Latin America is a diverse area, where each market is unique and has developed its own framework.
Chile has pioneered technology-neutral tenders in which renewables have competed against — and outbid — operating fossil-fuel plants.
In Brazil, development bank BNDES has financed auctions characterised by high local content.
Argentina has benefited from renewable-energy tenders under the Renovar programme and, more recently, the decision to allow power purchase agreements (PPAs) with private firms.
Mexico has developed its unique auction system based on system needs.
What these markets have in common is that they developed with subsidy-free schemes — a novel approach at the time.
This is a clear signal that wind and solar have finally reached the mature-technology status.
Auctions have often been the chosen path to secure PPAs, whether between private companies or directly with the grid operator or distribution system operators.
Competitive tenders have led to a global trend of electricity price reductions, and this has heavily affected the Latin American markets because, often, only aggressive bidders have been successful.
This environment has fostered competition among different players and generation sources.
Solar has become wind’s main competitor. It is more modular in terms of installation and investment, so has been an important driver in reducing the levelised cost of energy (LCOE).
This has pushed wind technologies to do the same. Auction prices keep breaking records: in late 2017, Mexico shocked the world when it allocated wind bids below $18/MWh, managing to outbid solar PV.
How is this possible? Liberalised markets are growing in Latin America, and wind has been one of the main players.
Price has become the new driver.
In the past five years, we have seen reductions of up to 40% in the turbine prices offered in Chile.
Developers used to ask wind-turbine OEMs for a quotation. These days, the most successful developers often approach manufacturers with the price they need to make their projects work.
Manufacturers have opened offices across the continent, led by Vestas, Siemens Gamesa, Nordex-Acciona and GE.
Senvion, Enercon, Goldwind and Envision have also established a presence in Argentina, Panama, Chile or Mexico.
The regional outlook is fast paced and vibrant, with lots of developments, mergers and acquisitions, auctions and new financing schemes.
Nevertheless, players are not necessarily finding it easy to ensure bankability in this competitive environment.
PPAs are seen to play a major role, as lenders are not willing to take merchant risk. There were some early experiences, most notably in Chile, where banks financed projects feeding directly to the spot market, without a long-term PPA.
Transmission infrastructure still needs investment; in some areas, curtailment led to the spot prices falling very low, even to zero, for several years and at peak generation times.
Consequently, some projects had 10-40% of their energy output curtailed. While generators in Uruguay are compensated for any curtailment, this is not the case in Chile, for example.
These market changes all highlight that the quality of the PPAs not only depends on the project, but that the offtaker position also needs to be thoroughly evaluated.
Social and environmental risk is another critical factor, and has at times been neglected. We have seen renewables projects in Mexico and the Dominican Republic facing such strong social opposition that they had to be relocated.
In Chile, some wind farms are being investigated by the authorities for possible breaches of noise regulations.
These issues must be considered and addressed from the earliest stage of development, so any perceived impacts can be mitigated.
The Latin American market is evolving rapidly, and LCOE is now an important driver as renewable-energy players try to keep up with the competition.
Time to market from the development stage must be cut while keeping development costs at bay.
Mistakes at any stage have a huge impact on project finance, which often leave little room for manoeuvre at current PPA prices.
Part of the developer, lender and owner’s vital role is making the right decisions throughout, from the resource-measurement stage through to asset management.
It remains to be seen how many of the successful bidders in recent tenders will be able to finance and build the projects and to see them generating.
Patricia Darez is country manager, southern cone and Andean countries at DNV GL - Energy