BlackRock-backed Chile solar boom will trigger higher costs

The most recent peculiarity in the rise of renewable energies in Chili comes from the proliferation of small solar plants that, according to the industry, are harming large producers and increasing electricity bills.

Companies backed by financial giants like BlackRock Inc. and TPG Inc. They have stuck to a model that offers stable prices for small, mainly solar, projects.

What started as a niche system is now becoming very significant, and the small generators known as PMGD (Small Medium Distributed Generation) will represent around 40% of demand for daylight hours by 2025, almost double current levels.

The money that goes to the PMGD is part of a successful clean energy case in Chile, where its abundance of wind and sunlight has helped it top Bloomberg NEF’s ranking of the most attractive emerging markets for renewable investments. PMGDs give environmentally focused investors access to stable prices in a market characterized by a glut of renewable energy that sometimes results in larger producers receiving nothing for their spot sales.

While greater supply normally drives prices down, in this case the opposite is true.

The payments to the PMGD will cost the system US$300 million next year and US$500 million in 2025, which will have to be assumed by other generators and industrial clients, such as copper mines, according to the Chilean Association of Small and Medium Hydroelectric Power Plants (Apemec).

In the future, regulated customers, including households, will also help cover the cost, as Apemec warns that bills could increase by around 10%. This comes at a time when the leftist government aims to reduce the price of energy for low-income people.

“The situation does not last long“, he claimed José Manuel Contardo, president of the association. “It’s a real financial bubble”.

The mechanism allows all PMGD energy to be remunerated at stable prices regardless of when it was produced, as a way to facilitate market access and financing. Prices are calculated based on a projection of the marginal costs of the system and today are around US$70 per megawatt hour on average.

The unintended consequences of measures to promote clean energy are a warning to other countries trying to move toward a greener grid. They also echo disruptive episodes in more developed markets that have used similar schemes. Feed-in tariff systems caused an unexpected increase in installation and program costs in Germany and Spain between 2004 and 2012.

In Chile, it was a 2006 decree that allowed small generators to gain access to the spot market and a price stabilization mechanism to obtain financing for projects of up to 9 megawatts (between residential and industrial consumption). By being located closer to consumption centers, PMGDs also avoid many of the transmission problems.

Only in recent years have PMGD They really started to proliferate. Financial institutions and wealth management offices were among the groups attracted to a market that offered an estimated four-year payback and 14 years of sustained returns. There are currently almost US$2 billion in PMGD projects underway.

BlackRock continues to strengthen its presence in the Chilean small generator market. In June it announced the closing of US$75 million in financing for the solar developer Solek following the latter’s commitment to build up to 200 megawatts in PMGD. The huge New York-based fund also bought 11 solar projects from D’E Capital totaling about 100 megawatts and another 100 megawatts in 15 projects from Renewable Resources Group. BlackRock declined to comment.

Matrix Renewables, created and backed by alternative asset manager TPG, had 328 megawatts of solar projects eligible for PMGD’s stable pricing mechanism, it said in a statement last year. Other big names investing in this space are Sonnedix and Germany’s Blue Elephant Energy.

PMGD developers simply follow the rules, and the pricing mechanism results in revenue periods and cost periods for the system, said Darío Morales, president of the Chilean Solar Energy Association (Acesol).

The underlying problem is artificially low marginal costs due to congestion in transmission and a lack of flexibility elsewhere in the system. “As long as we do not solve these problems, all the side costs of the electrical system will increase“, said Morales.

But business and industry groups are pressing authorities to change regulations, arguing that providing protection against swings in spot market prices creates additional incentives for an oversupplied market that has already driven some companies into insolvency. of renewable energy amid transmission and storage deficits.

The independent coordinator of the system, CEN, recommends modifying the way prices are calculated in an effort to reduce system costs. The Energy Ministry did not respond to requests for comment on whether it is evaluating those recommendations.

“It is giving rise to an artificially very profitable business, which is taken advantage of by large investment funds and transnational companies that obtain extraordinary returns at the expense of consumers.“, said Oscar Cabelloregulatory advisor at consumer rights group Conadecus.