Analysis: Brakes on growth in Chile and Uruguay

CHILE/URUGUAY: South America is a hot market for wind power, but after some years of rapid growth, installations in both Uruguay and Chile are set to slow beyond 2016.

Hot competition… Chile’s Atacama Desert, with 300 days of sunshine a year, is making the country very attractive to the solar industry (pic: SunEdison)
Hot competition… Chile’s Atacama Desert, with 300 days of sunshine a year, is making the country very attractive to the solar industry (pic: SunEdison)

Few countries can compete with Uruguay's rapid adoption of wind energy. Enzo Coppes, chief operating officer of state-owned utility Usinas y Transmisiones Electricas (UTE), attributes two factors to the breakneck pace of turbine installation: the political consensus that established the national energy strategy a decade ago, and UTE's position as an integrated power firm that could guarantee demand from wind projects.

This has allowed Uruguay to outpace the government's ambitious targets. The original target of 300MW was surpassed last year, and installed capacity should hit 850MW by the end of 2015. Next year another 400MW will be added, lifting total capacity to around 1.2GW. But beyond that date, growth will slow dramatically.

"We are reaching saturation point in terms of renewable energy because demand is already sufficiently covered," says Coppes. From 2017, demand for additional wind turbines is likely to grow only as fast as total electricity consumption rises, a figure closely tied to GDP.

Utility export

So UTE is looking at alternatives, specifically Brazil and Argentina, two huge energy markets that are struggling to cover internal demand. Uruguay and Argentina are already linked by a 1GW interconnection, although sales have so far been limited to surplus hydropower. Testing has now begun of a 500kV line to Brazil. Despite the competitive terms agreed with Brazilian utility Eletrobras, Uruguay is not planning additional investment to serve cross-border markets. "For the moment our investments are to cover our demand, not those of our neighbours," he says.

One issue is the company's limited capacity for investment. Most of the wind farms built so far in Uruguay have been funded through project finance with UTE providing 30% of the resources and the rest through project finance loans.

But for the 140MW Pampa wind farm scheduled to come online in 2016, UTE decided to finance 10% of the costs by raising around $80 million on equity in the project from individual and institutional investors on the Montevideo Stock Exchange. To the company's surprise, the raising was oversubscribed three times with small investors (limited to up to $20,000) buying parts of the issue originally reserved for pension funds.

"It reflects the demand for this type of product," says Coppes. UTE is now considering a similar mechanism to fund the Colonia Arias and Valentines projects now in development, each at 70MW. After this success, the government is considering using this model to finance other public infrastructure, such as highways and ports.

Wind vs solar in Chile

While demand for renewables in Uruguay may be flattening out, in Chile the renewables boom is just beginning. Since the country implemented an obligatory 5% quota in 2010 for renewables, more than 2.2GW of alternative renewables energy has been installed, with wind turbines accounting for almost
40% of the total.

Although Chile offers no subsidies for renewables projects, it does have some of the region's highest electricity prices. A tender for long-term contracts last December secured an average price of $108/MWh, a considerable improvement on previous auctions.

After the government raised the target for renewable energy to 20% by 2025, investment in the sector soared. Last year, Chile added 500MW of new wind turbines and total capacity now stands at almost 900MW.

But since that surge, interest in wind energy has waned as developers switch their attention to Chile's other huge resource: the sun. The Atacama Desert is the world's driest, offering solar firms guaranteed 300 days of sunshine. A government report estimates the country could support more than 1.3TW of solar capacity.

Tempted by this potential, developers have lined up plans to carpet the arid north of the country in photovoltaic panels. According to Chile's energy ministry, there are currently almost 2GW of solar energy plants under construction, compared with just 212MW of wind turbines. And authorities have granted licenses for another 9GW of solar capacity, compared with 5GW of planned wind farms.

Lack of transmission

A key barrier to the development of both technologies has been the lack of transmission capacity, especially between the sun-drenched desert and windy coasts of the north and the major cities of Central Valley. As a result, solar plants have been selling electricity at close to zero on spot markets due to the lack of local demand.

Plans to connect the two main grids with a new 500kV line from 2017 should unlock that potential. But whether wind or solar energy will take the lead is in the hands of the market.

"It's very difficult to make forecasts because there is no model which explains how this market moves," says Carlos Finat, executive director of Chile's renewable energy association, Acera. Any small adjustment to the investment costs or project capacity factor could allow either wind or solar to dominate, he says.

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