OVERVIEW - Mexico's long-term auctions evolving on road to freer market

As Mexico is preparing for its third long-term power auction, one of the major players in the country's renewable energy sector, Enel SpA (BIT:ENEL), does not expect additional price declines after the average price per MWh plus CEL dropped 30% between the two auctions in 2016.

According to Paolo Romanacci, head of renewable energies for Mexico and Central America at the Italian energy group, prices are not anticipated to fall further due to the efforts of Mexican authorities to develop a solid auction process which, he says, helps to reduce possible distortions. Prices could even increase given that some of the most financially competitive projects were already successful in the first two auctions and in view of an increase in the costs for some processes such as interconnection, Romanacci tells Renewables Now.

The second auction in September last year resulted in a very competitive average price per MWh plus clean energy certificates (CELs) of USD 33.47 (EUR 27.94), down 30% from the tender in the spring of 2016. Power supply was contracted from solar and wind resources mostly and one geothermal facility.

The factors cited for the steep price decline included increased investor confidence after the first tender, strong competition due to investors' eagerness to enter a promising market, depreciation of the Mexican peso, and a reduction in the adjustments for locating projects in specific areas based on the needs of the power system. The latter increases or decreases the prices offered for evaluation purposes only.

Enel secured 1,085 MW of capacity in the first two auctions, more than any other participant, and the third long-term auction has drawn its interest, the company executive says.

MEXICO'S AUCTIONS

As part of broader reforms, Mexico set about transforming its energy sector in 2013, opening it to private investment. The power sector reforms included the creation of a wholesale power market and the introduction of medium-term and long-term power auctions. The long-term auctions award 15-year contracts for electricity and 20-year deals for CELs. They have three components -- firm capacity, electricity, where only clean energy technologies can compete, and CELs, with participants allowed to make package bids across the three products. According to Mexican law, clean energy technologies include renewable resources, as well as nuclear, efficient cogeneration and carbon capture.

Mexico's two long-term auctions in 2016 are expected to result in the construction of 52 green power generation plants by 2019 and an investment of USD 6.6 billion. The tenders will add 5 GW of clean energy generation to the country's system and lead to 170% growth in solar and wind built over the past 18 years, energy secretary Pedro Joaquin Coldwell has said. A third auction is to take place in November this year.

The first auction was launched in November 2015 and the results were announced in March 2016. A total of 1,691 MW of solar projects and 394 MW of wind projects secured contracts. The winning companies included Enel Green Power, SunPower Systems, Recurrent Energy, Vega Solar and JinkoSolar, among others. There were no offers for firm capacity as the price was too low.

Enel was the biggest winner with about 1 GW of solar capacity across three projects. Construction of these projects -- the 427 MW Villanueva 1 and the 327 MW Villanueva 3 solar power plants in the state of Coahuila, and the 238-MW Don Jose project in the state of Guanajuato -- has begun and is fully on schedule, Romanacci says. He noted that when the company presents projects for auctions they are advanced in the permitting process and already have supply contracts in place.

The second long-term power auction was launched in April 2016 and the results were unveiled in September that year. A total of 1,853 MW of PV, 1,038 MW wind and 25 MW geothermal projects were successful. In addition, 68 MW of hydropower was awarded CELs and 899 MW of combined cycle plants got firm capacity contracts. Renewables also had a share of the total of about 1.2 GW firm capacity awarded.

Below is a summary of the auctions' awards:

Earlier this year Mexico launched its third long-term power auction, whose results will be announced on November 22. For the first time other buyers than the state-owned Comision Federal de Electricidad (CFE) will be able to participate via a clearing house.

FREE MARKET

Asked about whether he sees increased interest in the new option for power sales to other participants aside from CFE, Enel’s Romanacci said: "At the moment, the Mexican market does not present all the necessary conditions to favor a significant increase of new buyers, other than CFE, but we are confident that in the coming months Mexican regulators will be able to implement the adequate measures to boost the free market, in order to ensure greater liquidity and the participation of more actors."

The Mexican authorities this week said they have received 734 payments for bids from 80 bidders for the new auction. With respect to the purchase offers there were two that were not from CFE.

The future of renewable energy in Mexico is promising, Romanacci says. "Following the consolidation of the long-term auction process, the next challenge of the sector will be to ensure market liberalisation, offering opportunities to supply end users," he adds.

Mexico has set a target of getting 35% of its electricity from clean energy sources by 2024, 40% by 2035 and 50% by 2050. Clean energy sources, including large hydropower, accounted for about 20% of total generation in the first half of 2016, according to the Secretariat of Energy (SENER) data.

According to the Global Wind Energy Council (GWEC), Mexico had 3,527 MW of wind capacity at the end of 2016. It currently does not have a substantial amount of installed PV power capacity but things are set to change soon following the long-term auctions. In the second quarter of 2017, the country saw a year-on-year jump in clean energy investment to USD 1.8 billion, based on figures from Bloomberg New Energy Finance (BNEF).

(USD 1 = EUR 0.835)

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