Chile wants to suspend solar subsidies

Chile may be better known for its copper, but the country has also recently emerged as a pioneer of the energy transition and is experiencing a boom in solar installations. Now the government is threatening this. It plans to temporarily remove a subsidy mechanism, and solar developers are not happy.

As in other markets such as Europe and parts of the United States, solar generators in Chile rely on government guarantees of certain prices at which utilities must purchase their electricity. However, it appears that these guarantees – effectively subsidies – along with other factors have pushed the price of electricity for Chileans too high for the current government to afford, so it wants to suspend guaranteed minimum price payments for three years in order to continue subsidizing electricity.

The industry was understandably less than enthusiastic. Chile has seen a boom in solar power generation capacity in recent years, which is expected to reach 13.77 GW this year, up nearly 50 percent from 2023. When the plan to suspend subsidies was first announced earlier this month, three associations of solar developers expressed their “concern” about the government’s intentions, saying the plan “significantly alters the PMGD’s remuneration system by deducting, through an arbitrary mechanism, revenue from projects that have already received investment.”

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Foreign investors, who Chile attracts because of its generous compensation system for solar developers, are also critical of the move. “They invest in Chile and think it’s the Switzerland of Latin America,” David Crouch, managing partner of Aediles Capital, told Bloomberg. “This move sets a dangerous precedent.” Aediles Capital is one of the companies affected by the move and was founded to manage BlackRock’s energy assets in Chile.

“The proposed changes would cause us to immediately default on our obligations to our creditors,” another senior executive at a solar developer said in a comment on the Chilean government’s move, according to Bloomberg.

These comments suggest that profitability and even continued business in the solar industry remain highly dependent on government subsidies: In a report on the legislative changes, Bloomberg noted that some wind and solar developers have had to file for bankruptcy because they were exposed to the free market and did not receive government subsidies.

Supporters of the measure say it has oversaturated the market with solar developers and driven up electricity prices. This is also the case in the European Union and the UK, where governments have imposed additional taxes on electricity to finance the expansion of wind and solar power.

“We have identified a gap between the efficient development costs and the revenues of a group of producers,” Energy Minister Diego Pardow told Bloomberg in response to questions about the planned changes. “There is scope to contribute to the expansion of subsidies.”

The subsidy Pardow is referring to is a subsidy for electricity for residential use. There is one step almost any government would take when its constituents are faced with rising electricity bills: keep the electricity bills low. In this case, the government’s move put it at odds with investors who had previously flocked to Chile for the guaranteed revenue.

“Artificial interventions in the prices of electricity supply contracts awarded through public tenders have created uncertainty and distrust among those who finance the development of energy projects in Chile, as they significantly undermine Chile’s great unique selling point, legal and regulatory stability,” a coalition of three solar associations said earlier this month.

It is a little ironic, though. The project developers are complaining because the government wants to take away their subsidies – suggesting that subsidies are negative, but only when they are given to someone else, in this case low-income households. When the subsidies secure their own income, they are very positive.

By Irina Slav for Oilprice.com

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