‘Dangerous Precedent’ Rattles Chile’s Renewable Energy Market

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(Bloomberg) -- A legislative change is threatening to unravel one of the world’s safest bets in renewable energy, a Chilean incentive program that lured companies backed by BlackRock Inc. and JPMorgan Chase & Co.

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President Gabriel Boric’s administration is seeking to raise funds by altering a pricing mechanism for small electricity generators that has attracted billions of dollars of investment in mainly solar power. Critics say the program, created under a previous presidency, has been such a boon for investors that it’s oversaturated the market and increased costs for the overall system.

But if Chile reneges on a pricing commitment that was supposed to last for another decade, it will have a chilling effect on investment in a country known as business-friendly, investors say.

“You invest in Chile thinking that this is Latin America’s Switzerland,” said David Crouch, managing partner of Aediles Capital Inc., which manages BlackRock’s energy assets in the country. “This action sets a dangerous precedent.”

The government hopes to bring in $150 million a year through its proposed change to the pricing system for plants known as pequeños medios de generación distribuida, or PMGDs. The money would be used to expand electricity subsidies and help lower-income families cope as power tariffs that had been held down since a wave of social unrest in 2019 gradually increase.

Aediles and other small power generators argue the move contravenes Chilean law by weakening incentives meant to diversify the energy sector. They warn the bill, to be introduced in Congress this week, could also threaten their financial standing.

“The proposed changes would have us immediately default on our covenants to our debt holders,” warned Michael Minnes, managing director for Latin America at solar developer CarbonFree Technology Inc. Had the new pricing regime been in place, Minnes said the company would have never invested in this type of project in Chile.

Chile’s clean-energy boom has consistently put it at or near the top of BloombergNEF’s rankings of emerging-market destinations for renewables investment.

Through access to stable prices, the PMGD model affords environment-focused investors a measure of protection from bottlenecks and cost distortions caused by energy transmission congestion and storage shortfalls. Some renewable players in other segments of the market have been sent into insolvency as a result of those challenges.

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Boric’s government defended its bill as necessary given fiscal constraints. The move is a temporary measure that would lower compensation PMGDs get from the mechanism for three years.

“We have identified a gap between the efficient cost of development and the income that a group of generators is receiving,” Energy Minister Diego Pardow said in a written response to questions. “There is a space to contribute to the expansion of the subsidy.”

It’s unclear how much congressional support the government has for its proposal, but lawmakers may be leery of voting against a measure meant to help the poor.

Renewable gluts mean larger producers can get nothing for their spot sales at times, while small-scale generators are hedged. But the stabilized price mechanism for solar PMGDs is ultimately working as a subsidy increasing profits for project owners, according to Cristián Muñoz, founder of consultancy firm Breves de Energía.

“The massive influx of generation that the mechanism has caused entails significant inefficiencies in the power system, setting upward pressure on the system’s costs and stressing transmission networks,” he said.

PMGDs — each of which produces less than 9 megawatts — have a total installed capacity of close to 2,900 megawatts and make up about 12% of the national grid, according to independent system operator CEN. That’s up from roughly 200 megawatts a decade ago, and there are another 1,900 megawatts currently under construction.

In addition to BlackRock, the mechanism has attracted other foreign players such as Spain’s Matrix Renewables, Blue Elephant Energy AG of Germany, and JPMorgan’s Sonnedix. While the government’s bill hasn’t been formally presented yet, it’s already weighing on broader investment strategies in Chile.

Plans on Pause

CarbonFree, which has the largest market share among PMGDs with roughly 10% of installed capacity, was a week away from green lighting $300 million in financing for an energy storage project, Minnes said. “Now that investment is on hold until we get further regulatory clarity from the government.”

The rule change would force CarbonFree to breach a revenue-linked coverage ratio on its privately placed US dollar bonds, Minnes said, adding the company has already had calls with several of its debt holders on the issue.

Aediles was in conversations with BlackRock and other funds for fresh investments of as much as $1.5 billion in large solar and wind power generation in Chile, as well as energy storage. Crouch said that negotiation has been paused as well. “If this type of policy is enacted, we and our investors will be forced to target a different geography.”

Pardow pushed back against the companies’ criticism. The minister argued that “when someone says that this burden should not come from them, what they are saying is it should instead fall” on a government that’s trying to shorten waiting lists at public hospitals, improve school infrastructure and modernize its police force.

“These are the convictions of this government and we will defend them during the legislative process,” Pardow said.

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