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Coal fuels roughly 40% of Chile's power generation

Country has pledged to phase out coal by 2040

Santiago, Chile — Chile could soon resume imports of subbituminous coal from Indonesia, the world's largest exporter of the fuel, following the signing of a new trade deal between the two countries and the closure of Chile's largest domestic coal mine, market sources tell Platts.

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The move comes despite a government commitment to phase out coal-fired generation by 2040.

The Comprehensive Economic Partnership Agreement between Jakarta and Santiago, which was published Wednesday in Chile's official gazette, reduces tariffs on thousands of exports from both countries.

While Chilean farmers are looking to lift exports of fresh fruit, honey and olive oil to the archipelago's 270 million inhabitants, the country's power generators are hoping it will improve access to a new fuel source.

The closure later this year of Mina Invierno, located in the southernmost Magallanes region, will deprive local generators such as AES Gener, Engie Energia Chile and Colbun of their main source of subbituminous coal.

Under the government's decarbonization plan launched last June, all of Chile's 5,000 MW of coal-fired generation will close within two decades, including the first 1,000 MW by 2024, part of President Sebastian Pinera's pledge to achieve zero net emissions by mid-century.

Coal currently accounts for around 40% of electricity generated in Chile. Last year the country imported just over 11 million mt of coal, mostly Colombia, the US and Australia. Chile has free trade agreements in place with all three so imports are not subject to Chile's general 6% tariff.

Under the agreement, tariffs on imports of Indonesian coal into Chile have now also been reduced to zero.

CHILE'S LARGEST MINE COULD CLOSE

Mina Invierno was producing around 2 million mt of subbituminous coal, most of which was sold to power plants in northern and central Chile, when a court annulled a license to use explosives to break up overburden following a legal challenge by environmentalists.

If the company and government fail to overturn the ruling on appeal before Chile's Supreme Court, the mine could close as soon as next month.

Another once-regular supplier of subbituminous coal to Chile, the Usibelli mine in Alaska, halted exports three years ago following the closure of the nearest coal loading facility.

Indonesia in turn is keen to find new clients to reduce its reliance on the Chinese and Indian coal markets.

Meanwhile, changing conditions in Chile's power markets could lead generators to burn more subbituminous coal, officials told Platts.

As the country prepares to scale back thermoelectric generation, authorities are keen to encourage further investment in renewable technologies, such as wind, solar and geothermal power, which already account for 20% of the electricity supplied on the main grid.

In order to make more room for additional renewables capacity, the government has ordered generators to reduce their declared technical minimum for baseload coal-fired capacity.

Last June, energy regulator SEC fined AES Gener almost $5 million for overstating the minimum level at which its 760MW Guacolda thermoelectric complex in northern Chile could operate efficiently.

SUBBITUMINOUS COAL NEEDED

To comply with the stricter criteria, some companies could choose to burn lower quality fuels, such as subbituminous coal, Juan Carlos Olmedo, president of Chile's grid operator Coordinador Nacional Electrico told S&P Global Platts in an interview.

Given that Mina Invierno is about to close that would mean more imports.

"We could see more coal from Indonesia and from Australia," the official explained.

But with coal-fired power plants striving to stave competitive in the face of ever more competitive renewables technologies, buyers will focus on finding the cheapest energy source.

"If the Chileans are going to buy more subbituminous coal, they are going to buy from Indonesia," said one US-based coal trader told S&P Global Platts.

-- Tom Azzopardi, newsdesk@spglobal.com

-- Edited by Andrew Moore, newsdesk@spglobal.com