Banks Question Cost of Chile’s Renewable Energy Revolution

  • Companies may struggle to finance solar plants and wind farms
  • Renewable energy producers have pledged to slash prices

The renewable energy companies that are promising the cheapest electricity in Chile’s history may have overreached themselves as banks and investors balk at the risks.

Companies such as Solarpack Corp. Tecnologica and Mainstream Renewable Power Ltd. have pledged to provide electricity at prices between $29.10 and $41.10 a megawatt-hour after winning contracts earlier this year. Now, all they need is someone to lend them the money.

"My guess is that they will struggle to bring in financing," said Juan Lago, energy project financing manager at Banco Security, speaking at a renewable energy conference in Santiago Wednesday. "Not every power purchase agreement is bankable."

The auction of contracts to supply 12,430 gigawatt-hours of energy over 20 years attracted a record number of bidders in August, offering the lowest prices ever seen in Chile. The government celebrated the results as a rare victory after more than two years of sluggish economic growth, above-target inflation and funding scandals. Yet, that success story may not be all it seems.

"We are talking about highly leveraged projects and you might have problems financing them because at the end of the day the risk is for the bank," said Carlos Lopez, project financing manager at BBVA in Chile.

Early Signs

The early signs of trouble are already there. Four of the five companies that won contracts at an earlier auction in 2015 won’t be ready to supply the electricity next year as pledged, despite having won contracts at an average price of $79.30 a megawatt-hour, compared with the average $47.50 a megawatt-hour at this year’s auction.

Solarpack has transferred its contract to supply 100 gigawatt-hours to First Solar Inc. and will not build the two solar plants it had planned. Ibereolica SL won a 195 gigawatt-hours contract, but will not be ready until April 2017, four months later than expected.

Mainstream Renewable Power won the majority of contracts in last year’s auction through Aela, its joint venture with private equity firm Actis Asset Management, and was supposed to start building two wind-farms in October so they could begin operating early in 2017. Financing for the projects is not ready yet. The company is expected to close financing by early November, said Bart Doyle, Aela chief executive officer, in a telephone interview.

Under Strain

Those companies will be injecting electricity into a system that is already distorted by the power surges associated with generators that depend on weather conditions. In the north of Chile’s central grid, spot prices often fall to zero during peak solar radiation moments.

That is a problem, even for the companies that won long-term supply contracts in this year’s auction. Under Chile’s multi-nodal system, renewable energy generators don’t sell electricity directly to the grid. Instead, they sell it at spot prices in the local area, often in the north, and then buy it from other generators where most users are based -- typically in the south. 

A new transmission line that will link Chile’s northern and southern grids will lower costs and risks, while constant technological advances in the renewable energy sector will help prices go down, energy providers say.

"We deal with European banks, Japanese banks and multi-laterals and we don’t have the perception that getting financing is hard," Inigo Malo, Solarpack’s manager for the Andean region, said in an interview in Santiago. "We are finding appetite and disposition from banks to start conversations."

Question of Costs

To Aela’s Doyle, the prices guaranteed at this year’s auction are sustainable.

"Those prices are the new norm for renewables globally," Doyle said. "Last year people also said that prices were too low and that we weren’t going to close financing, but we are."

In an interview in September, Maximo Pacheco, who resigned as energy minister on Wednesday to join the election campaign of former President Ricardo Lagos, dismissed concern that prices in the energy auction were too low.

Not everyone is so sure though. Bidders offered lower prices based on estimates that the costs of renewable energy will drop before they have to start supplying power in 2021, adding risk to the mix, according to Lopez.

"We are increasingly relying on models that never guess the reality and fail consistently," Lopez said. "Basing the financing for 15 or 20 years on those models will become a problem at some point."

As banks look to restrict lending, those risks may become all important.

"We are making an effort to understand the changes in the market, but we are not going to go crazy and finance projects that are not attractive," said Harken Jensen, vice-president of global banking at Banco Santander Chile, speaking at the conference.

Lower Returns

Energy companies may turn to investors to finance their projects, but cut-throat pricing will bring lower returns of 8 or 9 percent, compared with previous double-digit figures, according to Ben Moody, executive director of Pan American Finance, an investment banking and advisory firm.

"It is going to be extremely difficult to get double digit returns in a market that has changed very dramatically," Moody said at Wednesday’s conference. "Obtaining financing is more complicated at these prices because the margin of error is smaller."

— With assistance by Vanessa Dezem

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