How Chile’s Politics Are Shaping the Global Energy Transition

Chilean politics swung back to the pro-free market right this month, with voters electing conservatives to dominate the assembly that will draft the country’s first new constitution since 1980. The stakes are high in Chile’s rightward lurch for everything from the economy to crime to abortion rights. The political pendulum swings will also have big implications for the global clean energy transition given Chile’s role as a dominant supplier of lithium, a crucial component of batteries for electric vehicles and renewable energy storage systems.

In late April, Chile’s leftist government unveiled a new lithium strategy, aimed at asserting greater state control over the industry as well as increasing the sustainability of production. The move comes at a time when governments and companies around the world are seeking to secure their lithium supply chains and expand production. With the world’s largest economically recoverable lithium reserves, Chile plays a massive role in the global clean energy transition. The new strategy risks backfiring, however, and turning into a roadblock to the rapid expansion of lithium supply needed for the energy transition. The recent political shift thus provides an opportunity to recalibrate the strategy to ensure Chile can attract the private investment needed to increase lithium mining at the scale and speed that the clean energy transition requires.

While the Chilean government’s focus on sustainability is laudable, the strategy is a confusing policy proposal that lacks the objectives, timeline, and resource allocation necessary to support the rapid expansion of lithium supply at a pace consistent with trying to decarbonize the global energy system by midcentury.

In its current form, the strategy risks asphyxiating the industry. Investors prefer predictability, but the new strategy relies heavily on undefined innovations and lacks clear implementation specifics, exacerbating uncertainty and making it difficult for investors to make informed decisions about the potential of Chile’s lithium industry.

To increase production, the strategy proposes that the government invite new players and negotiate with the two companies that currently produce lithium in the Atacama salt flat to extend their operation contracts in exchange for state control. Yet in its effort to attract new players, the strategy gets several things wrong.

First, it lacks clarity. In the name of sustainability, for example, lithium mining operations will be prohibited in 30 percent of the country’s salt flats area. Protecting vulnerable ecosystems is a commendable goal, but a clear and predictable process with a well-defined methodology to decide which areas are open to exploitation is missing. That risks lengthy, politicized delays.

The absence of basic definitions is also evident in other areas that are critical for investors, specifically those pertaining to state control. In some areas of what the strategy document calls “strategic value,” private companies will be invited to invest, but with state control. In others, state control will not be a requirement. The strategy does not say where those areas of strategic value are, however.

To add even more complexity, in some cases, the invitation to new players to explore and eventually produce will be made directly by the government, offering special lithium operation contracts. In others, two state-owned mining enterprises, Codelco and Enami, are tasked with inviting new companies to join them in developing lithium projects. Given that these state-owned companies face financial, operational, and technical challenges, this could very well lower the efficiency of the resulting joint ventures.

To be sure, new government policy plans are often cast in general terms, with implantation details worked out over time. But Chile’s new lithium plan lacks even basic definitions and explanations that would provide more clarity to the industry. Before this process is completed, it is impossible to attract new players and expand production.

The second problem is the strategy’s ambition to push for state control. The state has the right, if not the responsibility, to extract economic rents from Chile’s resources. But controlling lithium operations is not the best way to maximize value for the state. The track record of state-owned enterprises in Chile is mixed, at best. To make things worse, as the government itself has declared, the Chilean state has neither the expertise nor the capabilities to run lithium operations. The learning curve risks being slow and costly, hurting the country’s ability to profitably and sustainably increase supply, which is a requirement to generate value.

The strategy also states that firms investing in exploration would merely be “the preferred option” to then receive a contract for production. Investing in exploration requires a lot of capital and risk, but the reward is the value of producing the resource if a firm hits the right deposit. To avoid deterring exploration investment, Chile should provide firms that do make such investments with a right to develop the resource.

To protect the environment, which is a crucial objective, the strategy errs by pushing for specific technologies, such as a set of methods known as direct lithium extraction. These highly specialized technologies offer promise in minimizing environmental impacts but also have shortcomings. Instead of pushing for specific technologies, the state should focus on outcomes, demanding increasingly stringent standards to avoid, minimize, and restore environmental impacts and improve the yield of extraction.

Finally, one of the strategy’s ambitions is to demand that projects in new salt flats share more economic benefits with the state and local communities than what existing players contribute in Atacama. This aspiration does not take into account that the Atacama salt flat has the highest lithium concentration in the world, as well as a lot of existing infrastructure. In the new areas, it is important to allow flexibility in what fair benefit-sharing looks like, all while respecting free and prior informed consent when dealing with local communities.

If these issues are not properly solved, Chile risks deterring private sector investment, attracting only investors with a high-risk appetite and the political backing to pressure the Chilean state, such as large Chinese companies.

The strategy does a good job in realizing the need to negotiate the extension of the contract with SQM, one of the two companies currently extracting lithium in Chile, which expires in 2030. The contract with Albemarle, the other producer, expires in 2043, and renegotiating it now does not seem to be a priority.

The strategy proposes that Codelco, the state-owned copper company, negotiates with SQM to get a controlling stake for the state in the company’s Atacama operations. Although the details of the negotiation with SQM are not clear, it could result in a win-win. SQM could obtain an extension in the term of the contract and potentially an increase in its production quota. Those new conditions would give SQM incentives to invest, which it does not have under its current contract. In return, the state could gain a bigger share—most likely more than 50 percent—of the value created and demand more stringent environmental standards. It could also modify the contract so that all the assets required to operate the business without interruptions are transferred to the state at the end of the extended contract.

To make sure that a reasonable outcome is reached, however, the intention to get state control must be translated into a governance structure that ensures that the resulting corporation is run professionally, leveraging the business capabilities SQM has built and minimizing the risks of political meddling.

Although Chilean President Gabriel Boric had made an electoral promise to create a state-owned lithium company, many things are required to do so that the Chilean government does not have, including technical, commercial, and operational expertise; financial resources to assume risk; and a proper institutional arrangement to run a professional company.

Its creation would also require a special law, the approval of which requires a four-seventh supermajority in the Chilean parliament, where the current government does not have a simple majority. The opposition has publicly stated that it does not support the creation of that company, so it seems unlikely that such a law will be approved any time soon. Failure to consult with local communities also means the strategy has little support from the public. Despite these problems, the government decided to send the bill to parliament. That looks more like an effort to please critics from the hard left, who want the Chilean state to own 100 percent of the lithium industry, rather than a real effort to develop a state-owned lithium company.

Although Chile’s new lithium strategy may have legitimate goals and could lead to successful negotiations with SQM, it falls short in providing clarity and the right incentives to attract the many new players required to scale lithium production at the speed the clean energy transition requires. It leaves too many areas open to interpretation and political interference. Indeed, the reform may have the unintended consequence of increasing China’s role in Chile’s lithium industry. The strategy risks driving non-Chinese private investors—with lower risk appetites than Chinese companies and less willingness to press the government when needed—elsewhere, such as to Argentina or Australia. The political shifts underway in Chile as the constitutional assembly takes up its work are an opportunity for all parties to compromise and collaborate in the interest of the country’s future and the global energy transition. The clock is ticking.