Chile's curtailment conundrum: Does it threaten the viability of renewable projects?

Chile’s clean energy park has expanded rapidly over the past decade, spurred on by regulated supply auctions.

Solar PV capacity has boomed in the country’s sundrenched north, where wind farms also operate along the coastline.

But not all is rosy in the garden. Capacity expansion has outpaced demand growth during solar hours, leading to curtailment of output and, in turn, financial stress on generators, particularly pureplay solar firms.

The outlook for the next several years is therefore not too bright, despite a buildout of energy storage capacity.

To find out more, BNamericas speaks to Stan Malek, senior VP for renewables and infrastructure project finance at the Chilean office of Norwegian bank DNB.

The lender, which landed in Chile in 2008, provides local financing and advisory solutions in the clean energy and associated infrastructure segments, including transmission and desalination. The other area in which it is engaged is seafood. 

Malek is among the speakers scheduled to participate in industry conference Energyear Chile 2024, to be held in capital Santiago on March 5-6.

BNamericas: In Chile, what’s the situation regarding financing supply and demand in the renewables sector?

Malek: You could probably answer that from multiple angles, but I think the biggest theme right now that we see is that there is oversupply of renewables, especially solar projects. 

The situation is getting out of control and that becomes evident in the phenomenon called curtailment. And that's an element that might effectively kill multiple projects, SPVs [special purpose vehicles] that don’t have sufficient contracted energy and are going purely on merchant energy. Even those that are contracted are affected and, effectively, suffering.

Surprisingly enough, just because the market is being so oversupplied, you also have wind assets also suffering from curtailment. 

Last year, an average of 15% of energy was going into the ground. Last quarter, we saw curtailment for some of the assets we have financed as high as 40-50%. It will get far worse before it improves. We believe curtailment could easily double, maybe even triple, with all the pipeline of assets that are under construction that have financing secured.

Yes, a lot of the projects that are being built or are ready to be built will consider some element of storage, but still the net outcome is that there will be more energy delivered during the solar block in Chile. 

BNamericas: What’s the demand outlook?

Malek: Energy demand is growing but at a moderate pace. There are elements that could accelerate that such as electric vehicles, but we don’t see it picking up sufficient mass to kind of move demand enough.

So, effectively, we're bracing ourselves for huge curtailments coming in. That’s one of the things we’re analyzing on a project-by-project portfolio basis and monitoring very closely.

BNamericas: So the risk of financial stress, of companies declaring bankruptcy remains?

Malek: Yes, especially individual projects, not portfolios. These, I would say, are the most exposed to that risk. 

A lot of projects are suffering for various reasons. You suddenly have this perfect storm, with curtailment, with system costs that producers need to pay. Most of the projects that were financed over the past couple of years had assumed that these costs were around US$1-2/MWh. Right now, they're around US$15/MWh, precisely because of more and more PMGD [distributed generation plants that benefit from a stabilized price regime funded by larger generators] coming online and other elements not dropping. You might see this going up to around US$20/MWh, and I think the peak we’ve seen is US$26/MWh. 

That means that for whatever contracted power you had, let’s say, at US$50/MWh, now instead of US$50/MWh you get US$35/MWh. That’s a huge blow.

So these system costs, curtailment, system decoupling, suddenly you’re hit by this perfect storm. And unlike other countries, in Chile most of the risks are borne by generators and if there's no kind of remedy for that then, yes, gradually those risks will be incorporated by the market and that means PPA [power purchase agreement] prices need to go up, there needs to be a rebalancing. 

BNamericas: I guess there will be a lot of interest in what happens in the upcoming regulated supply auction.

Malek: Yes, we’ll be monitoring the results of that tender very closely because it will be the first tender in a while but, more importantly, it will be the first under a new PPA scheme. It involves certain corrections over the imperfections of the previous schemes. The two most important I think are the partial elimination of system decoupling – they're establishing zones – and system costs, which would be pushed as a pass-through to the final regulated customer. 

We’re seeing this as a positive change. But the other thing we do see is that typical market players that should be participating are so affected by the ongoing problems with their existing portfolios that we believe that they're not going to be able to participate. Therefore, we might see big discrepancies in the prices that are offered. We think some players might be very opportunistic in trying to get bigger volumes at relatively high prices.

In general, we expect less competitive prices compared to previous tenders, with maybe incumbents playing a more important role.

BNamericas: What’s the consensus on how to fix all this?

Malek: There are many ways to alleviate the situation. Many of the more European sponsors are pointing to regulatory intervention, for example, some form of control over new projects, effectively trying to control the supply side.

From what we’ve seen from the government, the CNE [national energy commission], we think that’s very unlikely. The message that’s consistently delivered is that the market should regulate itself. In this case, the only solution is precisely storage. 

We do see most of the sponsors working on this. Some [without the financial backing] could be forced into selling, looking for partners to work on storage solutions. 

In terms of transmission, yes, it’s a problem but at specific points on the grid. It’s not a systemic issue. Right now, we do see most of the system coupled and prices hitting zero literally every day. 

The good thing is that storage is now cheap, it’s affordable. Apparently, the supply story is becoming more and more positive, and we already see requests for financing solutions that involve [battery storage systems] BESS. Another good thing is that we hear from the sponsors that there are a lot of PPAs that could cater precisely for storage solutions. So, it’s now a matter of regulatory clarity, which is not there. Some key elements are still going through the contraloría [comptroller general’s office] and some are still getting multiple interpretations.  

But we’re on a good path. The banking sector will follow but maybe with more conservative structures.

BNamericas: Turning now to the banking sector, where it's the international players that are financing projects. What have been some of the implications of this whole curtailment issue? 

Malek: What we do see in general is that the banking sector is affected by this storm in the electricity sector, some more than others. 

Some banks have completely stopped their lending activity in Chile to see how the whole situation will play out. Some have become more conservative and have downscaled activity. Whereas some, on the other hand, have tried to use the whole situation to try to gain or regain market share. 

The situation is reshaping the banking sector as we speak. 

BNamericas: What about DNB?

Malek: When it comes to DNB, we’re here for the long term; we have a strong mandate from our headquarters in Oslo to carry on this business. We’re obviously continuing to learn from our experiences, which will be reflected in the positions that we take. But we’re still open for business and looking to support the electricity industry transition in Chile.