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Roundtable

How Would You Rate Results of Long-Term Electricity Auctions?

Wed, 02/21/2018 - 21:40

In total, the Ministry of Energy estimates investments for the awarded projects will reach about US$9 billion. The auctions stood out both for the absence of government subsidies and for the low average tariffs reached, which decreased in each auction. Auction winners are prioritizing reaching financial closing for all projects to achieve ready-to-build status, while 2018 will witness the operation of the first auction projects, which will be an indication of the viability of Mexico’s energy market. 

Juan Rubiolo, General Manager of AES Mexico

"The auctions ended with favorable prices and conditions for the Mexican market and for CFE, which was the only buyer. We have yet to see which of the winning projects will be built. Several factors are putting them at risk, with financing and permitting being the most critical. The banking sector is hungry to finance renewable energy projects but the lack of structure is hindering its participation. Higher interest rates in the past few years have also made it harder for companies to acquire attractive financing. The fact that private projects have a spot price component makes the problem even worse because Mexico has no spot market history. Technologically speaking, projects are also becoming harder to justify because the most accessible places in Mexico with the best natural resources and available infrastructure will become scarce."

Adrián Katzew, Director General of Zuma Energía 

"The auctions were conceived as national, multi-techonological, multi-product bids. Identifying your desired placement in the offer structure and assessing your acceptable risk according to price levels is imperative. Navigating the auction process means either you equate your offer price to your cost structure and see if it sticks or you take a deeper look at the market and the competitive context and converge accordingly with the value chain to identify the targeted prices. The execution phase entails working with banks and contractors to close pending contracts and to begin project construction. We are defining unprecedented financial structures, meeting the requirements of annual energy volume, CELs, alternate markets that used to honor those obligations, and studying their intrinsic risk in relation to our business."

Benjamín Torres, Partner at Baker McKenzie Abogados 

"Not every EPC local contractor participating in the industry has enough capacity or experience. Foreigners entering our market might have the resources and a solid track record in other countries, but they still need to understand that this is a new business environment with a new regulatory framework. In project implementation, there will be a lot to learn. Although this short-term scenario may sound pessimistic, it is not going to be a failure; there will be project delays due to flaws or ambiguities in the contracts, but these can all be solved by finding the right consultant with enough experience in EPC contracts. There will be a need for more EPC contractors because, although many have already arrived, the number of companies in the market will not be able to cover the number of projects that will be implemented."

Jorge Ochoa, Mexico Country Manager of AWS Truepower at UL

"From the moment the tenders were announced and up to the awarding of the projects, we saw a decrease in the number of PPAs. This was expected because developers wanted to see whether it would be a better market to focus on auctions or if PPAs would still be attractive. Now that there is a known floor for the prices in auctions, we have seen PPAs starting to move again as developers can now evaluate the advantages and disadvantages of each market. We have experienced that big companies that won in the auctions also found the PPA market interesting because they can create economies of scale. Medium-sized companies, on the other hand, are finding the PPAs more attractive because within them they can offer more services and innovative business models. Finally, the small ones are seeking associations with both medium and large companies."

Asier Aya, Managing Director Americas, International Power Division of Jinko Solar

"So far, we think the auctions have been successful in their objectives. We are satisfied with the transparency shown throughout the whole process, as well as the power volumes allocated. Through this instrument, Mexico has become the most attractive country in Latin America energy-wise. This long-term view allows us to plan ahead and to compete for large volumes of power generation. The participation mechanisms are somewhat complex, involving many different variables, but once understood, the process goes smoothly. Another important aspect of the auctions is that we are starting to witness how banks are willing to finance the projects, guaranteeing attractive liquidity. The Ministry of Energy and CENACE have done a great job in creating a well-received auction process and more private players are looking forward to participating." 

Juan Saltre, CEO of Ventus

"We were definitely influenced by the auctions. When we decided to expand from Uruguay, pushed by a saturation of the market due to overinvestment, we started analyzing Latin America’s biggest markets. In South America, we first looked at neighboring countries. Brazil was a complicated market to work in and we concluded that Argentina made more sense for our business plan. Mexico today is a market made up of more than 3,000MW of installed wind power capacity in operation, with the potential of tripling, which will generate more opportunities for companies like Ventus. We know there is fierce competition because it is a market that has been developing for many years with very competitive prices. We are not interested in engaging in a price war, but in providing a competitive proposal as a whole."

Francisco García, Country Manager Mexico of Gransolar

"The fact that the market started with auctions is positive for the solar sector. The first auction was subject to several technical conditions aimed at concentrating projects in areas that needed to reduce the cost of energy. The projects that were established in these zones came up against some permitting barriers related to social and environmental impact of operations. We are seeing a slowdown of projects from the first auction unfortunately, such that some are projected to start in 2018. Financing is therefore less viable, and the permitting situation is not projecting confidence. We hope that all these projects can overcome these obstacles because it would send a vote of confidence to the industry. Finalizing projects would also lower energy costs and encourage other industries to operate in hubs that need the economic support."