The Chilean renewables market has been the focus of much interest in recent years as the industry reacts to the potential for growth. In August 2014, the government awarded 76 concessions to more than 30 companies for development of 3.1GW of wind and solar energy projects. Latest figures released by the Centre for Renewable Energy in Chile in September 2015 have exceeded all expectations, with an encouraging pipeline of 50 renewable energy projects, corresponding to 2,394MW, declared under construction and planned to become operational between September 2015 and August 2017. As of August 2015, there were 69 renewable energy projects undergoing environmental evaluation by the environment authority with a total capacity of 6,015MW.
Renewable power is likely to continue to develop and to take a more prominent role in the energy profile in Chile. In August 2014 the installed renewable energy capacity represented 8.7 per cent of the total electrical capacity of the distribution system in Chile, whereas as of August 2015 this figure has increased to 11.27 per cent. Its growth will be sustained by a new renewable generation target of 20 per cent by 2025. Chile's rising attractiveness for renewables investment cannot be better illustrated than by its fast rise in the EY Renewable Energy Country Attractiveness Index, ranked in ninth position as of September 2015, up from thirty-third position in the February 2013 index. Business Monitor International's latest Power Risk/ Reward ratings rank Chile as the number two power market in Latin America, immediately after Mexico.
International players such as GDF Suez, BP (Pan American Energy), SunEdison, ENEL, Pacific Hydro, Actis, RP Global and Mainstream Renewable Power are already active in the market, with new projects making headline news on a regular basis. The market is attracting ever larger foreign investments. In 2013, private equity firm Actis and Mainstream Renewable Power established a JV to develop 600MW of wind and solar projects at an estimated cost of US$1.4 billion. The project has been cleared by the Chilean Environmental Evaluation Service and construction is expected to commence in the coming months. The government has also approved five solar plants totalling 300MW to be developed by China's Sky Solar at a cost of US$1.1 billion and the project is expected to get underway in the third quarter of 2015. Finally, Enel Green Power has started the construction phase of the Finis Terrae solar photovoltaic power project – the largest photovoltaic installation in the country. Once fully operational, the plant will be able to generate more than 400GWh per year, equivalent to the annual electricity needs of nearly 198,000 Chilean households.
At national level, non-regulated consumers such as mining companies are also realising the potential for renewables in Chile, and these consumers are contributing to their development by entering into agreements to purchase green electricity directly from generators. The rise of renewables in Chile is good news for both environmentalists and the mining industry, as Chile is fighting an ever-present risk of power shortages.
Power shortages and high electricity prices
Although rich in other natural resources, Chile has no gas, oil or coal and relies heavily on imports for its energy supply. Domestic resources are limited to large hydropower, which has to date played an important role. However, after a few years of droughts, and unreliable gas imports since 2004, energy supply and energy security are two of the key issues facing the country.
Scarcity of energy supply is compounded by the fact that the Chilean economy is buoyant, growing at an average rate of more than five per cent between 1987 and 2015. This is set to continue, with GDP growth predicted to increase at a rate of approximately 4.5 per cent until 2023. Northern Chile is growing even faster due to the expansion of its mining industry. Chile's energy requirement is forecast to grow in parallel at a rate of six to seven per cent until 2020.
These factors combined mean that the electricity price in Chile has traditionally been high in comparison to many other countries in the region. Recently, power traded on the spot market at US$80.9/MWh. Such high power prices mean that renewables projects can be competitive despite relatively low government support and without a price guarantee.
Limitations of hydro
Due to strong public opposition, in 2014 the government cancelled its plans to develop a large hydropower project – HydroAysen – in Patagonia, South Chile. The project, which consisted of five large dams, would have flooded 5900Ha of land, thus posing a serious threat to Chilean wildlife. Power transmission would also have been an issue, as the project would be remote from the main source of demand in Central Chile and so would have required substantial investments in the transmission system. Environmental concerns coupled with droughts in recent years have also highlighted the limitations of relying on hydropower and have led the Chilean government to announce its intention to limit its dependence on hydroelectricity.
No more coal?
