Mexico Gears Up for Second Power Auction

Mexico gears up for second power auction

June 06, 2016 | By Raquel Bierzwinsky in New York|Mexico City, Javier Félix Muñoz and Carlos Campuzano in Mexico City

Mexico issued bid guidelines in early May for its next auction of long-term power contracts expected to be awarded in September.

The first auction at the end of March awarded contracts to buy electricity from 2,180 megawatts of renewable energy projects at a weighted average price of approximately $47.70 a megawatt hour.

Prices in the second auction are expected to be roughly equivalent.

The second-round contracts will be 15-year contracts for the sale of capacity and renewable energy and 20-year contracts for clean energy certificates with the Mexican national utility, CFE, as offtaker. 

The initial version of the bid guidelines is available on the websites of the Mexican independent system operator, CENACE, and the Ministry of Energy.


According to preliminary information disclosed by the Ministry of Energy and subject to official confirmation by CFE during the auction process, CFE is expected to acquire through the auction seven terawatt hours of electricity and 1,000 to 2,000 megawatts of capacity. All technologies may participate in the capacity auction, but only “clean energy” technologies – that is, mainly renewables – may participate in the auction for electricity and clean energy certificates.

Along with the bid guidelines, CENACE published the expected prices of energy at the different nodes. Expected price differences will be used to compare offers in different price zones or nodes. CENACE will adjust the price of the offers by adding or subtracting the expected price difference. This adjustment will not alter the offered price, but will be a determining factor in selecting winning offers. 

The nodal price differences are so important that CENACE, in announcing the winners of the first auction, had to retract preliminary results that it had announced without having applied the nodal price algorithm to the bid evaluation process, only to come out 12 hours later with a revised list of winning bids that was significantly different than the first one. An initial review of the nodal pricing information for the second auction shows that the most favorable price zones are in the state of Baja California Sur (mainly in Villa Constitución, La Paz and Los Cabos), with expected price differences of minus $26.23 a MWh from the pricing proposals presented by bidders. 

Companies interested in participating in the auction must pay roughly $1,700 for the bid guidelines.

Bids must include technical and pricing proposals. Technical proposals are analyzed during the pre-qualification stage. If bids are approved at this stage, then the bidder may submit its pricing proposal in a subsequent stage. Technical proposals must address legal, financial and technical requirements such as interconnection availability at the bidding power plant’s site and node pricing related issues, among others. Pricing proposals will be presented in two stages. First, a bidder must indicate the interconnection status of the bidding power plant or unit and whether the offer will be indexed in pesos or in dollars. Two business days following the delivery of this information, the bidder may submit the proposed pricing for its bid.

Technical proposals are due with the pre-qualification applications between August 1 and 5.

Pricing proposals are due in two stages on September 19 and 21.

Multiple offers may be submitted by a single bidder. These offers may be conditioned to the acceptance of other offers, be mutually exclusive or a combination of both.

Bidders interested in participating in the auction must pay a flat evaluation fee of approximately $17,000, plus a fee of approximately $1,700 for each individual offer.

As with the first auction, bidders will be required to provide a commitment guarantee in the form of a standby letter of credit issued by a Mexican financial institution. The minimum amount of the guarantee must be calculated based on the following components: a flat fee of approximately $88,000, independent of the number of offers the bidder intends to present, plus approximately $19,000 for each megawatt of capacity a bidder intends to offer, plus approximately $9 for each MWh of clean energy a bidder intends to offer, plus approximately $5 for each clean energy certificate that a bidder intends to offer.

These amounts add up. For a 100-megawatt plant offering capacity only, the letter of credit would come to $1,988,000 and for the same plant offering 800,000 MWh of energy and associated certificates on an annual basis, the letter of credit would come to $11,288,000.

Upon execution of the PPA, the winning bidders must replace the commitment guarantee with a performance guarantee that must remain in place during the full term of the PPA. The amount of the performance guarantee is less than the amount of the commitment guarantee, and it decreases over time upon completion of certain milestones. CFE is also required to provide a payment guarantee in the form of a standby letter of credit issued by a Mexican financial institution that must remain in place for the full term of the PPA. If drawn, these guarantees must be replenished.

Projects awarded contracts in the next round must be in commercial operation by January 1, 2019.

What are some of the key terms of the PPA?

Payments under the PPA will be made on a monthly basis, with an annual settlement, and will be adjusted for inflation and exchange rate should the PPA be indexed in US dollars. The commercial operation date may be delayed for reasons outside the control of the generator for up to three years, including a delay by the government, the provider of wheeling or distribution services or CENACE, or unforeseen adjustments in the interconnection process, among other reasons. The PPA includes change-of-control restrictions that will remain in place for the first 12 months after the plant commences commercial operation, with limited exceptions. If the financial, technical or operational qualifications of the winning bidder were satisfied through its shareholders, either directly or through affiliates, then the PPA will require that any such shareholders maintain a minimum ownership threshold in the winning bidder until certain milestones or dates are reached.

If the CFE defaults, then the generator may terminate the PPA and set up a payment trust into which the offtaker will be required to deposit over time the amounts it would have had to pay had the PPA remained in place. If the CFE terminates the PPA due to an event of default of the generator, then CFE may still require the generator to continue, to the extent possible, selling to it the products sold under the PPA for the remainder of the term of the PPA and for the same price and terms. 

Key Dates

The deadline for acquiring the bid guidelines and paying for pre-qualification is July 22, 2016.

At least one consultation session will be conducted before the auction. Initial comments about the proposed bid terms were submitted and responses were issued by CENACE on June 3. Participants may submit follow-up questions on June 6. CENACE will then publish its final responses to the follow-up questions no later than June 10. Once this consultation session has concluded, CENACE is expected to publish the final version of the bid guidelines by June 20.

By June 27, CFE must submit its purchase offers to CENACE. CENACE will publish the amounts, prices and parameters of the offers approved by the Energy Regulatory Commission by July 4.

Participants must submit their pre-qualification applications between August 1 and August 5 and their commitment guarantees by September 7. Bidders may file no later than September 7 any modifications to their technical proposals, but only if these are the result of changes in the zones where their facilities are interconnected or to the capacity of the plant due to changes to interconnection availability. CENACE will then issue pre-qualification certificates to eligible bidders by September 13 and publish a list including all pre-qualified bidders on September 15. Once eligible bidders receive their pre-qualification certificates, they will be able to file their pricing proposals in two stages on September 19 and 21. 

CENACE will publish the auction results and the winning bidders by September 30, 2016.

Contracts awarded in the auction must be signed no later than January 31, 2017.