Chile is growing to be an attractive solar market, owing to a combination of high electricity prices as well as abundant solar resources. Solar power is becoming a very viable option for power producers in Chile as generation costs are already quite competitive with conventional sources such as coal, gas and nuclear power plants even without being bolstered by government subsidies and incentives.  In this note, we look at some of the factors that are driving the growth of the Chilean solar market and what two of North America’s largest solar companies – First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWR) – are doing in the region.
Chile’s Solar Industry Is Still In Its Formative Stages
Chile is one of the fastest-growing economies in Latin America, with a GDP growth rate of nearly 5.6% in 2012.  Demand for electricity in the country has been increasing due to a booming (and energy-intensive) mining industry as well as the rising economic empowerment of the middle class. However, supply growth has trailed demand and the country continues to be heavily dependent on imported sources of energy, and this had led to very high electricity prices. In 2012, some customers were paying an average of $0.25 per unit in the spot market.  Considering that Chile is rich in solar resources, with solar insolation in some parts of the country such as the Atacama region being among the highest in the world, solar power is becoming an increasingly viable option, even if subsidies are not factored in. The solar market in Chile is still in its formative stages, with total installations for 2013 expected to come in at less than 150 MW. In comparison, the United States is expected to install close to 4,400 MW this year.  However,the economic rationale for solar power remains very convincing, indicating that this could be a growth market for solar companies over the long run.
Challenges In The Chilean Market
Despite the compelling economics of solar power in Chile, there are a few notable bottlenecks that solar companies and project developers face. The first issue is financing. Some large power consumers are choosing to buy electricity from the spot market rather than committing to long term power purchase agreements (PPA) since they are apprehensive that the projects may not produce adequate electricity. Financiers on the other hand prefer to fund projects with PPAs in place since they guarantee more stable cash flows.  This problem has a lot to do with the fledgling nature of the Chilean solar industry and a lack of confidence with investors and consumers. But it is likely to be resolved as a few more large scale projects come online. Another area for concern for first time project developers is understanding the country’s complex and highly regulated electricity market.
SunPower Is Building The Worlds Largest Merchant Power Plant In Chile
SunPower has been making some headway in the Chilean solar market by leveraging its relationship with its parent company Total S.A. During the last quarter, the company announced that it would be building the world’s largest merchant power plant in Chile for Total SA, Etrion Corporation and Solventus Energías Renovables.  The project would be built unsubsidized at a cost of around $200 million and have a peak generating capacity of around 70 MW. Merchant power plants sell their power on the spot market rather than via PPAs. The project would be largely funded by debt from the Overseas Private Investment Corporation, which is the U.S. Government’s development finance institution. Total S.A. is one of Europe’s largest oil and gas companies, with extensive international reach. The company’s expertise and contacts are likely to be valuable to SunPower as it looks to expand further into Latin America and the Chilean market.
First Solar Can Expand Through Its Solar Chile Acquisition
First Solar acquired Solar Chile, a solar project developer based in Santiago, Chile earlier this year. Solar Chile’s projects are predominantly located in regions I, II, III, and XV in northern Chile, including the Atacama Desert region, which has the best solar irradiance in the world. The acquisition gives First Solar a portfolio of around 1.5 GW of early to mid-stage utility-scale photovoltaic power projects in Northern Chile. The company has also applied for permits to construct the $370 million 162 MW Luz del Norte project beginning in June 2014. First Solar’s Cd-Te thin-film panels perform better when compared to competing silicon based panels in extreme temperatures and this could prove to be an advantage for the company in the Chilean market. Given the high prices of electricity and strong demand for power, the firm could also have a better control over its pricing in the region.Notes: