Solar shines in Mexico's first clean energy auction

GTM research shows the Mexican solar market could be as large as 4GW-6GW per year by 2030, thanks to the Mexican Government’s green energy goals. In Mexico’s first clean energy auction, solar photovoltaic (PV) projects by Enel Green Power, SunPower and several other developers, won 74% of the power and clean energy certificates supply deals. Analysts estimate the capacity of the winning solar projects at about 1.86GW. GTM has now revised its solar capacity forecast for Mexico to total demand of 646 MW in 2016 and 1,513 MW in 2017. However, with project completion dates set for early 2018, developers will be under pressure to deliver.

Mexico just concluded its first Clean Energy Auction for energy, power and Clean Energy Certificates for purchase by CFE, Mexico’s only utility. The results are stunning -- 11 PV projects have been awarded contracts worth 4 million megawatt-hours (DC) per year. That translates to 1,860 megawatts of capacity (using an average capacity factor of 33.6 percent). Additionally, all 11 projects have won contracts for a combined 4 million Clean Energy Certificates (CELs).

The winning projects are from seven developers:

Enel Green Power with 992 megawatts and 2.25 million Clean Energy Certificates (CELs)

SunPower with 509 megawatts and 989,265 CELs (includes projects by local subsidiary Vega Solar)

Jinko Solar with 241 megawatts and 502,713 CELs

and 502,713 CELs Recurrent Energy (owned by Canadian Solar) with 62 megawatts and 140,970 CELs

Sol de Insurgentes with 27 megawatts and 60,518 CELs

and 60,518 CELs Photoemeris Sustentable with 29 megawatts and 53,477 CELs

Mexico defines clean energy quite broadly, so the auction was open to competition from wind, hydro, cogeneration, combined-cycle gas, and geothermal, as well as PV. Out of a total 5.38 million megawatt-hours of energy that was awarded, PV won 74 percent and wind won the remaining 26 percent, with no contracts won by any of the other technologies.

The scale of PV’s win is significant. According to data from GTM Research’s Latin America PV Playbook, Mexico has a cumulative 246 megawatts installed, with only 104 megawatts of that installed in 2015. Of that, only 50 percent are utility-scale projects.

In early 2016, we forecasted a total of 382 megawatts of PV in Mexico for this year, with only 300 megawatts of that coming from utility-scale projects. All of this was expected from projects grandfathered in under the previous Self-Supply and Small Power Producer programs now discontinued under the new energy transition law. No further demand was forecast for the year.

As for the auction scheduled for March 2016, consensus at Solar Summit Mexico, Greentech Media’s first international solar conference held in Mexico City in late January, was that solar would not win more than 200 megawatts. Based on what we saw in the market, however, our own estimates were more optimistic -- there was serious interest in the auction from well-established international companies, including some of the larger developers here in the U.S. -- and we therefore estimated solar to win as much as 500 megawatts in the auction. With project completion deadlines set for early 2018, that translated to 500 megawatts of solar demand forecasted for 2017.

FIGURE: Mexico New Solar PV Demand, 2010-2030E



Source: GTM Research's Latin America PV Playbook

Solar’s win of 1,860 megawatts in the auction is a significant jump for the market. We now estimate total demand at 646 megawatts in 2016 (an additional 264 megawatts) and 1,513 megawatts in 2017 (an additional 836 megawatts) tied directly to the auction. That’s a 104 percent jump in the forecast across the two years combined. As a result, solar in Mexico will now grow by 521 percent in 2016 as opposed to the earlier 267 percent forecast and 134 percent in 2017 as opposed to the the earlier 77 percent forecast.

Along with the jump in demand numbers, the average contract price of $50.7 per megawatt-hour (weighted average of $45 per megawatt hour) is noteworthy as well. While not as low as the $40.5 per megawatt-hour that was first reported by news outlets based on a yet-to-be-confirmed list of winners, this average is nonetheless very aggressive -- the range is from $35.44 per megawatt-hour for a 427-megawatt project by Enel to $67.5 per megawatt-hour for a 29-megawatt project by Photoemeris Sustentable. By comparison, lowest PPA prices in other countries are much higher.

FIGURE: Comparing Mexico's Lowest PPA Price



Source: GTM Research

How does all of this make sense? Well, clearly the solar industry globally has seen an opportunity in Mexico that has already been acknowledged by the likes of SolarCity last year. Low labor costs, excellent irradiation, a stable economy, and a strong PPA by a government-backed utility in the auction are some of the common reasons why local developers and experienced international players alike have flocked to Mexico for a piece of the solar pie. Mexico is a growing energy market with historically rising electricity prices.

With the government’s goal of 35 percent of renewables by 2024 and 45 percent by 2036, the market for solar could be as large as 4 gigawatts to 6 gigawatts annually by 2030.

Developers are certainly making a strategic play in Mexico with an eye on the market’s long-term growth. Internal rates of return (IRRs) on projects should be in the double digits for developers to justify investing in a developing market like Mexico. Access to international, low-cost financing due to U.S.-dollar-denominated contracts and very large project sizes (the average is 150 megawatts, with the largest being a 427-megawatt project by Enel) are certainly big factors in keeping costs down.

Completion deadlines between January to March 2018 add pressure on developers to start construction soon. Developers then might have to go lower than double digits on their IRRs to install projects on time and avoid penalties that are set at a proportion of the loss to the offtaker from undelivered energy per day (more on that in the upcoming Latin America PV Playbook Q2 2016 report).

With 3.4 gigawatts now planned between 2016 and 2018 (including some direct PPA and merchant sales projects), it remains to be seen if the market will be able to deliver on this pipeline. We are already expecting that at least 300 megawatts from this auction could get delayed and spill over into late 2018. While solar’s stunning win in this auction no doubt bodes well for PV in Mexico for the long run, we will be waiting to see how these projects get executed and whether all the awarded capacity will indeed be installed on time.