Fitch: Chile's Energy Agenda Proves Ambitious but Lacks Specifics; Increases Short-term Uncertainty

NEW YORK--()--Fitch Ratings believes the ambitious energy agenda announced by Chile's President Michelle Bachelet last week remains short on specifics, and increases regulatory uncertainty in the Chilean energy sector in the short term. The goal of the agenda is to reduce end-consumer energy prices while ensuring adequate energy supply to the country's growing energy system. The mechanisms by which the government will seek to reduce these prices are still not fully detailed. In addition, concurrent tax increases (corporate and emission taxes) could, in the end, offset the desired energy price savings the government is seeking as in the end, power companies would end up passing these higher costs to their end-customers. Over the long term, final electricity prices to consumers will continue to be largely determined by uncontrollable variables including hydrology and the cost of thermal fuels (LNG and coal).

As noted, the agenda's introduction follows the government's concurrent proposal to gradually increase the current 20% corporate income tax rate to 25% by 2017 and the possibility that a 'green tax' beginning in 2017 will be established (for more details please see Fitch's report 'Chilean Tax Reform' dated May 7, 2014). The green tax bill, in its original form, would tax emissions produced by electric generators producing electric power greater than or equal to 50 megawatts (MW). Each ton of carbon dioxide emissions would then be taxed at US$5/ton, while other pollutants would be taxed at US$0.10 per ton.

In the short- to medium-term, both the corporate income tax and green tax should raise revenue for the government (conversely, reducing cash flows in the power industry, particularly at companies with a higher mix of gas/coal generation), while mostly keeping energy prices static for residential users. In the long term, however, these measures could offset the energy cost reductions the government is seeking, as eventually the generators would pass along these higher costs to end-customers. Many large industrial users would see immediate price increases as these incremental tax costs will be passed-through to the customer per existing power purchase agreements (PPAs).

On May 15, 2014, President Bachelet unveiled her energy agenda. As part of the agenda, the Chilean government announced that it will make a US$400 million capital addition to Empresa Nacional del Petroleo (ENAP), with the government's rationale being that it intends to strengthen ENAP's financial position and reinforce its strategic importance as the national oil and energy company (discussed in Fitch's May 15, 2014 press release, 'Fitch: Proposed ENAP Capital Injection Signals Continued Linkage to Sovereign').

The agenda's goals are summarized below:

--The government will support the energy agenda with USD650 million, including a USD400 million capital injection in ENAP and USD250 million in investments over the next four years. The aim is to strengthen the State's role in the planning and regulation of the power industry, while increasing private competition.

--Along with the expansion of the Quinteros Liquid Natural Gas (LNG) plant, the government is seeking to construct a third terminal in the South-Central region of the country with the active participation of ENAP.

--The government also announced the interconnection of the SIC (Sistema Interconectado Central) and Sistema Interconectado del Norte Grande (SING) electricity transmission systems, which would help stabilize prices and energy supply through both systems, and design a stabilization system for fuel prices which would reduce the volatility in fuel prices.

--These measures should help reduce the marginal cost of electric power in the SIC by 30% through 2017, bringing the average price down from US$151/Megawatt Hour (MWh) in 2013 to US$106/MWh by 2017.

--Public power supply auctions for regulated customers would be redesigned, seeking a 25% reduction of energy prices for homes, enterprises and small businesses over the next decade. The average price in the last public tender in 2013 had a price ceiling of US$128/MWh, in which 80% of the energy blocks were awarded and 20% did not receive any bids.

--Regarding non-conventional renewable energies (NCRE), the government will reduce existing barriers for their development, with the goal being that 45% of the new capacity installed in the country between 2014-2025 is of non-conventional nature.

--In addition, the government will seek to encourage efficient energy use among consumers, with a goal of 20% in consumption savings (20,000 GWh/year, which is equivalent to the installed capacity of a 2,000 MW coal power plant) by 2025.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--Chilean Tax Reform (Frequently Asked Questions)

--Fitch: Proposed ENAP Capital Injection Signals Continued Linkage to Sovereign

Applicable Criteria and Related Research:

Chilean Tax Reform (Frequently Asked Questions)

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Contacts

Fitch Ratings
Xavier Olave
Associate Director
+1-212-612-7895
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Paula Garcia-Uriburu
Director
+562-2-4993316
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Xavier Olave
Associate Director
+1-212-612-7895
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Paula Garcia-Uriburu
Director
+562-2-4993316
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com