IBDRY Iberdrola SA (PK)

By Anthony Harrup 

MEXICO CITY -- Mexico expects investment of around $2.4 billion in the next three years in new electricity generation projects as a result of its third long-term power auction, which saw prices for clean energy continue to fall.

Sixteen projects won with bids to supply renewable energy under long-term contracts to state utility Comisión Federal de Electricidad, or CFE, and two private buyers, the Energy Ministry said Thursday. Contracts are expected to be awarded next week after the preliminary results are validated.

The winners will provide around 5.5 million megawatt hours per year of clean energy, 55% of which is solar power and 45% wind-generated electricity, and 593 megawatts in capacity, most of it conventional energy from a gas-fueled plant. A megawatt is enough power to supply about 1,000 homes.

"This shows the continued trend of the diversification of power sources, " said Dan Bartfeld, a partner at Milbank, Tweed, Hadley & McCloy, which represented clients in this and previous auctions. "The mix is moving much more significantly towards renewable power."

The auction was Mexico's third since the creation of the wholesale power market under a 2013 energy sector overhaul. The average price per megawatt hour for renewable energy plus a corresponding clean energy certificate was $20.57, down sharply from $33.47 in September 2016 and $41.80 in the first auction held in March of last year.

Prices were already surprisingly low at the previous auction, and with the latest drop, "you've got to wonder a bit about where people are getting their returns," Mr. Bartfeld said.

"I think it's a combination really of the [solar] panel prices coming down, which is significant -- technology resulting in cheaper panels -- coupled with companies looking for growing markets where they can invest, and Mexico is certainly top of the list," he added.

The $2.4 billion in expected investment is in addition to $6.6 billion in projects gained in earlier auctions, as Mexico aims to generate 35% of its electricity from clean sources by 2024.

Mexico has about 60 gigawatts of installed generating capacity and plans to add another 55 gigawatts in the next 15 years. Much of the new capacity will displace plants that are old and inefficient and won't be able to survive in the new competitive environment, said César Hernández, Mexico's under secretary for electricity, in a recent interview.

Mexico overhauled its electricity laws in 2013 along with changes that allowed for foreign and private investment in oil and gas exploration and production for the first time in nearly eight decades, with the goal of lowering costs to consumers.

"The Mexican system was not in bad shape even before the reform," Mr. Hernández said. "Basically, its big problem was high costs. Part of it was embedded in the fact that it was a public monopoly that had to buy expensive fuel from another public monopoly, which was Pemex."

On average, electricity rates were about 25% higher than in the U.S. when the changes were being planned. They fell to U.S. levels in early 2016 when oil and gas prices hit bottom, but have since risen somewhat, he said.

"But if you introduce investment, if you introduce new-generation facilities, new transmission lines, and if you introduce competition, competition should drive prices down," he said.

For the first time, two companies other than state-run CFE participated as buyers in the auction. They were a unit of Spain's Iberdrola, which is the biggest private power generator in Mexico, and a unit of cement giant Cemex SAB.

Write to Anthony Harrup at anthony.harrup@wsj.com

(END) Dow Jones Newswires

November 16, 2017 17:31 ET (22:31 GMT)

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