The Chilean government is proposing a change in its electricity pricing system which was originally intended to incentivize small renewable generators (<9 MW) to build country’s distributed generation infrastructure capacity, and which has attracted billions of dollars private equity and debt capital from foreign investors (”smart“ infra money).

The bill, if passed in the Congress, will likely create a wave of defaults, and dampen renewable energy investments in the country and elsewhere. The bill is part of the government’s broader strategy to fund subsidies for lower income consumers.

When subsidies to a group become excessive, relative the to market and what is fair and reasonable, as evidenced by high payments that were being made to the small generators (“PMGDs”), i.e., when market forces or regulatory formulae can’t price efficient outcomes, it often creates incentives for the government to change the rules for achieving public policy objectives.

Assessing long-term “subsidy” stability risks on subsidy-dependent energy transition infra remains one of the most challenging underwriting considerations even in markets where such risks are perceived to be low.  The upside underwriting case for debt and equity should always be capped by the upper bound on market prices that reflect reasonable market assumptions representing the asset class vs. relying on unrealistic price expectations driven by policy objectives. Asset owner LP’s, GP’s and lending institution should stress-test their assumptions for returns.

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#Chile #PMGD #EnergyTransition #RenewableSubsidies