Energy crisis compounds challenges facing the Chilean power sector

PRESS RELEASE from Fitch
1 December 2022

Related Content: Chilean Energy Transition Faces Temporary Headwinds (Regulated Power Purchase Agreements Expose Generators to Market Dynamics)

Fitch Ratings-New York/Sao Paulo/Mexico City-01 December 2022: The current geopolitical energy crisis and curtailment exacerbate challenges faced by the Chilean power sector, according to a new Fitch Ratings report. High coal and fossil fuel prices drove up electric marginal costs, exposing projects with power purchase agreements (PPAs) in the regulated market to adverse but temporary margin pressures. This coupled with system risks arising from the increasing penetration of variable renewable energy (VRE) sources and associated intraday spot price volatility, amplifies margin decline.

Chilean regulated energy auctions have adequately promoted competition while attaining low electricity prices, being the main driver of the system’s capacity expansion. However, since the awarded PPAs expose power projects to particular volume and price dynamics, special consideration should be given to the risks embedded in regulated PPAs to keep progressing in the energy transition while securing low prices for regulated users.

Fitch’s views on the risks faced by projects with regulated PPAs and associated with transitioning sector trends include:
--Curtailment risk. Expected to impact VRE sources over the medium term as new intermittent capacity comes online, but mitigated by new transmission infrastructure and storage capacity.
--Generation deficit risk. An adequate match between the generation profile and volume commitments can mitigate replacement power costs.
--Decoupling risk. Projects are exposed to financial margin erosion via unfavorable injection and withdrawal price differentials, which should recede as coal and fossil fuel prices and congestion decline.
--Demand risk. The effective demand and supply management from the National Energy Commission (CNE) partially offsets exposure to fluctuating regulated demand.
--Counterparty risk. Agreements are executed with a pool of regional Discos, although revenues are generally concentrated in a few creditworthy offtakers, deemed as credit positive.

Fitch believes price risk impact should ease as international commodity prices decline. Still, supply and demand imbalances must be further addressed via policy actions to achieve the desired carbon neutrality.

The report, “Chilean Energy Transition Faces Temporary Headwinds”, is available on www.fitchratings.com or by clicking on the link above.