LatAm is experiencing a boom in renewables, and in particular solar. Governments are rolling out tenders and tariffs are getting lower. But in an environment where tenors are set to shorten and pricing rise, some question whether this trend is sustainable.

Mexico has just held its second long-term power auction for renewable energy sources. The first process in March 2016 saw just over 2GW of wind and solar contracted, and more than 2.8GW of projects from the same sources were awarded in the latest September auction.

PV domination

In both processes, solar photovoltaic (PV) emerged as the dominant energy source, accounting for 54% of contracts in round two and 81% of contracts in round one. Wind accounted for the second largest share (43%) in the latest process compared to just 19% in March.

PV has also proven to be the most competitive energy source in the latest round of bids. The average price of solar offers was $31.7 per MWh, 42% below the offers received for this energy source in the first auction ($44.9 per MWh), and beating even conventional power.

Solar bidders in both rounds include Acciona, Aleph Capital, Alten, Canadian Solar, EdF, Enel, Engie, FRV, Grenergy, Hanwha, IEnova, Jinko Solar, OPDE, Solar Century, Sunpower, Thermion, Tuto Energy, X-Elio and Zuma Energía (of the Actis group).

Across the two rounds, 34 companies have committed to investing an estimated $6.6 billion in building close to 5GW of new renewable energy capacity.

Cenace offered three different products in the auctions – clean energy certificates (CELs), and capacity and generation contracts in these auctions – and to begin with state utility CFE is the sole offtaker under the contracts. Eventually other industry players are expect to participate as purchasers.

Capacity is contracted under 15-year PPAs, but CELs are issued for a period of 20 years. Some lenders have expressed concern over the merchant feature of the new PPA model. But lenders are already assembling for some projects.

As previously reported by IJGlobal, Aldesa Energía Renovables and local fund GBM Infraestructura have already mandated a Japanese bank and a development bank on a wind financing for projects which won contracts in March. And many other sponsors, including Enel, have requested proposals from banks.

Chile sets new low

PV also emerged as the most competitive energy source in Chile’s August power auction. Spanish developer Solarpack set a new world record in Chile’s latest power auction in which it offered a tariff of $29.1 per MWh for its 120MWp Granja PV project.

Solarpack’s offer was well below the average price achieved in the auction, which was $47.6 per MWh. Speaking to IJGlobal this week, Inigo Malo de Molina, head of the Andes region for Solarpack, points out that competing bids came very close, including one from Mainstream, which comprised a price of $29.2 per MWh.

Several reasons, according to Malo de Molina, made it possible to offer a price so low. A key factor was the approval of the transmission law in July 2016, which establishes different mechanisms to facilitate the expansion of the transmission system, ensuring that the system is electrically well connected and minimising the risk of system congestions. It is particularly important for solar PV projects to be able to generate power in the Atacama Desert where the best resources are, explains Malo de Molina. "This was one of the factors which allowed us to compete with a very competitive capex".

Sponsors bet on Argentina

Argentina is due to announce the winning bids in the country's debut renewables auction, RenovAr, on 7 October 2016. President Mauricio Macri launched the auction to contract 1GW of energy months after taking office in December 2015.

The Ministry of Energy and Mines received 6GW of bids from local and international players in September 2016. The average prices achieved for wind and PV are $69.5 per MWh and $76.9 per MWh respectively, while the minimum offer received for each was $49MWh and $59MWh. Foreign bidders include Acciona, Invenergy, Envision Energy, InterEnergy, Enel, Isolux, Inkia Energy, Jinkosolar and Akuo Energy.

That the auction is 6x oversubscribed is undoubtedly a vote of confidence for Macri's government, but there is skepticism over financing capacity for the development of the 1GW of winning projects, particularly as many of the active lenders to renewables in LatAm have not had a lending presence in Argentina for over a decade.

A senior LatAm focused multilateral banker says that while the auction appears 6x oversubscribed on the equity side, this is purely a representation of sponsors taking a bet on raising the necessary funding for these projects. If it were a measurement of the debt capacity, you might not even reach the targeted 1GW, they say.

While commercial funding on a project finance basis appears to remain some way off for Argentina, despite very strong interest in the reopening of Argentina, multilaterals including the IFC, IDB and CAF, as well as European bilateral agencies, such as DEG, Proparco and FMO have all expressed a willingness to fund the upcoming renewables projects in the country.

Even the international commercial banks who admit they are not ready to lend to Argentine projects at present commend the attitude of the government and its willingness to listen to the market. A number of important changes were made between the draft and final versions of the contracts aimed at bringing comfort to investors, for example. 

The huge interest stoked in the government-led renewables auctions being held across Latin America is a positive sign for a region that has suffered slower growth, corruption scandals and political turbulence in recent years. But it is important that the strong competition does not push prices to below what is feasible.