First Solar, Inc. (NASDAQ:FSLR) looks set to commence work on its Luz del Norte power plant, to be built in Chile's Atacama desert, after having secured a financing package for the project. The 141 megawatt (MW) project would be Latin America's largest photovoltaic solar power plant and will be the first of several projects that First Solar has in its development pipeline in the region. Although the project is significantly smaller than some of First Solar's North American projects, we believe that it should allow the company to gain a foothold in Chile's nascent, yet promising solar market.
Trefis has a $66 price estimate for First Solar, which is slightly below the current market price.
Potential For Solar In Chile Is Solid
Chile is one of the fastest-growing economies in Latin America, with a GDP growth rate of nearly 5.6% in 2012. Demand for electricity in the country has been increasing due to a booming (and energy-intensive) mining industry, as well as the rising economic empowerment of the middle class. However, supply growth has trailed demand, and the country continues to be heavily dependent on imported sources of energy, which has led to very high electricity prices. In 2012, some customers were paying an average of $0.25 per unit of electricity in the spot market, while rates in the United States are about half as much.
Considering that Chile is rich in solar resources, solar power is becoming an increasingly viable option in meeting some of the country's energy needs, even if subsidies are not factored in. The Atacama Desert, for instance, receives among the highest levels of solar radiation in the world. While the solar market in Chile is still in its formative stages, with total installations for 2013 estimated at about 150 MW (the U.S. installed 4.7 GW during the same period), the Chilean government intends to beef up the country's renewables capacity so that it accounts for about 20% of total generated power by 2025.
Given the strong energy demand and economic rationale, we believe that Chile could be an important growth market for solar companies in the long run. First Solar in particular could have an advantage in the Chilean market, given that its Cd-Te thin-film panels perform well relative to silicon-based panels in extreme temperatures. The company could also have a better understanding of Chile's complex and highly regulated electricity market, owing to its acquisition of Solar Chile, a solar project developer based in Santiago.
First Solar Overcomes Financing Hurdle
Securing financing for large solar projects has often proved difficult for developers in Chile. Financiers generally prefer to fund solar projects that have long-term power purchase agreements (PPAs) in place, since they guarantee more stable cash flows. However, some large consumers in Chile choose to buy electricity from the spot market rather than committing to long-term agreements since they are apprehensive that the projects may not produce adequate electricity. This problem has a lot to do with the fledgling nature of the Chilean solar industry and the lack of confidence of investors and consumers. First Solar seems to have solved this problem, having secured loans to the tune of $290 million from the Overseas Private Investment Corporation (a development finance institution run by the U.S. government) and the International Finance Corporation, which is a member of the World Bank Group.
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