Solar is set to surge in Mexico, but not without its risks. From the record-low prices at auction and delays caused by permitting and land disputes to financing and organised crime; industry insiders agree the market has its particular challenges.
By Adam Critchley
For this extensive analysis of the current state of Mexico's solar development market, local expert Adam Critchley collected a wide range of industry perspectives by consulting representatives of the Durango State Government, Atlas Renewable Energy, Gamesa Electric, BayWa r.e., Jinko Solar, NEXTracker, Scorpius Trackers, BSW Solar, Siemens, WRB Energy and Sonnergía.
Estimated reading time: 10 minutes
Solar is on the cusp of major growth in Mexico as a result of the three long-term power auctions held so far. The country is gearing up to hold a fourth auction in November, which will award projects slated to enter operations in January 2021.
The country’s largest photovoltaic (PV) project so far, the 754 MW Villanueva plant, (partly) entered operations in March. Located in Coahuila state, the project was developed by Enel Green Power Mexico, costing around $650m, after the Italian company was awarded the project in the country’s first auction, in March 2016. The company also completed its 238 MW Don José PV plant in Guanajuato state in May, and which it plans to expand by 22 MW in the short term.
And two PV projects awarded in the second auction, held in September 2016, secured financing late last year, namely the 158 MW Orejana in Sonora and the 179 MW Santa María in Chihuahua; another sign that things are moving forward.
The third auction, held in November 2017, awarded 10 PV projects, which will add around 1.6 GW to the country’s solar capacity, up from the approximately 800 MW currently in operation at nine plants in six states.
The largest project awarded in November is a 377 MW facility to be built by French company Neoen International in Aguascalientes state.
Other projects include:
Sonora state (498MW): the 200MW Bacabachi I, the 100MW Tastiota, the 99MW El Mayo and the 99MW Abril 99 projects
Aguascalientes state (395 MW): the 300MW Pachamama and 95MW Horus plant
Tlaxcala state (200MW): the 200MW Calpulalpan project
Chihuahua state (150MW): the 150MW Villa Ahumada PV plant
Zacatecas state: The 80.3MW Calera facility
That auction ushered in a record low price for clean energy, at an average US$20.57 per MWh, which is 30 percent below the prices achieved in the country’s second auction.
Prices: How low is too low?
Mexico’s downward price trend, while good news for consumers and off-takers, rings a warning bell to investors, however, as it pushes down projects’ profit margins and could make them more difficult to finance.
“Banks, development banks and other financial institutions need to see the market mature before they will disburse funds,” according to Mario Pani, regional director for Latin America at BayWa r.e. Solar Projects.
Speaking at a conference in Mexico City earlier this month, he said that the positive side is that the energy reform and the national electricity control centre (Cenace) have provided the framework that brings certainty to investors.
“Banks, development banks and other financial institutions need to see the market mature before they will disburse funds.”
Already established as standard practice in solar project development, financing will require developers to seek long-term power-purchase agreements (PPAs) to act as an anchor and guarantor for lenders.,Only by signing such long-term agreements will they be able to pay back their loans, he added.
This makes it difficult to attract structured finance for projects operating on the wholesale power market, or for those awarded in medium-term power auctions, the first of which was held in Mexico in March, awarding three-year contracts for energy and power purchases.
“Prices are dropping faster than costs, and with auctions fixing prices for years to come, projects can become unviable,” argues Fernando Sánchez García, solar sales director at Gamesa Electric in Madrid.
Mexico is part of a regional trend, with record-low prices having also been recorded at auctions in Argentina, Brazil and Chile., That obliges developers to find ways of trimming costs to ensure projects remain competitive.
“Prices are dropping faster than costs, and with auctions fixing prices for years to come, projects can become unviable.”
Alberto Cuter, general manager for Latin America and Italy at Jinko Solar, said the biggest issue for developers in the region is that large-scale projects are awarded at auction, which determines projects’ megawatt capacity, and because companies compete for contracts, auctions drive down energy prices.
“With the lowest solar prices in the world being hit in Mexico, the challenge for developers here is how to make their projects viable. Auction winners need to achieve their return on investment, and it will be complicated to build projects that are profitable.”
“We are in an industry with a very bright future, but it seems that at the moment solar is being killed by the low prices. Prices at auction in Mexico are too low, and that makes the development of plants too risky,” he said.
This situation is also exacerbated by the depreciation of the peso against the US dollar, with the Mexican currency having slipped 14.9 percent over the past 12 months. Furthermore, Mexico will hold presidential elections on July 1, with the new government taking office on December 1. An unexpected or contested result could put more pressure on the peso, as has occurred following previous elections.
Unlike in Brazil however, all PPAs signed at auction in Mexico are US dollar-denominated.
“As prices drop, it becomes more and more important to seek added value and reduce costs in PV developments,” according to Alberto Valdés, CEO of ISDMex, an engineering and digital services company that serves the electricity sector.
He added, however, that the need to reduce costs will drive innovation and the deployment of new technology, and force companies to design strategies that will lower costs and offer greater business possibilities to their clients.
“Technology should adapt to the client, and not the client to the technology,” Ritesh Pothan, senior VP at Scorpius Trackers, said at the same conference.
“Innovation is also needed to increase energy production, as well as lowering costs, by employing software, for example, such as smart control systems that can augment a PV plant’s output.”
One such solution is the deployment of robots for panel installation, he suggested.
