2024-09-13 16:01:52
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Chile has played down warnings that plans to cut revenues for smaller renewable power operators could trigger a wave of debt defaults and harm the country’s hard-won trust from foreign investors.
The US Chamber of Commerce and power investors raised the alarm after President Gabriel Boric’s leftwing coalition unveiled a draft bill that would reduce revenues earned by smaller, mostly solar providers generating less than 9MW to help fund an electricity subsidy for poorer consumers.
Finance minister Mario Marcel told the Financial Times that the concerns were overblown. “People should not overreact,” he said. “It’s reasonable for an investor to be concerned about the rules of the game . . . but to go from there to questioning our whole institutional set-up in electricity seems to me excessive and unnecessary.”
If the current plan, which was presented to congress last month, passes, “these plants will be in technical default”, said Luis Sabaté, chief executive of power generator Matrix Renewables, which has invested $440mn in the sector. Other investors, including leading infrastructure groups such as BlackRock, have spent a total of $3bn on small renewables projects in Chile, according to Infralogic.
“We won’t be able to pay the debt. This has an effect on subsequent investment . . . we were willing to continue investing in Chile but that will just stop,” Sabaté said.
Rating agencies have warned that some smaller power generators could become unprofitable if the government plan goes ahead. The Chilean Solar Energy Association and three other industry groups have described the proposal as “seriously flawed”, saying it “substantially undermines legal predictability”.
Smaller power generators supply around 12 per cent of Chile’s electricity, close to 3GW, Sabaté said. Overall, Chile obtained 55 per cent of its electricity from renewable sources in 2022, according to the IEA. The National Energy Commission had projected a rise in smaller power generation to 4.7GW by 2026, but Sabaté said companies are now putting plans on hold.
Investors have expressed a broader concern that the Boric government’s subsidy plan, intended to last three years, is a further signal that Chile, long known as an emerging market haven because of its stable, predictable rules, has changed for the worse.
At $21.7bn, foreign investment in Chile last year was the highest in a decade, Marcel pointed out. “People can say what they like, but . . . the decisions of investors show a certain interest in continuing to invest in Chile,” he said while in London for the Chile Day investment conference.
The government is pressing ahead with cuts to corporation tax, the development of a green hydrogen industry, increases in lithium production and moves to speed up the granting of permits for new projects. He said “these three factors together . . . would take our growth to 3 per cent [a year]” — a level he said that was similar to countries with comparable per capita incomes.
Government officials believe Chile’s access to abundant sources of renewable energy — its northern Atacama Desert has the world’s highest solar intensity — and short distances from generating sites to the country’s ports will make its green hydrogen exports competitive.
“Practically all countries are saying they will produce green hydrogen. But the natural conditions in Chile are greatly superior,” Marcel said. The government is evaluating proposed green hydrogen projects worth around $10bn and a pilot plant is expected to produce commercial quantities of hydrogen in two to three years, he added.
Chile is the world’s second-biggest lithium producer and the industry has expressed concern about the government’s decision to give the state a controlling role in the industry, saying it risks making the country less attractive than neighbouring Argentina.
Marcel said Chile is increasing lithium production faster than Argentina, thanks to an agreement between state mining firm Codelco and SQM, the country’s biggest lithium company, which would lead to increased output next year.
“We had as an objective to have three or four new lithium projects in addition to those in the Atacama, and we will probably have more,” he said.
The Boric government lacks a congressional majority and has struggled to pass legislation to increase tax revenues and give the state a bigger role in providing pensions. Marcel said that following an agreement with opposition lawmakers, he expected pension reforms to pass well in advance of Chile’s next general election in November 2025.
Plans to increase tax revenues by five percentage points of GDP during the current administration have now been scaled back to three percentage points, half of which will be found by improving collection and tackling evasion, he said.
“Part of the opposition has realised that if they want to govern next time, it doesn’t suit them to drag [into the next legislature] reforms which have not been resolved,” he added.
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