'Mexico's tenders are transparent – winners know why they won, losers why they lost'

FIVE MINUTES with Luz Aurora Ortiz Salgado, general director at the sub-secretariat of electricity, Energy Ministry of Mexico

After reaching record solar prices in its first renewables tender, Mexico is now holding a second auction, due to be finalised on 30 September and the subject of strong interest from global and local investors.

According to preliminary results, 57 companies put forward over 400 bids, which have allowed the off-taker – state-controlled power company CFE – to cover more than 80% of its power needs for the 15-year period starting in 2018.

Although prices are not expected to fall as much as in the first auction, the number of bids placed has risen significantly, opening the way to annual tenders as Mexico moves towards meeting its 35% clean energy goal by 2024.

“The next long-term tender will have to be kicked off in April 2017 at the latest. We hope that it will also take five months to be concluded. Our idea is that the tenders are short,” Luz Aurora Ortiz Salgado, general director at the sub-secretariat of electricity at Mexico’s Energy Ministry, tells Recharge.

With transparent tender policies, energy sector reforms, and US dollar-denominated, long-term PPAs, Salgado is confident that global interest in Mexico’s renewables sector will continue.

What do you think were the main factors behind the success of the first renewables tender?

Firstly we complied with the law, which says we had to launch a first tender before the end of the first half of the year. This is a signal that we are complying…and that we will continue to do so. This raises investors’ confidence.

Secondly, we have a model which allows all technologies to compete. We are not limiting technology, nor are we imposing minimum limits for contracts. We are setting a cap price and a maximum amount to be contracted, and this comes from the power supplier in the country, allowing any company that has a project to compete.

Another point is that we lowered the entrance barrier to the minimum legally required. The bidders are formalised companies that need to have a technical track record and capacity for raising debt, but they are all minimum requirements. So this raises the importance of guarantees set down to bid, an instrument that makes sure that bidders will honour their bids, because you cannot sign contracts without guarantees.

Finally, what lay behind the success of the tender was a transparent process. In the first tender [in March this year] we publicised it to the whole world. Yes, we had to make some adjustments, but the winners knew why they won and the losers knew why they lost – because they knew what the prices were. This brought a lot of credibility.

Why did solar come out much cheaper than wind power, and how do you respond to doubts that such projects may not be built in time?

A solar project can be concluded in two years without any problems. The only doubt was the land leases [which were missing in some cases], but you cannot anticipate the future. Still, some companies in Mexico were questioning that not all the winners would be able to sign contracts. Today, the contracts are all signed. This is the first step, the first signal that the projects will be built.

The process is open to all companies. So the fact that all technologies compete not only for PPAs, not only for clean energy and not only for capacity, creates a package in which all three a combined, showing that the model can be successful.

It seems that in the second tender the interest is as strong as in the first.

Yes, it already is. The number of companies bidding is slightly lower, but the number of bids is much higher. When we are analysing the technical bids, we had 468 offers in the first stage, today [the interview was conducted before the tender began its final stage on September 22] we have 577.

The smaller number of companies is significant, down to 83 from 103, but we believe they are serious bidders. In the last tender we also saw a reduction in the number of bidders by the time the economic bids were in. In this stage we believe that the majority will be qualified.

Many international renewable players stayed out of the first stage. Are they bidding now? Can you outline the profile of these bidders?

I don’t know the bidders. The power regulator (CENACE) knows, but cannot publicise it. What we see is a diversity of projects. There are small power projects with less that 10MW for those companies who have experience in this type of plant. But we also have projects between 10MW and 100MW and projects above 100MW. There are projects of 18MW and 500MW that competed in the first tender and won a piece of the pie.

And in the second tender, the cap price was below that of the first.

The power supplier, CFE, which for now is the only buyer at the tender, reduced prices for power and clean energy certificates. But the maximum price for capacity was raised significantly. Before, we were talking about $500 per MW [for which there were no bids]. Now we are talking about $2,000 per MW.

So, we now have a reference price which is very competitive and covers the costs of firm power generation. We believe that because of this, different technologies and more competitors will bid, competitors who are serious companies, including renewables who are offering capacity.

Do you expect prices to fall as much as they fell in the first tender?

The global trend is that always in a subsequent tender the price is lower than the previous tender. The US Nobel Prize winner, Stephen Chu, who is also energy secretary, when asked what would be the best way to develop solar power, replied by saying that investors should go to Mexico – without subsidies, it has the lowest price for solar.

Now Chile has the lowest price for solar. I wouldn’t know whether prices will get as low as Chile’s. If so, it would be welcome because it means that power that ends up in people’s homes and in shops will be cheaper.

When are the next tenders?

The next long-term tender will have to be kicked off in April 2017 at the latest. We hope that it will also take five months to be concluded. Our idea is that the tenders are short. So, we hope to end by September 2017 and have contracts signed before the end of the year for the projects to start operating initially at the beginning of 2020, although the regulator has a six month leeway so the projects can start operating between July 2019 and June 2020.

Also, we expect that by the end of the year we will finalise the regulation for a medium-term tender, which we hope to hold in 2017. This would be a tender for power and capacity without clean energy certificates. The energy would have to be delivered in 2018. These would have three-year PPAs aimed at power plants that have idle capacity, or ones that are starting operations and haven’t sold all their power.

And for the next long-term tender, how much power will be bought?

This depends on the power supplier. We don’t know whether there will be more than one power supplier buying power. But the amount to be bought will be determined on how much clean energy it has to supply, which is set annually by the energy secretariat every March for the coming year. Last year it was 5%, this year it was 5.8%.