Fitch: Carbon tax, drought to strain Chile's power sector

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Friday, October 24, 2014

Rising energy costs, a carbon emissions tax, transmission bottlenecks and drought will squeeze Chile's energy sector in the coming years, according to a Fitch report.

"Both [President Michelle Bachelet's] energy agenda and tax reform measures support the expansion of LNG capacity versus coal investments," the ratings agency said in its October Chilean Energy Dashboard report, "in spite of LNG's higher generation costs."

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The report also cited tighter regulation of natural gas distribution, as well as reforms to the country's power auction system, as increasing market uncertainties and negatively affecting investment decisions.

The two largest generators on the central SIC grid, Endesa and Colbún, have each faced their own challenges.

Endesa has suffered from the suspension of operations at the Bocamina II coal plant since December 2013, while Colbún's hydro output has been hurt by prolonged drought.

"These situations have created an imbalance in [the companies'] contractual positions, forcing them to replace efficient generation with more expensive sources of energy," Fitch said.

Chile's limited transmission capacity has not helped either.

"Transmission constraints are negatively affecting small renewable energy projects," the report said, "while the proposed interconnection of the country's two main systems (SIC/SING) has not been yet defined due to its complexity."

Despite these and other obstacles, Fitch said it does not project any negative rating actions for the sector in the short term, due to Chilean energy companies' solid credit profiles.

BNamericas will host its 11th Southern Cone Energy Summit in Lima, Peru, on November 12-13. Click here to download the agenda.