power grids: the Sistema Interconectado del Norte Grande (SING) and the Sistema Sustainability 2020, 12, 8248 4 of 19

Sustainability 2020, 12, x FOR PEER REVIEW 4 of 20 Interconectado Central (SIC), reﬂecting the vertical geographic structure of the country. Electricity population,demand for thewas central traditionally and southern supplied regions by the of SIC, the country, while the which SING represent was the overmain 90% power of the grid population, meeting wasthe primary traditionally electricity supplied demands by the for SIC, the while mining the SINGand mineral was the industries main power in gridthe north meeting of the the country. primary Forelectricity decades, demands the SIC for and the the mining SING and functioned mineral industriesindependently. in the This north structure of the country. changed For in decades, 2017 when the aSIC new and project the SING to interconnect functioned the independently. SIC and the SING This structure grids across changed 600km in was 2017 completed. when a new In projectthe place to ofinterconnect the SING and the SICthe andSIC, the a new SING and grids unique across power 600 km sy wasstem completed. called the National In the place Electric of the System SING and (SEN) the wasSIC, established a new and unique for the power purpose system of meeting called thethe Nationalenergy of Electric more than System 97% (SEN) of the was national established population. for the purposeTotal electricity of meeting installed the energy capacity of more of thanthe 97%SEN ofreached the national 23,315 population. MW by Total2018. electricityOf this capacity, installed thermoelectricity,capacity of the SEN conventional reached 23,315 large MW byhydro 2018. plants, Of this capacity,and non-conventional thermoelectricity, renewable conventional energy large technologieshydro plants, (NCREs) and non-conventional represented 53%, renewable 26%, and energy 21%, technologies respectively. (NCREs) As Chile’s represented economy 53%,continues 26%, toand grow, 21%, it respectively. is expected Asthat Chile’s the power economy system continues will double to grow, its current it is expected size, reaching that the power59GW systemof installed will capacitydouble its by current 2050 [16]. size, Regarding reaching 59GW gross of electricit installedy capacitygeneration, by 2050during [16 ].the Regarding same year, gross total electricity energy generationgeneration, amounted during the to same a total year, of total 75,641 energy GWh generation in the SEN, amounted which torepresents a total of 75,64199.3% GWhof thein total the generationSEN, which throughout represents 99.3% the country. of the total This generation total is throughoutmade up theof country.54.5% thermoelectricity, This total is made 28.2% up of conventional54.5% thermoelectricity, large hydro 28.2% sources, conventional and 17.4% large NCREs. hydro sources, and 17.4% NCREs.

2.1.Role Role of Coal of Coal Plants Plants in the inGeneration the Generation Mix Mix Coal has been considered to be one of the key energy sources in ChileChile forfor manymany decades.decades. Chile has one of the largest coal reserves in South America, which accounts for 4.1 billion tons, mostly in the south of the country [[24].24]. However, However, due to high exploitation costs, domest domesticic coal demand is met mostly through imports.imports. AlthoughAlthough thethe openingopening of of the the Mina Mina Invierno Invierno mine mine in in the the Magallanes Magallanes region region in in2013 2013 signiﬁcantly significantly increased increased domestic domestic production, production more, more than 80%than of 80% its total of its coal total supply coalstill supply depends still dependson external on sources.external Insources. 2016, net In coal2016, imports net coal amounted imports amounted to 10.6 Mt, to more 10.6 thanMt, more double than the double 2006 level. the Among2006 level. the Among source ofthe imports, source of Colombia imports, (42% Colombia of the total),(42% of Australia the total), (29%), Australia and the (29%), United and States the United (22%) Statesrepresent (22%) the represent largest shares. the largest shares. Over 90% of the total coal supply in Chile is used in electricity generation. Over Over the the last last decade, decade, the share of coal consumption in the power sector hashas been on a general upward trend. It has become the largestlargest andand most most a ﬀaffordableordable source source to meetto meet growing growing energy energy demand, demand, particularly particularly during during the energy the energycrisis when crisis Argentina when Argentina stopped stopped gas exports gas exports as of 2004. as of 2004. Over Over the last the decade, last decade, the share the share of the of coal the coalconsumption consumption in the in powerthe power sector sector increased increased more mo thanre than twofold twofold from from 18% 18% in 2006,in 2006, reaching reaching 41% 41% in in2016. 2016. Figure Figure1 presents 1 presents an evaluationan evaluation of coal’s of coal’s participation participation in the in Chilean the Chilean power power sector sector between between 1976 1976and 2016.and 2016.

45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 1976 1986 1996 2006 2016

Figure 1. CoalCoal in in the the Chilean Chilean power power sector, sector, 1976–2016. Source: [24 [24].

Today, ChileChile obtainsobtains moremore thanthan one-third ofof its electricity from generation by 28 coal-fired coal-ﬁred power plants with a generating capacity of 5500 MW. TheseThese coal plants are owned by the four largest power companies: the American-owned companycompany AES-GenerAES-Gener with with 15 15 plants, plants, the the French-owned French-owned Engie Engie with with 9 plants,9 plants, the the Italian-owned Italian-owned ENEL ENEL with with 3 3 plants, plants, andand thethe Chilean-ownedChilean-owned ColbColbún,ún, owner of one plant. plant. Coal-fired units provide baseload power to the power system with the highest annual capacity factor of more than 65% for electricity generation in Chile. Although coal may provide some technical and economic benefits for the Chilean electricity system, its increasing use is not consistent with the Sustainability 2020, 12, 8248 5 of 19

