Although we expect cash flow of some projects under the PMGD framework will face volatility in the near term due to delays in the interconnection to the grid and some level of curtailment, our overall perception of risk remains relatively unchanged. In addition, our ratings among such entities remain mostly stable. The rapid construction and growth of solar Pequeños Medios de Generación Distribuida (PMGD; the Spanish acronym for Small Distributed Generation Means) projects resulted in bottlenecks in connecting them to the grid. We expect this to remain the case in the short to medium term; we observe delays of up to 18 months as of the date of this report. In addition, we forecast some level of curtailment due to ongoing upgrades of substations and limited transmission capacity, while energy demand should remain stable. These factors will lower energy generation in the near term from the 2022 level. But the impact on projects' cash flow available for debt service (CFADS) will be partially compensated by higher stabilized prices, which increased in late 2023 to about $80 per megawatt per hour (MWh) from previous expectations of $60-$65 per MWh. We anticipate smaller projects and entities with portfolios of limited geographic diversity to be more affected.
What's Happening
The number of assets under the PMGD framework has expanded rapidly, as photovoltaic solar capacity has boomed across the country, rising to more than 2.6 gigawatts (GW) by 2023 from less than 0.5 GW 10 years ago.
The pace of capacity expansion has outpaced demand growth during daylight hours, causing energy spills and delays in the interconnection by distribution companies. The latter are in many cases overwhelmed by the number of projects to be connected, particularly in Chile's central regions of Maule, O'Higgins, and Coquimbo.
Why It Matters
For assets currently under construction, the following are the main risks
- Delays in the interconnection to the grid; and
- Extreme climate events, such as floods in 2023, that hamper timelines and overall start of operations.
These factors have triggered several waivers and amendments to the original credit agreements, particularly extending availability periods and long-stop dates of assets under construction that we rate. Delays in commercial operations date of the affected assets--in some cases close to 18 months, compared with previously expected six months--have diminished initial CFADS forecasts, hitting hard projects with a smaller number of solar assets. Therefore, some projects decided to switch from assets with significant construction delays to those already operating.
Once operational, assets will face the following main risks
- Higher-than-expected volatility in stabilized prices; and
- Curtailment in the dispatch of energy.
Stabilized-price volatility has been higher than initially anticipated, as prices for the first quarter of 2024 were about 20% higher than those in the same period in 2023. This could pose additional risks if we see the same price volatility in a scenario of falling prices. We assume a 10%-15% stress volatility in our base-case scenario for stabilized prices. Our downside-case assumption considers that assets experiencing curtailment will dispatch less energy until 2026-2028, by which time the upgrades of power transformers should be completed faster than those of transmission lines. (This assumption incorporates the solar resource according to a P99 scenario.)
What Comes Next
PMGD projects will continue to be exposed to curtailment risk. We expect this to be the case while the grid undergoes improvements in transmission networks, and reinforcement works at substations and power transformers. Although the curtailed dispatch amount varies, depending on where the improvements are needed in the region, we believe that most issues will be addressed by 2028.
We still project a decrease in stabilized prices, converging to our original base-case assumption by 2028. Despite higher prices since 2022, averaging $80 per MWh, we forecast real prices to decline to about $60 per MWh by 2027, as commodity prices decrease from previous highs and new renewable capacity is incorporated into the system.
Background In Brief
The PMGD framework was created by the Chilean government in 2006 to reach the 80% goal of energy production by renewable energy sources by 2030. These projects are self-dispatched, receive transmission toll reductions, and benefit from stabilized price regime. The latter is less volatile than the spot market prices, as its price is approximately 75% correlated to the average power purchase agreements prices in the Chilean electricity market and the remaining 25% is based on a 48-month projection of the system energy marginal cost.
Related Research
- Credit FAQ: How We Analyze Projects Operating Under Chile's Small Distributed Generation Framework, April 20, 2022
This report does not constitute a rating action.
| Primary Credit Analysts: | Juan Barbosa, Mexico City (54) 114-891-2108; juan.barbosa@spglobal.com |
| Maria Gavito, Buenos Aires (54) 114-891-2140; maria.gavito@spglobal.com | |
| Secondary Contact: | Julyana Yokota, Sao Paulo + 55 11 3039 9731; julyana.yokota@spglobal.com |
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