Chilean electricity market presents interesting business opportunities. On the one hand, Chile faces a shortage of energy supply and significantly high marginal costs and prices (some of the highest in Latin America, as well as between mining countries). The current Government’s Energy Agenda is supposed to face a decade of non-comprehensive and uncertain energy policies that have developed inefficiently the electricity system. Yet in the near term the nature of the SIC –Central Interconnected System– will not change so power prices would remain elevated and volatile through 2019-2020, experts are expecting a reduction of the prices for the 2020s.
This Political Energy Agenda is mainly relating with the promotion of greater competition and diversification of the energy matrix (e.g. tenders for power supply to distribution companies, such as the remarkable 2015/01 bidding process ending on May 2016 for 13,000 GW/h through 20 years Power Purchase Agreements). The focus is on renewables and liquefied natural gas. Likewise, the State plays an important role in this Agenda supporting and boosting investment in energy infrastructure and in the connectivity for energy development.
On the other hand, Chile represents an ideal renewable investment environment, which has been confirmed this week by the numerous renewable companies adjudicated in the 2015/02 bidding process (1,200 GW/h for 20 years). Renewables in the Chilean market have demonstrated their competitiveness, as they have succeed with no subsides (not as most of the projects around the world). The current energy policy is, in fact, addressed to take advantage of the abundance of Chile’s natural resources (4,000 kms of coast, short distance between mountains and sea, highest solar irradiation levels in the world, the 25% of the volcanoes in the world). In this way, the target of renewable non-conventional capacity increase from 11% to 20% by 2025 is no longer seen as an unrealistic goal.
Even though the PPA has become necessary for financing renewables, the negotiation position of renewable companies has been strengthened On the one side, the reduction of the generation costs of the thermoelectric plants –given by the drop in the price of oil and the lower prices of coal– allows renewables companies to meet their contracts in times of no sun or low wind buying energy in a lower price in the spot market. On the other side, Chilean natural conditions and strong history in hydro generation should be considered for the mix of projects (e.g. hydro and solar), because it ensures stability and, hence, strengthens PPA negotiation position.
The above demonstrates that the Chilean renewables market is not addressed only to large scale players. There are good opportunities and interesting incentives for smaller scale renewables (e.g. preferential grid access and off-take rights). Finally, some relevant regulatory proceedings have been simplified (e.g. granting electrical concessions, or land concession for renewables projects).
From a legal standpoint, the investor should have clear knowledge about the rights over the generation area, as well as over the transmission line area (surface rights, land concession, mining concessions). The interconnection issues, the environmental approval, and the construction permits, are also core legal aspects for energy projects. For instance, the interconnection agreement, the requirement of environmental impact assessment (for all of over 3 MW electric power generating plants) and/or the sectoral permits may be sensitive issues.
In sum, Chilean electricity market is offering interesting opportunities for investors, predominantly in renewables. Less than 10% of total identified Chilean renewable resources are in production, but financing constraints are impeding development of new projects.
Manuel José Barros, Lawyer, practice oriented to natural resources, energy and environment. Linkedin
Picture: Daniel Beilinson (CC0)