Power purchase contracts with non-utility corporate offtakers are growing in popularity in Latin America but remain an exception to the norm in project finance, said industry insiders at IJLatam 2020, IJGlobal's Latin America energy and infrastructure conference.

For banks looking at lending to such projects, the top priority is a counterparty with an investment grade credit rating and an essential function in the country's economy, but these qualities remain scarce in the region.

"In Mexico, there are only a few companies that can attract long-term PPAs," said Dorian Calderon, head of power and renewables at Sumitomo Mitsui Banking Corp. "If you attract smaller players, you get diversification, but they come with lower investment grade ratings."

Even if a lead arranger is able to get comfortable with a more exotic or complicated offtake structure, syndicating the debt out to less sophisticated lenders poses additional problems. "We are looking to finance these types of investments, yet on the retail level, smaller players are not there yet," said Calderon.

At the same time, rising to this challenge has become more important as some governments, such as Mexico's, have stepped back from the power auctions that were a ready source of bankable contracts in recent years. Mexico canceled its fourth power auction in 2019 after President Andrés Manuel López Obrador took office (PFR, 2/4/19).

Filling the gap left by the government, private companies have swooped in, looking to supply their operations with clean energy through long-term contracts instead of relying on distribution companies (discos) or the spot market.

The Covid-19 crisis has only exacerbated this trend across the region, as governments are less inclined to launch new auctions given the drop in power demand. Chile – where PPAs with private mining companies are common – has already postponed its 2020 power auction to next year, after shrinking the capacity that was going to be allocated from 5.6 TWh to 2.6 TWh (PFR, 9/11).

Non-utility PPAs are also slowly gaining momentum in Brazil through contracts in the free market, noted Jose Augusto Gomes Campos, director of business structuring at Brazilian construction firm Andrade Gutierrez.

"The reactions from the market are mixed," concluded Calderon. "Once they start becoming more prevalent, then you'll get greater buy-in from the market."

Among the projects with non-utility offtakers that have reached financial close in the past year are two renewable energy assets developed by Atlas Renewable Energy. In that case, the fact that the offtaker was not a traditional disco may even have been a boon, given a government-mandated power price freeze in response to protests last fall (PFR, 4/20).

And the pipeline of projects with non-disco offtakers has continued to grow this year too, with Iberdrola, for example, signing a 15-year PPA with Bayer for a 105 MW wind farm in Guanajuato, Mexico (PFR, 4/25).

(A version of this story first appeared on IJGlobal.)

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