Analysis: Golden decade for Chilean renewables becomes ‘perfect nightmare’ as firms face financial ruin

Analysis: Golden decade for Chilean renewables becomes ‘perfect nightmare’ as firms face financial ruin | Windpower Monthly

Dozens of companies are potentially facing financial ruin - caught between strained grid capacity and a mismatch between supply and demand, as well as soaring fuel prices.

“Nobody expected such a combination of problems at the same time – it’s the perfect nightmare,” Marta Veloso, Fitch Rating’s head of infrastructure and project finance in Latin America, told Windpower Monthly.

Boom years

Since the government tweaked auction rules a decade ago to favour intermittent technologies, Chile’s renewables sector - excluding large-scale hydropower - has ballooned to 12.7GW, including 4.1GW of wind.

Multi-decade power purchase agreements (PPAs) with distribution companies gave financiers the confidence to plough around US$5 billion into the industry and renewables capacity is set to grow by 50% over the coming year.

Gridlock and policy increase pressure

But underinvestment in transmission lines to link the resource-rich north with major population centres further south have forced project owners to give power away for free or else halt operations due to lack of demand.

A new transmission line to link north and south is in development but it will not be ready before 2030. The government is also pushing for more investment in energy storage, but this too could take years.

A government freeze on power prices during the pandemic increased the pressure and a spike in fuel prices last year was the last straw for many as stranded renewable projects were forced to honour the terms of PPAs with electricity from diesel-fired topper plants, at costs of up to US$300/MWh.

“Those in the north are clearly facing huge losses and have no chance of paying their debts while these supply contracts exist,” Rodrigo Violic, an energy industry consultant, told Windpower Monthly this week.

So far, three renewable companies have reneged on their contractual obligations citing financial difficulties.

Mainstream Renewable Power became the latest this week, blaming delays in the development of its 148.5MW Camán wind farm in southern Chile.

It comes after similar announcements late last year from Ibereólica, for the 245MW Cabo Leons II wind farm, and by Solarpack for its 80MW Maria Elena solar PV farm.

Dozens face financial squeeze

Mainstream Renewable Power, the largest pure-play renewables developer in Chile, is one of the worst affected.

“We expect the situation to improve but it will take some time,” Mary Quaney, Mainstream’s CEO, told analysts in May.

Last month, parent company Aker Horizons announced a €360 million write-down of Mainstream’s Chilean business, including 1.1GW of operational wind farms and another 1.5GW in development, citing market difficulties.

The company has appointed a financial advisor to head negotiations with lenders to restructure its long-term debt.

But the turmoil is not expected to end there. Dozens of firms are potentially facing the squeeze, especially those with assets concentrated in the north and which are wholly dependent on regulated clients.

In April, Fitch Ratings downgraded the corporate debt of Latin American Power - which operates two wind farms in Chile - for the third time in six months.

Bankruptcies and consolidation

Before the current situation gets any better in Chile, some companies could go bust.

In January, German bank KfW launched bankruptcy proceedings against Maria Elena Solar. This would allow a new investor to enter the business, renegotiate the PPA and refinance the debt or invest in energy storage systems which would alleviate the situation.

Many now expect a period of significant consolidation, after a decade in which the number of players in Chile’s power sector expanded from less than ten to almost three hundred.

“We’re not going back to four or five again, but a large number will probably be bought up by bigger players,” said Violic.

Industry split over solutions

To remedy the worsening situation, renewables companies have called on authorities to introduce massive changes to the way energy is priced to reflect the importance of renewable energy projects in the system.

But the issue has split the sector.

Nine leading developers, including Acciona, EDF Renewables, Ibereolica, Mainstream, and wpd have proposed a new pricing system to the government - but the plan is opposed by conventional generators.

Meanwhile, Chilean renewable energy association, ACERA, backed the motion although many members voted against.

In response, Diego Pardow, Chile’s energy minister unveiled a battery of measures which include exempting renewable companies from the tax on emissions, support for storage and introducing region-specific contracts in this year’s power tender.

But ACERA dismissed these solutions as being too little, too late and the current situation is likely to drag on.

A pioneer in power-market liberalisation since the 1980s; the authorities in Chile have traditionally sought to let market forces govern development. But developers warn that impossible conditions for renewable energy projects could threat the government’s climate change commitments.

“We are convinced that our country’s efforts to achieve carbon neutrality and the challenges of the energy transition require commitment and actions from all parties,” ACERA said yesterday (1 June).