Chile and the European Union modernize its Association Agreement with great impulse for the climate-transition critical industries of green hydrogen and lithium

German and European investors in the energy and commodities sector with an eye on the exchange between Chile and the EU - two like-minded regions sharing common democratic values and ambitious climate-change targets - can be pleased at the end of this year with the conclusion of negotiations on the modernization of the 2002 Association Agreement between Chile and the EU, which, among others, sets forth express provisions to secure European investors, offtakers and consumers access to green hydrogen, green ammonia, e-fuels and lithium in a sustainable way. Further Chile has enacted at the end of November cut-edge legislation on the storage of electrical energy and electromobility, which significantly helps to surmount current challenges in the consolidation of the renewable energies sector in the Andean country.

Already in 2002, the EU and Chile concluded an Association Agreement, consisting on a comprehensive free trade agreement which has successfully boosted trade and investment relations between the two regions since its entry into force, resulting in an increase of bilateral trade by 142% between 2002 and 2021. In 2017, the EU and Chile launched negotiations to modernise the Association Agreement to better reflect all relevant areas of bi-regional relations, taking into account the political, economic and technological changes of the last 20 years. On 9 December 2022, the European Union and Chile concluded said negotiations on the EU-Chile Association Agreement, now referred to as the Advanced Framework Agreement.

In particular, the provisions regarding sustainable access to climate-transition critical green fuels and commodities, such as lithium, offer exciting opportunities. Chile has considerable potential for the cost-effective generation of power from wind and solar sources and thus also for the production of green hydrogen, green ammonia and e-fuels, among others. Chile's self-imposed goal is to become the world's lowest-cost producer of green hydrogen by 2030 and one of the world's top three hydrogen exporters by 2040. EU Member States such as Germany, the Netherlands, and Belgium have already signed Memoranda of Understanding with Chile to allow trade in hydrogen in the future.

Chile plans to install more than 200 GW of renewable energy capacity for hydrogen production alone by 2040 (ten times what the country needs for domestic consumption), which is worth around USD 220 billion. The EU-Chile Agreement provides an attractive and secure framework for trade and investment in hydrogen and renewable power generation, ensuring sustainable production and processing as well as non-discriminatory access to the Chilean hydrogen market (e.g. through the prohibition of export monopolies, export licences, export taxes and disciplining price regulation), as well as to the electricity grids, which is monitored by an independent body. German and EU companies will be able to invest in renewable or hydrogen power generation capacity on an equal footing with domestic companies. The agreement provides for cooperation to facilitate trade in hydrogen, for example by harmonising certification systems for renewable fuels, removing barriers to trade in hydrogen and promoting hydrogen production.

On the other hand, lithium is critical for the EU Green Deal as it is indispensable for the production of batteries for electric vehicles and other energy storage devices. Demand and competition for lithium is growing rapidly with no end in sight. Restricted access to lithium threatens the future of EU battery production and could make the EU dependent on other battery producers such as China. Chile is one of the world's largest suppliers of lithium (40% of global lithium supply and around 80% of all EU imports (2020)). The advanced framework agreement between the EU and Chile ensures access to the lithium needed and compliance with the highest sustainability standards. The modernization agreements ensures non-discriminatory access through prohibiting export and import monopolies for raw materials, guaranteeing that no exclusive trading rights are granted to any particular company. With the agreement, Chile also commits not to introduce price targets that are lower than the market price of the previous year and not to apply export restrictions to the EU.

Further, regarding the energy market at the end of November 2022 the Chilean legislator approved the long awaited legislation for developers and investors in the renewable energy sector in Chile: the new Chilean law promoting the storage of electrical energy and electromobility (Law No. 21.505/2022) came into force.

Due to Chile’s geography and the fact that some parts of the electricity grid are still being expanded, the problem of curtailment continues to exist: the production of renewable energies, especially in the solar-rich north of the country, can be limited due to restrictions on the transmission of energy to more densely populated regions with high demand. Against this background, the installation of storage facilities, especially battery energy storage systems (BESS), is a promising solution.

The new law on Electrical Storage is a fundamental step forward in this area, which holds high investment potential, as it aims to facilitate and provide certainty to projects for the development and construction of both stand-alone battery storage and for combination with renewable energy power plants. The new law defines a new category of generation and consumption systems (sistema generación-consumo) within the general Law on Electrical Services of Chile. On the one hand, projects of this new category will be able to draw energy from the electricity grid for storage, but on the other hand, they will also be able to feed surpluses into it. The storage systems are also subject to coordination by the national electricity coordination body (Coordinador Eléctrico Nacional). They can also participate in energy and power transfers and be remunerated according to the current marginal costs of the electricity system or the so-called “node prices” (prices at the generation and transport level consisting of energy price and peak power price).

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Edder Cifuentes<br/>M.L.B.

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