Power Auctions: Icons of Reform
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Power Auctions: Icons of Reform

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Wed, 02/22/2017 - 12:14

As a direct result of the Mexican Energy Reform, the world watched the country carry out its first two longterm auctions to assign PPAs for the sale of power, capacity and CELs in 2016. The processes touched off a steep learning curve as authorities, developers and companies are all still new to the scheme, but the outcomes were hailed by players and regulators alike.

“The outcome of the power auctions was qualified as a success by several international media, including The Economist, Forbes and Bloomberg, and this successful experience has given Mexican authorities the confidence to strengthen and enhance upcoming editions,” says Guillermo García Alcocer, Chairman of CRE.

The first auction was a pilot, creating a starting point from which the process could be improved. CENACE received 226 sale offers and designed a mechanism to adjust the selling price to reflect the real value for the buyer. This price adjustment mechanism considered the location, the price indexation depending on whether it was in US dollars or Mexican pesos and a tie-breaking criteria for identical offers in quantity and price. The power plant’s distance from the interconnection point was the most determinant variant in the algorithm. This variant resulted in Merida’s projects being highly competitive as the state’s price zone caused a drop in the unit price by US$21.98 per MW/h, increasing the total economic surplus of the offers from that location.

During the first auction, an error in the algorithm resulted in some projects being awarded when they should not have been. The Ministry of Energy repeated the process, raising some concerns and pushing the authorities to prevent further skepticism by allowing open access to the program used to determine the winners. This call for transparency extended to the second power auction, prompting several key players to praise the process. “We are very satisfied with the transparency and coordination with which the government held both auctions,” says Héctor Olea, CEO of Gauss Energía and Chairman of Asolmex, a Mexican association for PV energy.

The second auction also surprised observers as the lowprice tendency marked since the first process continued. “The second power auction’s results can be qualified as a major success for the country,” says Jaime de La Rosa, President of the Mexican Energy Association (AME). “The industry already expected competitive prices based on the first auction’s results, which was internationally recognized as a successful exercise. But the second auction managed to surpass the high bar set by CENACE during the first round.”

TECH IN THE MIX

Bids got more complex and competitive as more technologies entered the mix. This was also a result of the change in the capacity purchase offers, where the MW/year unitary price offered by CFE went from MX$10,000 to MX$1.69 million from the first to the second auction, attracting winning bids from combinedcycle, geothermal and hydroelectric energy projects.

The two processes awarded 34 companies that are expected to invest US$6.6 billion and install 5GW of new clean energy capacity. Solar power surprised both national and international observers by sweeping the floor and becoming the source of 54 percent of the energy awarded in the first bidding round. It followed with over 40 percent in the second. The third and fourth long-term power auctions are expected to be held in 2017.

The third will be administered by the Ministry of Energy and CENACE, after which the fourth power auction will be the purview of CRE. One of the most anticipated characteristics of the future auctions is the participation of private companies as power purchasers, a role so far reserved for CFE. According to César Hernández, Deputy Minister of Electricity, the authorities are adjusting the process to incentivize a larger participation from private companies in the bids as buyers, although the final regulation is yet to be published.

“The major challenge for 2017 is to continue operating under these new regulations as they imply a paradigm change. The Mexican electricity industry operated under a monopolistic model for more than 70 years and it now has to get used to a brand-new model focused on competitiveness and structural separation. We must not forget that many of the market mechanisms did not exist in Mexico before. It is a new field for all of us. The results have been positive so far but it is not an easy process,” he says.

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