The time has come

It has been a long wait in the hot, dusty plains of Northern Chile. Solar developers have been flocking from Europe to the Atacama Desert with big plans for more than three years now, hoping to get rich off the natural abundance in this region, just as the mining companies have. This time, it is the desert’s sunlight that has drawn this latest gold rush, as the desert has some of the best natural solar conditions in the world. In many places, direct normal irradiation measures higher than 3,500 kWh per square meter, roughly three times as high as the vast bulk of Germany.
Developers have filed a seemingly endless series of applications for ever-larger solar PV projects with the nation’s environmental authorities, totaling over 9 GW to date. However, for years only a few small projects managed to win contracts and secure financing, even as more and more companies arrived from all over the world.
All of this has changed over the last 12 months. As of June 2014, GTM Research counts over 500 MW of PV under construction in Chile, making it the largest market in Latin America. The nation already boasts the largest single PV plant in the region, SunEdison’s 100 MW Amanecer plant. In total, Chile has now reached 186 MW of online PV, with the vast majority commissioned in the first six months of 2014.

A market without subsidies

While this is impressive, it is ultimately not the numbers that make Chile animportant market. Other nations in the developing world, including South Africa and Thailand, are installing hundreds of megawatts of solar PV annually, and India’s annual PV market is roughly 1 GW. What makes Chile different is that unlike South Africa, very few of these projects have been awarded via renewable energy solicitations. Unlike Thailand there is no feed-in tariff, and unlike India there are no subsidies of any sort.
Chile is the world’s first PV market of this size where solar is competing directly with other forms of energy, without subsidies, and winning. Adam James covers Latin America for GTM Research, and says that in this regard, Chile is unique.
“There is no reference for this,” notes James. “We have never seen a market grow from the ground without any subsidies. We have seen transitions from subsidized markets to unsubsidized, but we haven’t seen one grow from scratch.” This is leading to new business models, including the building of PV plants without power purchase agreements (PPAs) that sell their power on the spot market. Chile hosts the world’s largest merchant PV plant, SunEdison’s 50.7 MW San Andrés.
SunPower is building an even larger merchant plant, the 70 MW Salvador, and SunPower CEO Tom Werner says that he expects more of these projects in the future. “The reasons to do a merchant power plant are numerous,” Werner said. “One, of course, is that you can replicate it in Chile, so it is inherently scalable. Another is that you create a relationship with investors that takes solar mainstream.” As such, Chile is a vision of the future of the global PV market, a future not dependent upon the whims of policy but upon the raw competitiveness of solar technology.

The long wait

The Chilean market’s development has taken some unexpected turns. As European and especially Spanish companies came to Chile looking to sell power to the mining companies in Northern Chile, this meant that most of these projects were located in the nation’s Northern Grid (SING). The SING grid is not connected to the nation’s Central Grid (SIC), where population centers, including Santiago, are located.
However, as time went on a few projects began to be proposed on the SIC, to take advantage of high and variable electricity prices in certain nodes at the grid’s northern end. Here, the peculiarities of Chile’s electricity grid are important. The nation benefits not only from excellent solar resources, but also strong demand. On the SING grid demand is dominated by the mining companies, but demand is rising on the SIC grid from Chile’s urban areas. Much of the generation on the SIC grid is hydroelectric plants in the south, and Chile’s transmission infrastructure is weak in many areas.
The first large projects to obtain financing and begin construction were the ones on the SIC grid, including the merchant projects by SunEdison and SunPower. Given this sudden start after years of delay, it is tempting to look for some external driver, such as a change in national policies. Adam James of GTM Research says that is misleading. “The only thing that changed was the learning curve of the market participants on both sides of the table,” he revealed.

Merchant power

While many of the first projects were built on SIC, there are a number of projects under construction on SING. There is also a variety of off-takers and business models for the sale of power. Most projects have PPAs, including those with
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mining companies. However, two PPA projects by Enel have contracts to sell power to utilities awarded via public solicitations.
Additionally, three of the projects have a merchant component, and two have either contracts with no price floor or are selling excess power into the spot market. This is a new development for the global PV market. While the Gauss Energía’s 30 MW Aura Solar 1 PV plant in Baja California, Mexico, was the first plant of its size to sell electricity on a fluctuating price with no floor, no other market has yet seen large-scale merchant PV projects.
However, SunPower and other developers think that this model will soon spread. “There are many countries with similar profiles to Chile,” noted Werner. “You have other parts of the world that have good sunshine, strong economies, and a high cost of electricity. Think of it as the beginning of a trend that we are going to see in the rest of the world.”

Development banks’ influence

Whether they utilize the PPA model or sell merchant power, obtaining financing is still a major issue for utility-scale PV project development. U.S. and international institutions have played a big role in enabling Chile’s market to grow. SunPower says that funding from project partners Total and Etrion helped move the Salvador project forward, as did the company’s commitment to financing. However, like all of the large PV projects being built by U.S.-based developers, Salvador also received a $155 million loan from the U.S. Overseas Private Investment Corporation (OPIC). OPIC is the biggest lender for Chilean solar, with $887 million committed to date for five projects, including Amanecer and San Andrés.
Other large projects have received financing from the Inter-American Development Bank (IDB) and the World Bank’s International Finance Corporation (IFC), which have together committed $284 million at last count.
The relative economic and political stability of Chile is also a factor in access to financing, as lending institutions are more willing to invest in projects in the nation than in other developing economies in Latin America and elsewhere.
Developers note that the cost of capital is somewhat higher than in the U.S., but lower than many other nations, due to this enduring stability. And while development banks have taken the first mover risk, many participants expect the market to transition soon to local commercial banks. “The role they are playing is to establish the project finance market for other, more commercial sources of financing,” added Werner. “They are very important at this time. But this in short order could decrease the risk premium for international investors in solar projects in Chile.”

The future

GTM Research expects steady growth for the Chilean PV market, but not an explosion of projects. Analyst Adam James predicts that 255 MW of PV projects will be completed in 2014, and 308 MW in 2015. There are a number of factors at play here. There is a limited capacity of PV projects that can connect to individual nodes, including those nodes with the highest prices and greatest price fluctuations.
Chile itself is changing as well. The nation has long recognized the limitations of its current grid, and plans a number of infrastructure investments including connecting the SIC and SING in 2016. This will make marginal node prices less extreme, and while it may end windfall profits at some nodes, GTM’s Adam James says that this will be better overall for the nation’s PV market.
“Chile will no longer have the supply bubbles,” predicts James. “It will be good to renewable energy and solar because you will be able to export your power to where you need the power.” Another significant development in Chile was the rejection of the massive HidroAysén project in June 2014, after years of sometimes violent struggle pitting environmentalists and residents against the government and developers.
Environmentalists, civil society groups and politicians across the political spectrum have long been pushing for more non-conventional renewable energy (ERNC) in Chile instead of more big hydro projects. This manifested in a 2013 law that requires utilities to source no less than 20% of their electricity by 2025 from ERNC.
While the combination of these developments is indeed rather promising for Chile’s solar market, the future is still difficult to predict, and analysts have previously had little success in forecasting the size of the nation’s market in any given year.
However, what is certain is that Chile’s solar market is already underway, and setting a path for other nations to follow.