Latin America’s particular conditions set the pace for the surge of the merchant model earlier this decade, making the region a pioneer and a case study for the global PV market. However, current constraints are leading investors to favor long-term PPAs as a more bankable model towards financing solar projects, proven by the recent successes of electric power auctions. Merchant solar, however, could still make its comeback in the region if grid restrictions are soon overcome and the trends of increasing oil and gas prices and dropping PV component costs continue.
By Adam Critchley
Utility-scale solar projects anchored by long-term power-purchase agreements (PPAs) remain the dominant model in Latin America, and things look set to stay that way. With auctions now the acknowledged success story, in Argentina, Brazil, Chile, Mexico and Peru, this model seems to be the stable foundation on which to build, and for which banks are more likely to offer financing.
Chile has some of the largest merchant solar projects in Latin America, including the 146-megawatt Bolero PV plant, owned by owned by EDF Energies Nouvelles and Marubeni, and the 70-megawatt Salvador PV plant, developed by Etrion and operational since 2015. But there have been setbacks. The planned 80-megawatt Inti PV plant, in the country’s Antofagasta region, is currently stalled after investor Greenwood Energy withdrew from the project in 2016.
That plant, to be developed in conjunction with Pacific Solar, had procured all the necessary environmental permits, and would have supplied electricity to the country’s northern SING grid.
“Nowadays, it is impossible to finance a merchant project on the spot market, as there is no certainty of price going forward, particularly for larger projects.”
According to Javier Mozó, a Santiago. Chile—based managing partner at Caaapital, a renewable energy investment platform, merchant solar in Chile is currently not a viable option, given that selling electricity on the spot market means solar projects would not be bankable.
“Nowadays, it is impossible to finance a merchant project on the spot market, as there is no certainty of price going forward, particularly for larger projects,” he tells Solarplaza.
And Ana Verena Lima, a São Paulo-based South America analyst at Bloomberg New Energy Finance, agrees.
“Projects looking to sell into the spot market offer no certainty to investors,” she tells Solarplaza.
She explains that, in Chile, spot prices are very low, and low demand at certain nodes means that the spot prices drop to zero, and many projects in the same region create competition. And in Mexico the wholesale electricity market is still very new, having only launched at the beginning of last year, and with still very few players.
“It’s not so much pessimism regarding the viability of solar projects in Chile, but rather banks are being conservative, and they are more likely to offer loans on long-term, dollar-denominated PPAs at a fixed price.”
“It’s not so much pessimism regarding the viability of solar projects in Chile, but rather banks are being conservative, and they are more likely to offer loans on long-term, dollar-denominated PPAs at a fixed price,” she says.
She is also aware that, while many projects have been awarded at auction, it remains to be seen if companies will procure the planned financing, as the drop in prices for solar has caused banks to be more cautious.
In Mexico, meanwhile, merchant solar projects have tended to be much smaller, with the 39-megawatt Aura Solar solar facility in Baja California Sur, which only came back on line in late 2016 after having been knocked out of action by hurricane Odile in 2014.
That project supplies electricity to state utility CFE, but the region is something of an anomaly in Mexico, with the peninsula’s power source separate from the national, ‘mainland’ grid.
In April, Mexican firm Fortius opened the 8-megawatt Jalisco I plant, the first merchant solar plant to open since the 2014 energy reform that paved the way for the auctions, and the company is planning a second project.
In the event of an increase in oil and gas prices, solar is likely to become a more attractive investor target, particularly as component costs drop, and peak consumption hours coincide with peak production during daylight hours, making the energy source more suited to the spot market than others.
Recent PPAs struck with the private sector in Mexico include HSBC, supermarket chain Soriana and the country’s largest brewer, Grupo Modelo, in what would appear to be a trend toward shifting electricity supply to the private sector
However, with Mexico’s two successful power auctions having taken place, both of which were dominated by solar, and a third slated for November 22, coupled with the country’s aim to ramp up renewables use as part of its commitments pledged at the COP21 climate deal in Paris, it seems more likely that investors will seek the long-term PPAs with the CFE rather than attempting a merchant model, or opt to seek private off-takers, of which there is no shortage, as more and more Mexican companies seek to power their facilities with renewable energy.
Mexico’s energy ministry also announced this week that the country will hold its first medium-term auction in February. The two auctions held so far, and the third, which will be held on November 22, have been for long-term contracts, of 15 or 20 years, whereas the fourth auction will be for a maximum period of three years, and which is expected to make projects more attractive from a financing point of view, and will be open to projects of all types of power source, not just renewables.
Recent PPAs struck with the private sector in Mexico include HSBC, supermarket chain Soriana and the country’s largest brewer, Grupo Modelo, in what would appear to be a trend toward shifting electricity supply to the private sector, as companies are tempted by the low prices obtained at auction last year, when solar dropped to a regional record of around $33 per megawatt hour.
And enthusiasm for large-scale projects and distributed generation is healthy.
TURNING THE FOCUS TO DG
Caaapital is now focused on DG in Mexico and remains ‘on stand-by’ in Chile, Mozó says.
“We had been working in Chile and Mexico over the last two years, in mediation for financing through equity. We began focusing on utility scale projects, but we entered the market just as prices started dropping, and we therefore changed the business model to create our own investment vehicle and began working with distributed generation (DG) in both countries,” he says.
Evidence of the interest and confidence in the potential of Mexico’s DG market is proven by Caaapital’s setting up of a joint venture with Shanghai Ventures, called DG Energy Capital.
Launched at the beginning of the this year, DG Energy Capital is the first DG-focused private equity fund in Mexico and, in June, closed financing for Mexican DG supplier Galt Energy, which aims to grow its solar portfolio in the residential, commercial and industrial sectors.
“The main difference between Mexico and Chile is that in the former there are more incentives on behalf of the government, and there is a hunger to develop. In contrast, in Chile legislative changes to promote renewables have not had the anticipated effect.”
While Chile was a solar pioneer in Latin America, Mexico is now expected to overtake it in terms of installed capacity, as the northerly country has higher irradiation in more regions.
“The main difference between Mexico and Chile is that in the former there are more incentives on behalf of the government, and there is a hunger to develop,” Mozó explains.
“In contrast, in Chile legislative changes to promote renewables have not had the anticipated effect,” he adds.
He says that, for the time being, Mexico is also more attractive because of the quality and extension of its solar resource, whereas Chile’s solar region is more concentrated in Atacama.
“And DG is booming in Mexico, while it is stagnated in Chile, net billing has not had the penetration that was expected. We are betting on Mexico,” he says.
Mexico also continues to burden consumers with high electricity prices, for the residential, commercial and industrial sectors, and which creates an incentive to switch to solar.
And as with the first two auctions, held in March and September of 2016, the country’s third auction is also expected to have heavy renewable content, and which is likely to be once again dominated by solar.
Learn more about the future of solar business models and successful (re)financing of solar plants at Solar Asset Management LATAM, the Latin American region's largest and foremost conference on the operational phase of solar assets.
Adam Critchley is the Mexico energy correspondent for Business News Americas and frequent collaborator at Solarplaza