(Bloomberg) — Legislative changes threaten to unravel one of the world’s safest bets on renewable energy, Chile’s incentive program that is luring companies backed by BlackRock Inc. and JPMorgan Chase & Co.
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The government of President Gabriel Boric is seeking to raise funds by changing the pricing mechanism for small electricity generators that have attracted billions of dollars in investment in solar power in particular. Critics say the program, created under the previous president, has been a boon to investors because the market is oversaturated and increasing costs for the overall system.
But if Chile reneges on the price commitment that should be for another decade, it will have a chilling effect on investment in a country known as business-friendly, investors said.
“You invest in Chile thinking it’s the Switzerland of Latin America,” said David Crouch, managing partner of Aediles Capital Inc., which manages BlackRock’s energy assets in the country. “This action sets a dangerous precedent.”
The government hopes to raise $150 million a year through proposed changes to the pricing system for plants known as pequeños medios de generación distribuida, or PMGDs. The money will be used to expand electricity subsidies and help low-income families cope as electricity rates have been held up since a wave of social unrest in 2019.
Aediles and other small electricity generators argue the move runs counter to Chilean law by reducing incentives for various energy sectors. He warned the bill, which will be introduced in Congress this week, could threaten its financial status.
“The proposed change will make us immediately establish covenants with our creditors,” said Michael Minnes, managing director of Latin America at solar developer CarbonFree Technology Inc. invest in this type of project in Chile.
Chile’s clean energy boom has consistently placed it at or near the top of BloombergNEF’s ranking of emerging market destinations for renewable investment.
Through access to stable prices, the PMGD model offers environmentally focused investors a measure of protection from bottlenecks and cost distortions caused by energy transmission congestion and storage shortages. Several renewable players in other market segments have been sent into insolvency as a result of these challenges.
Boric’s administration defended the bill as necessary given fiscal constraints. The move is a temporary measure that will reduce PMGD compensation from the mechanism for three years.
“We have identified the gap between the efficient cost of development and the income that the group of generators has received,” Minister of Energy Diego Pardow said in a written response to the question. “There is room for contribution to the expansion of subsidies.”
It’s unclear how much congressional support the administration has for the proposal, but lawmakers are unlikely to vote against the measure to help the poor.
Renewable gluts mean that larger producers get nothing for board sales, while small-scale generators are protected. But the stable price mechanism for solar PMGD is ultimately used as a profit-enhancing subsidy for project owners, according to Cristián Muñoz, founder of consulting firm Breves de Energía.
“The massive force of the generation that the mechanism has caused entails significant inefficiencies in the power system, setting upward pressure on system costs and stressing the transmission network,” he said.
PMGDs – each of which produces less than 9 megawatts – have a total installed capacity of close to 2,900 megawatts and make up approximately 12% of the national grid, according to the independent system operator CEN. That’s up from about 200 megawatts a decade ago, and there’s another 1,900 megawatts currently under construction.
In addition to BlackRock, the mechanism has attracted other foreign players such as Spain’s Matrix Renewables, Germany’s Blue Elephant Energy AG, and JPMorgan’s Sonnedix. While the government’s bill has not been officially presented, it has already considered a broader investment strategy in Chile.
Plan on Rest
CarbonFree, which has the largest market share among PMGDs with about 10% of installed capacity, is just a week away from green-lighting $300 million in financing for energy storage projects, Minnes said. “For now the investment is on hold until we get regulatory clarity from the government.”
The rule change will force CarbonFree to breach the coverage ratio tied to earnings on its privately placed U.S. dollar bonds, Minnes said, adding that the company has been on the phone with several borrowers about the issue.
Aediles is in talks with BlackRock and other funds for fresh investments of up to $1.5 billion in solar and wind power plants in Chile, as well as energy storage. Crouch said negotiations have also stalled. “If this type of policy is implemented, we and investors will be forced to target different geographies.”
Pardow pushed back against the company’s criticism. The minister stressed that “when someone says that the burden will not come from them, what they are saying is that it must fall” on the government that is trying to shorten the waiting list in public hospitals, improve school infrastructure and modernize the police force.
“These are the beliefs of this government and we will defend them throughout the legislative process,” Pardow said.
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