The auction price stopped being a price you could buy at

Any plant director or CFO in Mexico who has been handed a renewable supply proposal in 2019 has probably been shown the number 20.57. It is the average price of Mexico's third long-term auction, and it is being used as a benchmark in bilateral negotiations where it does not belong. CENACE suspended the fourth long-term auction on 3 December 2018 and informed participants of its cancellation on 1 February 2019 (Global Energy, Expansión, La Jornada, 1 and 2 February 2019). There is no auction to buy into.

That changes what an industrial offtaker is actually doing when it signs a renewable power purchase agreement. You are no longer buying a slot in a government-run process with a state counterparty behind it. You are taking direct construction, delivery-date and counterparty risk on a private developer. The questions that matter are execution questions, and they are answerable before signature.

What USD 20.57 actually was

The third long-term auction, SLP-1/2017, produced its fallo on 22 November 2017, with preliminary results announced on 15 November 2017. It awarded 2,562 MW across 14 projects: 1,323 MW of solar photovoltaic across nine plants, 689 MW of wind across five, and 550 MW from a single natural gas plant (Energías Renovables, 23 November 2017, and Proyectos México project records).

The USD 20.57 per MWh figure is the average for the most economical package, and the basis is the part that gets dropped. The bid is for one MWh bundled with one Certificado de Energía Limpia. It is not a bare energy price. Comparing it against international solar or wind auction averages, which are energy-only prices for a single technology, is not a like-for-like comparison, and the Mexican average also carries 550 MW of natural gas inside it.

The record-low bid in the same auction, around USD 17.7 per MWh plus one CEL, is attributed to Enel by every source we have reviewed. Those sources disagree on the technology. Reuters Events reported it in November 2017 as a world-record low solar price. Energía Estratégica reported USD 17.77 per MWh for wind, secured by Enel Rinnovabile for the Energía Limpia de Amistad 2 and 3 projects in Coahuila, of 167 MW and 122 MW. We do not state which. Anyone using that number as a negotiating anchor should know that the market cannot agree what technology produced it.

CFE's director stated at the time that third-auction prices were roughly a third cheaper than the second auction and about half those of the first (Energías Renovables, 23 November 2017). Prices of that shape are what invite the underbidding question, and underbidding is where an offtaker's exposure starts.

Where a low bid becomes the buyer's problem

A developer that has bid thin has less margin to absorb a cost overrun, a delayed interconnection study, a land dispute or an equipment price move. The way that reaches a manufacturing offtaker is through the commercial operation date.

Work the arithmetic on your own contract rather than on the developer's. If your PPA is meant to start supplying in month 24 and the plant arrives in month 33, you are buying nine months of power somewhere else. Under CFE Suministro Básico or a Suministrador de Servicios Calificados at the price prevailing then, not the price you locked. For a plant with a meaningful electricity line, that gap is usually a larger number than any discount negotiated in the PPA itself. It is also the number that almost never appears in the proposal.

The contract terms that decide who carries that gap are specific and checkable:

• A guaranteed commercial operation date, distinct from a target or an expected date.
• Delay damages that actually compensate the cost of interim supply, expressed per day and capped at a level worth having.
• A long-stop date after which the buyer can terminate without penalty.
• A force majeure definition that does not sweep in permitting delay, social opposition or interconnection queue position, which are the three most common causes of delay in Mexico.
• Security for the developer's obligations, in a form and amount that survives the developer's own financing.

Developer diligence a buyer can finish in a week

Execution risk is concentrated in a small number of facts, and a buyer can establish most of them in a week.

• The generation permit issued by CRE for the specific plant, with its capacity and its holder.
• The interconnection status with CENACE, naming which of the three studies have been completed and what reinforcement works were identified.
• Site control, meaning the land title or lease and its term against the PPA term, plus the status of any ejido consultation.
• The environmental authorization from SEMARNAT and, where applicable, the social impact assessment required by SENER.
• The equity behind the project company and whether financial close has occurred, since a PPA signed with an unfunded special purpose vehicle is an option, not a contract.
• The developer's completed projects in Mexico, by name and commercial operation date, and whether those dates matched the ones originally contracted.

On our read, the last item does more work than the rest combined. A developer that has delivered two Mexican plants within a quarter of their contracted dates is a materially different counterparty from one whose track record is in another country or in a pitch deck.

What the gas pipeline dispute showed

The execution problem is not confined to renewables. Natural gas transport contracts in Mexico are capacity contracts. The shipper pays a fixed reservation charge for contracted capacity whether or not molecules move, and construction delay does not by itself suspend that obligation. During 2019 CFE publicly disputed exactly that arrangement with private pipeline developers, on systems where construction had been held up, including by local opposition along the route.

Two things follow for an industrial buyer, and they point in opposite directions. A contract whose payment obligation is independent of delivery protects the party building the asset, which is why lenders require it. And a contract with a state counterparty can be reopened when the political cost of honoring it rises, whatever the drafting says. A buyer signing a long-dated energy contract in Mexico should price both of those, rather than assume the paperwork settles the question.

Local opposition deserves its own line in the risk register. It is the failure mode that regulatory diligence does not catch, because the permits can all be in order while the route or the site is not socially settled. Ask which communities sit along the interconnection line, not only which sit around the plant.

What this means for a supply decision in late 2019

With the fourth auction canceled, an industrial buyer wanting contracted clean supply has two practical routes: a bilateral PPA with a private generator, taking the execution risk described above, or qualified supply through a Suministrador de Servicios Calificados, which converts execution risk into supplier credit risk and a shorter price horizon. Both are legitimate. They are not the same risk, and they should not be evaluated with the same checklist.

The comparison that decides it is not the headline energy price. It is the delivered cost including transmission and distribution charges, porteo, the CEL position, and a probability-weighted view of the supply start date. A buyer who runs that comparison honestly will sometimes find that a slightly higher price from a supplier already delivering power beats a lower price from a plant that does not exist.

Have a PPA reviewed before it reaches signature

Mexico Energy Partners reviews power purchase agreements and qualified supply offers for delivery-date risk, counterparty standing, CEL treatment and the charges that sit outside the energy price. An initial review needs the draft contract or term sheet, the plant's permit and interconnection status, and 12 months of CFE billing for the facility.

Request a PPA and counterparty review

Related reading: what grid connection and nodal pricing require of an industrial site and how clean energy projects in Mexico are financed. Our project management and energy procurement teams support these reviews.