Latin America’s Hottest Renewables Market Gets Government Boost

Updated on

Chile’s effort to loosen rules governing its power industry is delivering a record boost to renewable energy promoters who already were pouring cash into Latin America’s hottest market for the technology.

Developers led by SunEdison Inc. and Enel Green Power SpA invested $2 billion in Chile’s clean-energy industry in the first half of the year, more than double the pace of the same period a year ago, according to data compiled by Bloomberg.

The shift is the result of a tweak to regulations that required those who obtain contracts in government auctions to supply power continuously, a barrier that effectively prevented intermittent wind and solar farms from winning. The result is that demand for renewables in Chile is rising even as mining companies that previously sustained the industry are suffering.

“Until 2014, Chile’s boom was based on the spot market and on contracts with mining companies,” said Lilian Alves, an analyst at Bloomberg New Energy Finance in Sao Paulo. “The new driver now is auctions.”

Ten companies including SunEdison, Acciona SA and Abengoa SA have already won contracts in the auctions since the rule was changed in December. The power plants they’re working on would supply at least 1 gigawatt of solar and wind power, about the same as a nuclear reactor.

Power Auctions

Under the auctions, generators compete for contracts to deliver electricity under long-term agreements. Steady suppliers that use fossil fuels and hydro-electric plants previously dominated the auctions. The next tender due in the first half of 2016 is designed to allocate 29 percent of Chile’s regulated energy supply for the next decade.

The auction model is common in Latin America. Brazil included wind in similar sales since 2009, making it the region’s top market for turbines. It added solar in October. Brazil drew $1 billion for clean energy in the second quarter, down 50 percent from a year ago, New Energy Finance estimates.

Chile’s government acted because renewables growth is expected to slow with falling demand from the mining industry, which had been buying electricity from solar and wind farms to power mines.

A plunge in copper prices has held back interest in expanding mines, said Hernan Farace, senior vice president of project finance for Greenwood Energy, a New York-based solar developer that’s planning an 80-megawatt project in Chile’s Antofagasta region.

Demand Outlook

“Demand for energy may fall in the future, as there will be less new mines,” Farace said.

Solar installations will slow 40 percent by 2017 from 2014 and wind projects will slow by 30 percent, according to New Energy Finance

In Chile’s power auctions, developers offer to provide a certain amount of capacity at a specific price. They don’t say what types of power plant they’re planning. Bids are listed from cheapest to most expensive, and distribution companies select the lowest-cost proposal available until reaching their target capacity level. The winners get 15-year contracts.

SunEdison acquired Santiago-based Latin America Power in May along with its project pipeline of more than 200-megawatts of wind and hydropower plants in Chile and 119 megawatts of operating wind and hydro there and in Peru.

SunEdison’s Work

The company won contracts for 350 megawatts of solar plants in the December auction. The Maryland Heights, Missouri-based company has built four solar farms in Chile with 300 megawatts of capacity, and plans have installed 1 gigawatt in the next few years, according to said Alfredo Solar, the company’s general manager in Chile.

Clean energy has been soaring in Chile, which is a net importer of oil. There are almost 546 megawatts of solar farms working and another 1,700 megawatts under construction. That’s up from almost nothing in 2013. Wind capacity has swelled 50 percent to 892 megawatts.

Expensive power prices has helped drive investment in¼alternatives to fossil fuels. Chile’s power averages $151 a megawatt-hour compared with $125 in Brazil and $142 in Mexico, the region’s top two markets. Renewable contracts at the December auction averaged $103 a megawatt-hour.

Power in Chile is expensive in part because the nation has four major, unconnected grids. That means a dry spell that reduces hydropower in one region require utilities to use more-expensive alternatives. The government is working to link the two main systems by 2021, Marcos Severine, an analyst at JPMorgan Chase & Co. in Sao Paulo, said in an April report.

“The sector cannot grow only based on the merchant market,” SunEdison’s Solar said in a telephone interview from Santiago. “It must have long-term contracts, and the auctions will be the element to push renewable energy in Chile.”