UPDATE 5-Chile top court rejects $5 bln Castilla power project

* $5 bln, 2,100-MW thermoelectric plant struck down
    * Project can be resubmitted, supreme court says
    * MPX, E.ON say to re-evaluate business strategy in Chile
    * Environmental groups blast controversial coal project
    * World No. 1 copper producer struggling with power woes

    By Erik Lopez and Alexandra Ulmer
    SANTIAGO, Aug 28 (Reuters) - Chile's top court rejected the
planned $5 billion Central Castilla thermoelectric power plant
on Tuesday, citing environmental reasons, in the latest setback
for the mega power project in the world's largest
copper-producing nation.
    The decision on the planned 2,100 megawatt plant, a joint
venture of Brazilian billionaire Eike Batista's MPX Energia SA
 and Germany's E.ON, comes as Chile 
grapples with steep power prices, a shaky transmission grid and
reversals of several massive projects.
    MPX and E.ON said the joint venture would "re-evaluate its
business strategy in Chile" in the wake of the court decision.
    Chile's supreme court said the companies could resubmit an
environmental impact study grouping together the project's two
main components -- a port and a thermoelectric power plant -- 
potentially leaving the window open for the complex to see the
light at a later date. 
    Castilla could "harm the constitutional guarantee that one
can live in an environment free of pollution," the court said,
citing a lack of information about the unity between the two
projects as well as irregularities in land-use qualifications.
    Environmental groups have opposed mega-power projects
ranging from coal-fired, thermoelectric plants in Chile's
northern Atacama, the world's driest desert, to hydropower dams
in the wild southern Patagonia region. The Castilla case was
seen as a litmus test for several other
environment-versus-energy disputes. 
    Energy problems, as well as dwindling ore grades, regulatory
setbacks and extreme weather are seen threatening an estimated
$100 billion in mining investment by 2020.
    While mining helped Chile's economy grow 6 percent last
year, the Andean country has the highest level of income
inequality among the 34 OECD countries, according to a report by
the body last year, and many feel a copper-led boom has bypassed
    Castilla's rejection is also a blow to Brazil's Batista, who
is facing tumbling confidence among investors in his energy and
mining conglomerate. 
    More than $22 billion and over 8,000 megawatts in energy
investment in Chile have been suspended, according to Libertad y
Desarrollo, a conservative Chilean think-tank. 
    Castilla was planned for Chile's copper-rich Atacama region,
with the goal of providing energy to the booming mining area.
    Cerro Casale owned by Barrick Gold and Kinross
, Lumina Copper's Caserones mine and Barrick's
Pascua Lama mine are gearing up to operate in the surrounding
    "Miners are really going to deplore this ... Various
projects in the (region) are somewhat fragile," said Ronald
Guzman, mining professor at the Universidad Catolica in
Santiago. "They're going to seek new sources of energy ... I
think Argentina and Bolivia could appear as good sources."
    Years of under-investment, a destructive 8.8 magnitude
earthquake in 2010, droughts and logistical issues stemming from
the country's long, thin shape have debilitated Chile's power
grid, drawing increasing fire from energy-intensive mining
firms. Chile's power matrix has a capacity of 17,000 megawatts
and the government aims to add another 8,000 megawatts by 2020.
    "We have to see if the company decides to resubmit the
project, but clearly even if it does resubmit the project, it
delays the project, which means future demand will have to be
satisfied by other sources," said Andrew McCarthy, electricity
sector research analyst at Banchile Inversiones in Santiago.
     A spike in lawsuits against key energy projects is
increasing already steep power prices and inhibiting investment,
deputy energy minister Sergio del Campo told Reuters in an
interview in June. 
    Violent protests against mining projects are increasing in
neighboring Peru and Bolivia, where many citizens feel they have
not benefited from metals-led economic growth but have suffered
environmental costs.    
    A handful of fisherman and artisans from the tiny village of
Totoral in northern Chile had opposed the Castilla project on
environmental and health grounds, saying the coal-fired plant
would harm air and water quality.
    MPX and E.ON said in their joint statement that the projects
had been correctly evaluated and submitted to the highest of
environmental requirements. 
    The supreme court unanimously upheld an appeals court ruling
against the Castilla power plant earlier this year.
    If Castilla resubmits its project, it would have to explain
the transfer of coal and petrol from its port to its plant, the
court added. The port and plant projects had been submitted
    Shares in MPX gained 1.97 percent on Tuesday, while shares
in E.ON closed 0.7 percent lower.