“There is a lot of price pressure, and that has an impact on quality. Quality is being jeopardised, and there is a need to focus on that, and also how much maintenance a PV plant is going to need to avoid higher repair costs in the long term,” he said.
“The optimisation of costs is crucial to the success of a project, as is reducing construction time, but not just by building more cheaply,” according to Alejo López, senior sales director for Mexico and Latin America at NEXTracker.
“Innovation is also needed to increase energy production, as well as lowering costs, by employing software, for example, such as smart control systems that can augment a PV plant’s output,” he said.
He suggested that, with prices so low, companies need to continue to innovate but also to collaborate with other companies, such as in the IT sector.
“If prices are too low at the beginning, the risk increases because investment is kept low, and plants are deployed quickly and cheaply,” according to Joachim Goldbeck, president of the German Solar Association (BSW). He warned that developers need to keep an eye on quality to avoid system failures a few years into a project’s life.
Environmental and social risks
Another challenge developers face, is the need to carry out environmental and social impact studies for PV plants, in addition to carrying out consultations among local residents, factors that can contribute to a project’s delay or even cancellation.
These factors will become more important as solar expands into more Mexican states, which differ greatly in their topography. And while compensation can be paid to landowners, land may deteriorate beneath installed panels, and developers must take that into account, as land can perhaps not be reclaimed and returned to its original use once a plant is dismantled.
“It is important to avoid creating a dump, and we need to ensure the solar sector remains pro-environment,” Pothan said.
While PV plants in Mexico have so far been developed in the more arid north, plans to build in the lush and dense vegetation of the country’s southeast will imply deforestation, and developers will have to be prepared to compensate for that by reforesting other areas.
“Capacity is finite and locations must be chosen carefully, based on where there is room for capacity.”
Furthermore, the south of the country is much more complex than the north when it comes to procuring land access, according to Camilo Serrano, general manager for Mexico at Atlas Renewable Energy.
“Risks depend on the region, but two factors are consistent and which worry us the most. First there’s the social theme, which is increasingly important, sensitive and crucial, as we have seen projects that have not been able to develop due to local opposition. Some regions are more sensitive than others. The other challenge is interconnection,” he said.
“Capacity is finite and locations must be chosen carefully, based on where there is room for capacity.”
And in addition to environmental impact studies, in some areas of Mexico local authorities will also require that a geophysical scan be carried out to ensure there are no archaeological vestiges on the planned site.
Alfonso Cruz Flores, director of renewable projects for Mexico and Central America at Siemens, said the evaluation of the costs of permits must be factored in to allow developers to calculate how much electricity generation will really cost over and above their investment in components and land acquisition.
Developers may also have to seek permits at national, local and municipal level.
“A developer can have the perfect plant, but without coordination with Cenace, the energy ministry (Sener) and the relevant authorities and communities, the plant cannot enter operations,” he said.
“There has not been adequate planning in Mexico, and the complexity of the country’s grid has not been taken into account, and that has caused a delay and an increase in costs of projects.”
“There needs to be better evaluation for the next auction - not just considering the generation of electricity, but also its delivery - and there needs to be communication with the environment ministry (Semarnat) and the history and archaeology institute (INAH), as costs can be pushed up by the need for all of these permits,” he said.
He also pointed out that deserts, where the majority of PV projects are built, are not bereft of vegetation and wildlife, and it is not just a question of installing panels on top.
“Auction designs do not take into account the environmental impact of projects, and more planning is needed. Governments could facilitate this a little more,” NEXTracker’s López said.
“Around 30% of projects won at auction are not getting built, and developers need to follow the rules.”
José Luis Aguirre, Mexico business development director at Atlas Renewable Energy, said companies entering Mexico’s solar sector need to seek advice.
“The selection of constructors with experience is key, both regarding technical issues and terrain,” he said.
“Mexico is learning a lot as it moves forward, but companies need to learn about transmission grid risks, archaeological sites, and the need to make an investment to ‘take the temperature’ of the place, with the need to evaluate environmental and social challenges, such as the risk of social opposition to a project.”
He said all of these risks can be mitigated with prior research and consultancy, which are particularly important in a country prone to hurricanes, earthquakes and flooding.
“Around 30% of projects won at auction are not getting built, and developers need to follow the rules,” according to Jason Baillet, VP for renewables at WRB Energy.
Climate and crime
“Identifying climate risks, evaluating possible hurricane damage by using wind mapping, for example, and taking into account drainage to avoid flooding, are normal requirements for developing any project, but some companies don’t follow such procedures,” he said.
Aura Solar I, Mexico’s first utility-scale PV plant, located in Baja California Sur, was knocked out of action for more than a year by hurricane Odile in 2014.
“One must think about the role of PV projects. We have to use the energy reform so that the great beneficiary is the population, not the grid or the sector,” José Medina, CEO of Sonnergía, said, and who was echoed by Efraím Castellanos, director of energy with the Durango state government.
“In Durango, we have had situations where communal landowners and developers have come into conflict, and projects must have a positive social impact.”
“In Durango, we have had situations where communal landowners and developers have come into conflict, and projects must have a positive social impact,” Castellanos said, highlighting the need to raise awareness among communities of the project’s benefits.
And that engagement with communities is precisely the way to mitigate the risk posed by organised crime, according to Sonnergía’s Medina, given that some PV plants are planned for areas where there could be a danger of threats of extortion by criminal gangs.
“You need to keep the people happy,” he said. “Those people live there and you have to make sure that you’re treating their family well, and then they will respect you.”