About seven years ago, when prospects for large-scale, non-conventional renewable energy development in Chile were beginning to emerge, it didn't take interested observers long to realise that few countries on earth presented as favourable a business case for renewables development as Chile.
LEFT TO ITS OWN DEVICES
Nestled between a long stretch of South America's Pacific coast and the Andes, the bulk of Chile's 18 million inhabitants, plus its agricultural activity, are located in the central region. Chile's north is home to the Atacama Desert, one of the driest, sunniest places in the world where the bulk of the copper mining industry operates. In the south, home of the indigenous Mapuche community, lush forests and grazing lands sit alongside a string of volcanoes, lakes, fjords, inlets and twisting canals, peninsulas and islands.
Located too far out of the way and with too little demand to compete for thermal fuels at a global scale; lacking oil and gas production assets of its own; divided into three power grids; historically plagued by tensions with neighbours – Argentina, for example, enacted a sustained gas supply cut in 2004; home to a large copper mining industry eager for direct access to production assets; and characterised by regulatory stability and friendliness to foreign finance alike. This was the confluence of circumstances that led renewables to become a significant contributor to Chile's overall energy mix, providing for more than 10 percent of demand – a number that's set to double by 2025.
ON TOP OF THE WORLD
Though the brisk pace of wind and solar development activity is likely to lull for the next two to three years due to a variety of factors such as slowing copper demand (and therefore lower-than-expected energy demand from mining consumers), limited transmission capacity, and a handful of other market constraints, none of that stopped Milbank, Tweed, Hadley & McCloy's Los Angeles partner Allan Marks from remarking recently that Chile is still “on its way to becoming one of the top renewable energy markets in the world”.
International deals in the space have involved European institutions including the Netherlands' Rabobank, France's BNP Paribas and Societe Generale, Norway's DNB Bank, and Spain's Banco Santander. Also present is Japan's SMBC. Multilaterals such as the International Finance Corporation have been known to enter deals in the space as well, and, as Hogan Lovells partner Oscar Stephens observes: “The local banking market is very deep and there is fierce competition among local banks.
“It's a member of the OECD, so it has a very strong economy, especially relative to other parts of South America,” Marks says. What's more, “they've had changes in their political system back and forth, and still maintained strong support for both foreign investment and green energy”
Even with its political turmoil and corruption scandals – in the form of the Caval investigation most recently, which involves the son of President Michelle Bachelet, in a case of alleged influence peddling and inappropriate behaviour in real estate speculation activities – Marks is not alone in remaining convinced that regulatory destabilisation is unlikely.
AMBITIOUS GOALS AND INNOVATIONS
In the midst of a global search for viably scalable renewable energy technology, Chile has been one of the world's breeding grounds for technical innovations, and for creative deals such as the El Arrayan wind farm, which Marks was involved with and notably included a power purchase agreement (PPA) with an industrial off-taker. Apart from PPAs, hedges are being used in some off-take agreements.
According to Stephens, Chile faces a legal mandate that by 2025, 20 percent of electricity must be generated via non-conventional renewable energy sources.
This has led to a lot of action in the renewable arena, among the latest of which is the environmental approval in August for development of SolarReserve's 260-megawatt (MW) tower project including a solar storage component, which could be operational by 2019, if plans are realised. According to comments by SolarReserve chief executive officer (CEO) Kevin Smith at the Solar Power International conference last month, the firm's pricing for solar PV with integrated storage is well under 10 cents.
Spanish developer Abengoa has likewise been busy negotiating its right to develop two more solar-plus-storage projects, a 100MW solar PV plus 110MW heliostat power tower with 17.5 hours of storage capacity, and an 110MW generating plant with 17 hours of capacity, both of which utilise a combination of molten salt and battery storage. Abengoa believes these plants will be poised to fill peaking demand, and hopes they'll win on the open market against gas.
In the period between 2010, when SN Power's 46-megawatt (MW) Totoral generation plant (backed by the DNB and IFC) became Chile's first wind farm, and 2014, Stephens said in an interview that Chile's non-conventional renewable energy generation capacity grew to 10.9 percent of the total energy mix, up significantly from 7.3 percent the year prior and more than halfway to the 2025 goal.
While much attention has focused on expanding generation capacity, transmission systems in some areas are struggling to keep up, according to one European financier active in the market who recently reported that congestion and curtailment are threatening banks' returns on renewable projects as a result of Chile's poor transmission, especially in the south – a situation that Marks agrees is a very real issue in the country right now.
“A lot of these projects have been built out, and a number of transmission projects had to be built to accommodate them, but there are real issues with further transmission upgrades that would be needed and someone would have to pay for that,” Marks says. And while he believes there is a strong business case for transmission development at the moment, “there are issues with permitting and citing and clearing right-of-way that are all hard for a long, horizontal piece of infrastructure like a transmission line.”
For the time being, the likelihood is that projects will continue to be developed, but at a slower pace, at least until other circumstances align to support a second surge.
“I think there's a good future ahead, and I will stand by that statement, but I don't think there will be as much activity for the next two to three years as there has been in the last two or three years in renewables,” Marks says. “The wave has kind of crested, at least for the time being.”
'IT'S ALWAYS GOING TO BE SUNNY'
Chile's pro-renewables stance has seen the development of dozens of renewables projects that capitalise on the country's sunny Atacama Desert to the north and its windy southern cone. Assuming that the complex issue of rights-of-way and other touchy subjects associated with transmission system rollout can be adequately addressed, renewable resources are available at arm's reach, and ever ripe for the taking.
As Marks eloquently puts it: “It's always going to be sunny, and the wind is always going to blow.” Resources aren't the issue that will hamper development in the coming two to three years so much as lack of transmission capacity and stymied GDP growth related to a slowdown in mining operations, which represent as much as 30 percent of national energy demand.
As Stephens highlights: “The mining industry has been affected recently due to the cheap price of copper and certain projects that have been put on hold. Also, there has been a significant increase of the Peso/Dollar exchange rate in recent months; it has made dollar-denominated debt less attractive.”
Still, due to Chile's stability, the market's sophistication and the quality of the operators, he says, Chile remains attractive within the region.