With thermal coal prices across the Pacific basin at low levels, and new coal-fired generation load factors increasing markedly in markets like Europe, you would expect that the solution to Chile's energy needs lies in additional coal-fired plants. However, there is strong environmental and political opposition to additional coal capacity, especially in the North. In August 2013, a Chilean appeals court blocked the construction of Endesa's US$1.4 billion coal-fired thermoelectric project. In September 2014, Chile enacted a carbon tax which imposes a levy of US$5 on each metric ton of carbon dioxide emitted by thermal power plants with a generation capacity of at least 50MW. This measure reflects a commitment to Chile's target of cutting greenhouse gas emissions by 20 per cent from 2007 levels by 2020. Taken together, this means that significant levels of new coal capacity will not come online any time soon.
The potential of the Atacama Desert and the mining industry
The North of Chile is the home of the Atacama Desert, which has one of the highest rates of solar radiation in the world. The potential for the development of solar technologies in the North is vast. Half of the Chilean renewables pipeline is in solar PV.
The North is also where most of the Chilean mining industry (and a third of the world's copper mining) is located. The industry requires a continuous power supply yet there is limited power in the North and the development of new coalfired power stations to match increased demand is slow. Grid access and reliability of power supply are also problematic. By contrast, solar projects can be developed quickly and in close proximity to the mining sites, thus limiting grid access issues and risk of grid constraints. Of course, they also bring benefits in terms of corporate responsibility. Moreover, solar power can be produced at a competitive price in a country where power prices are traditionally high, particularly by eliminating the risk and costs associated with bringing fuel supplies to remote mining sites.
Mining companies are therefore supporting renewables development by entering into long term power purchase agreements with developers. In a recent report, EY estimated that mines in Latin America will invest more than US$1 billion in renewable energy projects by 2022, up from US$37 million in 2013.
For renewables developers, the commitment of mining companies to their project means they can secure better financing, since revenues for the project are put in place for a fixed period. However, it can be challenging to get mining companies to commit to long term offtake contracts. This has been an issue globally, as the cyclical nature of the mining industry is not easily reconcilable with the long term contracts required to underpin investments in the power sector.
There remains an issue with intermittency of renewables generation that can be difficult to manage for end-users. Concentrated Solar Power (CSP) projects with storage capability are touted as a possible solution, but the levelised costs of energy from CSP remain stubbornly high. Our view is that CSP is not going to be a game changer in Chile in the short to medium term.
Surfing the waves
A renewable resource not prepared to be thrown into the shade by solar is ocean energy. With its long coastline, powerful waves and tidal currents, Chile has 160GW of potential capacity available through marine energy resources, according to its government's assessment. This is more than ten times the current installed capacity in the country and could supply power to more than 112 million homes. The government announced in October 2013 that it will invite bids from developers for US$14 million of grants to build the country's first wave and tidal projects. The winners will be required to match the investment in the pilot projects, with an additional US$2.4 million available from the Inter-American Development Bank. The Chilean government also pioneered the creation of the national Marine Energy Centre, which was the first to be established in Latin America.
Merchant power and bankability
High power prices, a liquid spot market and attractive longer-term pricing forecasts for power have meant that a few renewable projects, including the Negrete wind project, have been financed on a merchant basis. One of the most impressive of these projects is the 50.7MW San Andrés solar farm, which will be built by SunEdison Inc. This project will be one of the largest merchant power projects in the world, with spot prices competing on the open market. It has received financing from the US government's Overseas Private Investment Corporation and the World Bank Group. Another recently completed project, the 70MW PV Salvador Solar Plant, is expected to produce approximately 200GWh of solar electricity per year, enough to supply electricity to approximately 70,000 households in Chile.
Such projects represent a welcome solution for developers who sometimes struggle to negotiate long term power purchase agreements at a reasonable rate. For these projects, the merchant risk is arguably limited, because plants in Chile are dispatched in order of their cost of generation to ensure that electricity is supplied at the lowest available cost. This system favours renewables with no fuel costs, such as wind and solar, which means that developers and financiers face little risk.
Favourable climate for investors
According to Transparency International's 2014 Corruption Perceptions Index, Chile, ranked at 21st place, is perceived to be one of the least corrupt countries in Latin America and is the third least corrupt in the Americas, after Canada and the US. On the 2013 Index, it ranks 22nd out of 177 countries. Chile has for a long time also been one of the most attractive countries for doing business in Latin America and is well-known for its openness to trade, capital flows, exchange of technology and ideas, labour movements and cultural integration. This favourable reputation has led it to be ranked ahead of the US, Mexico and Brazil in the EY Globalization Index (2012).
