Long known for its business-friendly posture, Chile has been a preferred destination for those seeking regulatory stability and investment security in the Latin American region. However, a legislative proposal introduced this week has caused consternation among investors in the country’s PMGD sector. Jonathan Carmody analyzes how the bill could impact small- and medium-sized distributed generation assets. 

Chile’s government on 26 August presented a bill to Congress that, while seeking to subsidize electric costs for an increased number of lower income households, could hurt small- and medium-scale renewable generation projects, market participants say.

The legislative proposal marks the beginning of the gradual unfreezing and normalization of electricity rates, frozen since the social unrest Chile experienced in 2019. It seeks to raise up to USD 900m through three mechanisms: increasing taxes on emissions; creating a VAT that will come as a result of higher tariffs; and adjusting the revenues of small- and medium-scale distributed generation assets with a capacity of less than 9 MW, known locally as “PMGD” projects.

That third component, which according to estimates will generate around USD 150m annually in 2025, 2026, and 2027, has caused concern among the developers and owners of PMGD projects.

“Chile has distinguished itself over the past 30 years as a country that respects the commitments it has made through legal and administrative regulations (including Supreme Decrees),” said David Orellana, co-managing partner at Aediles, a BlackRock Real Assets Global Renewable Power Fund III-backed investment platform operating in the country. “This withholding is an unprecedented public policy, as it is a hidden tax that represents approximately 30% of the PMGD revenues between 2025 and 2027.”

A spokesperson for the ministry provided a PowerPoint presentation given by Minister of Energy Diego Pardow to the Senate’s Mining and Energy Committee on 28 August and said that the proposal is “a developing story.”

PMGD projects are regulated by several Supreme Decrees (DS). Seeking to diversify the sources of generation for Chile’s grid, 2005’s DS 244 determined how to calculate a stabilized price per megawatt for small generation projects. Later, 2019’s DS 88 continued government support to PMGD projects only until 2034. DS 88 locked in investment so that projects that were operational, that obtained an interconnection permit within seven months of the implementation of DS 88, or that were classified as under construction within 18 months of the same date, could continue to access the stabilized pricing.

While the PMGD regime does not operate with a fixed price, it was designed to move the price per megawatt hour in a more stable way. The regime made the price for these projects quite stable, and that stability enabled the leveraging of the projects, Moody’s Ratings Analyst Philipp Toculescu told Infralogic.

“The new proposal is planning to take the price from the costs of the projects. There is some excess between the cost of building the project per megawatt and the price they’re receiving for the stabilized price that the proposal is planning to re/direct as subsidies,” he said.

Chile implemented the “PEC” regime following the social unrest of 2019, to freeze electricity costs for consumers. This penalized energy companies but there was a mitigation mechanism to monetize the receivables.

“In this case [the cap on PMGD revenues] we understand there is not a mitigation mechanism, which seems to be more aggressive,” Toculescu said.

Foreign capital inflows

Local and international developers and asset managers have invested around USD 3bn in capital to the deployment of PMGD assets in recent years and the proposed changes, even while still in the discussion stage in Chile’s Congress, are already having an impact on their investment decisions.

On 10 November 2023, Toronto-based solar developer CarbonFree Technology announced that it had put its 50th PMGD project into operation. The company made its initial investment in Chile in 2017 and has developed the most PMGD projects to date, with its 360 MW of operational PMGD projects accounting for over 10% of the market.

While the Canadian company has invested hundreds of millions of dollars in its generation assets and local distribution lines, that has come to a crashing halt with the presentation of the new subsidies bill.

“We were close to proceeding on our latest investment, a USD 300m battery project in Northern Chile, but had we known that the pricing available was going to be capped at USD 40 per megawatt for our PMGD projects we wouldn’t have made any investment in the country at all,” said Michael Minnes, managing director for Latin America at CarbonFree Technology.

Aediles co-managing partner David Crouch was very pessimistic about the future of the PMGD sector if the proposal passes through the Chilean legislature, saying that the proposed change “could result in one of the largest defaults in Latin America.”

While BlackRock is one of the highest-profile investors backing PMGD assets, other companies like Chile’s oEnergy, Verano Energy, JPMorgan-backed Sonnedix and TPG-backed Matrix Renewables have all secured project finance for portfolios of PMGD assets.

Top lenders to PMGD projects include European banks Natixis, DNB and BNP Paribas, according to data compiled by Infralogic.

Moody’s Ratings Vice President and Senior Analyst Daniela Cuan remained cautious on the proposals, saying that the final details and how the measures will be implemented are still unclear.

“There’s still a long way to go until this proposal becomes law but it seems to be credit negative for the sector and might result in diminished revenues for the impacted generators,” she said. “Most of the PMGD projects have been project financed with theoretical revenue streams and this new proposal will have some impact, as we understand there is not a lot of margin on their financial structures.”

The executive director of local industry group the Trade Association of Small and Medium Generators (GPM AG), Matías Cox Campos, said in a statement shared with local media and published on LinkedIn that “Despite the evidence, arguments and warnings provided by advisors, companies and trade associations, the Ministry of Energy presented a bill, where one of its pillars puts the financial viability of many PMGD companies at serious risk and affects obtaining financing for new projects that the country requires, necessary for the energy transition.”

Local energy and electricity market consulting firm Valgesta Nueva Energía in its August bulletin was equally critical, saying “… state price fixing, as demonstrated by multiple international examples, has resulted in energy crises, deteriorating infrastructure, and less competitive markets. Rather than moving towards a price fixing model for PMGDs, we believe it is more prudent to assess how the mechanisms for calculating and paying the stabilized price determined by law for these technologies can be refined.”