Latin America has seen a recent boom in energy auctions to encourage development and construction of energy projects. An "energy auction" is a mechanism to award energy projects based on competitive bids submitted in response to a prespecified, publicly available set of criterion.1 The bidder submitting a conforming bid with the lowest price is awarded a contract (typically, a power purchase agreement (PPA)) for the project.2 Countries in Latin America have pioneered the energy auction approach and have utilized it to award long-term contracts for new energy generation capacity (i.e., construction of new energy projects).3
As is true of most developing countries, the Latin American energy market's paramount focus is on expansion of generation to meet demand requirements.4 However, developers have been historically cautious of investing in new generation capacity because demand for energy has grown at erratic rates, thus, creating a volatile pricing market.5 Energy auctions have flourished in Latin America because the long-term contracts offered in such auctions provide an opportunity for developers to control pricing risks by fixing the volume and price for the generated capacity.6 Moreover, the competitive nature of energy auctions has resulted in decreased energy costs, further driving development of new generation capacity.7
In fact, Brazil, Chile and Mexico were in the top 10 globally of countries investing in renewable energy in 2015, with Chile and Mexico experiencing triple digit growth over 2014.8
In Chile, which has the third highest energy prices in South America, an auction in October of 2015 for 500 megawatts of new generation capacity resulted in solar photovoltaic bids being submitted at a price below wind farm bids, which have traditionally been the lower-cost option. 9 In August of 2016, Chile announced the results of an energy auction to supply 12,430 gigawatt hours per year.10 The average cost of the contracts in such auction was $47.59 per megawatt hour, which was 63% lower than the average during Chile's prior energy auction.11 In March of 2016, Mexico announced the results of its first-ever private energy auction for 1,720 megawatts of electricity.12 The average pricing in the contracts for the Mexico auction was $40.50 per megawatt-hour for solar power projects and $43.90 for wind power projects.13 The contracts resulting from this auction are expected to generate more than $2.1 billion in investment in new generation capacity.14
Energy auctions have flourished in Latin America by providing an efficient, competitive mechanism for encouraging development and construction of energy projects. Recent trends indicate that these auctions will continue to grow and help drive down the cost of energy, which, in turn, should encourage further investment into the development and construction of these projects.
As countries such as Chile and Mexico develop and construct the projects awarded during their recent auctions, other countries in the region are likely to follow suit by promoting the efficient development and construction of new energy projects through energy auctions.