Coal-fired units provide baseload power to the power system with the highest annual capacity factor of more than 65% for electricity generation in Chile. Although coal may provide some technical andSustainability economic 2020 benefits, 12, x FOR for PEER the REVIEW Chilean electricity system, its increasing use is not consistent with5 of 20 the government’s climate policy objectives as it is the main contributor of CO2 emissions in the country. It government’s climate policy objectives as it is the main contributor of CO2 emissions in the country. represents two-thirds of total energy-related emissions in the country. For this reason, environmental It represents two-thirds of total energy-related emissions in the country. For this reason, opposition to the coal plants in Chile has been strong and effective. The failure of two large coal-fired environmental opposition to the coal plants in Chile has been strong and effective. The failure of two projects “Barrancones (540 MW)” and “Castilla” (2100 MW) in central Chile are a good example of large coal-fired projects “Barrancones (540 MW)” and “Castilla” (2100 MW) in central Chile are a controversiesgood example that of provoked controversies highly that visible provoked public high debatesly visible and largepublic community debates and protests large community [25]. protests [25]. 3. Methodology—The ECOGEM-Chile Model 3. InMethodology—The this paper, we developed ECOGEM-Chile a new advanced Model version of the ECOGEM-Chile macroeconomic model in whichIn the this power paper, sector we developed is disaggregated. a new advanced Moreover, version given thatof the energy ECOGEM-Chile technology analysesmacroeconomic and both technicalmodel in and which economic the power parameters sector is disaggregated. are better modelled Moreover, and given more that realistic energy in technology the bottom-up-based analyses engineeringand both technical models, weand developed economic parameters a technique are to better link the modelled simulation and resultsmore realistic from these in the models bottom- into ourup-based ECOGEM-Chile engineering model. models, Coupling we developed the bottom-up a techni engineeringque to link models the simulation and ECOGEM-Chile results from modelsthese allowsmodels for into a better our ECOGEM-Chile evaluation of themodel. impacts Coupling of technology-based the bottom-up engineering scenarios models on the and economy-wide ECOGEM- andChile emission models assessments. allows for a Figure better2 evaluationshows how of the the ECOGEM-Chile impacts of technology-based model and a bottom-upscenarios on energy the modeleconomy-wide are coupled. and Outputs emission include assessments CO2 .emissions Figure 2 shows and the how economy-wide the ECOGEM-Chile and sectorial model impacts.and a Thebottom-up methodology energy is composed model are ofcoupled. a short overviewOutputs include of the ECOGEM-ChileCO2 emissions and model, the economy-wide a brief description and of thesectorial technique impacts. linking The the methodolog bottom-upy engineering is composed model, of a short and overview ECOGEM-Chile of the ECOGEM-Chile model, and an overviewmodel, of thea brief business description as usual of the (BAU) technique and coal-fired linking the plant bottom-up phase-out engineering scenarios. model, and ECOGEM-Chile model, and an overview of the business as usual (BAU) and coal-fired plant phase-out scenarios.

FigureFigure 2. 2.Description Description of of General General Equilibrium Equilibrium ModelModel for the Chilean Chilean Economy Economy (ECOGEM)-Chile. (ECOGEM)-Chile.

TheThe ECOGEM-Chile ECOGEM-Chile model model used used inin thisthis studystudy is characterized by by its its multi-sectorial multi-sectorial approach, approach, separationseparation of householdsof households by by income income quintiles, quintiles, breakdown breakdown of of information information by by relevant relevant trade trade partner, partner, and specificationand specification of the diofff theerent different production production factors, factor amongs, among others. others. It is aIt model is a model essentially essentially founded founded upon neoclassicupon neoclassic theory, where theory, savings where determine savings determine the investment, the investment, and it is assumedand it is thatassumed there that is competitive there is balancecompetitive in all marketsbalance afterin all amarkets process after in which a proce thess sectors in which minimize the sectors their minimize costs and their maximize costs and their profits.maximize ECOGEM-Chile their profits. ECOGEM-Chile is a “dynamic is recursive” a “dynamic model, recursive” meaning model, that meaning the agents that the are agents assumed are to beassumed short-sighted to be short-sighted and maximize and maximize their target their functions target functions from from period period to period, to period, adopted adopted from from the originalthe original the Organisation the Organisation for Economic for Economic Co-operation Co-operation and Development and Development (OECD) (OECD) GREEN GREEN model model [26–28 ]. The[26–28]. simulations The simulations of each period of each are period linked are through linked thethrough accumulation the accumulation of capital of (investment),capital (investment), which is endogenous,which is endogenous, and exogenous and exogenous suppositions suppositions regarding regarding the GDP, the job GDP, growth, job growth, and productivity and productivity trends. Thetrends. model The is composedmodel is composed of productive of productive sectors or sector activities,s or activities, several several occupational occupational categories, categories, income groupsincome (quintiles) groups (quintiles) for households, for households, public spending public spending categories, categories, final demand final demand spending, spending, trade partners, trade andpartners, different and pollution different types. pollution The types. summary The summ of theary ECOGEM-Chile of the ECOGEM-Chile model inmodel its current in its current status is presentedstatus is inpresent Tableed1. in Table 1.

Sustainability 2020, 12, x FOR PEER REVIEW 6 of 20

Sustainability 2020, 12, 8248Table 1. Summary of characteristics of the ECOGEM-Chile model. 6 of 19

CHARACTERISTIC DESCRIPTION Table 1. Summary of characteristics of the ECOGEM-Chile model. Sectors 60 sectors. 27 production sectors (including copper mining); 26 service CHARACTERISTICsectors DESCRIPTION (excluding electricity generation); 7 electricity generation. LaborSectors categories 12 categories: 60 sectors. high, 27 productionmedium, and sectors low (includingincome, by copper gender mining); (M, F) 26and service sectors (excluding electricity generation); 7 electricity generation. Labor categoriesurban/rural. 12 categories: high, medium, and low income, by gender (M, F) and Households Up to 10urban deciles/rural. Households Up to 10 deciles Trade partners 35 trade partners from more important countries (Brazil, USA, China, Trade partners 35 trade partners from more important countries (Brazil, USA, China, etc.) etc.) andand groups groups of of other other countries countries or regionsregions (rest(rest of of Asia, Asia, Americas, Americas, etc.) etc.) PublicPublic finance finance ConsidersConsiders the detailed the detailed breakd breakdownown of taxes of taxes and and transfers: transfers: direct direct and and indirect corporate taxes, direct household taxes (income tax), employment tax, indirect corporate taxes, direct household taxes (income tax), employment Duties, a value-added taxes (VAT), government to household transfers, tax, Duties,transfers a value-a abroaddded and fromtaxes abroad. (VAT), government to household Pollutantstransfers, The transfers emissions abroad factors and inherent from to abroad. Chile have been estimated by sectorial production and final consumption Pollutants The emissions factorsSource: inherent own elaboration. to Chile have been estimated by sectorial production and final consumption Source: own elaboration. The production sectors operate under constant scaled returns. The technology is given by a productionThe production function sectors modeled operate through under constant CES/CET sc functionsaled returns. (Elasticity The technology of Substitution—Constant is given by a productionTransformation) function with modeled a tree structure.through CES/CET Figure3 belowfunctions summarizes (Elasticity this of treeSubstitution—Constant structure. To obtain the Transformation)intermediate inputs with basketa tree structur and KEL,e. Figure fixed proportions3 below summarizes are assumed this tree (Leontief-type structure. To function). obtain the On the intermediatefactors side, inputs the capital basket basket and KEL, is divided fixed proporti into energyons are and assumed work, using (Leontief-type a new CES function). function, On and the energy factorsis successively side, the capital separated basket from is divided capital, into always energy assuming and work, CES using functions a new for CES substitution function, and between energy factors isas successively well as within separated them (types fromof capital, work, energy,always andassuming capital). CES The functions energy basketfor substitution is divided between into electricity factors as well as within them (types of work, energy, and capital). The energy basket is divided into and other energies used in production processes that can be substituted through CES. electricity and other energies used in production processes that can be substituted through CES.

