The Renewable Energy Equation

Report published in Minería Chilena on 11 July, 2016

The low prices obtained in Peru and Mexico’s renewable energy tenders earlier this year sparked debate in Chile. Local mining companies, eager to cut costs, are wondering whether these numbers could be replicated in Chile.

The results of Peru’s fourth renewable energy auction in February attracted attention in Chile. According to Peru’s Deputy Minister of Energy Raúl Pérez-Reyes, the average price awarded for wind projects amounted to US$ 38 MWh, compared to US$ 80 MWh in the first auction; solar project prices averaged US$ 48 MWh. It was rightly called a success.

What came to people’s attention in Chile is that only a few months before the Peruvian auction, in October 2015, the power supply tender for regulated customers that was held in the country (which was described as “historical”) achieved an average price of US$ 79.3 MWh. While 40% less than 2013 offers, it was still higher than the value achieved in Peru.

In this context, Collahuasi CEO Jorge Gómez referred to this price difference at a seminar in May 2015: “(…) with the same technology, the same capital cost and a better quality solar resource, Chile still has a higher energy price. It is an equation that is very difficult to understand and I certainly do not have the answer,” he said at that time.

Mining and Renewable Energy

The mining industry has promoted several renewable energy projects. Los Pelambres (Antofagasta Minerals) has the El Arrayán wind farm (115 MW), Collahuasi has the Pozo Almonte Solar photovoltaic plant (25 MW), Codelco has Calama Solar 3 (1 MW) and CAP has Amanecer Solar CAP (100 MW).

Francisco Danitz, Director of Energy and Water Resources at the state-owned company Codelco, explains how the company went through the experience of having been the first mining firm to tender an industrial-scale renewable energy plant. In 2010, along with Solarpack, they launched a facility with a capacity of 1 MW.

“Someone had to take the first step to open up that market”, explains Danitz. It was the first PPA (Power Purchase Agreement) without grant funding signed for a solar power plant and it was carried out on six hectares that Codelco granted as a gratuitous loan agreement.

This model, affirms the executive, is something that the Corporation is not going to change. “If we need to contract more energy, our model will always be off-take, because Codelco uses its money for its core business: mining”, he explains.

Despite experiences like these, the bulk of energy contracted by mining has been through international tenders, where the participation of renewable energy has been limited.

“Between 2010 and 2013, when mining companies contracted large power blocks (Codelco and Colbún, for example, signed two supply contracts, one for 15 years and another for 30, in January 2010), tenders took place in a context where there were few players in the electricity industry. This forced the mining industry to absorb a lot of risk, something that electricity companies had traditionally taken on. The generators, in general, acquired a business model that transferred (the risk) to customers. Today, with more players, this has reached a balance,” assures Danitz.

Renewable energy developers have also adapted to the new scenario, according to the director of energy policy: the renewable energy industry understood that mining companies could not offer a contract with the typical form of generation of their plants or transfer the risk. “Just like the conventional (developers), they must submit a proposal on the same terms. That is why today renewable companies offer complete blocks,” says the Codelco executive.

Benchmark

But the tender of October 2015, with regulated customers, did not take place on the terms that Danitz comments. The national and international call by the Ministry of Energy was intended to allocate power to three hour blocks. This resulted in 31 companies submitting offers and prices fell.

Given the private nature of supply contracts between companies, there were not many references to determine whether contracted power prices were high or not. However, results such as those in last October’s tender are viewed as a benchmark and generate public visibility. Hence the importance of the US$ 79.3 MWh achieved on average.

For Carlos Finat, executive director of the Chilean Association of Renewable Energies (Acera), the differences between tenders in Chile and Peru are real, but he says “it is not right to assume that those prices are comparable, since they occur in the framework of clearly different tender processes.” Even so, he believes that Jorge Gomez’s comments “have ignited an interesting public analysis of this matter, which can develop into a lesson on how to optimize electricity supply costs for individuals, industry and mining in Chile.”

If we need to contract more energy, our model will be off-take because Codelco uses its money for its core business: mining”, explains Francico Danitz, the Corporation’s Director of Energy and Water Resources.

A similar view is held by Daniel Garrido, Commercial Manager of Aela Energía, which was awarded 768 GWh in October, almost 65% of the auctioned supply. According to him, there are “a series of market and risk factors affecting the winning bids. Among them is the structure of contracts auctioned in Peru. Unlike the PPAs tendered in Chile, in Peru the generation profile risk versus demand is minimum and there is no nodal risk, since in Peru the power purchase agreement defines a facility’s obligation to sell the power it produces to the system at its injection point. In Chile, the power delivered to the system is firm (i.e. 24 x 7) and supply points are distributed throughout the entire interconnected system. This latter point, called marketing risk, significantly affects the balance of transaction risks, which also results in stricter financing conditions.”

Another differentiating factor, says Garrido, is the stark contrast in the wind resource or plant factor of wind farms in both countries. In Peru they are close to 50%, while in Chile they are closer to 30%, which directly affects the bid price.

Peru and Mexico

In addition to the Peruvian tender in April this year, results for the first long term renewable energy auction were reported in Mexico, which resulted in an average price of US$ 47.7 per MWh. With this, two countries obtained prices lower than the successful tender held last October.

ACERA drew up a memorandum to describe the main technical and contractual differences between the three tender processes. Among them the document points out that while in Chile the transmission costs are paid in part by the generators, in Peru charges between the supply and injection bus-bars are borne by the generator. In Mexico these charges do not exist.

In addition, in Chile, power awarded corresponds to the maximum amount that can be sold and in the event of low demand or over-contracting, the sale is for sums lower than the awarded one. Both Mexico and Peru guarantee the purchase of 100% of auctioned power.

According to Carlos Finat, “the lessons resulting from the analysis of these differences can perfectly well be applied to mining and industrial customers’ contracts, which would make it possible for them to obtain lower prices. An example of this is implementing contracts where the risk of exposure to marginal costs is shared with the customer. This has already been done in contracts between mining companies and conventional generators.”

“The lessons resulting from the analysis of these differences could perfectly well be applied to mining and industrial customer contracts, thus enabling them access to lower prices”, asserts Carlos Finat, from Acera.