Reflections on the First Renewable Energy Auction in Mexico

It’s been just a few days since CENACE (Centro Nacional de Control de Energía) disclosed the winning companies in the first renewable energy auction in Mexico. For many developers, this will be the starting line in their participation in the renewable energy market space in the country. A second, larger auction is planned for this year, and more auctions will follow in the future.

The large leap in renewable energy activity has been a long time coming. It was in 2004 that AWS Truepower participated with NREL, SENER, SEDIC, CFE, IIE and CONAGUA to estimate the total wind potential in Oaxaca between 33GW and 44GW. (http://www.nrel.gov/docs/fy04osti/35575.pdf). This and other resource mapping and measurement activities helped drive an initial wave of wind project development in the country, led by Oaxaca.

Wind Resource Map - Oaxaca 2004-2

Wind Resource Map – Oaxaca 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

By the end of 2015 Mexico had 3,073MW of installed wind capacity. New wind installations for the period 2004-2014 totaled more than $5.1B investment in the different “Temporada Abierta” (open season) programs, and also through private bilateral power purchase agreements (PPAs) between large consumers and independent power producers (IPPs). Though a respectable investment, only 714MW of wind was added in 2015. Solar photovoltaic installations trailed far behind, reaching only 279MW at the beginning of 2016.

The key players in this period have been turbine manufacturers, utilities and equity funds including ACCIONA, ENEL, Gas Natural, Iberdrola, EDF, Mitsui, CEMEX, Santander, Corporación Renovable, Mitsubishi, PGGM or Macquarie. A large number of projects are still in the pipeline of other market players such as Sowitec, MPG, WPMex, Soriana, Industrial Peñoles, Alarde, Vive, Aldesa, Comexhidro, Sempra, Eoliatec, among many others.

The next phase promises to be much larger. Under the 2015 electrical reform law, a new auction process was established, which is targeting 10GW to 12GW of new installed wind and 3GW of solar capacity by 2020, or 4 to 5 times the present capacity. With this price-competitive process, it seems that large utilities with strong balance sheets and access to cheap financing will be especially well positioned to compete for the right to build new wind and solar generation capacity.

The first auction results were published on March 29 and re-released a day later (after a correction) with some stunning results. The auction awarded a total of 5,385 GWh/year and about 5 million green certificates (CEL’s). The first surprise was that 74% of the total generation was awarded to utility-scale solar photovoltaic (PV) plants. The second surprise was how low the PV prices were, reaching a record low of $35.5/MWh and an average of $45.15/MWh. In contrast, awarded wind prices averaged $55/MWh, and the lowest was $42.90/MWh. So, many more and cheaper PV bids were successful in the auction than wind bids. This outcome is partly thanks to Mexico’s very strong solar resources and comparatively more limited wind resources. Nevertheless it would not have been possible without a vast drop in solar PV module costs in the past several years. Looking ahead, it is clear that wind energy will face increasing competition from solar PV, and not only in Mexico.

 

Winners of Mexico Auction 2016

Winners of Mexico Auction 2016 by Technology and Country

Winners of Mexico Auction 2016-table with price

Winners of the first Mexico auction of 2016 by Technology, Region and Price.

Eighteen solar and wind bids were selected from 11 different companies based in Mexico, Spain, Italy, US and China, with project sizes ranging from 18MW up to 500MW. The awarded capacity represents roughly 2% of Mexico’s current total power generation, and will represent about $2.6B of investment once the projects reach their commercial operations date (COD). Thus in one auction the amount of renewable generating capacity in the country will have increased by over 50%. The winners will need to execute the contracts with the off-taker before July 12, 2016, while plants will need to reach COD before March 28, 2018.

Besides how far PV has come, project prices in the Mexican auction prove two things. First, they signal that renewables will continue to be the world-leading technology for new installed generation. Second, they show that size matters: Large utilities and developers can push bidding prices down to unprecedented levels by leveraging better financing conditions (probably negative CAPEX assumptions in their financial models), reliable and trustable technology, and aggressive OPEX assumptions. (Question: Is the abundant liquidity provided by the European Central Bank influencing the low capital cost assumptions from some of the European bidders?)

The downward price trend in awarded renewable energy auctions is not confined to Mexico. Auctions elsewhere in Latin America show a strong declining trend, especially in the last renewable auction process in Peru, which revealed prices of 37-38$/MWh in wind and 48$/MWh in solar PV.

Awarded Energy Auction Prices

Awarded Energy Auction Prices (USD/MWh) Source: AWS Truepower and “Renewable Energy Auctions in Developing Countries,” IRENA

I am proud of the support AWS Truepower has provided so far to many of the auction participants (and winners) in the Mexico and Peru auctions. Through our strong technical and project management teams in Barcelona, Brazil, and Mexico, we have not only participated in the pre-qualification process, but also supported bidders in sizing their projects and shaping their bids. We expect to play an even more important role in the future, as participants will need to squeeze every KWh out of their projects through smart design and state-of-the-art energy assessment tools.

Given the razor-thin margins in recent winning bids, this new low-price scenario will also require a sound understanding of project risks by lenders and investors involved in financing projects. In that regard, AWS Truepower’s due diligence experience in Mexico is relevant. We supported $650 million in financing for the 252MW Ventikas Wind Project and helped it succeed and become the largest wind project in Mexico. (CEMEX and Fisterra Energy were co-developers of that project.) We also provided construction monitoring to ensure completion of the project to specifications.

Joan Aymamí, VP for Europe and Latin America

Joan can be reached at jaymami@awstruepower.com 

 

 

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