Figure 3. Structure of the production tree. Figure 3. Structure of the production tree. The electric sectors include seven types of electricity generation (gas, coal, fuel, wind, solar, biomass, and hydro power), and other energies include oil, fuels, natural gas, and combustible coal which count as energy inputs. The production function distinguishes between the use of national and imported products. This difference can be seen in an Armington function, that is, it considers the imperfect substitution between national and imported products. As in the case of production, there is a CES function that Sustainability 2020, 12, 8248 7 of 19 allows for substitution between the national and imported basket. Meanwhile, the national offer receives a similar treatment as that given to demand, now incorporating a CET function to distinguish between the national and exports market. The model assumes that consumers receive income as owners of different production factors and that part of this income is set aside as savings (proxy for future consumption). The decision between consumption and savings is static, that is, savings are treated as another “good” and determined simultaneously with demands for other goods. Households distribute their income between savings and consumption through an ELES (Extended Linear Expenditure System) profit function. This function also incorporates the minimum consumption of independent subsistence of the income level. Consumers maximize their profits and this maximization is subject to budget restriction. Once the intermediate demands and those of households are defined, then the rest of the final demands (i.e., investment, government spending, and import and export margins) should be included. The final demand of each item is defined as a fixed portion of the total final demand. In terms of public finance, this includes different taxes and transfers. The model defines: employment taxes, corporate taxes, income taxes (broken down by quintile), of which are direct taxes. It also defines duties and subsidies on imports, taxes, and subsidies on exports (different by sector) and VAT (national and imported, and by sector). The government also receives and gives direct transfers abroad, has expenses or consumption, and makes transfers to households. As a closure condition for public finance, the model allows two alternatives: in the first case, government savings are defined as fixed, just like the original level before any simulation, allowing for adjustment through government taxes or transfers. In the second case, government savings are variable, maintaining government spending, tax rates, and transfers as fixed. Apart from the closing rule for the government, where public savings can be determined endogenously or exogenously, as applicable, investment is determined by the savings-investment identity. For this, the value of total demand for private investment is equal to all resources available in the economy for that purpose (retained earnings or company savings, total household savings, capital flows from other countries or external savings, government savings net of expenses in the variation of stock. In this model, external savings is not considered dependent on endogenous variables (e.g., country risk, interest rates, etc.), but rather exogenous ones. The last closure rule is related to the payments balance equation. Here, the value of imports at international border prices (when assuming a small country, it is not affected by import prices) must be equal to the value of exports at international border prices, plus transfers, the payment of factors, and net capital inputs. Using Walras’s Law, the payment balance restriction can be removed from the model (which also allows for its correct calibration).

3.1. Coordination of the CGE and Engineering Models Coordination is done using a method that allows for interaction between the two models through outputs from one model to the other. For this purpose, it is important to determine the common variables or “points of connection” where the models can converge. In this particular study, the electricity generation projections from the energy model were incorporated in the macroeconomic model (CGE). This allows the CGE model to use these projections as a main guide for the evolution of sectors associated with electricity generation. Because this research focuses on the decarbonization of the electric sector primarily under the coal plant phase-out scenario, electricity generation is the main focus of the study on other energy sectors. In particular, two common parameters of the two electricity generation models were chosen to coordinate both models in this study. These include the total quantity of electricity generated and the percentage share of each technology. The intervention Sustainability 2020, 12, 8248 8 of 19 in the CGE model was applied next to the energy demand in production (decomposition of energy bundle) which is represented:

X pelect sigmaelecj,v j,v sigmaelec 1 XAP = aelectp elect lambdaep j,v− (1) elec,j j,v,elec j,v PA j,v v × × elec ×

The variable -aelectp determines the percentage share of electricity demand in a sector and is automatically adjusted in the model through optimization. The composition of electricity generation in the model contains seven generation technologies. The parameter lambdak is the capital efficiency by sector which establishes the capital requirement of a sector in order to produce. At the same level of production, a higher capital efficiency indicates that the capital requirement is lower, which also has a direct effect on the production sector’s prices. The percentage share of each technology in the energy model is directly incorporated into the CGE model through the variable aeletcp. For each of these sectors (except for generation) in the CGE model, the electric composition that they demand must be the same composition taken from the energy model, which also implies that the total composition demanded will be equal to the individual composition of each of the sectors, given that the variable determines the proportions demanded and not the total amounts. This manages to replicate the percentage share of each of the generation technologies considered. It must be highlighted that not all electricity generation technologies considered in the energy model could be considered in the CGE model. Some generation technologies from the first model had to be grouped to coincide with the technologies considered in the second model. The technology differences and groupings are summarized in Table2.

Table 2. Considered Technologies.

General Equilibrium Model for the Energy Model Chilean Economy (ECOGEM) Solar CSP Solar Solar PV Coal Coal Diesel Diesel Hydro passing Considered technologies Hydro dam Hydro Hydro series Biomass Biomass Geothermal N/A Gas Gas Wind Wind

The other parameter, total amount of energy generated from the energy model, was incorporated in the CGE model, modifying the capital efficiency parameter. The parameter establishes the necessary capital requirement of one sector in order to produce. Modifying this parameter (for example, making one sector more expensive or cheaper) helps influence the sectors’ prices, which indirectly implies modifying the quantity produced. With this in mind, it was decided that the seven electricity generation sectors found in the CGE model would be modified in the same way. By controlling this parameter, it is possible to achieve total electricity generation values and replicate the electricity generation scenario of the energy model. Sustainability 2020, 12, 8248 9 of 19

