TOUGH DECISIONS

Mexico 2020 | GREEN ECONOMY | FOCUS

Alternative energy efforts in Mexico are taking a hit as President López Obrador prioritizes oil. But in the midst of all the chaos, private auctions remain the only way to solve Mexico's energy woes.

It is no secret that Mexico has some of the world's best natural terrain to produce wind and solar energy. In recent years, the country has attracted alternative energy investors from across the globe, especially Europe and Canada. The 2013 Energy Reform and the 2014 Electricity Industry Law that liberalized Mexico's power sector and ended the monopoly of the Federal Electricity Commission (CFE) were heralded by many as a potential turning point for renewable energy in Mexico.

Between 2015 and 2017, international energy companies flocked to Mexico's three auctions for long-term power supply contracts and won wind and solar projects accounting for a considerable share of new power demand. This put Mexico on track to generate the world's cheapest solar power—with prices as low as USD17.7/MWh.
Unfortunately, the renewable energy industry has taken a hit under President Andrés Manuel López Obrador, who has made clear that his priority is returning Pemex, Mexico's state-owned oil giant, to its former glory. Only weeks after assuming office in December 2018, President López Obrador canceled the fourth long-term power auction and two major transmission-line projects that would have transported renewable energy around the country. His administration has also called for more investment in coal and stood by the CFE's decision to dismiss wind and solar energy as unreliable and expensive.
The government's decision to cancel the fourth power action led to frustration among private companies, pushing them to take matters in their own hands with the help of Mexico City-based Bravos Energia, an energy company formed by some of the long-term power auctions' original architects. Bravos Energia's plan is to hold private energy auctions and attract private companies that otherwise would have participated in Mexico's canceled auction.
Talking to TBY, Bravos Energia's CEO Jeff Pavlovic explained that the company was founded “to reduce barriers to private participation in the Mexican power sector, both by providing operational services that facilitate diverse companies' activities in the Mexican Wholesale Electricity Market, and by supporting the negotiation of bilateral contracts that investors need prior to committing to build new infrastructure."
As to why the private sector's participation in renewables is essential, Pavlovic highlighted that it is because of “the private sector's ability to manage risk," adding that “the established processes for public-sector investment planning and budgeting have never been well adapted to renewable generation projects."
Bravos Energia's first private-sector energy auction, for which 19 sellers and buyers had signed up, was scheduled for May 27, 2020, but it was dealt a huge blow when the National Center for Energy Control (CENACE) issued a resolution on April 29, 2020 to suspend all ongoing pre-operational testing of wind and solar electric generation projects. The decree also provides that pre-operational testing of new wind and solar electric generation projects will not be authorized until further notice.
Interestingly, the government has used the COVID-19 pandemic as a justification for new rules, which have granted a reprieve to the government's aging fossil-fuel power plants. While priority was previously given to the plants with the lowest production costs, the new regulations give priority to CFE plants, which generate electricity at as much as USD141/MWh, almost seven times more than some renewable energy plants. Critics say this decision was taken to burn surplus fuel that Pemex is unable to sell elsewhere due to the global oil crisis and the pandemic.
According to industry associations, the move will directly affect 28 solar and wind projects that were ready to go online and 16 that are under construction, with a total investment of USD6.4 billion.
Several international companies who have invested in Mexico's renewable energy sector, such as Iberdrola and Naturgy of Spain, Cubico and ARCO of Canada, AES and Sempra of the US, Enel of Italy, Engie of France, and Vestas of Denmark, have pushed their governments to warn Mexico that the new measures pose a serious threat to continued investment in the sector. The clock is certainly ticking for the López Obrador administration, which must quickly make some hard decisions. A glimmer of hope for private renewable firms did come in the form of an injunction, however, issued in late August, against government measures aimed at limiting the participation of renewable energy companies locally. The move could see previously approved projects move ahead.