Mexico’s Newly Opened Energy Market Attracts Renewables

It is a good time to be in the renewable energy business in Mexico since landmark energy reform opened up the electricity market and prioritized renewables. The government has an ambitious 12-year goal for renewable energy production, and private equity funds and development banks have millions of dollars ready to allocate to clean energy.

“There is a huge potential for exploiting renewable energy in Mexico,” says Guillermo Gutierrez of BK Partners, an investment management firm. “We believe this is an exciting moment.”

Mexico has set the goal to generate 35 percent of its energy from renewable sources by 2024, including large hydroelectric generators. In 2012, only 4 percent of electricity was generated from wind, solar and geothermal sources.

The government expects enormous increases in solar and wind power capacity for 2018 — solar will increase from 54.6 MW in 2012 to 627.5 MW in 2018, while wind will reach 8,922 MW from its current 1,332 MW in the same period.

Gutierrez manages the Balam Fund, a private equity fund dedicated to investing in renewable energy projects in Mexico. The fund currently has $160 million, and a $400 million target.  So far, it has identified 30 possible projects within the areas of wind, solar, hydropower and cogeneration.

“Last year it was complicated for us because when we started the fund, there was an impasse within the industry, projects were not moving” as the energy reform was debated and passed, Gutierrez says. Now, there are six projects in advanced negotiations that total 254 MW. “We believe we can close these projects in the next two months,” he says.

The New Energy Laws

The much-awaited energy laws are now being reviewed by Mexico’s congress, and analysts expect them to pass by June 2014. The laws will open up the previously restricted electricity market, monopolized by state utility company CFE, making it easier for private companies to build and operate power plants. The law also seeks to require the CFE to purchase renewable energy before any other sources of energy.

Mexico’s electricity supply cannot keep up with an estimated 4 percent annual growth in demand, according to official numbers. The government is hoping the energy reform can attract more investment in energy to help bridge this foreseen deficit.

“Mexico has 60 GW [of installed capacity], in order to meet demand we will need 110 GW by 2024,” says Gutierrez. “So that’s a really big challenge. We believe that with the new regulatory framework and the new transparency, it is something that can be achieved.”

“The new reform could further solidify Mexico’s world leadership in renewable energy policies,” says James Bowen, Mexico director of Boston-based Vertex Companies. Bowen’s company is part of the consortium ZacSol, which in April announced a 30-MW solar plant to sell electricity to the public grid in Zacatecas, central Mexico.

Subsidies are not expected to foment growth of the renewable industry. Aside from a tax incentive in which companies can depreciate their assets, the Mexican government will not offer other subsidies to the renewable sector.

“Additional incentives don’t exist because current policy wants to ensure we are promoting the most competitive renewables,” says Jose Maria Valenzuela, director of energy sustainability at Mexico’s Energy Ministry.

Mexico will continue to guarantee the purchase of electricity from renewable generators less than 30 MW. This, along with ideal wind and sun resources and the current high cost of making electricity by fossil fuel generators, are incentive alone for the renewable sector, argues Valenzuela. “In Mexico there’s a great opportunity to replace expensive technologies such as fuel and diesel with renewables,” Valenzuela says.

Businesses Make Their Own Electricity 

Mexico expects the largest chunk of new solar and wind capacity to be generated by businesses, which under a self-supply law allows companies to buy electricity directly from plants.

Walmart de Mexico, for example, supplies its stores in Mexico with a 67-MW wind farm on the isthmus of Oaxaca, an ideal location for wind power.

Earlier this month, a 252-MW wind project was announced in the state of Nuevo Leon that will provide energy for a group of companies including FEMSA, owner of the Oxxo convenience store chain, and cement giant Cemex.

Electricity for large businesses is expensive, doubling in the past 10 years from 6 cents to 13 cents per kWh. And while electricity for households in Mexico is highly subsidized, up to 80 percent, businesses pay for 65 percent of total electricity sales, and they can be expected to make the largest investments in renewable energy in Mexico.

Narcis Isern Subich installs solar systems for medium-sized businesses in Mexico, such as gas stations and office buildings. “Areas for wind energy development are already very saturated,” says Subich, director of BOIT Energia Renovables. “Solar panels are very competitive, they’ve dropped in price.”

For a hotel in southern Mexico, for example, Subich’s plan is a 6-kW solar system that costs $17,000; in ten years, the hotel will recoup the investment and save $28,000 on electricity.

“Since the cost of energy is so high, it’s a good investment for businesses,” says Isern. “I look for clients who are passing into industrial consumption. The material lasts 25 years, so the first five years you pay off the investment, the next 20 years you are saving on energy costs.”

Boosting Geothermal

Mexico is home to vast geothermal resource potential, but the industry has been limited to mostly government projects since prohibitive laws restricted private sector. This will change with the energy bill, which opens up the geothermal market and will promote private exploration and production.

“Geothermal has the advantage that it is a base energy, it doesn’t have the intermittency of solar and wind energy,” says Efrain Villanueva, director general of sustainability of the Energy Ministry. “That gives a lot of profitability and attractive possibilities for the private sector.”

Mexico is the world’s fourth largest geothermal energy producer, with 980 MW of installed nameplate capacity in 2013 (the U.S. leads geothermal production with 3,389 MW of capacity). Geothermal research center CEMIE-Geo opened in 2014 with an operating budget of $75 million over the next four years to promote exploration and projects with the private sector. Their area of focus is the Baja California peninsula and the volcanic axis that crosses central Mexico.

“What we are expecting is there can be projects with public-private associations that facilitates the use of geothermal energy,” says Villanueva. The Energy Ministry expects an additional 217 MW of geothermal power by 2018. This number is modest compared to the estimates for wind and solar, but reflects the greater time and resources needed for geothermal projects — a typical project takes about seven years to complete.

Geothermal, wind and solar energy will be the themes at the Mexican International Renewable Energy Congress, May 28-29 in Mexico City. More than 700 Industry players are expected and the key speaker is CFE head Enrique Ochoa Reza. “It is one of the best events of the year” for the renewable industry, says Bowen of Vertex Companies, who will be attending.

Lead image: Mexico City via Shutterstock

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Nathan Paluck covers business trends and the economy in Mexico. He has also written about food, culture and music from Lima, Peru, southern Mexico and Hartford, Connecticut. He lives in Mexico City.

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