IEEE Power & Energy Magazine - January/February 2021 - 79

Among the challenges merchant investments faced
in these two countries was an ever-larger penetration of
renewables, driven in large part by technological advances
and the downfall in renewable equipment costs. The additional factors of the collapse in oil prices from US$100/
barrel (bl) to US$35/bl, the economic slowdown of China
(Chile's largest copper export market), and the recession
in Europe (Turkey's largest export market) prompted electricity spot prices to collapse from an average of US$100/
MWh to US$40/MWh.
In Chile's case, the situation was exacerbated due to transmission constraints. Renewables were built faster than transmission lines, and the Atacama region, home to Chile's best
solar resources, were decoupled from Santiago, the largest
demand center. Solar projects experienced zero marginal
cost for several years due to delays in transmission construction. This is also a problem in other markets, such as India
and China, that have seen large renewable curtailments due
to transmission constraints.
With proper due diligence and robust financial structuring, IFC was able to cope with the above shocks or, rather,
the size of their impact, technological disruption was perhaps the only aspect that was completely unexpected. This is
what IFC calls " first-mover disadvantage. " In fewer than five
years, solar PV investment costs collapsed from US$2,200/
kW to under US$1,000/kW.
Of Chile's four separate electricity market segments, 67%
of installed capacity (13 of 20 GW) was in the Central Interconnected System (SIC), serving the country's central zone,
which includes Santiago and about 92% of the population. The
second-largest system was the Northern Interconnected System (SING), with 20% of installed capacity (4 GW) serving
the desert-mining regions in the north. At the time of IFC's
investments, up until November 2017, the SIC and SING systems were not interconnected, largely due to social opposition
to transmission expansion.
Figure 4(a) shows the spot prices before and Figure 4(b)
illustrates the spot prices after the commissioning of the
transmission line and its effect on electricity spot prices. At
certain hours, this included zero marginal costs in the northern SIC [the yellow lines in Figure 4(a)]. In consequence of
the transmission constraints and larger renewable penetration,
Investors and lenders in Chile's solar PV projects experienced
zero marginal cost in the northern SIC for almost four years.

Lessons From Chile: Technological Disruption
and Merchant Investments
The Chile merchant projects were structured based on spot
price forecasts from reputable power market consultants,
which relied on what were then considered conservative oil
price forecasts compared to other estimates in the market.
Still, the rapid descent in power prices in the northern SIC
system (to zero at some hours in the day for specific network
nodes) was not foreseen by anyone in the market. From this
experience, several lessons can be drawn.
january/february 2021

✔✔ Cannibalization of spot prices from rapid RE devel-

opment: The projections relied heavily on free-market forces, namely, that investors stop investing (and
banks stop financing) when faced with prospective
overcapacity or transmission constraints. In reality,
power producers rushed into the market, encouraged by 1) collapsing solar equipment costs, 2) the
availability of relatively inexpensive financing, and
3) specific features of the power market model that
made generators indifferent to signing a contract with
a distribution company to sell at the node price versus taking full merchant exposure to sell on the spot
market. Despite the strong decoupling phenomenon
identified (between the two transmission extremes
of the SIC), investors kept building solar PV projects (mostly merchant), which rapidly decreased spot
prices in the region. IFC's projects were the first
300-MW solar projects in Chile's north, followed by
another 2,200 MW.
✔✔ Transmission curtailment: Delays in transmission
expansion severely impacted node prices. Moreover,
renewable projects can be built at a staggering speed
compared to the necessary transmission, which increases the risk of a price collapse. Transmission curtailment risk is one of the key issues when financing
RE projects around the world. Many provinces in
table 1. IFC merchant or
quasi-merchant investments.

Country

Year of
First
Project

Chile

1991

Hydro,
solar,
thermal,
and wind

2,017

India

2004

Hydro

192

Turkey

2008

Thermal,
hydro, and
wind

4,476

The
Philippines

2008

Hydro and
thermal

1,035

Colombia

2008

Hydro

Panama

2010

Hydro,
wind, and
thermal

679

Romania

2010

Wind

228

Georgia

2011

Hydro

267

Peru

2011

Hydro

168

Mexico

2013

Solar

329

9,400

Total

Technology

Number
of
Projects

Megawatts
Installed

(Source: IFC, www.ifc.org/infrastructure.)
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IEEE Power & Energy Magazine - January/February 2021

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