The five per cent obligation on generators to incorporate renewables in their energy mix has been replaced by a 20 per cent target. This landmark agreement puts an end to several years of government hesitation where ambitious targets were proposed before being abandoned for being 'neither technically nor economically' feasible.
Under the current support regime, parties who are subject to the renewables obligation can comply by collecting green certificates, either issued to them or purchased from the market. The obligation only applies to contracts for the withdrawal of electricity from the transmission system that were entered into, extended or renewed after August 31, 2007. It also only applies to renewable electricity generated by installations that first connected to the system after January 1, 2007. As a result the market is still immature and with a limited range of buyers. However, there is a market and green certificates are traded at a reasonable discount to the value of the fine for non-compliance. For wind projects, green certificates can represent up to 15–20 per cent of project revenues.
The 2013 Budget Law allocated a budget of US$85.5 million to the 'Support for Non-Conventional Renewable Energy Development Programme' which subsidises pilot projects based on non-conventional renewable energy. Several public tenders have been launched under this fund, one of which is the CSP plants tender which was launched at the end of February 2013. Chile's Ministry of Energy agreed to provide a subsidy of up to US$20 million and to facilitate access to land for the plant. The government also announced that it had negotiated a consortium finance sources which amounted to over US$350 million in soft loans. The tender was recently won by the Spanish company Abengoa. In 2014 the company began construction of the Atacama 1, one of the largest solar complexes in Latin America. The power plant, located in the Atacama Desert, will have an installed capacity of 210MW and will be the first solar-thermal plant for direct electricity production in South America.
In addition, with many projects approved but not yet built, the Centre for Renewable Energy in Chile (CER) has announced several funding programs to help get more projects grid-connected, with particular emphasis on projects of 50MW or less. These plans include US$2.3 million in funding to develop and finance grid-connected projects in the coming year, plus another US$4.1 million for selfsupplying renewable energy systems. CER is also allocating US$1.8 million to back engineering studies for projects in the pre-investment stage and a further US$4.3 million for smaller projects to develop renewable energy systems for self-consumption (for instance, the nation's dairy sector, which is seeking to develop more biogas options).
Earthquakes severely affect energy security in Chile. The majority of Chile's electricity grid was severely affected by the earthquake that shook Chile in February 2010. This, coupled with a lack of investment, is blamed for blackouts and other constraints that still affect Chile. There are concerns that the grid is ill-equipped to accommodate intermittent renewables generation. Further investment in the system will be required if Chile is to add targeted 8000MW of new capacity (renewables and conventional) by 2020. In April 2015, President Bachelet confirmed the government's commitment to its energy plan for the unification of Chile's two electricity grids, the SIC (which serves Santiago and the central region) and the SING (which supplies the northern region), by signing an official decree. This would mean overcoming the 600km stretch of desert which currently divides these grids. President Bachelet has also promised to open up the grid to further competition, which, she argues, should lead to a reduction of the SEC's marginal costs by 30 per cent in the next four years.
Alternatives to merchant power
Developing projects on a merchant basis is not going to be attractive to all investors and the market needs to develop so that wind and solar power can be sold on a long term basis to distribution companies and wholesale customers. This may require solutions such as development of aggregators, which are able to manage a larger portfolio of renewable assets, and structuring power purchase agreements in such a way that 'blocks' of power are sold (for example, by combining intermittent renewables with hydro and other storage options).
Corporation tax increase
A new tax bill was passed by the Chilean Congress in September 2014. This bill proposes to overhaul the current tax system by effectively increasing corporate income tax from 20 per cent to 25 or 27 per cent in the period 2014– 2017. The reform is expected to increase the cost of doing business in Chile.
With the increased demand for power from the mining industry and the country's unparalleled natural resources for renewables generation, such as wind, solar or geothermal, the Chilean renewables market has great potential and should continue to attract the interest of international investors. High power prices and the structure of the power market both contribute to making the financing of a renewable project on a merchant basis a real possibility. The support of the mining industry, through direct power purchasing from green projects, will also greatly assist the bankability of renewable projects.
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