Fitch Ratings forecasts that Chilean generation company profitability
will be undermined in 2016 by the current sustained decline in prices,
given the sector's exposure to the Spot market and falling marginal
costs, which accelerated in the second half of 2015. Increasing
competition in the industry also resulted in lower prices for the recent
public bidding for regulated clients, modifying expectations of future
contract prices and thus moderating the sustained increases seen in 2013
Case by Case
Each generator could see its profitability affected by the drop in
prices depending on: the characteristics of its installed capacity
matrix, contracted position versus exposure to the spot market, and
indexation structure of its contracts, among other factors. However, the
greatest impact is likely to come from current price declines, and Fitch
expects a drop in profitability from 2H15 to 2016.
Among the generators rated by Fitch, Endesa SA (IDR 'BBB+') and Colbun
SA (IDR 'BBB') show generation matrixes with a strong hydrological
component, and thus their cost structure is more favorable in years of
average hydrology. For Endesa, its conservative business strategy,
coupled with access to natural gas (LNG) through its stake in GNL
Quintero (IDR 'BBB+'), provides headroom to face scenarios of price
volatility with comfort. Colbun looks more vulnerable due to a tighter
contractual position compared to its efficient generation capacity,
although access to LNG in the short to medium term has provided more
E.CL S.A. (IDR 'BBB') and AES Gener SA (IDR 'BBB-'), whose generation
matrixes are mostly thermoelectric, would be more harmed by low spot
prices, as their average generation costs is higher.
E-CL shows more financial headroom to cope with lower returns, while AES
Gener, in the midst of an expansion stage and with a more aggressive
capital structure, will be more vulnerable when incorporating lower
Decline in Spot Prices:
The overall decline observed in energy prices in Chile results from
several factors, both internal and external. On one hand, the offer is
increasing through the addition of new generation capacity for 3,730
megawatts (MW) in the next 15 months, with a high solar component, while
the demand is slowing down due to lower than expected economic growth.
Additionally, there is a higher availability of hydroelectric plants as
a result of increased rain in 2015, and the sharp decline in
international commodity prices has reduced generation costs with such
The marginal costs of the industry, both in the Sistema Interconectado
Central (SIC) and the Sistema Interconectado del Norte Grande (SING)
have shown sustained declines in recent years that accelerated in 2015.
And thus the price scenario has changed. As of September 2015, SIC
showed an average Spot price for the nine months of the year USD108.8
megawatt hour (MWh), down from 148.2 / MWh and 179.6 / MWh average for
the years 2014 and 2013, respectively. As of the same period, the SING
reported an average spot Price of USD54.3 / MWh, from USD81.9 / MWh and
USD76.7 / MWh for the previous years, respectively.
For the last quarter of 2015 and 2016, the SIC is expected to add
1.810MW of new capacity, including 136MW of the fifth unit of Guacolda
and 1,192 MW of solar plants. In the same period, the SING is expected
to incorporate new generation capacity for 1.920MW, including a 517MW
combined cycle, the two coal-fired units of AES Gener's Cochrane with
236MW each, and 724MW of photovoltaic plants.
Last Bid Supply emphasized Downward Trend in Prices:
The last public bidding for distribution companies held in late October
2015 received 31 offers. The volume of 1,200 gigawatt hours (GW/h),
which will begin supplying energy in 2017 for a period of 20 years, was
awarded at an average price of USD79.3 / MWh, showing a significant
reduction of 26% and 38% compared to the prices achieved in the 2014 and
2013 bids, respectively. Economic offers received ranged between 65 USD
/ MWh and 108 USD / MWh.
In addition, 100% of the blocks were awarded to companies with
generation assets or projects of non-conventional renewable energy
(NCRE), mainly solar, with no current contracts. The large traditional
generating companies were not awarded, although some of them tendered
for the total volume but at a higher price.
What is expected for 2016's Bidding Process?
While the outcome of the last bidding process for regulated customers
could be seen as a sign that the traditional large generating companies
need to change their pricing strategy for the next tender to be held in
April 2016, the size of this process could hinder a sustained fall in
prices. With 13,750 GW / h per year, the upcoming auction is over 10
times the recent tender. This tender was designed to award up to 29% of
the regulated demand projected for the next decade and will be the first
process to be developed under the new legal framework that provides
greater flexibility to generators in terms of conditions and terms,
increasing the level of competition in the industry.
Fitch believes it is difficult to project that such a significant volume
of energy could be entirely supplied by small projects, especially
because of the difficulties/challenges in terms of transmission that
this scenario would present. Although the time gap until the supply
start in 2021 provides enough time to build new large projects, this
growth on the base of efficient supply would keep pushing the prices
down, discouraging investments in large projects.
Among the main risks and challenges that face these new processes and
projects is the great challenge to broaden and strengthen the national
transmission system in a timely and proper way, so as to provide
adequate access to the grid to the more efficient plants in operation.
Development of photovoltaic and solar projects, which by their
intermittent nature present challenges in terms of coordination of
dispatch could especially be hampered by limited access to transmission
In addition, obtaining required permits and environmental approvals
continues to be an issue, including relationships with affected
communities in the areas of construction and operation of projects and
transmission lines. The viability of several projects and therefore the
sustainability of an efficient and reliable generation base depends to a
large extent on the development of these industry factors.
To this end, the Chilean government started discussion in congress on a
new transmission law that would give the state a central role in the
definition of paths and location of new transmission lines, especially
those that are considered of public interest. Finally, as several of the
projects awarded are 'greenfield,' Fitch believes it is important to
maintain adequate monitoring of the progress of their construction and
development to avoid any future supply problems.
Additional information is available at 'www.fitchratings.com'.
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