3.2. Scenario Simulation Through this coordination, the two energy model scenarios are replicated in the ECOGEM-Chile model. These include the BAU scenario and the coal plant phase-out scenario generated by the energy model andSustainability the replications 2020, 12, x FOR byPEER the REVIEW ECOGEM-Chile model. The scenarios describe different9 of 20 development paths in3.3. the Scenario energy Simulation generation sector in Chile, and their implications on proportion of renewable sources in the energy portfolio. Through this coordination, the two energy model scenarios are replicated in the ECOGEM-Chile Themodel. BAU These scenario include includes the BAU scenario the scenario and the coal that plant projects phase-out the scenario growth generated of the by energy the energy sector without consideringmodel anyand typethe replications of shock, consideringby the ECOGEM-Chile the national model. energy The scenarios characteristics describe anddifferent trends and the expecteddevelopment evolution paths of the in the current energy generation energy technologies sector in Chile, beingand their used implications around on the proportion world. of Considering renewable sources in the energy portfolio. that the copper sector is the main sector of the Chilean economy in energy consumption, the copper The BAU scenario includes the scenario that projects the growth of the energy sector without projectionsconsidering were importantany type of shock, for the considering definition the ofnational future energy trends. characteristics Given this, and trends it was and decided the that this productionexpected would evolution be given of the exogenously, current energy technologi and the electricityes being used generation around the world. industry Considering would that be manipulated exogenouslythe copper during sector the is the coordination main sector of process the Chilean of economy the two in models. energy consumption, Figure4 shows the copper the electricity projections were important for the definition of future trends. Given this, it was decided that this generation share trends obtained in the energy model for 2020–2050. On the other hand, Figure5 production would be given exogenously, and the electricity generation industry would be representsmanipulated replications exogenously of the resultsduring th obtainede coordination from process the energy of the modeltwo models. in the Figure ECOGEM-Chile 4 shows the model. As shown inelectricity Figures generation4 and5, share the proportion trends obtained of non-conventionalin the energy model for renewable 2020–2050. On energy the other technologies hand, (solar, wind, andFigure biomass) 5 represents in replications the energy of generationthe results obtained mix underfrom the theenergy BAU model scenario in the ECOGEM-Chile represents 20% in 2020, model. As shown in Figures 4 and 5, the proportion of non-conventional renewable energy 40% in 2030, and 60% in 2050. However, although the weight of coal-fired plant generations has technologies (solar, wind, and biomass) in the energy generation mix under the BAU scenario dropped,represents coal generation 20% in 2020, continues 40% in 2030, to playand 60% an in important 2050. However, role inalthough the Chilean the weight generation of coal-fired mix under the BAU scenario.plant generations has dropped, coal generation continues to play an important role in the Chilean generation mix under the BAU scenario.

100% 90% 80% 70% Diesel 60% Solar 50% Wind 40% Hydro 30% Biomass 20% Energy generation share Energy generation 10% Coal 0% Gas 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 Years

Figure 4.FigureElectricity 4. Electricity generation generation share share obtained obtained inin thethe engineering model model under under business business as usual as usual (BAU). (BAU). Source: own elaboration. Source:Sustainability own 2020 elaboration., 12, x FOR PEER REVIEW 10 of 20

Figure 5.FigureElectricity 5. Electricity generation generation share share in baseline in baseline replicated replicated with with Macro Macro model. model. Source:Source: ownown elaboration. elaboration.

3.3.1. Coal Plant Phase-Out Scenario The coal plant phase-out scenario includes the gradual reduction of coal generation between 2020 and 2050. As shown in Figures 6 and 7, the proportion of coal technologies in the energy generation mix represents 38% in 2020, 20% in 2030, and 0% in 2040. On the other hand, non- conventional renewable energies were gradually replacing carbon over those years.

100% 90% 80% 70% Diesel 60% Solar 50% Wind 40% Hydro 30% Biomass 20%

Energy generation share 10% Coal 0% Gas 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 Years

Figure 6. Electricity generation share obtained in the engineering model under plant phase-out scenario. Source: own elaboration. Sustainability 2020, 12, x FOR PEER REVIEW 10 of 20

100% 90% 80% 70% Diesel 60% Solar 50% Wind 40% Hydro 30% Biomass 20% Energy generation share generation Energy 10% Coal 0% Gas 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 Years Sustainability 2020 12 , , 8248 10 of 19 Figure 5. Electricity generation share in baseline replicated with Macro model. Source: own Coal Plant Phase-Outelaboration. Scenario The3.3.1. coal Coal plant Plant phase-out Phase-Out scenarioScenario includes the gradual reduction of coal generation between 2020 and 2050. AsThe shown coal plant in Figures phase-out6 and scenario7, the includes proportion the gradual of coal reduction technologies of coal ingeneration the energy between generation mix represents2020 38% and in2050. 2020, As 20%shown in in 2030, Figures and 6 and 0% in7, the 2040. proportion On the of other coal hand,technologies non-conventional in the energy renewable generation mix represents 38% in 2020, 20% in 2030, and 0% in 2040. On the other hand, non- energiesconventional were gradually renewable replacing energies carbonwere grad overually thosereplacing years. carbon over those years.

100% 90% 80% 70% Diesel 60% Solar 50% Wind 40% Hydro 30% Biomass 20%

Figure 6.FigureElectricity 6. Electricity generation generation share share obtained obtained in in the the engineering engineering model under under plant plant phase-out phase-out scenario. scenario. Source: own elaboration. Source:Sustainability own 2020 elaboration., 12, x FOR PEER REVIEW 11 of 20

Figure 7.FigureReplication 7. Replication of plant of phase-outplant phase-out scenario scenario by theby ECOGEM-Chilethe ECOGEM-Chile model model Source:Source: own elaboration. elaboration. 4. Empirical Results 4. Empirical Results This sectionThis section describes describes the the simulation simulation results. results. First, First, a BAU a BAUbaseline baseline and then andcoal-fired then plant coal-fired plant phase-outphase-out scenario scenario are are simulated. simulated. The results results report report the variations the variations (percentage (percentage changes) in changes) CO2 in CO2 emissions, CO2 emissions intensity pathways, and the economy-wide impacts after reducing coal emissions, CO2 emissions intensity pathways, and the economy-wide impacts after reducing coal generation in the power sector. Figures 8–10 describe the percentage variations for CO2 emissions and generation in the power sector. Figures8–10 describe the percentage variations for CO 2 emissions CO2 emissions intensity pathways, respectively, between 2020 and 2050. This is mainly because a and CO2transitionemissions in the intensity energy matrix pathways, from coal-fired respectively, plants between to renewable 2020 energy and 2050.generation This plays is mainly an because a transitionessential in the role energy in reducing matrix Chile’s from CO coal-fired2 emissions plants and emissions to renewable intensity energy for 2050. generation The energy matrix plays an essential under the BAU scenario still largely relies on coal-fired plants, which are important contributors of role in reducing Chile’s CO2 emissions and emissions intensity for 2050. The energy matrix under the BAUCO scenario2 emissions. still Currently, largely the relies Chilean on power coal-fired system has plants, 28 active which coal-fired are power important plants, contributorsproviding of CO almost 40% of the country’s power, while generating 26% of all greenhouse gases. Decarbonization 2 emissions.of the Currently, power sector the Chileanby phasing power out coal-fired system power has 28 plants active and coal-fired replacing powerthem with plants, renewable providing almost 40% of theenergies country’s is expected power, to generate while better generating results. 26% of all greenhouse gases. Decarbonization of the power sector by phasing out coal-fired power plants and replacing them with renewable energies is expected to generate better results.

