High costs of energy due to a severe drought that has severely impaired hydro power plants coupled with restrictions in the capacity of transmission systems has once again put renewable energy in the sight of authorities as a way to decrease reliance of hydro and coal-based electricity.

Also the campaign promise of President Piñera to reach a goal that 20 percent of the energy demand in Chile is supplied by renewable energy by 2020, provides the political backdrop required for new legislation.

Recently, the Chilean Senate approved a bill that would move to country toward more widespread adoption of non-conventional renewable energies.

The Current Law

The law set forth a goal of 10 percent of power generation by 2024 to be supplied by non-conventional renewable energies; starting at 5 percent between 2010 and 2014 and increasing 0.5 percent yearly from 2015 until reaching the proposed goal. However, the 5 percent is calculated over the basis of power supply agreements entered into after 2008, so currently the real goal is approximately 2.5 percent. This obligation must be complied by the power generation companies, subject to fines that currently go from $32.6 to $49 per each MHz of deficit. Though these fines may seem considerable relative to current marginal costs, it may still be cheaper for some generation companies to breach the legal obligation than to invest in renewable energy installed capacity. 

The law also created renewable energy certificates, which are issued by the authority according to the injections of each plant, allowing for its trade between power companies. However, the law and its regulation scarcely regulated the certificates, which has created some uncertainty regarding their real and effective use.

The New Bill

The bill creates a renewable energy tendering process for quotas allocated to renewable energy source (according to the objectives set by law), which would be carried out every two years. The incentive framework would change from the current renewable portfolio system to a tendering system, which implies an important change in the tariff-setting mechanism. The bidders would offer tariffs for the specific energy block or injections that they would commit (annual MWh), being assigned the bid to the lowest offers. Such tariff would be applicable for a 12-year-term from the commercial operation date of the respective plants, a term that cannot be further than 36 months from the awarding decree. The final buyers would be the other actors in the spot market, therefore the renewable energy tariff would be constant and not subject to any changes in marginal costs of the spot market, allowing access to project finance. The tender process, from the release of its terms and conditions until the respective awarding,, could not take more than 200 days.  The terms of bidding process would consider a maximum bidding tariff.

According to the bill, the requirements to participate in the bid include:

  • A favorable Environmental Qualification Resolution (Resolución de Calificación Ambiental or “RCA”) of the respective projects, or a declaration that they do not need an RCA. This requirement implies that the bidder must assume some time and expenditure to obtain such RCA;
  • The paid-in capital of the bidder should be at least equal to the 30 percent of the total required investment or have a commitment to have paid-in the capital if the bid is awarded;
  • Guarantees for the bidder’s offer, for the construction of the project and for possible fines considered in the bidding terms.

These requirements could impose some restriction to the Chilean generation market, which has been operating for the last 30 years under free market rules, especially in connection with the paid-in capital and financial guarantees. The renewable energy goal would increase from the current 10 percent to 20 percent (calculated from the total power generation), and the term to reach such a goal is reduced from 2024 to 2020. Such an objective would increase on a 2 percent annual basis from the applicable 5 percent in 2013, until reaching 20 percent of the total energy injections (for 2020, the increase will be 3 percent). Also, the bill considered that the authorities keep a public registry of all the transfers of renewable energy certificates and the price of the transaction.

Moving Ahead

The bill will now be reviewed by the Representatives Chamber, and it is expected to be enacted within 2012. The bill should allow projects that currently have all the required permits and approvals, but have not entered into PPAs (and therefore, can not obtain finance) to start their construction and commercial operation, and significantly increase the participation of renewable energy power plants in Chile.

Also, the option that separate tender process are carried out per energy source, would allow a balanced development. However, it is fundamental that the tendering process does not benefit inefficient projects, in order for the reaching the required energy blocks and objectives.