We expect Chile’s power sector to continue being well-diversified, with a mix of conventional thermal, hydropower and non-hydropower renewables generation. Historically, conventional thermal (mainly coal and natural gas) and hydropower have been the market’s main contributors to the generation mix. However, with the recent rise of non-hydropower renewables over the past decade, prominently the solar and wind power sub-sectors, Chile experienced greater diversification of its power mix. As of end-2021, conventional thermal power contributed 49% to the generation mix (26% from coal, 18% from natural gas and 4% from oil). While hydropower and non-hydropower renewables contributed 25% and 26% to Chile’s generation mix respectively. We expect the market to experience further power mix diversification away from coal power generation, with solar and wind power sectors to ramp up significantly to make up for the drop in coal power generation. Chile will end 2031 with non-hydropower renewables contributing to 52% of the generation mix; double its current proportion.
Non-hydropower renewables will overtake conventional thermal to be the dominant power type in the market’s generation mix in 2025, supported by a robust renewable power project pipeline. Over the coming years, non-hydropower renewables generation will increase significantly, from 21.6TWh in end-2021 to 56.1TWh in 2031. This will be at an annual average growth of 10.1% over our forecast period. In 2025, we forecast that non-hydropower renewables will contribute 37% to Chile’s generation mix, surpassing conventional thermal’s 33%, being the dominant power type.
This strong growth will be supported by rapidly expanding solar and wind power sub-sectors. Renewable power project auctions have been successful in driving costs of renewables down and increasing investor interest. September 2021’s state-sanctioned power supply auction resulted in an average bid price of USD23.78 per MWh, which is 27% lower than 2017’s. This has strengthened Chile’s solar and wind power project pipeline, reflected through the 221 solar photovoltaic and 78 onshore wind power projects in our Infrastructure Key Projects Data (KPD). These projects are currently in pre-construction or construction, totalling about 50.4GW in capacity. While we do not expect all projects to come online, it presents upside risks to our already constructive forecast that non-hydropower renewables capacity will more than double, from 8.5GW in end-2021 to 14.8GW in 2031.
Decommissioning of conventional thermal power plants in the coming years will erode the sector’s dominance in the market’s power mix, giving way to the strongly growing non-hydropower renewables sector. We have a bearish outlook on the growth of coal and gas power in Chile over 2022-2031 as they become less attractive to developers following the increasing cost competitiveness of renewable power types. The government also plans to phase out coal power in the market, resulting in a contraction of conventional thermal power capacity in the coming years.
Additionally, under President Gabriel Boric, the government is working toward a more aggressive domestic carbon taxation system. Under the current legislation, power producers pay about USD5 per tonne of carbon emission, with plans to increase it to USD35 per tonne by 2030, under the long-term national energy strategy. This will further urge the private sector to shift its focus away from conventional thermal power to renewables. Overall, we expect Chile’s conventional power sector to end 2031 with 23.5TWh in generation and 11.2GW in capacity, down from 41.4TWh and 14.5GW in end-2021.