Solar PPAs in Latin America: How Low Can They Go?

If the Peru and Mexico auctions are any indication, Latin American markets are establishing a new, and very low, normal for solar prices. Peru recently awarded a solar PPA at $47.98/MWh to Enel Green Power (EGP), making headlines as the lowest PPA on record, but just weeks later EGP beat its own a record in Mexico’s auction with a PPA price of $35.44/MWh for solar PV, and an average price for all awardees of $50.77/MWh for wind and solar.

What’s pushing these prices down, and how long will it last? Developers are likely making a few key assumptions. First, commodity prices are falling – 80% since 2008 according to data from IRENA – and are expected to continue dropping so modules will be cheaper. Second, EPC costs are likely to fall as renewable energy penetration increases throughout the region. Lastly, the quality of resources is very good in these markets, increasing the effectiveness of solar technologies so developers can get more bang for their buck.

While solar costs are indeed falling, it’s the jaw-droppingly low prices bid by Enel Green Power (EGP) that are making headlines. They are building massive installations, much larger than in the past, and economies of scale are helping to push down the prices. Access to funds at highly competitive rates from organizations such as the European Investment Bank has also enabled EGP to bid aggressively. “Our prices were the most competitive but in line with those submitted by other international operators taking part in the auction”, said Carlo Zorzoli, Enel Green Power’s Head of Latin America.EGP has won 1172 megawatts of solar PV in Latin America in 2016 alone. That in itself is noteworthy; perhaps more noteworthy is that they believe they can build profitable projects across a portfolio of tightly priced PPAs.

It’s hard and perhaps not even desirable for other developers to compete with Enel Green Power’s low bids, but there are other players in these markets bidding at or very near to Enel’s winning prices. Companies eager to make a footprint in the market are coming in at or below cost, according to industry analysts, potentially with IRR’s in the single digits – a reality they are willing to face to gain a strong foothold in these young markets with enormous potential.

A favorable regulatory environment will continue to be vital in attracting serious developers and maintaining low prices. Peru’s regulator, Osinergmin, required very high bid bonds for their RFP – $50,000/MW – and tied the PPA price to the U.S. dollar, which could prevent results similar to the frenzied bids and current situation in Brazil. Mexico also allowed developers to bid in pesos indexed to U.S. dollar, which offered more economic certainty. Peru’s next RFP is couple of years off, Mexico has one coming up in August, and many expect to see even lower prices. However when it comes to other Latin American markets, while prices may be relatively low, they aren’t expected to break records, particularly in Argentina where many unknown factors loom. Broadly, however, the theme is clear: Latin America is opening up, competition is fierce and – at least as far as pricing is concerned – it’s a race to the bottom.