Chile project finance VP talks supply auction outlook, PMGDs, ‘booming’ BESS investment

Storage is booming in Chile, with capacity on track to climb to almost 10GW by 2030, from around 1.3GW today.

In terms of supply auctions, two are underway this year, one short-term, the other long-term. All eyes will be on the level of participation, particularly in the long-term auction, given factors such as price stabilization mechanism regulatory fallout, curtailment and price decoupling have hurt multiple players in recent years and dampened interest, particularly among independent renewables generators in the north with offtakers further south.

Meanwhile, a cloud of regulatory uncertainty has settled over the PMGD distributed generation segment, leading to a virtual halt in associated financing activity.  

In the first part of a two-part interview, BNamericas talks to local finance expert Stan Malek about several hot topics in the local energy arena: regulated supply auctions, PMGD regulation and energy storage.

Malek is senior VP of energy and infrastructure project finance at the Chilean offices of Norwegian financial institution DNB.

BNamericas: Chile has two supply auctions for regulated clients underway. Given the price stabilization mechanisms and price decoupling clearly dampened appetite in past processes, what’s your view on the level of interest we could see this year?

Malek: DNB is still part of the banking group that is financing these projects with distribution company [power-purchase agreements] PPAs. Projects with those PPAs are still on our books.

So, we’re very aware of the issues that the legacy PPAs of that sort bring. We were recently asked by [national energy commission] CNE to participate in a series of workshops aimed at improving the future tenders and future contracts.

This, I think, is a very good move from CNE. I mean, already, the contracts that were tendered previously were improved significantly, because they removed the risk of system costs and the [price] decoupling risk.

So that is a huge improvement. But having said that, no matter what improvements you put in place right now, the legacy ones are causing a lot of pain, pain that remains unresolved.

There are also the PECs [three temporary end-user electricity rate stabilization mechanisms, virtual loans shouldered by generators to shield residential users from rate increases.]

All of that, effectively, in many cases, put our projects in default because of liquidity squeezes. We had to react and restructure some of the projects.

So, banks have short memories, but not that short. People still remember what happened 2-3 years ago. Banks have a lot of unresolved cases on the balance sheet.

And with a lot of activity in the private PPA space, you simply don’t need to go and finance potentially new projects with even an improved version of new [distribution company] disco PPAs.

BNamericas: Any thoughts on appetite for participation? 

Malek: I would [however] honestly be surprised if there is no interest from the incumbents, unless, obviously, they have some internal policies that may keep them from participating in such tenders. Other than that, I think it could be a very attractive opportunity. 

BNamericas: What about new projects? Do you think we could see associated investment in new generation parks or will bidders plan to use existing assets to supply the power?

Malek: That’s where it becomes trickier, because if you want to use project finance as a financing method and with the new disco PPAs, at this stage, I think it would be very difficult to obtain such financing.

But, you know, the new [long-term] tender will probably require the assets to be operational by around 2030. That means you need to probably close the financing in around 2028-29. Where will we be, where will the banking industry be? Might we forget some of the issues? It’s difficult to say.

BNamericas: What about energy storage? There seems to be a lot of investment being made in systems. What’s your take on it all, for example, what’s the level of demand for project financing?

Malek: Demand is huge. I’ve never seen so much activity and pipeline since I started working here in the Chilean energy sector. Most of the projects that we see are attached to either existing or to-be-built solar generation. 

The very few that we’ve seen on a standalone basis are usually done through tolling agreements, where the incumbent is effectively managing the battery and the project is just based on the availability of battery, and you receive the fixed payment. We’ve seen a few of those. But most of the projects that we do are hybrid. 

Investment in storage right now is booming. What’s helping in all that is precisely demand from industry, from bankable off-takers for 24-hour renewable energy. And now the cheapest way to provide that type of power is through a mix of solar and batteries. This is why we see all these billions [of dollars] sought in debt, and in equity as well. 

BNamericas: We’ve heard hybridization helps derisk projects, given you have control over the supply of electricity needed to charge your batteries. 

Malek: Yes, in that case, you don’t need to worry about charging cost. With solar panels being so cheap, it’s a cheap way to get one of the risks out of the way. Today you do have a lot of curtailment, which means zero prices during the solar block. The question is whether that is going to be the case for the next 10 or 15 years. That is precisely the period we are considering for those financings. 

BNamericas: Let’s shift to electricity regulations. What stands out on the landscape for you?

Malek: The first thing that pops into my mind is the whole mess that we are dealing with right now regarding [grid-connected distributed generation plants of up to 9MW] PMGDs. 

They have effectively started to face a huge regulatory risk since last year when they were exposed to potentially being a source of funding for a [state] subsidy for regulated clients.

So, while it is almost now a given that they won’t be, we’re still yet to see if that really is the case [as the bill remains under discussion in senate].

Also, PMGDs might need to face curtailment [under another proposed regulatory change]. That’s the part where I think we do see some logic to that. It’s hard to argue that a PMGD project, a smaller scale project, should be allowed to inject at a “privileged” price and not face any curtailment, where, for example, an industrial-scale project that is next door to it, has sometimes 40% of generation sent to the ground.  

Some of those [industrial-scale plants] need to also effectively support PMGDs, their stabilized price.

So, [also considering zero marginal costs] it’s effectively a double or triple whammy [for an industrial-scale project], depending on how you look at it. I think there is merit to [the proposal] that PMGDs should participate in curtailment.

But then again, what sort of timeline are we talking about implementation? The government is suggesting two years. Is it enough [time] to even get the capex for the necessary equipment, that would allow them to do that, in place by this time? So, again, huge uncertainty because – depending on also how you apply this curtailment, how you approach this sharing – the impact there could be 20-30% of revenues. So, it’s a huge thing.

BNamericas: As we understand it, complete removal of the stabilized price mechanism is being mulled.

Malek: Yes, the latest proposal is actually considering complete removal of stabilized price in its current form from 2034 onwards. That is something that is virtually hard to even comment on because the stabilized price was supposed to help small-scale projects that don’t have enough commercial power to precisely be able to copy a little bit of the PPA conditions.  And if the stabilized price now has to be just an average of spot prices, that concept is completely lost.

BNamericas: So, there is a lot of uncertainty. What are the implications, the fallout?

Malek: So, effectively, if you summarize all of that, the whole regulatory turmoil is making it literally impossible for us to look at this type of asset. 

Honestly, I would be surprised if any other financing institution could consider entering such financings. At the same time, which I think is going to be very interesting, is that a lot of these projects have been financed through mini-perm [short-term financing] structures, meaning with legal tenors of five years or around that, that will need to be refinanced shortly.

What is going to happen to all that? That will be a very interesting thing to see. So, I think that the message here is that because of the these – you may argue, right or wrong – intentions to perhaps properly regulate the PMGD market, and because of the way it is being done, I think it’s effectively causing the entire energy sector to be viewed through, I would say, eyes of considerably higher regulatory risk.

Some banks precisely have been considering holding their lending activity just because of precisely what has been happening to the PMGDs.

(The original version of this content was written in English)