Chile has received two bids for electricity from large-scale solar projects, in 20 year contracts, at prices under 2.5¢/kWh at a recent national auction. The lowest bid was 2.148¢/kWh.
These second lowest bids in the world – to a recent Saudi Arabian bid – are a product of the country having possibly the best solar sunlight on the planet, but also represents continued price declines in the solar industry and financial trust in the product from global financial houses.
Chile’s National Energy Commission, based out of Santiago, Chile, received 24 power auction bids to supply the country with 2,200 GWhs annually for two decades beginning in 2024. A total of 20,700GWh was submitted as bids, nine times higher than contracted. The winners were announced on Nov. 3, with Enel submitting the lowest bid of 2.148¢/KWh and GPG Solar Chile submitting the second lowest bid at 2.480¢/KWh. The average bid price was 3.25¢/KWh.
The 2016 national bid in Chile set records in the country as the largest-ever power auction. In the last three years energy costs procured via these bids have fallen 75%. In the 2015 tender, first year of an auction of this type in Chile, the average price was 7.93¢/kWh. Last year it was 4.76¢/kWh on the record 12,430GWh worth of volume.
In 2016, Chile briefly led the globe for lowest price of a solar kilowatt-hour at 2.91¢/kWh. Friday’s bid was 26% lower than last years.
Chile and Saudi Arabia are two very different countries, but both of them are building significant solar power – and at the lowest prices globally. It’s important to talk about both deals, with their unique qualities, so we better understand what to expect from other regions globally.
On October 3rd, Saudi Arabia announced a bid of 1.79¢/kWh for a 300MW farm. Much of the reaction to this Saudi Arabian bid was that it wasn’t a sustainable bid outside of the country – with some suggesting there was under the table money or that companies weren’t going to profit. My opinion is that high levels of interparty trust leading to low loan rates, along with some of the best sunlight in the world, drove the record pricing. Whatever the exact mix of variables that led to the record low price – it truly seems unique to a wealthy, family ruled country like Saudi Arabia.
In Chile we do have possibly the best sunshine for solar power on the planet. This is due to a combination of the driest place on earth, being on the equator and at elevation. Almost these levels of sunlight exist in Saudi Arabia, the Sahara Desert, parts of the western Australia, southwestern Africa, and the desert area between the USA and Mexico. Outside of these locations your solar panels will fundamentally produce less electricity due to fewer photons hitting them. So Chile has that going for it, and that’s nice.
However, we also have less than perfect credit and the standard interparty trust building that costs legal and finance fees. This past summer, S&P ”downgraded Chile’s long-term foreign currency rating to ‘A+’ from ‘AA-.’” Moody’s ‘changed outlook on Chile’s ratings to negative.’ In the Saudi deal, loans rates could have been 0% because the groups involved were all family heading separate government businesses, and questions about financial strength 20 years out probably didn’t come up. When Moody’s and S&P lower the credit ratings of a country, the international solar power developers like Enel end up paying higher loan rates.
The most telling piece of data though is the 26% price fall from last year to this year’s bids in Chile, and that they align almost perfectly with the price falls we saw in the Middle East between last and this year. Late last summer, a record bid around 2.42¢/kWh for a 1GW+ project landed in Abu Dhabi. This year, the price fell to about 1.79¢/kWh in the Saudi project. Both the Saudi and Chilean price falls occurred after the majority of the collapse in solar panel pricing we saw at the end of the Chinese construction season in 2016. Maybe this year’s price fall is partially related to solar panels, but not them falling in price – instead their amazingly increasing efficiency.
Analysts will tease out what percentage of the price is due to low credit and how much is due to great sunshine. The finance houses will then fine tune their models to better position themselves at the next large solar construction cash deployment opportunity.
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