Figure 8. Variation in CO2 Emissions Source: Own elaboration. Sustainability 2020, 12, x FOR PEER REVIEW 11 of 20

Figure 7. Replication of plant phase-out scenario by the ECOGEM-Chile model Source: own elaboration.

4. Empirical Results This section describes the simulation results. First, a BAU baseline and then coal-fired plant phase-out scenario are simulated. The results report the variations (percentage changes) in CO2 emissions, CO2 emissions intensity pathways, and the economy-wide impacts after reducing coal generation in the power sector. Figures 8–10 describe the percentage variations for CO2 emissions and CO2 emissions intensity pathways, respectively, between 2020 and 2050. This is mainly because a transition in the energy matrix from coal-fired plants to renewable energy generation plays an essential role in reducing Chile’s CO2 emissions and emissions intensity for 2050. The energy matrix under the BAU scenario still largely relies on coal-fired plants, which are important contributors of CO2 emissions. Currently, the Chilean power system has 28 active coal-fired power plants, providing Sustainabilityalmost2020 40%, 12 of, 8248the country’s power, while generating 26% of all greenhouse gases. Decarbonization11 of 19 of the power sector by phasing out coal-fired power plants and replacing them with renewable energies is expected to generate better results.

Sustainability 2020, 12, x FOR PEER REVIEW 12 of 20

Sustainability 2020, 12, x FOR PEER REVIEW 12 of 20 FigureFigureCO2 8. emissionsVariation8. Variation in in CO variationsCO2 2Emissions Emissions among Source: Source: Own the Own elaboration. sectors elaboration. 1.0% CO2 emissions variations among the sectors 0.5% 1.0% 0.0% 0.5%

-0.5% 0.0%

-1.0%-0.5%

-1.5%-1.0%

-2.0%-1.5% 2013-2.0% 2018 2023 2028 2033 2038 2043 2048 2013 2018 2023 2028 2033 2038 2043 2048 papce cemen tranf tcarr combu papce cemen tranf tcarr combu tranm culti miner madar cobre tranm culti miner madar cobre

Figure 9. CO2 emissions variations among the sectors. Source: Own elaboration. Figure 9.FigureCO2 9.emissions CO2 emissions variations variations among among the the sectors. sectors. Source: Source: Own elaboration. Own elaboration.

Figure 10. Variation in CO2 emission intensity. Source: Own elaboration.

4.1. ImpactFigure on FigureGDP 10. 10.Variation Variation in in CO CO2 2emission emission intensity. Source: Source: Own Own elaboration. elaboration. Figure 11 shows the difference in GDP related to a mandatory early phase-out of plants and the 4.1. Impactbaseline on betweenGDP 2020 and 2050. A decrease can be seen as of 2017, and the greatest difference with Figurethe baseline 11 shows is seen the in 2024difference (0.15%). in After GDP this related year, the to differencea mandatory drops early as the phase-out economy adjustsof plants to the and the new restrictions. In general terms, the impact on GDP is relatively little, with a reduction of the baseline between 2020 and 2050. A decrease can be seen as of 2017, and the greatest difference with baseline from 0.05% in 2040 to close to 0.02% by 2050. The fact that the GDP decreases is to be the baselineexpected, is seenconsidering in 2024 the (0.15%). suppositions After made this year when, the cons differencetructing the drops scenario. as the In particular,economy thereadjusts is a to the new restrictions.higher cost of Inelectricity general generation terms, the for impactall sectors on of GDPthe economy. is relatively Moreover, little, the with economy a reduction must sub- of the baselineoptimally from assign0.05% investmentin 2040 to resources close to due 0.02% to a diffbyerent 2050. generation The fact share that thanthe originally.GDP decreases These two is to be expected,factors considering lead to a lower the GDPsuppositions in this scenario. made Thiswhen difference constructing will diminish the scenario. as the economyIn particular, adjusts there to is a higherthe cost new of costs electricity of electricity generation and substitutes for all sect forors lower of therelative economy. cost factors. Moreover, the economy must sub- optimally assign investment resources due to a different generation share than originally. These two factors lead to a lower GDP in this scenario. This difference will diminish as the economy adjusts to the new costs of electricity and substitutes for lower relative cost factors. Sustainability 2020, 12, 8248 12 of 19

4.1. Impact on GDP Figure 11 shows the difference in GDP related to a mandatory early phase-out of plants and the baseline between 2020 and 2050. A decrease can be seen as of 2017, and the greatest difference with the baseline is seen in 2024 (0.15%). After this year, the difference drops as the economy adjusts to the new restrictions. In general terms, the impact on GDP is relatively little, with a reduction of the baseline from 0.05% in 2040 to close to 0.02% by 2050. The fact that the GDP decreases is to be expected, considering the suppositions made when constructing the scenario. In particular, there is a higher cost of electricity generation for all sectors of the economy. Moreover, the economy must sub-optimally assign investment resources due to a different generation share than originally. These two factors lead to a lower GDP in this scenario. This difference will diminish as the economy adjusts to the new costs of electricitySustainability and 2020 substitutes, 12, x FOR PEER for REVIEW lower relative cost factors. 13 of 20

FigureFigure 11. 11. ImpactImpact on GDP GDP.. Source: Source: Own Own elaboration. elaboration.

