Is Chile still attractive for wind investors?

• Renewables have expanded rapidly in Chile over the last decade
• However, operators are losing out in the 'marginal cost' system
• Trade body ACERA has warned about "financial sustainability"

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Renewable energy investment in Chile has rocketed over the last decade.

In 2013, there was 301MW of operational wind capacity, which grew twelvefold to 3.8GW in 2022, according to the International Renewable Energy Agency. Growth has been even more stunning in solar, from just 15MW in 2013 to 6.3GW in 2022. There are also around 7GW of projects being built in the country.

But this ten-year success story may now be coming to an end. Renewable energy operators in Chile are facing more financial strain, and the government has so far been unable to implement policies to improve the situation.

One reason for the problems facing operators is the country’s ‘marginal cost’ power market. This means power is dispatched to the grid based on the variable costs at the asset which, for wind and solar, are around zero because the wind and sun are free. Renewables are therefore first in line to get power onto the grid, but they will often receive little or no money for power produced during times of high production, because of power price ‘cannibalisation’. More generation results in lower prices.

Another reason operators are struggling is Chile’s transmission grid. The long and thin geography of the South American country makes it tough to supply power from where it is produced in the north of the country to where it is needed. Transmission lines can often be oversaturated when production is high, which means operators have to curtail production – and, in Chile, there is no compensation for curtailment. 

Operators also do not have the option of switching off their projects, as they have to supply electricity when demanded by grid operator Coordinador Eléctrico Nacional.

Finally, the transmission system can cause problems for firms that need to dispatch power to customers in another region. Renewables operators can end up having to transmit power to the grid in one area for no return, and then pay to withdraw power in another area to supply their customers. Industry experts have argued that this is unfair because fossil fuel firms receive subsidies from everyone that withdraws power from the grid.

In short, operators are under pressure from a few directions, and it is causing problems for some of the industry’s best-known companies.

For example, Aker Horizons reported in its 2022 results that subsidiary Mainstream Renewable Power has been forced to make a $350m writedown due to the impact of “grid capacity limitations leading to increased costs”. Two other firms – Maria Elena Solar and Ibereolica Cabo Leones III – declared bankruptcy in 2022 too. Onlookers have warned that further insolvencies in wind and solar are likely in 2023 and 2024.

These problems have not gone unnoticed. Chilean trade association ACERA warned in July that wind operators in particular are facing a “complex financial situation”, and called on policymakers to find “ solutions that ensure the financial sustainability of companies”. It also highlighted the lack of renewable energy project finance deals in 2022 as a sign that lenders and investors are cooling on the Chilean market.

But operators and investors should not give up hope quite yet.

Policy hope

On 10th July, the Chilean government submitted an ‘energy transition’ bill to Chile’s Congress, with a focus on unlock investments in transmission projects to improve the reliability of the grid. This builds on the $2bn transmission project announced in late 2022 to connect Antofagasta in northern Chile to capital city Santiago.

The bill also includes a $2bn programme of support for large energy storage projects that could come into force by 2026. This would make it easier for individual operators to store power at times of high production, and supply it to the grid when production is lower and power prices are more attractive. The growth of energy storage could be especially beneficial in solar as it can help with load-shifting, but would be positive for wind farm owners too.

Chilean authorities released bidding terms in July for a 5,400GWh renewable energy and storage tender, in blocks of 1,800GWh and 3,600GWh that are set to come onto the grid in 2027 and 2028 respectively. Bidders have until 23rd December to submit bids. The tender is open to both domestic and international companies.

These changes cannot fix all of the problems facing renewables operators in Chile, but policymakers are trying to do so by increasing grid capacity; helping to operate the existing grid more flexibly; and changing power price mechanisms so renewable energy companies are not unfairly disadvantaged. These are all needed if Chile is to continue its energy transition and operate with high penetrations of renewables.

The upcoming tender will give a great indication of how companies in the private sector feel about these plans.