m&a community logo
Chilean energy M&A: Opportunities and challenges
Back to Insights

Chilean energy M&A: Opportunities and challenges

latam M&A

For 5 years running, the Bloomberg News Climatescope report has ranked Chile as the most attractive emerging market for renewables investment. After reaching its 2025 target of 20% clean energy generation five years early, the country is now looking at 40% by 2030. It also wants to eliminate the use of coal and become the leading exporter of cheap hydrogen by 2040.

Over the past few years, Chile has attracted over 20 billion dollars in renewable energy investments, due in no small part to its well-structured electricity sector, with dollar-denominated PPA auctions and bilateral contracts with large consumers available outside the regulated market.   

The M&A Community, a global network of professionals dedicated to providing reliable intelligence, expert analysis, and networking opportunities, arranged an online roundtable, chaired by Óscar Parra, to discuss Chile’s renewable energy sector, which is expected to see a significant volume of M&A activity in the next few years.

What are the deal challenges from the business development perspective?

Diego Varona López:

Definitely the biggest challenge is the uncertainty stemming from recent regulatory changes, not least the greater autonomy for local government.

Next is how much longer it is taking to obtain permits, way beyond the statutory deadlines. Some reasons for this are systemic, such as administrations not having the resources to cope with the renewable energy boom, others are Chile-specific, such as the different reasons each imposing their own criteria for permits.

Connections are becoming increasingly complex from both technical and administrative perspectives. So we are seeing the term “curtailment” used a lot and this is causing some concern regarding asset valuation.

There is also a mismatch between areas of resource and consumption and a lack of parallel investments in grid reinforcement. And some areas are currently viewed as higher risk, leading to a concentration of projects in some regions and none in others.

All these challenges mean development costs are higher; overall, the time required to develop a project has almost doubled compared to four or five years ago. But project sale prices are not rising to match; they are falling.

And what about opportunities for dealmakers in the renewable energy sector?

Diego Varona López:

On the plus side, there are two key areas of opportunity:

  • PPAs: increased demand for renewable energy, especially in the short term, is leading to slight price increases.
  • New technologies: New regulations are still out for consultation, but the technology is mature and capital expenditure is reducing, making storage systems an attractive option at this time.

New technology offers both opportunities and increased risks, but it also promises higher profitability. It’s all about getting the right balance between the current short-term challenges and emerging opportunities.

So, if you were to sum up what we might expect in the next couple of years, what would your analysis be?

Diego Varona López:

In the short term, there is negativity surrounding permit and connection issues and regional uncertainties.

The medium and long-term prospects are much sunnier with growing demand, excellent solar resources, and an expanding mining industry driven by the global transition to renewable energy consumption.

Alfonso, what can you share about your company’s experiences? 

Alfonso Alcalde:

BTG Pactual has a strong focus on renewable energy and infrastructure assets and over the last few years, we’ve been involved in several M&A transactions.

Last year there were 7 closed transactions in Chile involving utility-scale assets (those with a capacity of at least 50 megawatts) and we are seeing similar levels of activity this year.

How do you see the renewable energy market in Chile? Who are the big players in the industry? 

Alfonso Alcalde:

I would classify 4 main types of investors in this sector:

  1. The Big Four: Enel, AES Andes, Colbún, and ENGIE Chile
  2. Renewable platforms: Innergex and Sonnedix
  3. Infrastructure funds: both local, such as Todesca, and international players like Brookfield and BlackRock
  4. Chinese companies

Key to the M&A analysis process is the eternal question of whether it’s better to buy an existing asset or build a new one. While the former saves time in permitting and construction etc. it may also have a reduced future lifespan compared to a newly constructed one. And while the valuation of a PPA can be separated from the asset itself because PPAs are often treated as financial assets, the value of a new project will depend on how easy it is to get off the ground as well as its future potential.

But all in all, despite the challenges, the renewable energy market in Chile remains highly active for the foreseeable future.

What are the main regulatory and legal considerations when analyzing a renewable energy project or the sector as a whole?

Sebastián Leyton:

Firstly, the open access that Alfonso mentioned. Yes, this means that there are few barriers to entry for new projects, but it can lead to an oversupply of projects in one location, resulting in the curtailment issues Diego referred to. So technical advisors need to look beyond their specific project and consider what other projects might be queued up behind it.

With Chile’s renewables goals becoming ever more ambitious there is pressure to keep adding new projects, even if this is not the best use of resources and adds to delays. So when assessing any project you have to bear in mind what might happen in the future.

Another factor is location, with regions having different legislation, connection possibilities, potential actors that might be affected, and permitting processes.

And what about PMGDs and PPAs?

Sebastián Leyton:

PMGDs (Small Distributed Generation Projects), once so desirable because they offered stable tariff rates similar to FiTs, are now facing curtailments due to transmission limitations.

PPAs used to be a big plus when we were evaluating a project, but the cost of servicing can be significant for both buyers and sellers, and we are seeing a rash of PPAs that are more financial in nature.

So we may need to reevaluate our approach to ensure that projects can thrive in this evolving market.

How do you analyze the current political risk factor in Chile, especially if RCAs (Environmental Qualification Resolutions) are delayed for political reasons?