4.2. Impact4.2. Impact in thein the Labor Labor Market Market By phasingBy phasing out out coal coal plants, plants, prices prices andand balanced qu quantitiesantities in inthe the labor labor market market will be will slightly be slightly affected.affected. The The impact impact on on generation generation andand thethe loss of of jobs jobs in in the the electricity electricity generation generation sectors sectors and other and other productionproduction sectors sectors affected affected is presented is presented below, below, in termsin terms of totalof total employment employment in thein the economy economy and and salaries by qualificationsalaries by qualification level and gender. level and The gender. coal plantThe coal phase-out plant phase-out leads some leads sectors some sectors to reduce to reduce jobs and jobs others and others to increase jobs. Naturally, the coal plant phase-out brings about a nearly 90% decrease— to increase jobs. Naturally, the coal plant phase-out brings about a nearly 90% decrease—according according to the Figure 12 below—in direct employment in the coal generation sector as of 2040. Due to the Figure 12 below—in direct employment in the coal generation sector as of 2040. Due to its to its significance, there is also a reduction in direct jobs in the coal mining sector, whose production significance,drops thanks there to isthe also reduction a reduction in coal-fired in direct generation jobs in. the A decrease coal mining in jobs sector, in the whosecoal mining production sector is drops thanksnot toas thesharp reduction as in the coal in coal-firedgeneration generation.sector, because A coal decrease mineral in is jobs not used in the exclusively coal mining in coal-fired sector is not as sharpgeneration. as in theEven coal still, generation by 2040, a 50% sector, drop because in jobs can coal be mineralseen. is not used exclusively in coal-fired generation.On the Even other still, hand, by 2040,to offset a 50% the reduction drop in jobsin coal-fired can be seen.production of electricity, other generation sectors must increase production and, therefore, their direct employment. In fact, the wind, hydro, and solar power generation sectors see an increase in share as of 2022, approximately, which brings about an increase in direct jobs in these sectors. As these sectors are based on renewable energies, they are called “green jobs.”

Sustainability 2020, 12, x FOR PEER REVIEW 13 of 20

Figure 11. Impact on GDP. Source: Own elaboration.

4.2. Impact in the Labor Market By phasing out coal plants, prices and balanced quantities in the labor market will be slightly affected. The impact on generation and the loss of jobs in the electricity generation sectors and other production sectors affected is presented below, in terms of total employment in the economy and salaries by qualification level and gender. The coal plant phase-out leads some sectors to reduce jobs and others to increase jobs. Naturally, the coal plant phase-out brings about a nearly 90% decrease— according to the Figure 12 below—in direct employment in the coal generation sector as of 2040. Due to its significance, there is also a reduction in direct jobs in the coal mining sector, whose production drops thanks to the reduction in coal-fired generation. A decrease in jobs in the coal mining sector is not as sharp as in the coal generation sector, because coal mineral is not used exclusively in coal-fired generation. Even still, by 2040, a 50% drop in jobs can be seen. On the other hand, to offset the reduction in coal-fired production of electricity, other generation sectors must increase production and, therefore, their direct employment. In fact, the wind, hydro, Sustainabilityand2020 solar, 12 ,power 8248 generation sectors see an increase in share as of 2022, approximately, which brings 13 of 19 about an increase in direct jobs in these sectors. As these sectors are based on renewable energies, they are called “green jobs.”

Figure 12. Variation in employment in sectors related to generation. Source: Own elaboration.

On the other hand, to offset the reduction in coal-fired production of electricity, other generation sectors must increase production and, therefore, their direct employment. In fact, the wind, hydro, and solar power generation sectors see an increase in share as of 2022, approximately, which brings about an increase in direct jobs in these sectors. As these sectors are based on renewable energies, they are called “green jobs.” Of course,Sustainability there 2020, 12 is, x alsoFOR PEER an REVIEW impact on employment in other sectors not related14 of to 20 electricity generation, which is affected by the increase in electricity costs, the reassignment of investment Figure 12. Variation in employment in sectors related to generation. Source: Own elaboration. resources, and a domino effect in sectors whose production varies. Figure 13 shows that there are sectors with higherOf course, levels there ofis also employment an impact on and employment others with in other lower sectors levels. not related The rangeto electricity of variation in this case isgeneration, much lower which thanis affected in the by sectorsthe increase directly in electricity affected, costs, with the reassignment a maximum of investment increase of 1% and resources, and a domino effect in sectors whose production varies. Figure 13 shows that there are maximumsectors decrease with higher of 3%. levels One of employment sector where and others employment with lower goeslevels. upThe isrange in of construction, variation in this as the new generationcase options—and is much lower reductionthan in the insectors salaries directly as affected, discussed with below—give a maximum increase an impulse of 1% and to this sector. On the othermaximum hand, decrease coal generation of 3%. One sector was anwhere important employme sourcent goes ofup electricityis in construction, for the as metallurgythe new sector, thereforegeneration its disappearance options—and implies reduction an in increasesalaries as di inscussed generation below—give costs an and impulse the to operating this sector. On costs for this the other hand, coal generation was an important source of electricity for the metallurgy sector, sector. Thistherefore implies its disappearance a reduction implies in production an increase in and generation also in costs job and demands. the operating This costs can for be this seen in the followingsector. graph. This implies a reduction in production and also in job demands. This can be seen in the following graph.

Figure 13.FigureMost 13. Most relevant relevant variation variation in employment employment not related not related to electricity toelectricity generation. Source: generation. Own Source: Own elaboration.elaboration.

Total household income by quintile is also affected by the plant phase-out (see Figure 14). This Totalincome household considers income salary, bycapital, quintile and transfers. is also The aff ectedresults byshown the in plant the figure phase-out below present (see Figure 14). This incomenegative considers variations salary, for all quintiles. capital, The and variation transfers. ranges The reach results their maximum shown around in the 2040, figure at –0.3% below present (for households in the second and third quintile) and stabilize between –0.1% and –0.15%. The reduction in salary income, as well as in the GDP, means that households across all five quintiles see a lower total income. Sustainability 2020, 12, 8248 14 of 19 negative variations for all quintiles. The variation ranges reach their maximum around 2040, at –0.3% (for households in the second and third quintile) and stabilize between –0.1% and –0.15%. The reduction in salary income, as well as in the GDP, means that households across all five quintiles see a lower total income.Sustainability 2020, 12, x FOR PEER REVIEW 15 of 20

Sustainability 2020, 12, x FOR PEER REVIEW 15 of 20

Figure 14.FigureVariation 14. Variation in income in income by quintileby quintile under under plant phase-out phase-out scenario. scenario. Source: Source: Own elaboration. Own elaboration.

