Chile Energy Auction Gives Bachelet a Success to Boast About

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  • Auction of electricity contracts saw prices slump 40%
  • Investment in industry cushioned economic contraction in 2Q

After more than two years of sluggish growth, Chile’s President Michelle Bachelet finally has a policy success to boast about.

The biggest auction of electricity supply contracts in the country’s history Wednesday saw the average price slump 40 percent from the previous auction last year as renewable energy producers dethroned many of the country’s incumbent energy suppliers. At the same time, investment in the industry helped cushion a contraction in the economy in the second quarter.

“With this auction, we can confirm that we are on the right path” in terms of energy policy, Bachelet told reporters Thursday. "This is good news for Chileans’ pockets, for the environment and also for the economy."

Bachelet and Finance Minister Rodrigo Valdes have been trying to talk up the economy for more than a year as slumping business sentiment undermines investment. Their success with the energy industry contrasts with falling copper production, stagnation in the manufacturing industry, rising unemployment and falling household spending. Gross domestic product contracted 0.4 percent in the second quarter from the previous three months, the first decline in six years, even as investment in machinery and equipment rebounded.

"Strong investment in machinery is related to the energy investment boom in northern Chile,” said Felipe Alarcon, an economist at Euroamerica. “This could continue, even if lower prices after the auction mean that the investment is not that attractive. There is a lot of investment committed already."

For more on yesterday’s energy auction, click here.

Spending on machinery and investment leaped 9.7 percent in the second quarter from a year earlier, up from 1 percent growth in the previous three months. Investment related to the energy auction and lower prices could add as much as 2.5 percent to Chile’s potential GDP growth, Valdes said, without specifying over which period of time.

"Many of these investments are projects that will have to be built,” Bachelet said. “We are talking of about $3 billion in investment that will generate 3,000 new jobs, so this is good news for the economy.”

Families and small companies will see their electricity bills fall between 20 and 25 percent from 2021, Energy Minister Maximo Pacheco said Wednesday. Most winners in the auction presented renewable energy projects that are looking to take advantage of the country’s geography and climate to provide power at lower prices. 

One of the contracts was the cheapest deal ever seen for any type of power project, according to Bloomberg New Energy Finance. The Spanish solar-energy developer Solarpack Corp. Tecnologica won a contract to sell power from a 120 megawatt-solar plant for $29.1 per megawatt-hour. That compares with the previous low of $29.9 per megawatt-hour for a project in Dubai in May.

“Chile has the world’s highest solar radiation, 3,000 kilometers of coast and large rivers, so it has the conditions to increase renewable energy sources," Pacheco said.