Sebastián Leyton:

It’s true that the revocation of some RCAs has affected the markets, but, given the status of our EU visitors today, I believe that the Energy Ministry does understand the importance of energy’s role in development.

Do you believe that the Chilean regulatory framework is adequate to ensure production of green hydrogen over the next 30 years?

Diego Varona López:

Most countries are struggling to update their regulatory framework to keep up with the increasing pace of technological change. Chile is beginning to regulate storage, but green hydrogen is different: for a start, we need a legal definition for it.

How do you think green hydrogen will impact Chile’s development, considering its potential? 

Diego Varona López:

I do believe the potential for green hydrogen is significant, but I see it as a long-term opportunity because the technology is still in its early stages. Hydrogen from oil and gas is extremely cheap at the moment, though the situation is evolving.

What is the average timeline for solar or wind projects between 100 to 150 megawatts?

Alfonso Alcalde:

That depends not just on the size of the technology but also on the associated PPAs and their risk type. I can tell you that in the last five years or so, implied returns of M&A transactions have been around 10 to 12% in dollars at the equity level.

Have you seen any country where there is a time limit to maintain the offered price in a tender due to market volatility? For example, in Ecuador, two large projects were awarded two years ago, and one only managed to sign its concession contract two months ago and the other is still under negotiation.

Diego Varona López:

I’m not familiar with the regulations in Ecuador, but I think that the contract has to be signed by the Council of Ministers which makes the timeline unpredictable, something that always adds risk for investors.

But if you are familiar with the country where you are investing and feel comfortable in that region, you are more likely to invest because you won’t let today’s political noise interfere with your long-term investment decision.

What is your opinion on non-compliance with PPAs by distribution companies, such as María Elena Solar and others?

Sebastián Leyton:

I remember the Campanario problem in 2012: without a guarantee bond system in place, companies in the market took a long time to recover what they were owed. Today that’s no longer the case, as the bonds prevent a domino effect.

With Maria Elena, there was a PPA dimensioned for 24 hours with a solar plant, which was potentially unlawful. So, a lot depends on how that liquidation process unfolds. If they can sell it as an asset or a business unit and continue operating the asset, that’s great; if it ends up being sold in parts, that’s not so good.

As for Caos Leones, a few days ago, they sent a letter to the administrator asking how they can reintegrate into the system. And Copie Web seems to be more about a construction delay. Clearly, the market is stressed, so we are all watching closely what happens with Maria Elena.

Are banks still interested in financing M&A transactions or new projects, given the market risks and recent insolvency cases in the market?

Alfonso Alcalde:

Yes they are, but it does depend on the project and, as I mentioned earlier, the characteristics of the associated PPAs. Financing is currently one of the major concerns for banks so PPAs with no annual risk are undoubtedly more attractive.

However, debt and leverage ratios have fallen compared to what we saw some years ago, and there have been a lot of distressed asset transactions recently. So, I think precautions are being taken, and financing merchant assets is more challenging.

What is the minimum and maximum price per megawatt for the sale of a solar park with approximately 3 years of operation?

Alfonso Alcalde:

Each case is different, as I mentioned earlier and you have to evaluate the assets in separate parts. Depending on the technology, and the resource, in general terms there tends to be a correlation between the market-to-market of the asset, the cost of building from scratch, and M&A transactions. For example, the transaction reported last week for AES Andes by Bolero Solar, sold for $770,000 per megawatt, and the asset had been in operation for five or six years.

How do energy prices in Chile, both bilateral PPAs and the energy exchange market, impact the entry of new solar and wind hybrid projects, nodal risk, and increased demand from the mining industry?

Diego Varona López:

Location is key: for instance, two solar projects, one in the north and the other in the south, have very different technical constraints from the grid, as well as supply and demand issues. So, prices will depend on location, and secondly, technology.

I think we will be seeing fewer standalone solar products and more hybrid products, combining different technologies to spread the risk. If you want to hedge, you can sign a PPA with a corporate off-taker, one of the Big Four that Alfonso mentioned. But again, the price offered by the off-taker will depend on your project’s location and the timeframe.

In conclusion, prices very much depend on location and technology, and if you add storage, that’s another complication. You need to weigh up when and how you incorporate storage, based on future price scenarios.

The future of the Chilean renewable energy landscape

In 2018, the Chilean government launched an energy roadmap to 2022, focusing on modernizing the sector’s regulations and policies. As a consequence, installed solar and wind capacity increased dramatically, from 0.1% in 2017 to nearly 37% last year. Plus, distributed solar generation increased fourfold between 2018 and 2020, and last year, renewable energy generation accounted for 55% of total electricity generation.

It’s clear that Chile’s renewable energy sector has the potential to grow even further in the next few years. At the moment, according to Acera, the Chilean renewables’ association, there are 6,950 MW of renewable energy and storage projects now under construction in Chile. About 68% of them are solar projects and 25% are wind projects.

In addition to that, another 231 MW of storage projects are currently under construction (68 MW have received approval, and 57 MW are under review). And the Chilean authorities have recently announced a $2 billion tender mechanism for energy storage to maximize the use of renewable energy generated in the northern part of the country.