4.3. Impact4.3. on Impact the Copper on the Copper Sector Sector

Finally, at the sectorial level, it should be noted that copper production will be affected by a Finally, at the sectorial level, it should be noted that copper production will be affected by a slight slightFigure increase 14. Variation in the price in income of such by quintilean important under plant input phase-out as electricity, scenario. dropping Source: Own with elaboration. respect to the increase inbaseline the price production of such (see an Figure important 15). This reduction input as reaches electricity, its maximum dropping in 2024, with at −0.59%, respect but to then the baseline production4.3.stabilizes (see Impact Figure at on a thedrop 15Copper of). − This0.3%. Sector reductionThe coal plant reaches phase-out its scenario maximum implies in an 2024, increase at in0.59%, electricity but prices then stabilizes − at a droppaid of Finally,by0.3%. all consumers, at The the coalsectorial given plant level,the phase-outnew it shouldrestriction be scenario notedimposed. that impliesLike copper all production production an increase sectors, will in be copper electricity affected mining by a prices paid is affected− by the increase in electricity prices, which leads to a decrease in production. The reduction by all consumers,slight increase given in the the price new of restrictionsuch an important imposed. input Likeas electricity, all production dropping with sectors, respect copper to the mining is in production is summarized in the table below. Copper mining demands a large amount of affected bybaseline the increase production in (see electricity Figure 15). prices, This reduction which leadsreaches to its a maximum decrease in in 2024, production. at −0.59%, but The then reduction in stabilizeselectricity at for a dropproduction, of −0.3%. given The thecoal machinery plant phase-out used in scenario the industry. implies In an the increase social accountingin electricity matrix, prices productionpaid54% is ofby summarized the all consumers,sector’s electricity in given the the demand table new below. restriction comes from Copper imposed. coal-fired mining Like generation. all production demands This sectors, amay large lead copper amountone to mining think of electricity for production,isthat affected the givendecrease by the the increase in machineryproduction in electricity would used prices, be in greate which the industry.r leadsgiven to the a decrease Intotal the phase-out in social production. accountingof coal-fired The reduction plants. matrix, 54% of However, electricity as an input does not vary much despite the different sources from which it may the sector’sin production electricity is demand summarized comes in the from table coal-fired below. Copper generation. mining demands This may a large lead amount one toof think that come. This is reflected in the model, by using enough elasticity to represent the Chilean reality. the decreaseelectricity in production for production, would given be the greater machinery given used the in the total industry. phase-out In the social of coal-fired accounting plants. matrix, However, 54% of the sector’s electricity demand comes from coal-fired generation. This may lead one to think electricitythat as anthe input decrease does in notproduction vary much would despite be greate ther given different the total sources phase-out from of which coal-fired it may plants. come. This is reflected inHowever, the model, electricity by usingas an input enough does not elasticity vary much to despite represent the different the Chilean sources reality. from which it may come. This is reflected in the model, by using enough elasticity to represent the Chilean reality.

Figure 15. Projection of percentage variation in copper production in plant phase-out scenario with respect to the baseline. Source: own elaboration.

Figure 15.FigureProjection 15. Projection of percentage of percentage variation variation inin copper production production in plant in plantphase-out phase-out scenario with scenario with respect torespect the baseline. to the baseline. Source: Source: own own elaboration. elaboration. Sustainability 2020, 12, 8248 15 of 19

5. Discussion: Challenges to the Ambitious Decarbonization Goals Climate change has become the greatest challenge pushing many governments to adopt several strategies to reduce GHG emissions on the short- and long-term horizons. In this context, the Chilean Government has recently established ambitious plans to eliminate some of its coal-fired power generation plants by 2024 and the rest by 2040. This pathway towards zero-carbon electricity relies heavily on development of its local rich renewable energy sources. Over the last few years, renewable energy technologies worldwide have become fundamental sources to significantly reduce energy-related carbon dioxide (CO2) emissions in the power sector as they represent two-thirds of all greenhouse gases (GHG). According to a recent study by the International Renewable Energy Agency (IRENA) the expansion of renewable energy and improvement of energy efficiency can account for around 90% of energy CO2 reductions [29]. To achieve this scale of decarbonization, global power generation and total primary energy supply should be represented around 80% and 65% by renewable energy sources. Although renewable energy today accounts for only 30% of the global energy generation mix, over the last few years, most of the new installed capacities in the generation mix were captured by renewable energies. In 2018, more than 60% of new power capacities have been made using these technologies. This is expected to grow even in the near future as the cost of these technologies decrease. Therefore, the levelized cost of electricity from solar photovoltaics and wind power has experienced a sharp decrease of an astounding 73% and 23% respectively between 2010 and 2017 [30]. Some renewable technologies currently in commercial use, particularly solar and wind power, are cost competitive compared to traditional fossil fuels in most regions of the world. With one of the richest renewable energy sources, a sharp drop in technology costs, attractive market conditions and relevant policy changes, Chile has become one of the most attractive markets in the Latin American region. Chile’s recent renewable energy boom has made significant improvements towards reducing emissions, and it is evident that their share in the grid will increase significantly in the near future. Given that coal power plants and NCREs currently constitute around 30% and 21% of installed capacity in the Chilean power market, respectively, the total replacement of coal plants by renewable energies by the year 2040 means that more than 60% of energy will come from variable energy sources such as solar and wind power technologies. But despite these enormous gains, it is important to determine whether or not a massive expansion in renewables in the current grid can deliver affordable, reliable, and clean energy, at least in the short- and mid-term horizons. In this decarbonization scenario for the energy sector, to what extent are the government’s latest ambitious targets coherent with the current technological limitations? Despite remarkable technological improvements related to renewable generation, storage, and transmission, there are still serious challenges that need to be highlighted and addressed through additional policy interventions so as to sustain this rapid energy transition. A first challenge is that the urgent need to replace coal plants with renewables will require significant overbuilding of renewable generation to meet its growing demand. According to long-term energy planning scenarios built by the Chilean Ministry of Energy (2018), Chile plans to develop 40% of electric vehicles and 100% electric buses by 2050. This means that the future electrification of other sectors will further increase demand for electricity. One of the important factors in the large overbuilding capacity is associated with the “capacity factor” of renewable technologies, particularly solar and wind. The average capacity factors of solar (24%) and wind (34%) technologies are much lower compared to coal-fired plants, which is 60% on average. This means that the power sector will require a larger capacity from wind or solar technologies to generate the same amount of electricity produced by coal-fired plants. Moreover, due to the variability of renewable technologies, they have a low rate of use, and most of the time, the power generated by these technologies cannot be used to meet demand. This is particularly true in the case of wind and solar power. For instance, these technologies are not available all the time and when they are, most of the time demand is low. Therefore, low capacity factors and utilization rates require cheaper solar and wind technologies to make this overbuilding capacity economically advantageous. Sustainability 2020, 12, 8248 16 of 19

