Faith and Financing

November 2012

Summary

In October, pv magazine attended the inauguration of Chile’s biggest PV plant. At 1.4 MW, the project may seem trivial compared to the large-scale plants already in operation across the globe. However, for Chile it represents the start of what will hopefully become a burgeoning solar industry. That is, if the faith and financing hurdles can be overcome.

Body

Loud, fast, foot tapping Spanish music blasts from speakers as traditional dancers whirl around in colourful costumes, hats swaying precariously under the heat, which beats down on a group of VIPs, businessmen, journalists and local community members clustered together under a tent in the Atacama desert. Shortly before the dancing begins, Chile’s national anthem is sung, a catholic priest delivers his sanctification in Spanish, and a coca leaf-chewing shaman performs a blessing, sprinkling what appears to be beer over the photovoltaic (PV) panels, incense wafting around him and his helpers.

The participation of the local community at the inauguration of Chile’s largest PV plant is of paramount importance, Hugo Calderon, MD of Kalmer Ltda and advisor to Saferay tells pv magazine: advice applicable to all businesses looking to operate in the country. It is a sign of respect, and a good way to win over the locals, who can hinder a project’s progress, or have it thrown out of the window completely, as was the case for E.ON’s thermoelectric plans, which were rejected this August after failing to secure environmental approval.

The 1.4 MW PV plant located in La Huayca, was developed and built by Germany-based Saferay GmbH and Chile’s Seltec Ingeniería, under the name Selray, in just 10 months. Its completion is said to represent a large leap forward for Chile’s fledgling solar industry which, to date, has under three MW of installed solar capacity. Designed to sell the generated energy to mines in the region, the plant is expected to pave the way for more ambitious PV projects in the future, and show the banks and mining industry that solar is a viable, cost effective energy solution. As Marko Schulz, CEO of Saferay underlines, the miners in particular, are very sceptical of solar, having heard of numerous plans, but not seeing any tangible results.

Difficulties

Having completed the first phase, Selray aims to scale its 1.4 MW plant to 9 MW and then 30 MW by the second quarter of 2013. However, progress is contingent on obtaining a power purchase agreement (PPA) and financing – something of a bottleneck in the relatively open Chilean market. Selray now has to go back to the mining companies and promise it can produce solar in northern Chile more economically and environmentally-friendly than other power companies, and offer them contracts with attractive prices, in order to provide planning security. The company must also talk to the banks. Schulz says he wants to use Chilean banks to finance the expansion, in order to keep the value creation and business benefits in the country. However, as many point out, most Chilean financiers are reluctant to invest in solar without more working examples. Frost & Sullivan tells pv magazine that securing project financing is the biggest hurdle to operating in the Chilean PV market; something Marta Alonso, General Manager of Enertis Solar and Suntech’s Latin American Business Development Manager, Fernando De Samaniego Steta both confirm. “Commercial banks are not willing to provide non-recourse financing without a PPA in place from a creditworthy off-taker,” says De Samaniego Steta. “Many banking institutions are also hesitant because they have little experience with large-scale PV projects in Chile, but this is starting to change.” As Frost & Sullivan explains, “Multilateral development banks have already launched finance programs for renewable projects. CAF’s [a development bank in Latin America] special funding program for clean energy projects … could limit the lack of financing in the region as the local banking system improves credit conditions for renewable energy development.” Solarpack’s Chairman, José Galíndez, meanwhile, is confident financing is not an issue. “Funding is and will be available for projects with good technical and economical layout,” he states. Stefan Franko, business leader for Renewables from GE Power Conversion, adds, “We are perfectly positioned and have the right contacts for obtaining support financing for solar projects in Chile. Next year, we expect to see developments in the double digit MW range in Chile now that the necessary settings are in place.” To date, the two biggest PV plants – Selray’s 1.4 MW La Huayca plant and Solarpack’s 1 MW Calama Solar 3 plant – were self-financed, in order to get the projects off the ground. While Selray is searching for financing for its expansion plans – reportedly it is looking for US$70 million – at the time of going to print, the Inter-American Development Bank (IADB) was mulling over the possibility of providing US$21 million of the US$80 million investment required for Solarpack’s PV pipeline. The remaining funds are expected to come from the Canadian Climate Fund for the Private Sector in the Americas (C2F), an unidentified export credit agency, and other multilateral development banks and/or commercial banks.

In addition to financing, grid connection is said to be another issue in Chile. The country operates off of four power grids. However, a lack of investment in infrastructure, environmental issues, and logistical problems resulting from Chile’s geography, have served to burden the grid. Sky Solar’s MD of South America, Hong Chen, says a lot of the regions have limited grid access, due to the transmission system, which is why his company’s PV project pipeline has been distributed across several regions. Marta Alonso of Enertis Solar, active in Chile since 2010 in providing consulting and engineering services, further explains, “The complexity in obtaining [an] interconnection point is in the procedure by which compliance must be established both by the Center for Economic Load Dispatch and the owner of the line. Technical standards for interconnection, system security and the change costs of the infrastructure needed to operate the new plant must be considered. This framework generates uncertainty about the costs and time to obtain the necessary interconnection.”

Why Chile?

