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Chile is known throughout the world as one of the stirring success stories of the developing world, a country that sped past other nations confronted by similarly daunting circumstances thanks to its rejection of statism, its embrace of the marketplace and the ability of its people to tap its extraordinary resources.

Yet, today, Chile faces threats some of which are profound and could become, over time existential, precisely because it seems to have misread the origins of its own success. Like other successful nations, Chile may have gone too far in its rejection of a role for the state in its economic affairs even as it also has gone too far in taking for granted the exceptional resources on which its future growth could depend.

Nowhere is this paradox more clear than in perhaps the most critical, misunderstood and complex sector of its economy: energy. It is here that the next stage of Chile’s extraordinary growth story will depend on its ability to balance its healthy instinct to leave much to the markets with a better sense of where strong government policies, regulation and even periodic intervention are urgently needed.

In this respect, Chile is facing challenges much like another country seen as a champion of the market-led boom of the past several decades, the United States.  In both cases, there has been a clear failure to appreciate the legitimate role governments must play in advancing national interests and avoiding the imbalance sometimes created in markets where too few players have too much power and too little vision. The final especially relevant parallel is that neither country has the coherent, forward-looking, security and climate interest-balancing, national energy policies they need.

Chile’s energy woes are a direct problem of its successes. Growth has increased demand. And the same privatization policies that helped stimulate that growth have led to disengagement of the government from the sector and loss of public influence over energy outcomes, which in turn has led to a disproportionate reliance on a few resources - like hydro and natural gas - that have created vulnerabilities to foreign supply disruptions, climate upsets and price swings. 

The overdependence on hydro, which supplies about 40 percent of its energy, leaves it exposed to droughts. That the rest of Chile’s supply is provided by coal, natural gas and diesel, leaves the country over-dependent on unreliable suppliers, like natural gas producer Argentina, or on comparatively dirty sources of energy.

This hydro dependency will be exacerbated by major new projects like HidroAysén. While hydro does of course produce cleaner energy than fossil fuels and the remote southern region of Aysén where the project is located has not been affected by the recent drought, future climate change creates risks for such projects that do not seem to be fully taken into account in Chile’s approach to its energy portfolio.

Despite studies and speeches, there has been insufficient effort by Chile’s government to do as the country requires and move more decisively away from its overreliance on energy sources that are either open to disruption - hydro, natural gas and petroleum products - or that are so carbon-intensive that they pose a threat to the environment - coal, petroleum products and, on a relative basis versus renewables, gas. 

The Chilean government has during both the Bachelet and the current, Piñera, administrations promised more active efforts towards needed energy diversification.  These have included fact-finding missions abroad and promising efforts to better understand options - like feed-in tariffs - which might help promote more renewable energy development. Chile has set a goal of having 20 percent of its capacity coming from non-conventional renewables (which excludes hydro projects over 40MW) and there are promising solar initiatives in the Atacama Desert where mining companies are sources of enormous demand as well as some interesting wind projects on the books, but efforts are currently too small and not favored by some of the country’s major energy providers.

Those providers have too much leeway in terms of choice - thus increasing national energy risk and potential costs and creating a worry and thus a disincentive for foreign investors - because the Chilean government’s regulatory mechanisms and institutions are not up to the challenges of guiding the market in needed directions. More support for solar and wind and backing for Chile’s rich additional potential sources of energy including biomass, tidal, geothermal and, where geology permits, nuclear, could be more easily provided with enhanced regulatory frameworks in the areas of generation, power purchases and distribution that create the necessary prerequisites for investment. The country would benefit from active entities or legal structures akin to the US Federal Energy Regulatory Commission or public utilities commissions were they to offset the influence of a few big energy companies with appropriate checks on the impact of their actions on ratepayers, evaluation of alternatives, sustainable solutions and national energy security concerns.

Chile would not have created the energy demands it has today, or those it will have tomorrow, without its trailblazing freeing of markets and rolling back of intrusive government. But it now faces obstacles and risks that require not a reversal but a thoughtful, moderate, informed rebalancing that will help protect the legitimate interests of both Chile’s energy company shareholders and the country’s citizens. 

David Rothkopf is president and CEO of Garten Rothkopf, a Washington, DC-based international advisory firm.  He served as a senior official in the Clinton Administration. Allison Carlson, vice president at Garten Rothkopf, contributed to the writing of this article.