Another important challenge for a successful transition to a larger share of renewable energy sources in Chile is growing demand for smart grid technologies, costly grid upgrades, and a significant overbuilding of transmission infrastructure. An expansion of grid interconnection and transmission capacity is an important option for coping with the variability of wind and solar power generation, reducing the requirements for regulation reserves, improving congestion management and decreasing the need for backup generation capacity. According to the experience of countries with the highest level of renewable penetration, upgrading grid infrastructure and increasing interconnection and electricity trade have been fundamental factors for large penetration. The recent interconnection of the northern and the central power systems through a 600-km-long truck transmission was a significant step forward in Chile. This is expected to provide more flexibility in power transmission from the northern regions, making a large amount of solar power available to the central region, where there is a higher energy demand. However, over the last year, this transmission system segment has been experiencing significant congestion, leading to frequent price decoupling and curtailments [31]. As a result, the price decoupling in the case of northern Chile, which is home to rich solar resources, drove marginal costs to zero given the large penetration of renewables. Absence of strong interconnections and electricity trade with neighboring countries is an important limitation for the current and future penetration of renewables in the Chilean power system. In general, commercial exchange of electricity among South American countries lags behind other regions due to both regulatory differences and markets that function very differently. Chile only has interconnection with Argentina, and this is not currently in operation. The deep decarbonization of the Chilean energy system can be realistic when economically and technically reliable storage technologies are available and integrated into the power system. However, these are still currently either minimal or at a very early stage of development and unlikely to sufficiently meet future flexibility requirements resulting from massive expansions of renewable technologies under decarbonization efforts. In a future low-carbon energy system, storage technologies have fundamental potential to provide a wide range of attractive benefits at all levels of the electricity system. At the generation level, they can provide arbitrage, balancing, and reserve power, etc.; at the transmission level, they can improve frequency control and investment deferral; at the distribution level, they can ensure voltage control, capacity support, etc.; and at the consumer level, they can provide peak shaving, time of use cost management reducing the volatility of market prices [32–34]. Currently, almost 99% of current established storage capacity is represented almost exclusively by pumped hydro-storage, mainly in mountainous areas. Chilean Law 20,936, first adopted in 2016, establishes the general aspects related to energy storage, defining storage systems and integrating them into power systems. Currently, regulations on storage only refer to the operation of pumping stations without hydrological variability. Regarding other battery storage technologies, although minor installations in these technologies present promising impacts on grid stability, increasing flexibility and reducing curtailments, their massive application remains limited. Over the last few years, the production of green hydrogen using renewable energy in Chile has become a high priority area for the further development of the energy sector. For this purpose, the Chilean Ministry of Energy recently recognized its ongoing work to draw up a national hydrogen strategy. Currently, fossil fuels represent almost 96% of the world’s hydrogen, while the remaining 4% comes from water. However, this situation is changing quickly due to remarkable decreases in the cost of renewables, particularly solar power. Over the last few years, solar technologies in Chile have become progressively competitive due to low operating costs resulting from the high capacity factor in the northern zones with some of the best solar resources in the world. For instance, the Atacama Desert receives 3500 kWh/m2 of DNI radiation and 3000 h of sunshine per year, which is 65% higher than average radiation in Europe. Therefore, this factor gives Chile a highly advantageous position to produce hydrogen at competitive prices. Sustainability 2020, 12, 8248 17 of 19

6. Conclusions and Future Research Chile’s rich solar potential allows for the proposal of an ambitious decarbonization of its electricity generation sector that goes beyond what will happen naturally due to market conditions; however, this will impose trade-offs that must be adequately assessed. The multiple impacts of electric sector decarbonization goals relating to sustainable development requires an appropriate modelling approach. Computable general equilibrium models allow quantifying economic, social, and environmental impacts. The model must respond to the needs of policymakers, in particular replicating expected energy development pathways and allowing assessment of the policies of interest. The dynamic recursive ECOGEM-Chile model has been adapted for this. First, the electricity generation sector has been disaggregated to include renewable energies, especially solar and wind, that are expected to be the key future generating sectors. The expected evolution of the generating sector has been soft-linked with the ECOGEM model replicating the expected future energy matrix up to 2050. The model has been modified separating the energy nesting into electricity and non-electricity sectors that have a low substitution among them. Using the model together with the best projections for key exogenous parameters such as GDP, population, and labor supply growth, a baseline scenario for the economy between 2020 and 2050 has been developed. It includes the future development of 60 economic sectors, including seven electricity generating sectors, 12 labor categories, household income per decile, and CO2 emissions, as well as relevant macroeconomic variables. Even though most of the future growth of electricity generation will come from solar and wind power, in this baseline scenario, it is still expected that 15% will be generated using coal in 2050. An alternative decarbonization scenario that considers a complete coal phase out in 2040 has been assessed considering economic, social, and environmental indicators. The results show that in this scenario, GDP can be expected to fall 0.3% in 2050 relative to the BAU scenario due to a small increase in electricity costs. This rise in electricity prices will result in a small fall in copper production of 0.3% due to the importance of electricity costs in total copper costs. On the social front, income by quintile will fall as GDP falls, by 0.2% for the poorest and between 0.3% and 0.4% for the other. In the labor market, employment in the coal electricity generation sector will fall by 100% in 2050, but green jobs in the solar and wind sectors will grow 20% and 10%, respectively. Total employment in the generating sector is not affected. Finally, CO2 emissions will fall over 20% in 2050. These results suggest that a phase-out of coal generation will have significant impacts on emissions and result in a structural shift towards green jobs, over 20%. The trade-offs, however, are that the increase in electricity costs will have negative impacts on GDP and household income that will fall around 0.3%.

Author Contributions: S.N., R.O., and H.O. designed and performed the research and wrote the paper with results checking. All authors read and approved the final manuscript. Funding: This research was funded by ANID/FONDAP/15110019 (SERC-CHILE) and ANID/FONDECYT/ 11170424, ANID/FONDEF/ID16I10128, ANID/FONDAP/15110009. Conflicts of Interest: The authors declare no conflict of interest.

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