Focus: Renewables

Dreams Anew

Dreams Anew

Jul. 14, 2013

In June of 2013, the International Energy Agency (IEA) announced that renewable energy would provide more of the world's electricity than natural gas (24%) by 2016, mostly due to growth in the sector and emerging economies. The IEA claims that as renewable technologies improve and the cost of acquisition falls, energy-hungry economies like Mexico's will install capacity at a higher rate to catch natural gas generation. Currently, renewables account for 24.2% of Mexico's installed generation capacity, a shade over the predicted global average for 2016. However, between 2009 and 2012, the price of onshore wind turbines fell 20%, while in 2011 to 2012 alone, the cost of photovoltaic panels fell around 40% and spending on renewables rose 17%. These changes have altered the calculus that has so frequently excluded renewables in favor of conventional sources, and key players such as Exxon Mobil and BP have recently predicted a larger role for renewables. The coming years could see a blossoming renewables market in Mexico.

In 2012, the Calderón administration passed a new renewable energy law that mandated a 30% drop in carbon emissions by 2020, and called for 35% of electricity to be generated by renewables by 2024. Although these ambitious goals include the creation of a new government body to oversee their implementation and have been hailed by some as landmark, the current administration of President Peña Nieto is focused on developing Mexico's substantial hydrocarbon resources and boosting GDP growth above 6%.

Nonetheless, the nation is on track to achieve its renewable energy goals. In 2012, it had 74 renewable energy projects in the pipeline worth a collective $8 billion, and the Secretariat of Energy has stated that by 2014, Mexico will have 5 GW of wind-generating capacity. In 2012, Ernst & Young's Country Attractiveness Index ranked Mexico among the top emerging economies for renewable energy investment, just below South Africa and South Korea. The potential for renewable growth in the Mexican market is huge, but barriers to establishing stable long-term projects exist. Mexico's regulatory framework for electricity generation and its state power company, the Federal Electricity Commission (CFE), will need to pass bold new legislation and update the national grid to make Mexico attractive to renewable investors. Currently, the arrangements in which electricity can be sold at a profit are numbered. Private companies can produce electricity for self-supply, cogeneration, import/export, or as independent power producers (IPPs). The final arrangement, producing as an IPP, allows the sale of electricity directly to the CFE at a fixed rate that guarantees a return on investment. Currently, only five wind plants operate on this model, while most renewable energy players (other than CFE-owned hydroelectric and nuclear power plants) operate on a self-supply model, wherein they contract with a large company to provide electricity.

Thomas Mueller-Gastell, the Director of EDF Energies Nouvelles Mexico, described the situation as follows, “In self-supply power plants there is no tender and all power is sold to private companies, typically at a discount on CFE tariffs. So far, a developer has to be very competitive and very aggressive in order to meet those prices and make a profit." Developers need to beat the CFE's tariffs to be attractive to private companies; a difficult prospect. Additionally, the government is unlikely to offer tax or other incentives to speed up development, a move that has been popular in the US and Europe.

Mexico has 1.9 GW of wind energy projects under construction, as well as an 80-MW solar station in the Sonoran Desert. As things stand, the industry has reason for optimism about renewable energy generation. Between the copious resources and growing economy, opportunities are practically guaranteed. However, that optimism should be tempered by the prevailing political and regulatory realities of the Mexican present.