The Covid-19 pandemic has prompted lockdown measures in countries across the world as a viable option to deal with the rapid transmission of the virus. The virus reached the South American continent, with Brazil followed by Chile reporting cases at the beginning of March.
Since the middle of March, the government imposed a lockdown and established an action plan that includes employment, public health and tax actions to the tune of $11.75bn, which is equivalent to 4.7% of the nation’s GDP. The action plan intends to protect jobs, companies and market investments. The measures aim to ensure the availability of sufficient liquidity to companies by postponing certain tax obligations and reducing the costs of obtaining finance.
This is particularly beneficial for renewable developers as there are no direct fiscal incentives to support renewable project development. Rather, investments are encouraged through favourable market mechanisms such as quota obligations, restructured auction procedures and carbon tax. The government’s open market approach is to generate electricity at the lowest cost possible and facilitate energy security.
The power sector in Chile is dominated by thermal power, which accounted for 51.2% of the total installed capacity and 54.9% of the electricity generated in 2019. Much of the fuel for thermal power plants is imported and, in recent years, fluctuations in the supply have resulted in high electricity prices. Apart from intending to keep the retail prices low, Chile is also committed to increasing the share of renewables to 20% of the energy mix in 2025 and between 60% to 70% in 2035.
Furthermore, in 2019, the country committed to phasing out coal plants without carbon capture storage or other equivalent technology and become carbon neutral by 2050. These initiatives are expected to support the development of a power generation mix, comprising primarily of renewables and backed by thermal power. Pre-Covid-19, the sector was estimated to witness an annual installed capacity of 1.1GW of renewables, but post-Covid-19, the annual installed capacity is likely to decline to 0.97GW in 2020.
Given below is a figure on the revised capacity installation for renewables and the impact on Covid-19 on certain aspects of the market.
Annual installed renewables capacity in Chile
The pandemic is bringing about drastic changes within the power sector with short term implications likely to disrupt sector trends until next year. Chile has a substantial industrial sector, in particular, mining, which accounts for a large portion of the demand in the north. Since March 19, many producers have scaled back operations or suspend production.
Antofagasta suspended its Los Pelambres mine and the state-run Chilean mining company Codelco announced reduced operations. Parts of the country are under rolling lockdown, including the commercial centre of Santiago, which are causing a decline in the consumption of power and creating grid redundancies. Between mid- March and mid- April, the average demand for power declined by 5% and in certain regions such as Central Metropolitan region, the demand declined by 15%, according to the National Electric Coordinator (CEN).
The drop in power demand is likely to affect the market’s chain of payments, with generators facing a reduction in revenues. Although the shortfall will be mitigated by payments from the stabilisation fund created in 2019 to address retail price hikes, small and medium generators will be negatively affected.
Capital market impact
The nation does not provide any direct fiscal support for the development of renewables. However, market mechanisms have been implemented to facilitate renewables deployment. Nevertheless, the market has witnessed significant commercial activity due to key drivers such as a privatised energy market, high retail prices, government’s coal agenda, availability of resources, and a number of projects, particularly solar, have emerged on a power purchase agreement (PPAs) or merchant basis.
Currently, the ongoing pandemic is creating financing constraints in the market, to the detriment of development activities. With future cash flows at risk, merchant projects are at risk of payment defaults due to low demand for power, and foreign market players will see their revenues decline due to the devaluation of the local currency peso.
A number of projects are being developed through asset finance with significant debts procured from Development Finance Institutions (DFI) and commercial banks. New projects seeking financing could be impacted by the uncertainties in the capital market, making efforts to source capital more difficult in the short term.
Other emerging constraints
Chilean Government offices have adopted remote working and because of that the submissions and responses have been delayed. The Environmental Assessment Agency (SEA) has suspended all administrative procedures, including the environmental impact assessment of the projects, which is critical to initiate construction. Furthermore, borders have been closed, giving rise to logistical challenges.
In February, Chile’s national energy commission postponed a key power generation auction from June to the end of the year due to lower than normal demand forecasts. This auction could potentially witness lower than normal participation as financial criteria of participants is prioritised, both in terms of qualification requirements and winner selection. Developers must submit financial risk rating reports, confirming their company’s risk rating is not lower than a BB+. In addition, three years of company accounts, proving financial credibility, are also required for participation in the auction for developers.
Despite the economic turmoil and potential delays in capacity addition, the power sector will continue to remain resilient in the long term. According to the national energy commission, 86 non-conventional renewable energy (NCRE) projects were under construction at the end of February, which will result in the addition of 4.5GW of new capacity in 2021. A number of projects are currently awaiting approval as well.
It is likely that these projects could see their operational date pushed back due to emerging market constraints as a result of the pandemic. Foreign stakeholders in the market will face difficulties and could move towards reducing their exposure in the country, which could impact private investments. Chile’ economy is largely based on mining and agriculture, which are emission-intensive and the government has pledged to become carbon neutral, which bodes well for the renewables market outlook.