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Mainstream Renewable Power won seven government contracts in Chile to build one gigawatt of wind energy plants worth $1.7 billion. (Photo: Mainstream Renewable Power)
Monday, September 12, 2016

Chile: Historic Energy Auction

Auction is the most significant event to enhance country’s energy competitiveness in 20 years.

Inter-American Dialogue 

Chile announced the winners of its largest-ever energy auction on Aug. 17, the results of which will dramatically drive down the price of electricity for the country in the next five years, government officials have said. The winning bids slashed electricity costs to $47.60 per megawatt hour, significantly lower than the original market expectations of around $80 per megawatt hour. Who were the biggest winners and losers in the auction? Has Chile been successful in attracting investment into its energy sector, and specifically in its renewable sector, as compared to other Latin American countries? How will the results of the auction change Chile’s energy outlook in the mid-term?

Kevin Levey, partner, and Loana Martín, associate at Squire Patton Boggs: If the awarded electricity supply actually results in projects being built, Chile could be the biggest winner. Chile has had among the highest electricity costs in South America. The Chilean government estimates that these projects will help lower electricity costs for families and small businesses by 20 percent within five years. Mainstream Renewable Power and Endesa, a subsidiary of Enel, were awarded more than two-thirds of auctioned electricity supply while companies such as Engie Energia Chile (formerly E.CL), Colbún, AES Gener, Pacifi c Hydro, and Enap were not awarded any capacity. Colbún and AES Gener particularly suffered because they have large power-purchase agreements expiring within next several years. This auction was the largest in Chile’s history and still attracted a considerable amount of interest as demonstrated by the number of bidders and the average awarded price. One of the reasons for such heightened interest was the enactment of a new transmission law, which permits grid expansion for specific regions, improves connection among Chile’s three grids, establishes an independent grid operator, guarantees open access to the grid, and makes transmission pricing more transparent. Other Latin American countries such as Mexico and Peru have also had recent success in attracting investment for their renewable energy sectors. Both countries recently held successful auctions that also awarded energy supply for historically low average prices. The success of Chile’s latest auction will ultimately be defined by whether projects are completed to supply the awarded capacity. Many still doubt that these projects can be completed given Chile’s aging transmission infrastructure, congestion and record-low pricing, which will make it difficult to secure financing.

Kathleen C. Barclay, chair of the American Chamber of Commerce in Chile: High energy prices have been one of Chile’s greatest competitive challenges for many years. In the recent energy auction process, prices were reduced from a peak of approximately $136 per megawatt hour earlier in this decade to less than $50 per megawatt hour. According to government estimates, this result will imply a 20 percent regulated price reduction from 2021. This is the single-most significant event to enhance the country’s energy competitiveness in the last 20 years. Moreover, the country’s energy matrix will be diversified to incorporate significant amounts of wind, solar and LNG into the mix. This diversification is strategic as it reduces the country’s traditional dependence on fossil fuel imports. It is important to note that the winning bids will represent more than $6 billion in new investments in the country’s energy sector, which will have a positive impact on Chile’s growth going forward. Chile is leading the non-conventional renewable energy development in the region, mainly due to its great resources and the market conditions that have been implemented. We at AmCham Chile have seen a high level of interest from important U.S. companies such as Solar Reserve, First Solar and Pattern Energy, which have recently worked with AmCham in Argentina, where there is significant interest in learning from Chile’s successful efforts to diversify its energy matrix, to promote new investment and introduce added competition in this key sector of the economy. The structure of the process—including the different size of the blocks; a three-to-five year period for bringing new projects on stream; providing for some bids during the day, others at night, and others for peak times; as well as extension of the supply period to facilitate financing of new projects—was highly effective. The public policies underlying this auction process involved key design components to promote competitiveness and new investment in the system that should serve the country well in the medium term.

Rodrigo Fernández Hirsch, consulting manager and co-owner at Energética: The largest auction was recently awarded with an average price of $47.60/MWh, historically the lowest since the auction mechanism was implemented. What could be a normal price for many countries, for Chile is a superb price, considering the amount of energy (12,500 GWh/year) and the prices of the previous auctions—around $80 and $110/MWh in the last two. Chile awarded Endesa with the largest amount of energy (47 percent) with the company offering a bid in the $47.50 to $55.50/MWh range, and could be considered as the biggest winner of this auction. On the other hand, AES Gener and Colbún weren’t awarded a single MWh, making them the main losers. Renewables were also at the center of attention, because all the energy that was not assigned to Endesa is based on wind and solar. Wind energy was the most highly-awarded among pure renewable suppliers. Mainstream was the lead winner among renewable companies, achieving power-purchase agreements to build seven wind farms. With the last auction, prices will go down in the mid-term and Chile’s generation matrix is becoming even greener, thus accomplishing the goals of all the recent changes in the Chilean energy market. However, it remains to be seen if all the projects associated with the PPAs are actually built. It also must be taken into account that the price for the final user won’t drop immediately; the resulting PPAs start in 2021, and older PPAs with higher prices still are and will be in force. However, the resulting prices set a benchmark for non-regulated clients which have to negotiate directly with the generator.

Carolina Herrera Jáuregui, Latin America advocate at the Natural Resources Defense Council: The big winner in Chile’s recent energy auction was clearly the non-conventional renewable energy (NCRE) sector, which secured 52 percent of the generation that was contracted. Mainstream Renewables, for example, won 30 percent of the power auctioned and will build seven wind projects totaling 986 MW. In contrast, conventional energy companies like Colbún and AES Gener, which formerly dominated the market, just could not compete against prices ranging from a record-breaking low of $29.10/MWh for a solar plant to $73/MWh for a wind plant. In the mid-term, the auction is expected to result in 20 percent lower electricity costs for regulated customers by the year 2021. Overall, Chile has been very successful in attracting investment for NCRE. Since 2012, Chile has seen more clean energy investment than any other country in South America, except Brazil. In 2015, $3.4 billion flowed to the country’s clean energy sector. Wind power has done particularly well, with wind projects securing far more generation contracts through auctions in Chile than in any other Latin American country. In the last year, wind in Chile secured 5,256 GWh at auction compared to 2,302 GWh in Brazil (in second place). While utility-scale clean power projects are successfully attracting investment, smaller renewable energy projects—such as for self-supply—and energy efficiency still face hurdles when it comes to securing investment. To maintain its place as a clean energy winner going forward, Chile will need to take steps to facilitate investment in these promising sectors as well.

Sara Larraín, executive director at Programa Chile Sustentable: The reduction of market obstacles in the recent energy regulations in Chile allow the participation of 84 different companies in the latest electricity auction, offering 85,000 GWh of energy, seven times more than the demand through the auction. The biggest winners in the competition were the non-conventional renewable energies (NCRE), especially wind and solar, and the new NCRE investors who won 50 percent of the electricity auction, which will be available to the national energy system between 2021 and 2041. In this time, consumers will benefit, with a 20 percent reduction in the cost of electricity. The success of the auction was the result of the implementation of two laws: one that established a target of 20 percent NCRE by 2025, and the recent reform of the auction system for regulated electricity consumers, which established small and medium blocks of energy, time-related blocks and more time to build power plants. In addition, specialists said the Chilean NCRE target for 2025 will be achieved by 2020. Finally, with this auction, Chile at last opened the door to new investors, market competition in the field of electricity, and clean and cheap energy.

Republished with permission from the the Inter-American Dialogue's weekly Energy Advisor



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