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Fitch: Chile's Coal Phase-Out May Pressure Coal-Fired GenCos' Ratings in the Long Term.

Chicago: According to Fitch Ratings, Engie Energia Chile (BBB/Stable), Empresa Electrica Angamos S.A.(BBB-/Negative Watch) and Guacolda Energia S.A. (BBB-/Negative Watch) will be the most affected in the long term by the recent government agreement to phase-out coal generation completely by 2030-2050, as these companies are mainly coal-fired power generators. As of December 2017, 57% of Engie's installed capacity was exclusively related to coal generation, with less than 1% in renewables, while Angamos and Guacolda are single coal-fired asset power generators.

Angamos and Guacolda would experience downward pressure to their respective long-term credit profiles as a result of this agreement, as they are most exposed to regulatory changes affecting coal generators. Over the past few years, Chilean generation companies (GenCos) have slowly implemented strategies to stop building new coal-fired plants. Engie's Infraestructura Energia Mejillones(IEM) is the only coal-fired plant currently under construction, and is expected to commence operations in 2018. Engie Energia Chile has announced its strategy to shift its focus toward renewable energy.

Engie, Angamos and Guacolda are protected from this risk over the medium term due to a combination of solid capital structures, strong contractual positions, and/or robust coverage ratios supported by experienced parents. In the case of Angamos and Guacolda, the amortization trajectory for the companies' debt and the importance of these subsidiaries to AES Gener (BBB-/Negative Watch), provides them with an additional layer of protection to this long term risk. AES Gener benefits from a well-spread generation mix in terms of asset and geographical diversification, with 47% of the companies' installed capacity related to coal generation, and 23% related to hydro and renewables, mostly in Colombia. AES Gener is also currently developing the hydro project Alto Maipo, which would increase its hydro share to 30%.

Engie's ability to reduce its exposure to coal and migrate to cleaner fuel sources will be key to supporting its ratings. This strategy may prove to be challenging, as the vast majority of its power generation has been coal-fired. Although Engie has a significant exposure to coal, the company benefits from strong power purchase agreements with an average life of more than 11 years and average monomic price of USD126 MWh, particularly attractive under current market conditions. This, coupled with the company's strong capital structure would support the company's cash flow generation until a new strategy is implemented to further diversify the company's generation matrix.

Chile was the first country in South America to introduce carbon taxation of approximately USD5 per tonne of CO2 to discourage the use of polluting fuels in power generation. Nevertheless, declining coal prices and relatively low taxes did not force the system to retire a significant portion of its coal-fired plants early. This new agreement between the government and GenCos intends to gradually reduce coal-fired generation to negligible levels by the mid-2030s. The announcement is in line with the government's Energy agenda target a 60% share of energy generation coming from renewable sources by 2035, and going up to 70% by 2050.

Fitch believes thermal generation will continue to account for at least 40% of Chile's generation matrix at least until the mid-2020s, declining to approximately a third by the mid-2030s even with the recent government announcement to eliminate coal-fired generation in Chile in the long term. The Chilean government announced an agreement reached with the main GenCos to stop building new coal-fired plants without carbon capture and storage systems, and to gradually decrease the participation of coal-fired electricity in the country's generation matrix. Main GenCos included Engie, Enel Generacion Chile (BBB+/Positive), AES Gener and Colbun (BBB/Stable).

In 2017, thermal generation represented approximately 60% of the country's total generation with approximately 41% related to coal. Hydro and non-hydro renewables, or non-conventional renewables (NCREs), represented 27%, and 17% of the generation matrix, respectively. Fitch expects the country's generation mix to evolve into cleaner fuels by 2030. We expect hydro generation to contribute approximately a third of the total country's generation with the rest evenly distributed between NCREs and thermal generation. Fitch assumes thermoelectric generation by 2030 will be mostly associated with natural-gas fired plants with less than 10% related to coal-fired generation.

The country's migration toward NCREs will be gradual, as transmission constraints remain until the Sistema Interconectado Central (SIC) and Sistema Interconectado Norte Grande (SING) are fully integrated in 2018. Chile has vast untapped renewable energy potential, especially in photovoltaic (PV) electricity, because of its Atacama Desert, which receives the largest solar irradiation in the world, along with declining prices in solar technologies. Fitch believes that to successfully incorporate NCREs as a significant contributor to the country's power matrix, the system must be more flexible. It will also require additional investments in the country's transmission infrastructure and storage, alongside a conventional fuel source, to support the intermittence of renewables. In Fitch's view, natural gas is the logical candidate for complementing solar and wind-power's intraday generation patterns as coal is discouraged, and more frequent combined-cycle gas turbine (CCGT) start-ups will be required.

Some of the major Chilean GenCos have implemented power storage solutions in the country, including AES Gener with two 20MW batteries each in Angamos and Cochrane, and a 12MW battery in Nueva Tocopilla. Enel owns a hybrid system integrating a solar plant with a lithium ion battery and hydrogen storage at its Cerro Pabellon geothermal power plant in the Atacama Desert. Chile's Atacama Desert possesses one of the world's largest reserves of lithium; this, coupled with the ample expertise of some of the Chilean GenCo's parents in implementing power storage solutions, such as The AES Corporation(BB/Positive) and Enel S.p.A.(BBB+/Stable), could facilitate the rapid increase in batteries in the country.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:3CHIL
Date:Apr 24, 2018
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