insights
Chile’s Renewable Energy Boom
Unseen risks threaten long-term growth.
Fernando Prats
chile, geography, green-transition, infrastructure, investment, latin-america, ncre, ppa, regulation, renewable-energy
Despite widespread optimism among environmental organisations, international institutions and investors, Chile’s green transition faces critical structural challenges that threaten the long-term success of its energy revolution. Chile has become a global leader in renewable energy, with over 60% [i] of its electricity generation in 2023 coming from renewable sources, up from 53% the previous year. The country also ranks among the top nations for solar and wind energy potential [ii], particularly in the northern region of the country. However, despite this progress, Chile’s transition to renewable energy is encountering significant economic and infrastructural risks, primarily stemming from geographic imbalances, transmission bottlenecks and regulatory inefficiencies that impact power generation companies.
The rapid growth of non-conventional renewable energy (“NCRE”), particularly in northern Chile, has exposed significant economic vulnerabilities. The geographic distance between low-cost generation zones and high-demand consumption centres, coupled with underdeveloped transmission infrastructure and pricing decoupling, threatens the financial stability of energy operators. Without addressing these systemic challenges, Chile’s ability to fully utilise its world-class solar and wind energy resources may remain constrained.
Tricky business for NCRE in Chile
Geography
Chile’s geography, with its extensive 4,270-kilometre north-south stretch, creates a natural imbalance between renewable energy generation and consumption centres. Most of the country’s solar capacity is concentrated in the far north, especially in the Atacama region, which has some of the highest solar radiation [iii] levels in the world. Similarly, over 25% [iv] of the installed wind energy capacity is in northern Chile, but more than 60% [v] of national electricity demand originates from the central-southern region, particularly around Santiago. This geographic mismatch creates a heavy dependency on transmission infrastructure to deliver low-cost energy from the north to high-demand centres.
Infrastructure
Chile’s existing transmission infrastructure has struggled to keep pace with the rapid growth of renewable energy capacity in the north. Despite the integration of major regional grids under the National Electric System (“SEN”) in 2017, congestion in transmission lines persists [vi], limiting the ability to transfer low-cost energy to high-demand regions. This results in cost decoupling [vii]; while the marginal cost in northern Chile can drop to USD 0 due to surplus energy, the central-southern region often relies on more expensive thermal plants, driving marginal costs significantly higher.
Additionally, Chile’s energy infrastructure has become heavily dependent on foreign suppliers, particularly from China, creating broader strategic risks. Currently, Chinese firms control nearly two-thirds [viii] of Chile’s energy sector, including generation, transmission and key infrastructure projects. For instance, China Southern Power Grid [ix] holds a 27.8% stake in Transelec, Chile’s largest transmission operator. Furthermore, a surge in Chinese solar panel imports, with a 70% [x] increase between 2022 and 2023, demonstrates the sector’s heavy reliance on foreign supply chains. While this dependency has facilitated rapid scaling of renewable capacity, it raises long-term concerns about energy security and economic resilience.
Regulation
Chile’s electricity market operates under a marginalist [xi] pricing system, where generators are paid based on the local marginal cost of electricity in their region. This model prioritises the dispatch of the cheapest energy sources, such as solar and wind, in low-cost generation zones. However, the limited transmission capacity prevents the energy from reaching high-demand consumption centres, resulting in decoupled prices, so while generators in the north may face marginal costs of USD 0, those in Santiago may experience significantly higher costs, exposing northern generators to substantial financial losses.
Risk-factor
The combination of geographic, infrastructure and regulatory challenges poses significant financial risks for NCRE operators, both for those operating under long-term Power Purchase Agreements (“PPAs”) and those selling in the spot market.
PPAs
Generators that enter long-term PPAs with clients are particularly vulnerable to pricing decoupling. For example, if Generator A signs a PPA with Company B at a fixed price of USD 50 per kWh but operates in northern Chile where marginal costs frequently drop to USD 0, the transmission bottleneck may force the system to supply Company B with energy generated from thermal plants at a higher marginal cost of USD 100. Generator A would still receive the agreed-upon USD 50 per kWh but would have to cover the cost difference of USD 50 per kWh, resulting in severe financial losses.
Spot Market
Generators without long-term contracts must sell their energy in the spot market, where prices fluctuate based on local marginal costs. In northern Chile, an oversupply of solar energy often drives marginal costs to USD 0, meaning that operators may generate electricity without receiving meaningful revenue. The insufficient transmission infrastructure exacerbates this issue, preventing surplus energy from reaching central-southern consumption zones where prices remain high. This exposes generators to consistent financial stress and operational uncertainty.
Cautionary tales
The financial pressures caused by transmission constraints and pricing decoupling have already resulted in severe economic distress for several major renewable energy operators in Chile.
Inversiones Latin America Power (“ILAP”)
ILAP, which operates two major wind farms in northern Chile, San Juan and Totoral, had its credit rating downgraded [xii] in June 2023 by Fitch Ratings to ‘C’, citing severe liquidity pressures. With the inability to transmit low-cost energy to central-southern regions, ILAP was forced to cover the cost differences between injection and withdrawal nodes under its PPA contracts. As a result, ILAP’s profitability eroded and the company entered Chapter 11 bankruptcy protection. Although it restructured its debt [xiii] in January 2024, the root causes of its financial distress (cost decoupling, transmission bottlenecks, and regulatory inefficiencies) remain unresolved, posing ongoing risks to operators.
María Elena Solar
Similarly, María Elena Solar, a subsidiary of Spanish firm Solarpack, filed for bankruptcy in 2023 after facing significant financial losses. Operating a 72 MW solar plant in the Antofagasta region, María Elena Solar encountered marginal costs dropping to USD 0 due to local oversupply, preventing the company from generating meaningful revenue. Transmission bottlenecks further compounded the problem, as the company could not deliver energy to high-demand areas, ultimately pushing it into bankruptcy. This case further highlights the structural vulnerabilities within Chile’s energy market and the acute challenges facing renewable energy generators.
How can these risks be mitigated?
While the challenges facing Chile’s renewable energy sector are deeply rooted in geographic and regulatory realities, strategic measures can be taken to mitigate these risks.
Firstly, energy operators should negotiate more flexible PPA contracts incorporating risk-sharing mechanisms with clients, reducing exposure to pricing decoupling and financial losses. Additionally, increased engagement with regulatory bodies to advocate for infrastructure expansion and market reform is crucial.
For investors, focusing on long-distance transmission infrastructure and energy storage solutions presents significant opportunities to resolve existing bottlenecks. The recently approved Electromobility & Storage Law [xiv], which supports investment in energy storage, could stabilise the grid and reduce price volatility. However, these solutions come with high upfront costs [xv], necessitating greater collaboration between the public and private sectors.
Ultimately, addressing Chile’s transmission infrastructure constraints, reducing dependence on foreign supply chains and reforming the marginal cost pricing model will be critical to ensuring a stable and sustainable renewable energy transition.
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References:
[i] https://www.statista.com/statistics/1262922/chile-renewables-share-electricity-mix/
[iv] https://generadoras.cl/prensa/como-avanza-la-energia-eolica-en-chile-por-region
[v] https://www.cne.cl/wp-content/uploads/2021/12/AnuarioCNE2020.pdf
[viii] https://thediplomat.com/2024/09/china-is-gobbling-up-chiles-energy-sector/
[xi] https://fen.uahurtado.cl/wp-content/uploads/2010/07/I-303.pdf
[xiv] https://www.df.cl/opinion/columnistas/crisis-de-las-energias-renovables-responsabilidad-compartida
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