Renewable vows: Increasing capacity through wind and solar alternatives

With installed capacity of 2600 MW in wind and 55 MW in solar power plants, Mexico generates around 10% of its energy with non-hydro renewables, but it aims to produce 35% of its energy from clean sources by 2024.

Jose Pablo Fernandez, director-general at Grupo Dragon, told OBG, “Mexico’s 2024 goal is ambitious but possible. It has 18-19% clean energy production, and the aim is to raise this by 5% by 2018.” This 5% excludes pre-existing projects and upcoming endeavours under grandfathered legislation.

Irene Hernández, industry and energy partner at PwC, said that while the 5% clean energy requirement may seem conservative, it implies installing 4000-6000 MW of clean energy capacity by 2018. “Renewable projects would have to be installed at 2000 MW per year, which is adding the total capacity we have today every year,” she said. Realising these numbers will require the creation of an attractive operating environment.

Incentives

Mexico offers incentives to push the renewable energy agenda. For grandfathered projects, there is energy banking and preferential wheeling. The former is a net metering policy for self-supply projects. It calculates rates on a one-year basis, considering the hourly generation and consumption times for differentiated tariffs. The latter is a transmission tariff set according to generation and consumption tension. These two incentives help renewable energy self-supply projects under the grandfathered legislation get energy to their customers for a lower price.

The entry of Renewable Energy Certificates ( Certificados de Energías Limpias, CELs) will replace both mechanisms. CELs will not be technology differentiated and will be granted according to the amount of energy produced. The reform uses a broad definition of clean energy, with technologies such as co-generation considered clean. Where co-generation technology follows the Energy Regulatory Commission’s efficiency standards, only the amount of energy generated over a standard combined-cycle plant will be awarded CELs. Mexico also allows all machinery and equipment that is used for generating renewable energy to be fully depreciated in one year, as opposed to 5% annual depreciation for that used in non-renewables.

Wind

Mexico’s wind potential is especially promising. Regions including La Ventosa in Oaxaca, Tres Mesas in Tamaulipas and La Rumorosa in Baja California have high-yield projects with more than 35% capacity factors. As of mid-2015 the country had 31 wind parks operating with installed capacity exceeding 2500 MW, and the Mexican Wind Energy Association has targeted 9500 MW of total installed capacity for 2018. Transmission capacity will be a challenge, given that places such as Oaxaca are experiencing bottlenecks.

Solar

According to marketing group GTM Research, Latin America will see 2.2 GW of solar capacity come on-line during 2015. Of this, Mexico will install about 195 MW, up from 67 MW in 2014. A key factor, as soon as the grandfathered legislation project pipeline runs out, will be the CEL price, as current fuel prices make solar generation costs uncompetitive without strong incentives. However, other opportunities are expected to arise, such as distributed generation (DG), which uses small-scale technology to produce electricity close to the end user. “Mexico has had DG mechanisms for a number of years,” Peraza told OBG. “The growth rate for homeowners generating energy via renewable sources in their homes has been spectacular.”

Challenges

One of the challenges has to do with the sector entering the new CEL market. The incentives for grandfathered legislation were mostly effective, but the question is whether CELs will cover the generation cost difference and make renewable energy competitive. “We have seen from other energy markets that certificates and related volatilities tend to be less tangible than other incentives such as net metering or preferential wheeling,” Hernández told OBG. “Mechanisms such as tax incentives and long-term power auctions have to be in place. If renewable energy development is left to the open wholesale market, the movement will probably not be as fast as required.”