For the first time in its history, the Mexican power market is opening up for both competition and foreign investment. As part of the 2013 Mexican energy reform, a suite of policies and targets were brought into legislation with the aim of modernizing and advancing the country’s energy system. The reform was introduced to provide an energy boost after the declining production of Mexico’s state owned oil and gas company Petróleos Mexicanos (Pemex) and to reduce the electricity price, which is on average 25% higher than electricity prices in the US for residential and commercial users.
Mexico’s reformed energy market has drawn significant amounts of attention and interest from companies keen on entering emerging growth markets. Coincidentally, this interest comes at a time where the development conditions for wind and solar projects have never been more favorable. The installed costs of wind energy projects have dropped in parallel with a significant increase in productivity of modern wind turbines. Similarly, the installed costs of solar photovoltaic (PV) projects have dropped tremendously over the last few years.
Until recently, Mexico has been slow to develop its very considerable renewable resource potential. Until eight years ago, Mexico only had 85MW of wind energy installations and approximately 22 MW of solar PV systems (the bulk of which were stand alone, self-supply systems). Fast forward to today and the market has changed considerably. As of 2014 the installed capacity of wind power projects exceeded 2,600 MW, and the solar industry, while still small, had begun to see multi-megawatt, grid-connected projects being installed.
Challenges and opportunities on the horizon
While the recent growth has been laudable, it does not compare with the ambitious targets set by the government for the supply of clean energy. The Mexican government has prescribed clean energy generation targets of 25% by 2018, 30% by 2021, 35% by 2024, and an ultimate target of 50% by 2050. These ambitious targets, combined with the energy reform, have triggered significant growth in the industry. The Mexican government is aiming to triple the total amount of clean energy generation and to achieve a 9.5GW target by 2018 is a huge logistical and operational challenge by any standards. To put it into perspective, achieving the 2018 target alone equates to adding new operational wind farms equivalent to Canada’s 23 year cumulative installed capacity in only three years. Meeting half of this target capacity would be equivalent to the entire Danish fleet of wind turbines being energized in Mexico in three years’ time , so even achieving 50% of this target would make a significant difference.
Procurement opportunities in this newly energized market will take shape in one of four forms:
(i) selling power directly to suppliers or qualified users (large electricity users who buy power from the National Center of Energy Control (CENACE) or suppliers at non-regulated rates);
(ii) selling power to the wholesale electricity market;
(iii) participating in the long-term auctions for service and capacity supply;
(iv) partnering with Comisión Federal de Electricidad (CFE) or its subsidiaries for projects.
The first opportunity to participate in long term auctions was announced in Q4 of 2015 and successful bids are to be announced by the end of Q1 2016. While there is a lot of interest from companies willing to participate in the auction, many have been choosing to take the ‘wait and see’ approach in order to see where the floor for power costs will lie. As a partial result of the auction announcement, few, if any, companies have entered into third-party power supply agreements with independent power producers (IPPs) in the last two years and consequently, a backlog of potential projects exists, including many natural gas cogeneration projects. This has potential to lead to aggressive pricing during the first auction and it will be the duty of IPPs and their advisors to ensure they have properly assessed the viability of their projects in order to produce competitive bids.
In many regions around the world, governmental subsidies and tax credits constitute a broadly used benefit for investors in wind energy. For the time being, Mexico’s Ministry of Energy has chosen not to be over reliant on a subsidized system, in part, as a means of promoting the most competitive renewable energy sources. Nevertheless, Mexico’s tax code provides for accelerated depreciation of investments in renewable energy equipment. Under these provisions, a company investing in wind power generation equipment may deduct up to 100% of its total investment during its first taxable year (and may be able to carry forward any deduction amount it is unable to use).
SgurrEnergy’s involvement in the energy market
SgurrEnergy’s recent work in Mexico includes supporting developers in identifying and assessing wind and solar sites and working with established operators of wind farms to improve the performance of their assets. More broadly, SgurrEnergy is currently working on several projects across Latin and Central America. The company’s global expertise is far-reaching, including the recent creation of a global Solar Developer’s Handbook to assist those constructing solar projects, giving guidance and good practice to developers to increase consistency and reduce risk in projects.
Recently, SgurrEnergy has been working on feasibility and measurement campaigns for solar and wind projects across Latin America, with heavy involvement in contract reviews and negotiation support, construction monitoring and commissioning verification. Social impacts and Equator Principles reviews are mandated by the development banks as well as many of the large international corporate lenders and SgurrEnergy conducts these reviews to enhance the social license of local renewable projects. SgurrEnergy’s main aim is to help clients to find the best site, develop it well and then optimize the project to ensure the best return possible and a successful project all around.
What next for Mexico?
The challenges of meeting the short and long term goals are numerous. The regulatory system in Mexico is still evolving and uncertainty remains on how and when the final implementation of the laws will take shape. Additionally, the social, economic, and political context in Mexico varies widely and care must be taken to ensure that this consideration is taken into account during project planning. Case studies of projects where landowner and community considerations were not fully taken into account exist, and projects and companies have suffered considerably as a result. With the energy reforms the entire landscape for the operation of the Mexican electrical system will change, and a successful outcome will require a deep level of learning both by existing developers in the market and by new entrants. As with many systems in transition, there will be companies that will find great success, and others that will fail. The ability to learn and adapt to the new and evolving market will be key in ensuring that projects are successful.
Growth in the electricity market in Mexico is anticipated to be 4% annually in the coming years. There are ambitious goals set for meeting demand growth and transitioning old generation to clean energy sources. Despite uncertainty with respect to the rollout of the Mexican energy reforms, significant opportunities will continue to exist in Mexico, and the installation of new renewable and clean energy projects is likely to outpace that of many of the more established and mature markets.
FURTHER INFORMATION
As a multi-disciplinary, global consultancy, SgurrEnergy, a Wood Group company, provides a variety of services and expertise across the whole lifecycle of renewable energy projects. The team of engineers has consulted on projects in over 90 countries, using significant global expertise and local knowledge of markets to work with developers to ensure that projects are well planned, well-constructed and perform optimally in operation.
www.sgurrenergy.com
ABOUT THE AUTHOR
David Barrie is SgurrEnergy’s Business Development Coordinator based in their Mexico office.