Latin America is becoming an influential force in solar as developers throughout the region push prices downward.
Recent electric power auctions in Argentina, Chile and Mexico resulted in record-low bids for solar, ranging from $29 per megawatt-hour to $41 per megawatt-hour.
So what do the success of these auctions say about the health of each country’s solar market?
Mexico
Mexico’s second auction in September assigned power generation contracts and clean energy certificates to 23 firms and consortiums from 11 countries. The projects are expected to add 2.87 gigawatts to the country's installed capacity and rake in an estimated $4 billion in investment, according to the country’s energy control center, Cenace, the regulatory body created out of the 2014 energy reform.
The average price per megawatt achieved was $33.40, 30 percent below the price obtained in the March 30 auction.
The energy ministry, Sener, says that both auctions combined will result in 34 new power generation companies operating in the country, adding 5 gigawatts of capacity, with a $6.6 billion investment.
GTM Research predicted after the first auction that solar in Mexico would grow by 521 percent in 2016 and 134 percent in 2017. Those predictions now appear conservative given the more aggressive prices achieved in the second auction.
“We are seeing a disruption in the industry, and a combination of hunger and appetite,” Héctor Olea, president of Asolmex, Mexico’s solar power association, told GTM.
“It’s all to do with timing. Five or so years ago, when wind dominated, it perhaps wasn’t the moment for PV, as costs were still high, but in the last five years, the costs of panels have dropped by 85 percent, and now we are taking advantage of the cost reduction,” said Olea.
“The stars are aligning, in the sense that the reform has worked well and with the precise timing of the improvement of PV technologies, and we can expect to see solar at the forefront of growth in the renewables sector in Mexico.”
Olea said that the energy reform created a more favorable climate for doing business in Mexico, improving project bankability and boosting long-term confidence in the country.
However, he also expressed his hope that record-low prices would not jeopardize the profitability of projects and hurt developers.
“I don’t dare to forecast anything,” he said regarding a possible further price drop.
But he did predict coming growth in large-scale storage, which could further help Mexico harness its vast soar resource. “Storage is the natural complement, and [it] will be commercially viable in five years’ time,” said Olea.
The participation of large global players in the auction also allays fears of project delays or cancellations. Among the companies that were awarded contracts to supply electricity to state utility CFE are Enel Green Power; AT Solar, a joint venture between Spain’s Acciona and local firm Tuto Energy; as well as Engie, SunPower and Tractebel.
The projects from the auction also have a clearly defined timescale, for 2018 and 2019 completion.
“There are always casualties of war, but the majority will be developed,” Olea said.
And according to Kevin Levey, a partner at Squire Patton Boggs in Washington, D.C., Mexico is the Latin American country with the least risk for delays or cancellations.
He does harbor some concerns, however.
“The pricing is incredibly low, and the question is whether you are going to be able to procure financing for projects, even though Mexico is a fairly mature project financing market,” he said.
He also warned that developers could face problems if they haven’t obtained their environmental licenses or land leases.
Argentina
In its first auction earlier this month as part of the RenovAr program launched by the government in May, Argentina awarded contracts for 17 renewable energy projects totaling 1.1 gigawatts.
The projects comprise 12 wind farms totaling 708 megawatts, four solar projects with a total of 400 megawatts, and a 1-megawatt biogas project.
The prices awarded for wind averaged $59.40 per megawatt-hour, with an average of $59.70 for solar and $118 for biogas.
The majority of solar projects were awarded to a consortium made up of Jujuy province's state-run energy and mining company JEMSE, Argentina's Grupo Alberdi and China's Shanghai Electric Power Corporation.
Jujuy authorities said in September they expected to sign a financing deal with China-based lenders for the projects totaling 300 megawatts.
Spanish firms FieldFare and Isolux Corsan will develop a 100-megawatt project in Salta province.
“With government support and a successful auction, Argentina is definitely emerging as a market to watch in Latin America,” said Gwendalyn Bender, product manager for solar assessment at Vaisala, a Finnish measurement and forecasting company that assisted with 30 percent of the due diligence reports submitted as part of the auction.
But while the auction ushers in a new era for the renewables sector in the country, Argentina is still grappling with economic troubles that make financing more expensive, according to Squire Patton Boggs' Kevin Levey.
“People need to be patient with Argentina. Developers can bring in export development financing, but at the end of the day, solar will remain more expensive than in Chile and Mexico,” he said. “President Macri has done a good job in renegotiating sovereign debt after the default, and there are signs things are turning around.”
Argentina has also negotiated a fund with the World Bank to provide securities on power-purchase agreements and assist with project financing.
Chile
Chile’s most recent power auction in August brought in a bid from Solarpack at $29.10 per megawatt-hour for its Granja Solar project. At the time, this was the lowest bid ever recorded for a solar project. Other winners included GPC, a subsidiary of Spanish firm Gas Natural Fenosa, which secured bids for two solar plants.
Chile’s total installed solar capacity is 1.3 gigawatts, with 1.6 gigawatts under construction.
Yet despite its massive solar potential and historical position as Latin America’s market leader, Chile faces problems with transmission. It must link its solar generation hub in the arid north to the large population centers farther south, given the country’s tremendous length.
Chile passed a transmission law in July. Carlos Finat, executive director of the country’s renewable energy association Acera, described it as “what the country had been waiting for.”
The law will allow power to be transmitted between Arica in the north and Chiloé Island in the south, thanks to the SING-SIC interconnection to be completed next year.
The law also created a new governing body to manage the transmission network.
Also in July, Chile's central grid operator CDEC-SIC launched a tender for three transmission projects that will require investment totaling $192 million.
But until that transmission infrastructure is in place, linking up the country’s power generation to its population centers will remain a cause for concern. Those record-low prices are also a concern, according to Levey.
“Chile is trying to develop projects in areas of high solar irradiation, but they are susceptible to the prices in those locations. Because there was so much development so quickly, the spot pricing is very low, and there were assumptions made as to the high number of projects coming on-line,” he said.
The fall in spot prices has pushed down rates of return, thus hurting project financing.
In an attempt to give solar a further boost, the Chilean government launched the Transforma Solar project in September, which aims to create a PV research and development center and offer financing support. Transforma Solar will involve state development agency Corfo, the country’s science and technology council Conicyt, and mining company Enami.
German cooperation agency GIZ, as well as Acera, solar power association Acesol and the country’s associations of electricity distributors and generators, Empresas Eléctricas and Generadoras de Chile, respectively, are also engaged in the program.
Chile is taking steps to keep supporting solar’s growth. But transmission constraints will continue to limit the industry.
“It will all come down to whether the government has the funding to build that infrastructure,” Levey said. “On paper, it looks fantastic, but we need to see if they can execute, and improving that infrastructure is going to be key.”