In the process to secure supply for regulated customers, to be held on July 27, 12,430 GWh will be offered, making it the largest tender in ten years. NCRE and the big players’ rush would explain prices.

One month before the electricity tender, the sector expects up to 40% lower prices and high competition

There seems to be unanimity in the electricity market when talking about the upcoming tenders.

Most of the players project three elements that will define the competition: high participation of players, high competition in the day-ahead blocks and an average price defined by the incumbents’ bids.

In 40 days, interested companies must submit their bids to take part of the 12,430 GWh offered, which in turn are divided into blocks and sub-blocks.

To date, about 48 companies have shown interest in the tender, including Chile’s three largest generators: Endesa, Colbún and AES Gener, which have contracts that expire in the next 25 years.

“There is a lot of interest. We have no doubt that there will be a high level of participation. We have just published changes to the bases that are being analyzed by the different actors. As we have always said, the more competition, the more the final consumers benefit because prices go down”, said the executive secretary of the National Energy Commission (CNE), Andrés Romero.

“You’re going to see the effect of the Transmission Act, we expect this to have an effect on price as well, and we expect a very appropriate pricing scenario that reflects robust competition,” he added.

According to industry experts, bids of up to US$50/GWh could be seen, but the average price will be set by the bids of the large generators, which are expected to take a significant share of the pie. This would imply a decrease of about 40% with respect to the last process, carried out last year.

“There will be all kinds of offers, of US$90, US$50, US$70 or even US$100, but it is impossible to say an average price (…) In terms of the bidding process, the most massive will be the energy offered by the traditional generators, such as Endesa, AES Gener and Colbún. I believe that they will be the greatest weight in the final price of the bids, more than renewable companies with very good prices”, said Hugh Rudnick, director of Systep and academic at the Pontificia Universidad Católica de Chile.

“We will have a strong competition among bidders, with the participation of new foreign firms in the process, where we will surely see offers lower than the US$ 79MWh of the previous bidding,” said Daniel Gutiérrez, partner of BGS Energy Law SpA.

The opinion of the actors. From the renewable energy association Acera, they indicate that “it is difficult to say a number” of participants, but they estimate that the NCRE offer that will be presented to the bidding will be at least for more than half of the tendered amount.

“The amounts ultimately awarded will depend on the stiff competition that we anticipate will occur,” he says.

HydroChile’s CEO, Federico Ravazzani, went further and estimated that the prices that will be seen could reflect players that would lower their profitability to minimums in order to obtain a supply contract (PPA).

“In the bidding you are going to have two types of players setting prices that to me do not reflect the economic factors that one should take into account in a free economy situation, and that do not reflect reasonable profitability for these small players,” he said.

Acera qualifies as “high” bid bond for bidding process

“It does not seem that the bids should contemplate the necessary guarantees to back up the seriousness and compliance of the offers. However, in the case of the performance bonds, it seems to us that the amounts to which they were adjusted are somewhat high in comparison with industry practices”.

This was the response of Carlos Finat, executive director of Acera, when asked about the new requirements established by the authority in the terms and conditions of the next electricity bidding process for regulated clients.

On July 10, the National Energy Commission (CNE) announced the new bidding conditions, which, unlike other years, include an annex that aims to ensure the quality, timeliness and security of supply from the start date and for the years indicated in these conditions.

Specifically, this translates into the contracting of an insurance policy or the delivery of a guarantee of faithful fulfillment of the contract to ensure the injection of energy.

The amount of coverage for the first demand immediate performance insurance or the performance bond will be UF 300, or approximately $7.8 million.

Rodrigo Danús: “I don’t know why a 20-year bid is being made, such a long term”.

Rodrigo Danús, president of South World Business Holding, describes as “madness” the decision of the Energy Commission (CNE) to call for bids to supply energy starting in 2021 and with a 20-year horizon.

The reason? The dynamism of the electricity market makes it impossible to project prices for the next two decades, especially with the price reduction of non-conventional renewable energy (NCRE) as a result of technological advances.

How are you viewing the Chilean electricity market?

-We are analyzing the values that have been obtained in other countries and they are very aggressive. Some values have been below US$50/GWh, such as what happened in Mexico and Peru. Obviously the market conditions in Chile are a little different, and more so because of the major transmission problems from the Atacama area to Santiago. In Chile the only area of generation that is effectively the most efficient in the world is solar, because hydro has very good rivers but they are quite far from the consumption area and the investment amounts are at least US$2-2.5 million per MW, while solar is less than US$800 thousand per MW without the problems of a drought year. This makes for a dramatic change in how the Chilean market will be configured in the future.

And how are you looking at the upcoming electricity tenders for regulated customers?

-An unexplainable situation happens. I do not understand why the Government is bidding for 20 years when there are such dramatic changes in terms of technologies. To give a 20-year price today with these changes that are going to favor Chile in a very important way is incomprehensible, even more so when these contracts will begin to be dispatched around 2021. The obvious and prudent thing to do, although obviously the three large companies in the electricity sector will not want to do so, would be to delay the bidding process for one or two years until it is clear what the new solar technologies will be and the need for transmission from the Atacama area to Santiago.

What is the most complex?

It is crazy to mortgage the consumer for 20 years with technologies that should no longer be used in Chile. I recognize that solar has been such a dramatic change that they are absolutely going to change prices. This is not a matter that is a decision of the participating companies, but a decision of the Government and obviously the same transmission capacity that there is from Charrúa to Santiago must be from Copiapó to Santiago. It is incomprehensible that run-of-river hydroelectric plants are being built, and even less comprehensible that hydroelectric plants with reservoirs are being built; it should not be justified. Economically, if the electricity market develops efficiently, it should never be justified again.

In that sense, do you think that the current tenders are tailor-made for large generators?

-I think it is very much influenced by the three majors, basically their assets are going to change in value with this new technological change. What is needed is to give an efficient signal to the market of what Chile is going to be in the next 20 years, and Chile is going to be in the next 20 years – except for a very small thermal base – solar between 10 am and 5 pm, and obviously it will continue with the existing plants, but no more plants will be built, because it is the most efficient; and maybe in 5 more years the MW of solar will go to US$300 thousand. How are you going to compete with that? Today they are complicated by a transmission line because it is managed by the big players in this market. They decide whether or not to build the line, they do the studies, you send the consultants, and we are screwed on that side. The Ministry of Energy has to be super independent and look not for the interests of a group but for the interests of the country.

With the matrix you project, what price should one see in the electricity market on average?

-Today, US$50 GWh is already being financed, with profitability that does not exist in the electricity market. Today we are talking that in 2 more years this investment value could drop by another 30% or 40%, and the efficiency of the panels is improving notably.