The encyclopedia · Finance & Accounting · Operational decision · 2016
Mexico's solar auction made clean power a market
Mexico's long-term electricity auction, run by the state utility as sole buyer, drove clean-energy prices 44% below the ceiling.
Secretaría de Energía (SENER) · CFE · CENACE
the move
After Mexico's 2013 energy reform, the electricity market had to be built from scratch, with the utility CFE as the sole buyer. A generator with no buyer has no revenue, so the state had to create demand before supply would come.
Instead of setting prices, SENER ran a long-term auction: it published maximum prices for clean energy, capacity and clean-energy certificates, then took sealed bids. Bids above the ceiling or below 10% of it were dropped, and because the surplus beat the 14.6% trigger, the auction cleared without extra rounds.
The result was a race to the bottom. The second auction (September 2016) awarded 3,776 MW, about 2,871 MW of it new builds backed by roughly $4 billion of investment. The average clean-energy-plus-certificate price came in at $33.47 per MWh, 44.2% below the ceiling, and capacity at $32.36/MW-year, 64.1% below its ceiling. Solar took 54% of energy and wind 43%. The single buyer and long contracts turned an untried market into a competitive one.
why it works
- A single big buyer with a published ceiling gave generators a floor of demand and a target to beat
- Long-term contracts and dollar indexation made future revenue bankable for project finance
- Scoring energy, certificates and capacity together let bidders trade off the products they could deliver best
- The one-round clearance rule avoided the gaming and delay of multi-round descending clocks
what transfers
Where no market exists, a single credible buyer with a published ceiling and long contracts can conjure one, and competition does the price-setting.
what came after
The auction's record prices became a benchmark for Latin America. Later Mexican policy reversals under later governments wavered, but the 2016 design is credited with proving that a state-led, competitive long-term auction can set world-low clean-power prices.
references
- Con precios altamente competitivos se anuncian los resultados preliminares de la 2ª subasta eléctrica de largo plazo
- Renewables come in at $33.47/MWh in Mexico's second auction
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