Santiago, Chile — Policies favoring clean energy and increased competition would normally dim prospects for existing producers. Not in Chile, where foreign investors are driving a renewable boom at a time of surging returns by local utilities.
In the year since President Michelle Bachelet took office, Chilean companies including Enersis SA and AES Gener SA are among the best performers in Americas energy stocks tracked by Bloomberg. In the previous 12 months, they were the worst after years of opposition to coal and hydroelectric projects and a prolonged drought crimped earnings and sent prices soaring.
The change in fortunes comes as government efforts to plug the investment shortfall lure newcomers like Electricite de France SA and as renewable companies from Acciona SA to SunEdison Inc. make Chile the hottest alternative energy market in Latin America, with dozens of wind and solar plants being developed. That’s flowing through to local companies, which are increasing efficiencies and investing in newer technologies, Energy Minister Maximo Pacheco said in an interview Tuesday.
“When companies see all this competition, their first reaction is to see a short-term problem,” Pacheco said from his Santiago office. “But when you have clear rules of the game, when you have public policy that promotes competition and newcomers, the incumbents start to do things better. Competition is very good for the industry.”
Chileans’ electricity bills have risen 30 percent in five years and could increase by another 30 percent without Bachelet’s plan including promoting renewables since the country imports more than 90 percent of its oil and gas, Pacheco said. Chile also needs to stem energy costs to capture copper and gold mining investments that could top $100 billion.
Chile received 17 offers to generate power from new projects, mainly from renewable energy companies, at 17 percent cheaper values compared with a December 2013 bidding round, according to the government.
“We started to feel there was a huge appetite from investors,” Pacheco said. “There is a very attractive investment climate.”
EDF, GDF Suez, Acciona and Abengoa SA won contracts in December to supply Chile in the coming decade, providing more competition for Endesa SA, Colbun SA and AES Gener, which together account for about two-thirds of power generation.
Chile had a portfolio of 45 power projects as of November 2014, of which 39 percent were non-conventional clean energy projects, ministerial data show. That’s up from a government estimate that tracked 28 power projects in March last year.
Chile ranks seventh in generating power from renewable sources among the 35 nations from the Organization for Economic Cooperation and Development and G7. The Chilean energy ministry says renewables including large hydro-power plants have accounted for about 60 percent of generation in recent years.
Enel Green Power SpA leads Chile’s renewables market with 534 megawatts of generation capacity, more than double the second-ranked producer.
The country’s greatest potential may lie in the Atacama Desert, where radiation levels are higher than any other part of the world, Pacheco said.
Spain’s Abengoa is investing 1.7 billion euros ($1.82 billion) on a solar park in the desert that will combine solar thermal and photo-voltaic technologies to provide round-the- clock power in the copper mining north, according to the company.
“There is a level of radiation in Chile that you can’t find anywhere else,” Ivan Araneda, general manager of Abengoa Solar Chile unit, said by telephone last week. “So there is an efficiency that you can’t get anywhere else, and also there is demand from mining companies that doesn’t exist in other countries.”
Chile has the two sunniest places on earth while Sudan has the third, meaning solar energy could provide cheap energy for the mining industry and be exported to neighboring countries as the region works on grid integration, according to Pacheco.
“Clearly we are in a place where solar energy is a tremendous opportunity,” Pacheco said. Chile is building 1,164 megawatts of solar capacity as of November, a third of the total.
The country will connect 741 megawatts of solar power to the grid this year and continue to surge in 2016 before stabilizing in 2017, according to Lilian Alves, a Sao Paulo- based analyst at Bloomberg New Energy Finance.
Chilean companies in the NYSE Bloomberg Americas Clean Energy Index returned an average of 28 percent in the past year, the best performance after Peru’s 60 percent return. U.S. companies gained 1.3 percent in the same span. In the previous 12-month span, the three Chilean members were the worst performers with a 6.8 percent loss. Four of the top seven performers in Chile’s benchmark stock index in the past year were power companies.
“The country’s supportive policy regime, transparent competitive electricity market, and access to capital have all put Chile ahead of some of its Latin American neighbors,” said Adam James, a solar energy analyst at GTM Research. “We expect that the market will grow significantly in 2015.”
Electricity producers are also benefiting by a crude and natural-gas price plunge and local currency depreciation given their supply contracts are tied to the dollar, Gaston Forte, an analyst at Banchile Inversiones, said by telephone.
“The government has said that it wants to help to unblock all projects that have all of their permits approved,” Forte said. “We haven’t seen any signs of interventionism here. We remain positive on the sector but you have to be selective.”
For now, the renewable surge probably won’t faze Endesa and AES Gener as Chile needs a big increase in megawatts to keep apace with increasing demand from mining and as the middle-class buys more electrical appliances, Pacheco said.
Even with the new projects, Chilean households won’t see any reduction in their power bills until the beginning of the next decade, he said.
“There hasn’t been enough investment for developing generation and transmission,” Pacheco said. “Our number one priority is to stop the increase in prices.”
Copyright 2015 Bloomberg
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