Strong fundamentals spur Mexico's low solar prices, industry growth
Mexico's sharp solar growth, spurred by the awarding of projects in the three electric power auctions held so far, is anchored by the country's strong fundamentals and ideal conditions for the power source.
"We think the main reason that prices are so low is that Mexico is a great place for solar and wind," said Veronica Irastorza, associate director at NERA Economic Consulting and a former undersecretary of energy in Mexico, in a co-authored blog post for Energy Institute at Haas.
"Solar power is just beginning to emerge, so all the best locations are still available, and labor costs matter both for construction and operation. Low costs, and high quality sun and wind can't explain the large decrease in prices between 2016 and 2017, but they can help explain the overall low level of prices."
"Another factor is that the Mexican contracts are structured so that developers face zero risk from energy prices, macroeconomic fluctuations or currency devaluations," Irastorza writes.
"These are 15- and 20-year guaranteed price contracts in US dollars, so even if Mexican wholesale prices collapse, this won't affect revenues. Moreover, under the contract the buyer receives the power at the generation node, so the developer bears no transmission or congestion risk."
Also read: Mexico's top 5 states for solar growth
Mexico's third electric power auction, held in November, saw record low prices for solar-generated electricity. Among the 10 projects awarded are a 377MW facility to be built in Aguascalientes by French company Neoen International, operational in 2020, the 150MW Villa Ahumada PV plant in Chihuahua, and the 200MW Calpulalpan project in Tlaxcala.
Irastorza also pointed to the presence of big developers in Mexico, such as Enel Green Power, Mitsui & Co. and Canadian Solar, as a promising sign that projects will go ahead.
"These are large capital-intensive projects, paid for over long time periods. So the cost-of-capital is crucial when it comes to determining total project cost. The entry of large, patient companies, during a time of low global interest rates means that these projects can be done at very low cost," she said.
In addition to the development of large-scale projects, the use of solar power by households and businesses in Mexico has increased by 30% this year, according to Israeli solar developer Enlight.
The company's spokesman in Mexico, Juan Pablo Robert, was quoted by state news agency Notimex as saying that the power source now offers a highly efficient alternative for consumers, as well as lowering their carbon footprint.
"It is no longer a luxury, but a necessity for thousands of families, businesses and industries that are seeing the benefit of this opening up of the sector, as there still exist myths surrounding the use of this technology," he was quoted as saying.
He pointed out that use over a 25-year period can lead to a 97% reduction in electricity costs, and financial institutions such as with BX+ bank have signed an agreement with Enlight to provide loans for solar installation.
Also read: Aguascalientes, Sonora to boost solar capacity
Mexico will hold a medium-term power auction in March.
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