Photovoltaics

Companies planning to expand into Chile have to analyse the risks and rewards of their investments and evaluate political stability, opportunity for growth, access to capital, ability for solar to compete with other forms of energy, etc. SolarReserve, First Solar and Etrion offer their experiences.

Developers of large-scale solar energy projects are constantly assessing markets where policy, demand, and risk are acceptable to investors and lenders.

Even though it is clear that the global financial crisis has impacted markets such as the U. S. and Europe, each country and each project presents unique challenges and risks, but those are addressed by appropriate financing structures.

In this context, Chile is emerging as an attractive option. The nation has had a strong, growing economy for over a decade and the trend is expected to continue. The mining sector has led this growth and the commensurate increase in demand for electricity. 

“Chile is a very attractive market in large part due to the fair and transparent nature of its regulatory and business environment,” says Tom Georgis,Senior Vice President of Development at SolarReserve. 

He continues, “One of the reasons that SolarReserve is expanding into new markets, such as Chile, is that there has been a lack of coherent or stable policy around renewable energy in markets like the U. S. and Spain. As those markets contract, focus has shifted to emerging markets for renewable energy such as Chile and South Africa who will benefit from deployment of the latest technologies, flow of capital, and competitive prices.”

Working in a new market

Among entities that are trying to strengthen their presence in Chile include Etrion. One of its key priorities is to diversify in terms of geography and contract regime. In Chile, an electricity producer like Etrion can operate in two ways.

The first is through long-term PPAs with industrial users like Etrion’s first Aguas Blancas project (an 8.8 MW solar project in the Antofagasta region in the North of Chile) and the second is merchant projects without PPAs where the electricity is sold directly into the grid and then gradually complemented with PPA revenues.

Explaining Etrion’s move, its chief financial officer Cheryl Eversden says the entity initially focused solely on projects with secured PPAs.

“However due to the high electricity prices in Chile, we are now considering options to implement projects operating at merchant provided they would provide attractive returns,” says Eversden. “We are also in preliminary discussions with lenders who have confirmed their appetite to provide non-recourse project finance to generation projects-at merchant- which validates the merchant business case for part of our portfolio growth.”

The company considers this option as a way to accelerate its installed capacity, which, once online, can help Etrion secure additional PPAs with customers who wish to switch to more attractive long-term rates.

“As part of our pipeline, we are developing four solar projects near Antofagasta, which we expect to be fully permitted by the end of 2014 and plan to implement it with a combination of PPAs and merchant revenues. To date we have approximately 100 MW under development, with our first 8.8 MW expected to be connected in the second quarter of 2014,” she says.

Working with mining companies

Eversden says the mining industry is Chile’s single largest industry, with growth expected to reach US$100bn by 2020 with a very limited source of energy to meet this demand. Therefore, electricity is a key concern for the mining sector, both in terms of supply (i.e., shortages) and price.

“Obviously the growth in the renewable energy sector will increase the supply of electricity which will help to minimise the effects of shortages and grid congestion and by entering into long-term PPAs, the mining companies can obtain certainty over the cost of electricity. Overall, given the abundance of mining companies operating in Chile, it is an ideal vertical market for solar companies like Etrion to target for growth,” she says.

As for its 8.8 MW solar project, Aguas Blancas, Etrion signed the PPA with Atacama Minerals S.C.M., in July 2013, a 15-year take or pay contract to provide electricity to its Aguas Blancas iodine mine. The project is located approximately 3 kms from the mine and will be connected directly into the mine’s substation.

“We have pre-selected the EPC and O&M contractor and we are targeting to start construction in the fourth quarter of this year. We are also in discussions with international lenders to provide up to 80% of the total project cost and we expect to reach financial close by December of this year. This is very exciting as it validates solar as a viable electricity source to mining companies in Chile and it is also the first project executing on our strategy to diversify in terms of geography and contract regime,” says Eversden.

Alex Hay, director of business development for Latin America at First Solar, says there are two types of clients in the system: regulated and unregulated.

“Within the second group, mining companies require the most energy. In fact, studies carried out by mining organisations show that the consumption curve at these companies has increased considerably and is expected to grow,” says Hay. “Photovoltaic energy solutions have shown to be very competitive, they compete with conventional energies, including coal, they are quick to implement (less than 1 year per 100 installed MW); they decrease fossil fuel dependency. In the case of mining, which requires a 24 hour supply, hybrid solar-LNG or solar-other base energy solutions are alternatives that the country must consider in its generation supply plans.”

For its part, First Solar hopes to close the year with three projects undergoing environmental assessment in Chile. The first, Luz del Norte, was already submitted for processing and the team expects its approval by the end of the year.

Georgis says as a group, mining companies are the largest users of energy in Chile. “Today, certain mining projects are even being delayed due to a lack of available energy so this is a clear opportunity for us to address,” he says.

He adds that PV is an inexpensive alternative to diesel or natural gas, but it is variable and cannot provide a 24 x 7 energy solution which the mines require. PV can displace fuel but it cannot eliminate the need for conventional power infrastructure. “The energy resource must be available on demand on a 24/7 basis because that is how the mines operate. Our CSP with integrated molten-salt storage can do that cost effectively and when integrated with PV, can offer baseload solution with zero fuel cost or harmful emissions,” says Georgis.

Scope for Improvement

Hay says Chile has taken major steps to remove the barriers for the entry of NCREs (non-conventional renewable energy), such as the bills that are currently being processed in Congress: electric concessions and promotion of NCREs.

“However, there is still work to do regarding the incorporation of solar energy on the matrix, for example: in the area of supply contracts, access to competitive sources of financing both for credit and for capital. As well as elements that depend on the will of the players involved in the system,” he says.

As for limitations, companies do acknowledge the relatively small size of the country and the long development process required to develop and build renewable energy projects. However, the latter is not dissimilar to many other countries across the world; therefore this delay in project execution is not seen as a barrier for entry for companies such as Etrion. 

“Although Chile is a relatively small county, we see it as an excellent country for Etrion to grow and diversify over the next few years,” says Eversden.

In general, companies like SolarReserve find the regulatory market in Chile to be reasonably favourable for the development of both PV and CSP solar technologies. As seen in the United States, there is often a significant discrepancy between announced projects and those that are actually viable and proceed through financing then into construction. Georgis says regulation must evolve to address the reality of an emerging IPP market, specifically around renewable energy. Land, water, environmental, cultural, transmission, finance, etc. are just some of the issues that the regulatory regime incorporates, he says.

Certainty is critical to sustaining investment. Having in place a clear policy with defined objectives and milestones coupled with the requisite sources of capital will result in a sustained interest in Chile. As Georgis says, South Africa is a clear example of where this has been achieved with respect to renewable energy through their highly successful programmatic Department of Energy Procurement Programme.