Regulatory changes in energy sector attracting private financing in Mexico

Besides opening up the market for private participation in the hydrocarbons sector, Mexico’s fast-moving energy reform is also strengthening the use of renewable energy sources within the country’s electricity grid.

Although the use of renewables has experienced an organic expansion over the years, new market-driven mechanisms, combined with rising domestic and international interest from investors, are helping to re-equilibriate the weight of clean energy generation within the country’s overall energy mix.

Policy goals have been driven by a need to reduce the environmental impact of electricity production, as well as allow competition to play a larger role in price reduction and efficiency gains. Despite the country’s natural potential for solar and wind generation, clean energy has not progressed in a continuous trend. In 2014 renewable energy sources accounted for 25% of the country’s total electricity generation capacity, down from 29% in 2009. A significant reduction in hydroelectric output in 2015 led to a further 3.9% decrease in clean generation for that year. The trend was partly reversed, however, with the gradual expansion of wind generation infrastructure, with total installed wind electricity capacity jumping to 2000 MW in 2014, from a mere 85 MW in 2006, according to Harvard Business School’s January 2017 “Mexico’s Energy Reform” report. Although previous policy measures served as important building blocks for Mexico’s renewables policy (see overview), the 2015 Energy Transition Law had an important role in securing renewable generation goals. Regulation placed the burden of reducing the environmental impact of electricity production on consumption on both energy sector players as well as large-scale electricity consumers.

Market Opening

After a three-year regulatory process, Mexico launched its wholesale electricity market in January 2016. This allowed the transition from a market where the state-owned Federal Electricity Commission (Comisión Federal de Electricidad, CFE) was the only entity authorised to buy and distribute electricity, to one in which supply and demand would guide the relationship between electricity producers, intermediaries and final buyers. This opened the door for independent power producers (IPPs) to establish electricity sale agreements with large-scale consumers, in addition to selling their output to the CFE. However, the new rulings kept operational control of Mexico’s electricity grid in the hands of government authorities. The Ministry of Energy is charged with the regulatory supervision of the market, and the National Centre for Energy Control (Centro Nacional de Control de Energía, Cenace) runs the newly established wholesale market, keeping transmission and the operational management of the electricity grid under its oversight. Another government entity, the Energy Regulatory Commission (Comisión Reguladora de Energía, CRE) is charged with allocating operating licenses to both customers and IPPs wanting to participate in the wholesale market.

Additionally, the CRE is responsible for allocating clean energy certificates (certificados de energía limpiados, CELs), to energy producers for each MWh of clean energy generated. Large-scale consumers and electricity wholesalers can buy the CELs from clean energy producers, creating another revenue stream for the energy producers. The development of the new market for certificates was planned for 2018. The combination of these instruments and regulatory responsibilities has driven the development of new renewable generation capacity, with an important focus on solar and wind generation projects.

Auctions

Much of the public policy to expand renewable energy generation in Mexico has been driven by a series of long-term auctions for the establishment of clean energy generation. Two auctions that took place in 2016, and a third in late 2017, overseen by Mexican power sector authorities, have led to the commissioning of about 22 GW of new generation capacity, with associated investment set to reach $9bn, according to Deloitte. In March 2018 Cenace and the CRE announced a fourth auction, with winners declared in November, and contracts due to be signed in February 2019.

First Step

The first auction, organised in March 2016 by Cenace, tendered 15-year electricity purchase agreements for CFE. The process surpassed initial expectations, with 69 firms participating and a total of 1850 MW being offered, which was followed by the selection of 11 firms with 18 different renewable energy generation projects. The majority of the renewable capacity contracted under the first auction, at a total of 1691 MW distributed across 12 different projects, was solar, with the CFE agreeing to pay for $45 per MWh. The auction also led to the sale of over 5m CELs.

The process was further validated through the second electricity auction, which took place in September 2016. Solar and wind generation projects were again the top bidders, with a total of 57 firms participating in the auction. Mexican power authorities allocated power purchase agreements to 23 bidders, amounting to a combined 3916 MW of generation capacity. The investment set to be generated by the new energy projects was forecasted to surpass $4bn over a three-year period, according to estimates from the government.

More structural changes came with the third auction in November 2017. A key change was the involvement of private companies, which for the first time were allowed to purchase electricity, prompting large-scale consumer Cemex and Spanish utility Iberdrola to participate. A total of 2500 MW of new installed capacity was contracted, and prices reached $20.57 per MWh, a record low. The auction resulted in the planned construction of an additional nine solar plants, five wind farms and a turbogas generation unit.

Local Presence

Realising Mexico’s clean energy ambitions will depend on balancing the right investment incentives with competitive price agreements between energy producers and clients, whether it is the government or large-scale consumers. Several other sector challenges also remain, particularly in the wind segment. “Mexico’s wind industry is evolving and growing fast, but there are still some challenges that need to be addressed in order to ensure that the country meets its renewable energy targets,” Enric Català, sales director of global wind turbine manufacturer Vestas, told OBG. “In particular, it is important to incentivise investments on transmission line infrastructure in order to connect the areas with the best wind resources to load centres across the country. Mexico offers great opportunities for investment in advanced manufacturing capabilities and other industrial services, such as transportation and construction, which translates into great potential for boosting the segment’s competitiveness.”

In August 2017 Mexico’s Zuma Energía reported that it had secured $600m in financing for its Reynosa wind farm, set to be one of the country’s largest wind-powered electricity generation units, with 424 MW of capacity, a key development for the segment.