A new bill to freeze consumer power prices in Chile has some project finance bankers worrying about the potential impact on projects with older, higher-priced power purchase agreements.

The bill, introduced by President Sebastián Piñera on Nov. 2 in response to widespread protests in Chile, will freeze consumer power prices until December 2020. The law had been in the works for less than two weeks and its speedy approval took many by surprise, says a deal watcher in Chile. The Chilean National Congress approved the bill on Nov. 5.

Consumer power prices, which are calculated on the basis of the weighted average cost of power injected into the grid, were supposed to rise by 9.2% this year. The increase was attributed to PPAs awarded in 2014 to projects that that are now coming online.

In contrast, PPAs awarded in 2015 were priced much lower as wind and solar developers descended on the auction.

As a result of the new law, revenues under PPAs are expected to be deferred for two years. The government has set a cap of $1.35 billion for total deferred revenue.

Deal watchers say that smaller developers with highly levered projects may struggle to make it through the two-year deferral period. "This is bad news," says a Latin America project finance banker in New York.

“If you freeze consumer tariffs, developers must renegotiate their PPAs,” explains a project finance banker in Santiago, adding that some sponsors are already in talks with banks about financing.

“The problem is that they won’t have the money at hand to pay off their bank loans,” says Patricia Dárez, CEO of 350 Renewables, in Arauco, Chile. An investment banker in New York agrees that some projects may no longer be viable and others may default, "depending on how leveraged the project was.”

The bill also freezes the exchange rate between dollars and Chilean pesos incorporated into the PPAs, says Dárez. Chile's Colbún will not suffer from this as much as large foreign developers, she notes, because most of its contracts are in pesos. 

Not everyone is as concerned, however. “This legislation is very temperate,” says another Latin America project banker in New York. “It does not kill the business, but it does respond to social demands.”

The bill does not regulate PPAs that come into effect in after December 2020 and will not affect projects that qualify under the small-scale PMGD program.

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