Despite these issues, Chile is seen as an ideal solar location. Martin Cataife, an industry analyst in Latin America for Frost & Sullivan, says that due to the unique sunlight exposure in the northern regions, up to 1,318 GW of PV could be installed in the country – a figure gleaned from a study conducted in 2011 by the Chilean Ministry of Energy and the German Agency for Technical Cooperation (GIZ). Newly appointed Energy Minister, Jorge Bunster, who used to be a top executive at COPEC, Chile’s largest gasoline distribution company, additionally tells pv magazine there is a lot of potential in PV and that it will play a significant role in the future, thus explaining his attendance at the inauguration of Selray’s first Chilean PV plant. Marko Schulz adds that the decision to expand into Chile was a logical one for Saferay, based on the high solar irradiation, stable political and economic environment, and huge energy demand. Indeed, it is predicted that energy demand will continue to increase over the next few years, due to the growth of Chile’s economy and the fact the country relies heavily on energy imports. Cataife continues, “The golden age of copper mining has a major impact on Chile as well, as key mining companies that were keen to adopt diesel and gas generation systems have rectified this strategic decision towards renewable energy generation.” Originally, Chile had intended to rely on nuclear to meet its energy needs. However, these plans were shelved following the nuclear disaster in Fukushima, Japan, last year. Chile’s economy is export-based – raw materials, wine and food feature heavily – and it became clear nuclear could not be viewed as a safe option, particularly in light of the threat posed by regular earthquakes. “This is why solar is taking off now,” says Calderon. Added to that is the obligation by Chile’s power utilities – ENDESA, AES Gener, Colbun, EC-L – to purchase at least 10% of their electricity from renewables. There are discussions underway to increase this to 20%.

Responding to whether Chile will help its burgeoning PV industry, Energy Minister, Jorge Bunster says the government is looking into the matter. He was clear though that no remuneration would be offered, since “technologies have to compete on their own in the market” – a point that Saferay’s Schulz supports. As such, to turn a profit, companies must rely on selling electricity on the spot market, or securing PPAs. According to Schulz, the average spot market price for electricity is around US$0.16/kWh in the central grid, which when compared to the US$0.05/kWh reaped in Germany, for example, is very generous. However, as spot market prices tend to fluctuate – between US$0.10 and US$0.20/kWh, according to Sky Solar’s Hong Chen – a PPA is preferable, since it offers a stable price over a set period of time and can help a company obtain bank financing. Hong Chen adds that Sky Solar intends to use a mixture of PPAs and spot market sales for its 300 MW of planned projects. Solarpack, meanwhile, which has a 26 MW PV pipeline in Chile, has already secured two PPAs: one for its planned 25 MW Pozo Almonte project with mining company Compañía Minera Doña Inés de Collahuasi; and one for its 1 MW Calama Solar 3 plant with Chilean state enterprise Codelco (Corporación Nacional del Cobre de Chile), realized this June. “The private sector in Chile started signing PPAs for solar PV technology only last year. We are seeing more and more interest and bids for solar PV as the off-takers are realizing the competitiveness of this technology in comparison with other alternatives,” says Solarpack’s Galíndez.

Bureaucracy

That specific remuneration for PV plants has not been offered in Chile has not stopped companies from planning large project pipelines. In the first eight months of 2012, 32 applications for 2.4 GW of PV were submitted to Chile’s online environmental licensing database, SEIA. So far, the organization has approved 914 MW. However, as Frost & Sullivan points out, many planned projects are experiencing “serious” financing difficulties, and many pv magazine spoke to referred to the plans as “bragawatts” – i.e. they won’t get off the ground. Furthermore, Frost & Sullivan’s Martin Cataife says the permitting and approval process for PV projects is lengthy. A Declaration of Environmental Impact (DIA) is said to take around 208 days, while the average lead time for an Environmental Impact (EIA) is 346 days. Moreover, if the Chilean Environmental Evaluation Service (SEA) approves a request, further bureaucratic requirements are needed, depending on a project’s grid connection. “This might take another year to fulfil,” Cataife says, adding, “Many projects are contested by the government and public opinion as well.”

By contrast, the process was relatively straightforward for Saferay and Seltec. In just 10 months, the two companies managed to develop and execute their 1.4 MW plans. While Seltec obtained a location and authorization, Saferay sourced the necessary components from a number of international players, including modules from Canadian Solar, mounting systems from Krinner Schraubfundamente GmbH, and two 680 kVA outdoor ProSolar central inverter units from GE Power Conversion. “People seem to be open to solar in Chile, but the country needs concrete examples to see how it works. The Saferay plant shows that solar works and thus, the door can now be opened to bigger projects,” says company advisor Calderon. He adds that German companies, in particular, have a window of opportunity of around 18 months in which to enter the Chilean, and neighbouring Peruvian and Colombian markets, due to their PV know-how and expertise, particularly on the installation side. “As such, companies have to be quick, like Saferay. Germany are the innovators and they have to play this up.”

Faith & financing

There is no doubt Chile is an interesting emerging market for the PV industry. As many have pointed out, through its stable political environment, growing economy, abundant sunshine and increasing energy demands, conditions for the installation of solar are ripe. And, while there is a lack of industry knowledge in the country, opportunities for companies on an internationalization pathway are plentiful. Furthermore, due to the lack of subsidies, it will (hopefully) provide PV with the chance to prove itself against its fossil fuel competitors. Despite this, Chile is not without its difficulties. As Suntech’s Fernando De Samaniego Steta succinctly puts it, “faith and financing” are the two biggest hurdles to the Chilean solar market. “As the solar industry is in the nascent stage in Chile, we’ve invested time explaining to local players and potential off-takers the economic and technical viability of solar. As new ground-breaking projects … come online, we can overcome this challenge and solar will be accepted as a viable, mainstream solution for power generation. Any emerging market requires a period of education to instill faith in a new technology. This process is well underway in Chile,” he says. As such, perhaps Hugo Calderon’s advice of starting small and getting bigger, in order to give yourself time to obtain the necessary permits, permissions and financing, is worthy of consideration.

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