Chile has long been the leader of Latin America's renewable energy market. But growth is now threatened by a number of challenges that quickly need to be overcome, according to industry players and authorities.
The South American country ranked 10th worldwide in terms of renewables growth in 2015, according to the most recent Renewables 2016 Global Status Report released in June.
According to the report, Chile’s growth ranks behind its neighbors Brazil (the world’s third-largest renewables generator behind the U.S. and China) and Mexico. But Chile’s investment in the sector outpaces all Latin American countries by far.
According to the renewables status report, Latin America was the world’s fastest-growing region for renewable energy in 2015, during a year when global investment in the sector reached record levels and added 147 gigawatts of capacity.
A shrinking pipeline
Chile’s growth is set to continue in the short term, with a slew of projects in the pipeline that will strengthen the country’s position as Latin America’s second-largest wind market after Brazil.
In May, the country’s environment watchdog approved the 105-megawatt El Camaronessolarthermal plant planned by Spanish firm Elecnor in the northern Arica region. Another Spanish developer, Grenergy, plans to build two large PV parks in Chile, and received financing last December from the Inter-American Investment Corporation to develop projects in the country’s Coquimbo region, also in the north.
Those announcements followed 10 renewables projects approved in April worth a total of well over $1 billion. And there are around 10 more wind farm projects in Chile currently subject to environmental evaluation, including the $930 million Loa and $860 million Camarico farms.
But a slowdown may be inevitable.
New project announcements in the last quarter of 2015 and first quarter of 2016 totaled just one-third of the total during the same period of 2014/2015. PV capacity additions in the past two years have led to an oversupply of electricity that has pushed down prices and impacted the viability of many projects in the pipeline.
Falling prices, rising congestion
Chile's renewables developers are facing falling spot prices, transmission congestion, slow access to the market for non-conventional renewable energy generators, the need for more generation flexibility to complement the current intermittency of wind and solar, and opposition among communities to renewable energy projects in their vicinities, according to Carlos Finat, executive director of the country’s renewable energy association (Acera).
“The Chilean transmission network is seriously congested,” he said.
Although a new transmission law designed to bring a long-term solution to the congestion is in the works, companies operating in the country’s northern grid still have to live with generation curtailments and difficulties in obtaining adequate connection points for their new projects.
“And while renewable energy generators have shown their competitiveness, offering lower prices to distributors in recent auctions, in many cases mining and industrial clients are still not open to considering renewable energy generators as potential suppliers,” said Finat.
To counter these challenges, Acera has actively participated in the design of the new transmission law so that it includes an expansion mechanism, allowing new transmission infrastructure to begin operating quickly.
Other measures include studies carried out by independent system operators to determine the restrictions that could affect the connection and operation of renewable energy projects, allowing for their prompt resolution, he said.
“And with respect to the acceptance of projects among local communities, the recently introduced equal tariff law rules that clients living close to power generation facilities are subject to discounts on their electricity bills, proportional to the installed capacity of the plants in the area," said Finat.
Chile currently dominates the Latin America solar market, but it may soon relinquish its regional leadership, according to GTM Research’s Latin America PV Playbook, released earlier this month.
That report expects both Mexico and Brazil to install more PV than Chile in 2017 and eventually to surpass it in cumulative installations by 2018.
Across Latin America, PV capacity expansion has been revised down to 650 megawatts, caused by lower spot prices and a shrinkage in energy demand from mining, the report states. The drop in demand from Chile’s mining sector is expected to recover in line with copper prices, but developers are still seeking non-mining clients for power-purchase agreements.
With the third-highest electricity prices in Latin America, behind Uruguay and Guyana, increased solar capacity after auctions and further grid expansion will help bring greater supply of solar power from the north and reduce consumer costs by up to 25 percent, the report predicts.
But falling spot prices, which are pushed down by the mining industry slump, present a big challenge to renewables developers in Chile. And because the country’s more populous central region is powered by hydroelectricity, supply increases during the summer snow melt, driving down prices further.
Chile’s spot prices are currently at a historic low. While the country’s PV market will grow by 24 percent this year, it is expected to contract by 26 percent in 2017, with prices remaining unviable until the end of 2018 when the 753-kilometer Cardones-Polpaico transmission line enters service.
Eroded incentives, project delays
Chile’s distributed generation segment also remains in the doldrums due to a lack of policy support and an unviable net-billing system that erodes incentives for customers to switch to solar. GTM Research predicts that the segment will remain dormant and expand its share of the solar market to just 6 percent by 2020, driven by industrial-scale projects.
Utility-scale projects dominate in Chile, accounting for 98 percent of the total. And despite a coming contraction, it is expected to account for 90 percent of the market going forward.
There is also a delay in project development. Neither Solarpack’s 55-megawatt project nor First Solar's 44-megawatt project, which won an October 2015 auction, have started construction. And the next auction has been delayed to December as the government awaits the completion of transmission infrastructure.
The December auction is expected to put 13,750 gigawatt-hours up for grabs, with prices expected of between $45 and $55 per megawatt-hour, GTM Research predicts.
“The power sector is experiencing some additional issues in terms of overcapacity and saturation,” said Salvatore Bernabei, head of ENEL's Global Renewables Division.
EGP currently has 300 megawatts of projects in execution in Chile, and in May opened its 160-megawatt Finis Terrae PV plant, the company's largest in the country, in the northern Antofagasta region.
The power sector needs to react quickly to accelerate the expansion of transmission lines and the implementation of new systems for grid automation and management, said Bernabei. Reducing development costs is also vital.
“The real challenge for both the solar and wind industry will be to make their technology more competitive while keeping a good product quality, producing kilowatt-hours in a stable and reliable way,” EGP’s Bernabei said.
And that's a challenge for renewables in every market -- not just Chile.