Renewable Energy Project Execution

August 21, 2019

Mexico’s renewable energy auctions benefited from the experiences of other countries, so results have generally been better

Energy project execution received significant unfavorable coverage in Mexico this year, which makes it imperative to look at the issues carefully. There is a real danger of underbidding and delayed projects in renewable energy auctions.

We believe Mexico’s overall record is good by international standards. It is essential to maintain a balanced approach, especially when the balance of power is changing in Mexico.

Possible Underbidding

There is reason to believe that underbidding may be a problem in Mexican renewable energy auctions. The International Renewable Energy Agency (IRENA) reported that the global average price for solar energy auctions was 66 USD/MWh in 2017. At the same time, the auction price for wind averaged 46 USD/MWh. Mexico’s third renewable auction produced an average electricity price of just 20.57 USD/MWh, far below global levels. This result was hailed as a success at the time, but low initial bids can lead to project execution issues.

Potential Delays

Mexico’s renewable energy auctions benefited from the experiences of other countries, so results have generally been better. According to IRENA, 53% of Mexican solar energy auction projects were on time, while only 37% experienced delays. Brazil had just 26% timely completion compared to 63% delays.

The situation in India was even worse, with 14% completion and 54% delays. Note that these numbers do not add up to 100% because of abandoned projects and cases where project status could not be determined.

Although not directly related to renewable energy auctions, a high-profile dispute involving gas pipelines brought attention to project completion issues in Mexico. The Federal Electricity Commission (CFE) ended up paying private companies for pipes that they did not complete because local political opposition delayed their construction. This controversy highlights the need to obtain local support for energy projects.

Falling Costs and Long-Term Auctions

There are issues involving Mexico’s long-term auction format, the falling costs of renewable energy, and project execution. Mexico has particularly long renewable energy contracts, which can last 15 to 20 years. Crucially, more than 90% of Mexico’s renewable auctions were for solar or wind power. IRENA statistics show that solar energy auction prices fell over 74% between 2010 and 2018, while wind prices fell by more than 30%. Given the size of these declines, it should not be so surprising that Mexico’s long-term auctions produced low bids.

However, projecting long-term prices in an era of rapid technological progress is particularly challenging. At Mexico Energy Partners, we help clients assess future auction outcomes and generation capacity coming on-line. We also provide project management and vendor selection for developers.

Project-Based Centralized Solutions

Political changes are also coming to Mexico, and more project-based centralized solutions may be the way forward. One proposed solution to project execution issues in renewable energy auctions is to give governments more control of certain aspects of projects. For example, the government might specify where to build a power generation facility.

This is not necessarily heavy-handed, and it could help companies to complete projects. When the government determines the location in advance, energy firms do not have to deal with the type of local opposition that delayed gas pipelines. Better specified projects also limit government payments for incomplete work and associated political controversies.

Ensuring Timely Completion

In Mexico’s current political climate, it is more important than ever to take every step possible to complete renewable energy projects on time. Stronger compliance rules generally help firms to know what governments expect and deliver it on time. Germany’s strict compliance rules show that approach improves project execution but also raises prices. India’s attempts to negotiate lower prices with winners after auctions may be responsible for low completion rates.

Finally, there is the risk that completed projects will not produce as much energy as anticipated. Successful renewable energy project execution depends on maintaining a delicate balance between competing objectives. Balance is difficult to obtain in actual practice, but it can be achieved with the practical experience of Mexico Energy Partners.