No more auctions for solar and renewables in Mexico

from pv magazine Mexico

Mexico’s state-owned power utility the Comisión Federal de Electricidad (CFE) will not resume auction tenders for renewable energy generation capacity, its director general Manuel Bartlett has confirmed in a televised interview.

“Why should we buy power, if we can produce it?” said Bartlett. “The CFE does not require third party support. We are doing well, we have strengthened ourselves in the first 100 days of the new administration. The president has given us resources, he has encouraged us and we are very happy … The CFE will continue to grow.”

In a press conference in late January, Mexico’s new president Andrés Manuel López Obrador made his first official statement on his energy plans and offered little encouragement for the renewable industry.

On CFE’s role in the nation’s energy future, the president voiced regret at the utility’s loss of market share in terms of generation.

Will utility embrace solar?

“The CFE generates now only half of what is consumed, while private companies are supplying the market with very high costs,” said Obrador. “Instead of improving, we have worsened in this matter.” No reference was made to the success of Mexico’s Energy Reform program, which introduced auction-based procurement that led the country to record the lowest price for large-scale solar in the world for a time – a price significantly lower than that seen for power generated from conventional sources.

With the new head of state having exaggerated the extent of CFE’s reduction in power generation by using the word “half”, Obrador also failed to mention the lack of transmission capacity which is holding back Mexico’s electricity sector.

What remains unclear is whether the CFE intends to build solar plants or plans to increase its share of the power market using conventional fuels. If CFE has an eye on solar – like a significant number of its peers worldwide – energy auctions could be replaced by EPC tenders for the construction of PV projects.

Mexico’s solar sector has been in limbo since the new administration confirmed the cancellation of a fourth energy auction, having postponed it a month earlier.

Market prospects

The cancellation was a negative signal for the market, according to James Ellis, head of Latin American research at BloombergNEF.

“Regardless of the fact that core tenets of reform are written in the constitution, freezing specific policies such as auctions and [the] implementation of the clean energy certificates – CELs – market, will dramatically slow development of renewables, and utility-scale solar in particular, in the near-term,” Ellis told pv magazine. The analyst said solar has been the greatest beneficiary of Mexico’s auctions and the opening up of the energy sector.

Solar overtook wind for the first time in Mexico last year as a result of the auctions, in which PV made up 70% of assigned capacity. “Nearly 90% of commissioned renewables capacity additions in 2018 were auction projects, and [auctions accounted for] nearly 80% of solar projects commissioned last year,” said Ellis, who added, the volume of projects with planned delivery dates this year is equally high. “While we can expect those projects already awarded long-term PPAs will continue to progress, failure to reinstate the auction program will mean sharply lower investment and a steep drop-off in the project pipeline for delivery post-2020,” he said.

The analyst is also convinced cancellation of the auction will weigh heavily on development until there is greater clarity. “Energy policy under AMLO [Obrador] remains a question mark but his inclination appears to be to emphasize state-owned entities at the expense of market liberalization,” said Ellis.

Despite the country aiming to generate 35% of its energy from renewables by 2024, Mexican companies bought a relatively small amount of clean energy in 2018 – less than in 2017. According to Ellis, companies are now hesitating before approving new green energy purchases. “It’s hard to see how the latest move to cancel the auction will improve this,” added the analyst.

What will happen after 2020?

Maria Chea, an analyst for the Americas at IHS Markit, also believes the auction cancellation has had a negative effect. “The cancellation of the fourth auction does not affect the schedule of the previous tendered projects but clouds the visibility of new renewable generation after 2020,” she said.

“The cancelled auction represents a possible loss of over 1 GW of PV that could have been awarded, and leaves little hope for future auctions to be held throughout López Obrador’s term. The cancelled auction is not likely to completely bring utility-scale PV deployment to a halt after 2020, but may significantly lower the PV pipeline in terms of volume.”

According to Chea, bilateral PPAs could represent an alternative for large PV projects. “PPAs in Mexico, although limited, were present before the 2013 energy reform and have been gaining momentum after the reform,” she said. Chea cited the long-term PPA between French power company Engie and steelmaker Gerdau Corsa for a 130 MW solar facility, as well as Balam Fund’s 35 MW solar project that powers Farmacias del Ahorro. However, according to the analyst, those contracts will not be enough to replace the portfolio of projects that could have been driven by auctions.

Another push for large-scale solar could come from the wholesale market. “Developers and investors may also choose to participate on the spot market, and given the price points from previous tenders, it is an attractive option,” Chea said. “However, there are inevitable risks associated with this strategy, as we saw in the case of Chile.” Mexico suffers from a similar lack of interconnectivity between its regions as the Southern American nation, which saw the offtakers of private PPAs suffer heavy losses after a rush to develop renewable capacity in its unconnected north led to overcapacity.

15 GW of new PV up to 2024

Manan Parikh, a U.S. analyst with Wood Mackenzie, believes 15 GW of new solar capacity will be deployed between next year and 2024, for a cumulative 20 GW at the end of the period. “Despite the recent cancellation of the fourth energy auction, the existing contracts awarded in the previous rounds will be respected, according to the first statements of the AMLO administration,” Parikh told pv magazine, adding access to finance had also improved.

“I am a bit skeptical about further growth after 2021, which does not mean we will see a slowdown or that the market will disappear,” said the analyst, “it’s just that now it’s difficult to understand what could happen, since what the government said so far is not enough to make this long-term projection.” Parikh also said bilateral PPAs could make up for part of the missing capacity prompted by a lack of auctions. “I do not think it can be a one-to-one compensation but I am convinced that it could eventually lead to a more sustainable market,” he said.

Pluralization of the market

The WoodMac man said the prices seen in previous auctions, and especially the last one, are not sustainable – or at least sustainable only for big players like Enel, Engie and other big utilities. In which case, private PPAs can give the operators involved a better sense of the market. “We may see projects that offer prices slightly lower than the nodal prices, and not the record prices observed in the auction, but this will probably lead to a more stable business environment, which would result in steady growth,” said Parikh.

Asked about the potential of large-scale solar on the spot market, the analyst said it was difficult to perceive what such a scenario could offer. “There are a couple of projects in the spot market, but the current transmission and distribution infrastructure is not designed properly for this type of business,” he said. “Perhaps only in combination with bilateral PPAs, [could] the spot market [be] a concrete option in the short term.”