Press Release

High costs, congestion erode Chilean power projects’ margins

Bnamericas Published: Tuesday, October 25, 2022

PRESS RELEASE from Fitch Ratings

October 25, 2022

Fitch Ratings-New York-25 October 2022: High coal, oil and gas prices are driving up Chilean electric marginal costs, exposing power projects with long-term, regulated, fixed-priced power purchase agreements (PPAs) to margin erosion, Fitch Ratings says. Transmission constraints amplify margin decline as renewable energy cannot be fully transmitted to load centers at peak production times, leading to price decoupling or unfavorable price mismatches at injection and withdrawal nodes.

Fixed-price PPAs with creditworthy distribution companies are designed to mitigate generation company (genco) price risk, although, in practice, all off-taker energy is bought on the spot market at withdrawal nodes. Gencos assume the risk of price differences (decoupling costs) at the injection and withdrawal nodes, and typically offset the costs via injection-node spot revenues. However, rapid renewable-energy generation build-out outpaced available transmission and storage capacity, contributing to systemwide grid congestion and leading to drops in injection prices, pushing them to zero during solar hours. Transmission limitations, associated power curtailment and volatile spot prices increased decoupling costs, leading to margin pressures.

Fitch-rated renewable power projects with regulated PPAs are materially exposed to continued deterioration of coverage metrics and liquidity positions if spot price volatility persists. Such exposure led to Fitch placing Inversiones Latin America Power Limitada (BB+) on Rating Watch Negative in June. However, projects such as Javiera SpA and Parque Solar Fotovoltaico Sol del Desierto SpA (BBB-/Stable) that are compensated for decoupling costs under bilateral PPAs by passing through all withdrawal costs to the off-taker or contractually establishing the same injection and withdrawal nodes are resilient to market risks. Nevertheless, decoupling risk led projects such as the Ibereolica Cabo Leones II wind power facility and the Maria Elena solar power plant to announce they could not meet their obligations to pay for energy purchased in the short-term market.

Renewable projects are exposed to increasing curtailment risk due to geographical power oversupply in resource-rich regions and lack of system flexibility. Electricity delivery restrictions are expected to increase as additional non-conventional renewable energy (NCRE) assets are added to the grid.

The central Chilean region, where the power is mainly consumed, relies heavily on hydroelectric generation and high-priced thermal generators. Marginal costs are driven by high natural gas and oil prices, which exert upward pressure on spot prices at withdrawal nodes. Recent lower supply from hydroelectric plants increased reliance on expensive thermal power sources, primarily during non-solar hours. As a result, average spot prices paid at the withdrawal nodes in Chile’s central region are higher than at injection nodes in the north, where renewable energy is generated. Renewable penetration and the adverse hydrological conditions Chile has faced since 2010 have also increased intraday spot-price volatility.

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