(Bloomberg) -- The latest quirk in Chile’s renewable energy boom is coming from the proliferation of small solar plants that the industry says is squeezing larger producers and inflating power bills.

Companies backed by giant financial firms including BlackRock Inc. and TPG Inc. have latched on to a model offering stable prices for small — mainly solar — projects. What began as a niche system is now entering the mainstream, with small generators known as PMGDs for their Spanish initials forecast to account for about 40% of daylight-hour demand by 2025, almost double today’s levels.

The money pouring in to PMGDs is part of a clean-energy success story in Chile, with the nation’s abundance of wind and sunshine helping it top BloombergNEF’s ranking of most attractive emerging markets for renewable investments. PMGDs give environment-focused investors access to stable prices in a market characterized by renewable gluts that can mean larger producers get nothing for their spot sales at times.

While more supply normally pushes down prices, the opposite is true in this case. 

Payments to PMGDs are set to cost the system $300 million next year and $500 million in 2025, which will have to be shouldered by other generators and industrial customers including copper mines, according to hydroelectric association Apemec. In the future, regulated clients including households will also help pick up the tab, with Apemec warning bills could go up by about 10%. That’s at a time when the left-leaning government is looking to ease the price of power for low-income earners. 

“The situation won’t resist for long,” said Jose Manuel Contardo, who heads the association. “It is a true financial bubble.”

The mechanism allows all PMGD power to be remunerated at stable prices regardless of the time it was produced, as a way to facilitate market access and financing. Prices are calculated based on a projection of the marginal costs in the system, and today stand at about $70 a megawatt hour on average.

The unintended consequences of measures to promote clean energy offer warnings for other countries trying to move toward a greener grid. They also echo disruptive episodes in more developed markets that have used similar schemes. Feed-in tariff systems led to unexpectedly high installation and program cost blowouts in Germany and Spain between 2004 and 2012.

In Chile, it was a 2006 decree that led to small generators gaining access to the spot market and a price stabilization mechanism to obtain financing for projects of as much as 9 megawatts — somewhere between residential and industrial scale. By being located closer to consumption centers, PMGDs also avoid much of the transmission issues. 

It wasn’t until the last few years that PMGDs really started to proliferate. Financial institutions and family offices were among groups drawn into a market offering an estimated four-year investment recovery and 14 years of steady returns. There are almost $2 billion in PMGD projects underway now. 

BlackRock continues to build its presence in Chile’s small generator market. In June, it announced the closing of $75 million in financing for solar developer Solek following the latter’s commitment to build as much as 200 megawatt peak of PMGDs. The New York-based fund powerhouse also acquired 11 solar projects totaling about 100 megawatts from D’E Capital and another 100 megawatts in 15 projects from Renewable Resources Group. BlackRock declined to comment.

Matrix Renewables, created and backed by alternative asset manager TPG, had 328 megawatts of solar projects eligible for the PMGD stabilized price mechanism, it said in a statement last year. Other big names investing in the space include Sonnedix and Germany’s Blue Elephant Energy.

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PMGD developers are merely playing by the rules, with the price mechanism resulting in periods of income as well as costs for the system, said Dario Morales, head of solar energy association ACESOL.

The underlying problem is artificially low marginal costs as a result of transmission congestion and a lack of flexibility elsewhere in the system. “As long as we don’t solve these problems, all the side costs of the electrical system will increase,” Morales said.

But business and industry groups are lobbying authorities to change the rules, arguing that providing protection from spot-market price swings creates further incentives for an oversupplied market that’s already sent some renewable players into insolvency amid transmission and storage shortfalls.

Independent system coordinator CEN is recommending changes to the way prices are calculated in an effort to reduce system costs. The Energy Ministry didn’t respond to requests for comment on whether it’s considering those recommendations. 

“It’s giving rise to an artificially very profitable business that’s taken advantage of by large investment funds and transnational companies that obtain extraordinary returns at the expense of consumers,” said Oscar Cabello, regulatory advisor at consumer rights group Conadecus.

--With assistance from Dan Murtaugh and Valentina Fuentes.

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