Issue Number: 110   July 2014

Mexico's Reforms and the Future of Renewable Energy



Researched and written by Nico Cottrell.

Saturday 21st December 2013 was an epoch-making day for the Mexico's energy industry because a revolutionary energy reform bill formally became law. The reform will break up the state monopoly over energy in Mexico that had existed for more than 75 years. Javier TreviƱo, Mexican Congressman, described the bill as 'historic, real and transformational'[1].

The energy bill has not had an easy passage, however, and received resistance from Mexicans who see the ownership of the oil industry as a symbol of national pride. Despite this, the bill is now picking up pace and on April 30 2014, President Enrique Pena Nieto introduced to the Mexican Congress nine new bills, including amendments to several existing laws. The Government hopes these reforms are all passed before the end of June 2014.

Foreign investment has become a pressing matter in Mexico because with slowing oil production, it is believed that only private companies will bring the necessary capital, experience and technology to develop the country's deepwater and unconventional reserves.

Environmentalists are concerned that the energy reforms will be focused on attracting Foreign Direct Investment (FDI) for the exploitation of Mexico's generous offshore oil reserves. This anxiety was revealed at a recent energy conference in Mexico, where Greenpeace protesters held up banners saying 'More Renewable Energy, Less Oil'[2] . However, it does seem that renewables will be an important part of the revolutionary shift in Mexico's future. The country has the goal to generate 35% of its energy from renewable sources by 2024. This is a tall order given that in 2013 only 3% of electricity was generated from wind, solar and geothermal sources[3].

Additional government targets include increasing solar capacity from 54.6 MW (2012) to 627.5 MW in 2018 and enlarging wind capacity from 1,332 MW (2012) to 8,922 MW in 2018. Balam Fund, a private equity fund, manages investment in renewable energy projects in Mexico. The fund currently has $160 million (with the target of $400 million), and has identified 30 possible renewable energy projects.[4] Earlier this year, the Government approved 10 renewable energy projects worth an estimated $2.1bn[5].

Incentives and setbacks to renewable energy in Mexico

Unlike some renewable markets like Spain, Germany and the USA, there are no feed-in-tariff or tax advantages that incentivize the use of renewable energy generation in Mexico. However, there are some policies which encourage renewable energy, including a Renewable Energy Transition Fund and 0% import/export duties for renewable equipment.[6] Additionally, Mexico has an abundance of renewable power resources. Hydroelectricity is particularly successful in Mexico and contributed 11% of Mexico's electricity generated in 2013.

The lack of subsidies for renewable energy projects will mean that project location is critical because of the regional variation of electricity prices in Mexico. Electricity prices in some parts of Mexico are around 25% higher than in the US, which will make some renewable technologies appear relatively cost competitive without subsidies. Therefore, it is likely that renewable developers will initially focus on customers and regions where electricity prices are be higher. However, once competition has settled into every corner of Mexico's electricity market, regional price differentials may decrease, potentially putting pressure on renewable energy to demonstrate its cost-effectiveness.

Regional locations for renewable projects will again play an important role given that some areas of Mexico will create more solar energy than others. According to one pro-solar website, Greentechsolar, using 15% efficient photovoltaics, a huge solar array square 25 km on each side (equivalent to 0.06% of Mexico's land-area) in the northern states of Chihuahua or Sonora could in theory supply all of Mexico's electricity.[7] Potential for generating solar power is often expressed in kWh/m2/day. Average levels across Mexico of 5kWh/m2/day are 60% higher than in Germany, currently the largest PV market in the world.


Figure 1: Mexico's Solar Potential. [8]

Conclusion

The future of renewable energy in Mexico will be interesting in the years to come. As the energy bill becomes formal legislation by the Mexican Congress in the coming weeks, there will be greater investment certainty for foreign companies looking to take advantage of Mexico's large renewable energy sources. Additionally, given growing turmoil in emerging market countries such as Ukraine and Russia, and various African and Middle Eastern states, Mexico with its close ties with the US and low geopolitical risk, will offer potentially safer investment opportunities. With is enviable solar potential, Mexico has strong prospects for greater renewable generation.


[1] http://www.usnews.com/opinion/blogs/world-report/2014/06/13/mexicos-pemex-oil-energy-reform-is-just-the-beginning.

[2] http://latino.foxnews.com/latino/news/2014/04/24/greenpeace-urges-mexico-to-promote-renewable-energy/.

[3] http://www.eia.gov/countries/cab.cfm?fips=MX.

[4] http://www.renewableenergyworld.com/rea/news/article/2014/05/mexicos-newly-opened-energy-market-attracts-renewables.

[5] http://www.ey.com/Publication/vwLUAssets/Renewable_Energy_Country_Attractiveness_Index_41_-_June_2014/$FILE/EY-Renewable-Energy-Country-Attractiveness-Index-41-June-2014.pdf.

[6] http://us.practicallaw.com/9-524-0279?q=&qp=&qo=&qe=.

[7] http://www.greentechmedia.com/articles/read/sunny-mexico-an-energy-opportunity.

[8] http://www.evwind.es/wp-content/uploads/2013/03/energia-solar-mexico.jpg.


July 2014 MZINE