Spotlight: Chile’s electricity industry sailing in choppy waters

Chile’s electric power industry is experiencing what is arguably its third major bout of turbulence of the past half decade.

The sector has blossomed in recent years despite challenges, the latest in the form of a government subsidy bill that has sparked concerns about direct fallout and potential impacts on general investor sentiment.

The main bone of contention in the bill is a proposed measure to raise some US$150mn by temporarily amending the remuneration mechanism applicable to the country’s small distributed generation plants known locally as PMGDs.

Generators have cried foul and other business sector voices and lawmakers, including foreign stakeholders – among them French bankers – have joined the chorus of concern. 

The legislation would result in PMGD plants receiving a temporary revenue haircut, which, according to some, could spark debt repayment distress. Last quarter PMGD capacity stood at around 3GW of Chile’s non-conventional renewable energy park of 18GW. Capacity could reach nearly 5GW in 2026 amid strong growth in the number of projects – up to 9MW, primarily solar PV and chiefly connected to the distribution network – being built.

The big question is what potential impact the bill, even if amended, would have on investor sentiment, particularly concerning new power plants requiring project finance. 

The bill constitutes the latest challenge for a large chunk of the industry, following the implementation of end-user rate stabilization in response to the 2019 social protests and the perfect storm of curtailment and price decoupling that has taken its toll on the finances of plants, particularly pureplay renewable energy firms.

In terms of the latest headwinds, Chile’s PMGD plants tend to enjoy a stabilized price, shouldered by bigger generators and often described as a de facto subsidy. An estimated US$217mn, or roughly 20% of systemic costs last year corresponded to these charges, which have been trending up and fueling concerns about the potential impact on decarbonization efforts. 

In terms of green hydrogen projects planned for the country’s north, developers have said systemic costs constitute a disincentive to using the grid to power the energy-hungry electrolyzers they plan to install. 

Meanwhile, given the financial impact tends to eventually be transferred to end users, and since the PMGD generation park is growing and hence potentially resulting in a bigger future burden on larger generators, the PMGD segment – or rather the stabilized price they obtain – will have detractors too, particularly bigger generators with no PMGD exposure, and demand-side players. 

Larger players could argue they have already done their bit, given their revenues were impacted for several years following the end-user rate freeze applied in 2019.    

An overarching aim of the bill, meanwhile, is to raise around US$1bn to pay, through 2027, subsidies to 4.7mn regulated clients, roughly three times as many as originally targeted. Other pillars involve a doubling of the carbon tax on fixed emitters to US$10/t – also impacting generators – and VAT revenue from the bigger bills that have started landing on doorsteps after end-user rates were unfrozen last half, which dropped a political bombshell onto the laps of the executive despite congress approving the legislation. 

During a sector event held Tuesday by Chile’s association of nonregulated electricity clients Acenor, energy minister Diego Pardow, in comments likely alluding to the PMGD issue, said: “Debate is conducted in a participative manner, using hard evidence as the base, and from there we progress.” 

A few days earlier, during an investor day event in London where energy firms and their backers met with senior government officials, finance minister Mario Marcel indicated concerns had been noted.

“The government is committed to resolve… electricity prices, rates and subsidies,” Marcel reportedly told investors.

The US$150mn the government hopes to obtain from the PMGD revenue is not considered a stratospheric amount given the size of the country’s budget, which is around US$90bn this year. Lawmakers have been urged to seek alternatives. Pardow has previously indicated there was little budgetary wiggle room, and that money needed to come from somewhere to support families. 

The focus now is on congress and what steps are potentially taken to allay concerns. In parallel, discussion already underway, via a public-private PMGD working group, may intensify, especially given these small plants continue to mushroom and that competitively priced electricity is an enabling condition of the energy transition. More private investment will be needed too.