Chile’s renewable energy sector is losing its lustre

(Santiago, Chile) — Not even the pisco sours could wash away the grim mood permeating the crowd of renewable energy executives, government officials and diplomats gathered on a rare rainy spring night in Santiago.

“We’re just trying to keep spirits up,” one European diplomat told Gas Outlook on the sidelines of the October 8th annual dinner of Chile’s Renewable Energy and Storage Association (Acera). The industry group was established more than two decades ago, when the country’s power sector was dominated by a handful of conventional hydroelectric and thermal generators, including ones that used gas from neighbouring Argentina.

Since then, hundreds of renewable generators have flocked in, especially solar and wind companies drawn to Chile’s exceptional sunshine, gusty conditions and stable investment climate. But behind the PV panels and whirling turbines, new obstacles are threatening to stunt the country’s investment appeal for renewable energy.

Up to now, Chile has made enormous strides. In the national power grid known as SEN, PV solar accounts for 28.2% of 34GW of installed capacity. Wind takes up another 13.9%, according to the latest figures from trade group Generadoras de Chile. In contrast, coal-based capacity represents 12.1%, gas 11.4% and oil 10.3%. Coal in particular is retreating as generators such as U.S. utility AES and France’s Engie gradually decommission coal power stations.

Over the past year, renewable capacity has skyrocketed by nearly 3GW to 18.3GW. More is on the way, especially solar. A full 53.6% of 6.3GW of capacity under construction is solar.

The trend is reflected in generation. In August, solar and wind together accounted for more than a third of supply, compared with 29.5% for thermal generation, including 15.8% gas. The balance came mainly from reservoirs and run-of-river hydroelectric plants.

Big as it seems, this renewables wave is underperforming its potential.

For one thing, transmission bottlenecks mean that the grid coordinator (CEN) routinely curtails renewable supply, particularly in northern regions far from the main demand centre in Chile’s capital, Santiago.

In July, for example, the coordinator curtailed 208.2 GWh of solar and wind generation, representing 8.9% of the total for the two technologies. In December 2023, the height of Chile’s summer when intermittent renewables are particularly prolific, the curtailment rate reached 547 GWh or 21.2% of the total.

The curtailments illustrate the mismatch between renewable generating capacity and transmission. “Chile has seen a high penetration of renewable energy, much more than had been predicted, but the transmission system has not expanded at the same pace,” Acera president Sergio del Campo told Gas Outlook.

“This means that a lot of the time we’re forfeiting generation. So far this year for example, the energy we didn’t inject could have supplied 1.8 million families. It’s a serious problem.”

Volatile prices

This structural challenge is aggravated by volatile international prices for the imported commodities used in thermal power stations, said del Campo, who once headed coal generator Guacolda.

Renewable generators in northern Chile, for example, are forced to absorb the difference between the low price at which they inject energy and the higher prices paid by their clients in the centre and south in cases in which the generators have to rely on thermal plants to fulfil supply contracts.

The phenomenon has plunged some renewable companies into financial distress, as occurred last year with two Spanish firms’ projects, Solarpak’s Maria Elena Solar plant and Ibereólica Cabo Leones 2 wind farm.

Energy storage projects are starting to ease the constraints. Although Chile only has around 500MW of installed storage capacity, another 2GW are in the pipeline, according to Acera.

Transmission projects are moving more slowly. The main initiative is the $1.48 billion Kimal-Lo Aguirre line, known as Conexión Energía, that would run 1,343 km through five regions, from Antofagasta to Santiago. After a string of delays, the developers led by China’s state-owned Southern Power Grid International, hope to launch operations in 2029, unlocking as much as 3GW of renewable supply. The line would be the first in Chile to use high-voltage direct current technology (HVDC) that is considered especially efficient for renewable energy.

Chile’s chronic permitting lags and court challenges risk further setbacks. In April, Chile’s environmental evaluation agency (SEA) rejected a permit for the $324 million Itahue-Hualqui transmission project led by Spanish firm Celeo Redes, claiming insufficient information in the company’s permit application. The much-larger Conexión project is seen as vulnerable to a similar fate.

President Gabriel Boric’s leftist administration is promoting two bills that would streamline permitting and prioritise projects that contribute to Chile’s goal of carbon neutrality by 2050. In her speech to Acera delegates, environment minister Maisa Rojas highlighted the legislation and its role in combatting not just climate change but also biodiversity loss and pollution.

But investors say the problem goes beyond the legal framework. They point to Chilean generator Colbun’s recent withdrawal of an application for a pioneering $1.4 billion pumped storage hydro project after the SEA raised what the company deemed were “discretionary” objections. Colbun vice president Bernardo Larraín attributed the impasse to government bias. “As much as the national authorities talk about promoting investment . . . there are people inside public agencies who don’t like large-scale projects.”

Norwegian generator Statkraft is facing even more resistance. The company’s 52MW Los Lagos run-of-river project in southern Chile is 90% complete but has no clarity on a launch date after the country’s high court ordered a fresh indigenous consultation. And the project site has been violently attacked multiple times. “There has to be predictability and certainty. If not, the country will lose a giant opportunity,” Statkraft Chile CEO María Teresa González told local media.

Another cloud hanging over Chile’s renewable energy sector is a government proposal to reduce the profit margin of small distributed generators under 9MW. Since 2006, these generators have enjoyed a stabilised energy price in a measure designed to accelerate renewable uptake and diversify the pool of suppliers.

Under the controversial new proposal, the stabilised price would be cut by as much as 40% for three years in order to raise $150 million a year to cover part of the cost of an expanded electricity subsidy. Not surprisingly, the proposal has sparked an outcry from small generators and big investors like Blackrock that have financed projects on the assumption of steady cash flow.“This is an expropriatory measure that has no legal basis,” said Stephanie Crichton, CEO of Czech renewables developer Solek Chile.

The problem the Boric administration is seeking to address dates back to late 2019, when the former administration suspended an electricity rate hike amid violent street protests. The Boric administration put off the increase even further. Now it’s trying to soften the blow of a rate adjustment by expanding the number of households eligible for a subsidy.

Small renewable generators argue that the government should dig deeper into its own pockets to pay the subsidy bill, rather than erode their profits and risk massive bankruptcies.

Renewables rift

The price stabilisation scheme is not without controversy of its own. In a recent congressional hearing, Chile’s grid coordinator CEN asserted that it represents a “market distortion” because utility-scale renewable plants don’t enjoy the same benefit. That distinction recently led Mainstream, Acciona, Iberdrola and other renewable giants to withdraw from Acera, which has fiercely defended the small generators.

Experts such as Daniel Salazar agree that the stabilisation formula has already far exceeded its goals and should be corrected, but not necessarily by diverting the payments to an unrelated subsidy scheme.

In the meantime, the uncertainty risks having the perverse effect of consolidating the energy sector back into fewer hands. And longer term, the bumpy trajectory of renewable energy in Chile is weighing on the country’s aspirations to produce climate-critical green hydrogen.

In his speech before hundreds of renewable energy executives and diplomats at the Acera dinner, energy minister Diego Pardow shared personal anecdotes rather than addressing the challenges that are alienating investors, drawing harsh whispers in the audience.

“What the heck was he talking about?” one delegate asked. “He didn’t make one mention of the problems we’re facing.” Minutes later, an illusionist burst onto the stage to entertain the audience, capturing the sentiment that in Chile’s energy sector, not all is as it seems.