Reform has led to new opportunities in Mexico’s energy sector, especially in terms of renewable power generation. The country has launched three auctions for solar and wind projects in recent years, with the first held in early 2016. However, President Andrés Manuel López Obrador – known by his acronym AMLO and who came to office in December 2018 – is not expected to support energy auctions to the private sector during his term. Mexico’s challenge now will be to meet its clean energy ambitions without the auctions – presumably by drawing on the capacity of state institutions instead – while also addressing issues stemming from an overburdened and under-maintained transmission system.
Electricity Market
The main players in the electricity market are the state’s Federal Electricity Commission (Comisión Federal de Electricidad, CFE), Spain-headquartered Iberdrola and Acciona, Japan’s Mitsui, Enel of Italy, the US’ Sunpower, French giant Engie, Mexican firm Zuma Energía, Spain’s Consorcio Fotowatio and Paris-based Neoen.
Mexico’s electricity matrix produced 317 GWh of power in 2018, up 2.5% from 309 GWh in 2017, according to the Ministry of Energy. Clean energy sources, including hydropower, geothermal, wind, solar and bioenergy, contributed 23.2% of this total in 2018, up from 21.4% the year before. Consultancy firm Deloitte México projects annual electricity industry growth of 2.8-3.6% over the medium term, driven in large part by the country’s vast manufacturing operations. “Demand for power comes from a combination of population growth and economic growth,” Israel Hurtado, president of the Mexican Association of Solar Energy ( Asociación Mexicana de Energía Solar, ASOLMEX), told OBG. “The growth rate of the electricity market is higher than national economic expansion at the moment.”
According to local think tank México ¿Cómo Vamos?, the electricity generation industry grew by 1.2% in the second quarter of 2019, compared to the same period of 2018, and expanded by 1.6% over the previous quarter. The government is targetting for annual growth of 4.5% and aims to revamp the electricity system, with a focus on updating outdated infrastructure. Part of the plan laid out by officials also includes supporting renewable energy sources. According to Mexico’s National Development Plan, it is of strategic importance that the administration “rescues” the CFE and modernises state electricity generators, particularly hydroelectric plants, some of which operate with 50-year-old machinery and produce far below capacity.
Investment
Renewables companies were surprised to find auctions for electricity sales to the CFE cancelled in March 2019, a move supported by AMLO to lessen the share of private companies in power generation and instil more power in the CFE. “The CFE now generates only half of [electricity] consumed, while private companies are supplying the market with very high costs,” AMLO said at a press conference in January 2019. “Instead of improving, we have worsened in this matter.” While cancelling further auctions limits investment opportunities, Hurtado says the wholesale market is still thriving, and that prices in the first three renewable auctions produced some of the lowest electricity prices in the world. In the first auction in 2016, for example, prices ranged from $35.44 per MWh for Enel’s 427-MW solar project, to $67.50 per MWh for the 29-MW solar project by local Photoemeris Sustentable.
Investment opportunities are indeed present in the country’s wholesale market, where companies are looking to ink bilateral contracts and power purchase agreements (PPAs) to meet their clean energy obligations. The AMLO administration has promised to respect past contracts, thus the campaign to install additional solar and wind capacity is marching forward. From the first renewables auction, 7% of 1790 MW had entered into operation by mid-2019; of the second auction, about 34% of 2259 MW has begun generating; and all plants to generate 1150 MW of energy from the third auction are under construction, with ASOLMEX expecting them to come on-line beginning in 2020. “The wholesale market is only three years old, therefore it is a market that has to mature a bit more,” Hurtado told OBG. “However, there are solar plants with large capacities of 200 or 300 MW that are being built exclusively for PPAs with a particular buyer.” Investment in solar power is projected to total $8.5bn in 2019, up 34% from $6.3bn in 2018, according to the association.
Project Pipeline
The current administration aims to have at least 35% of electricity coming from clean energy sources by 2024, compared to 23% in 2018. According to estimates by ASOLMEX, the new portfolio of solar and wind projects coming on line will put Mexico at 25% by 2021, but an additional 10% may be a stretch for the three years after. The roster of works planned through 2021 include 31 solar projects in the state of Sonora, 15 in Chihuahua and 14 in Durango. Furthermore, Enel is building the largest solar plant in the Americas, and the company’s biggest plant in the world, in Coahuila, a 754-MW facility worth $650m. In terms of wind energy, Tamaulipas will see 12 new projects, Yucatán 11 and Coahuila five. As of December 2018 Mexico had 38 solar plants with an installed capacity of 4000 MW and 54 wind parks with 4900 MW of installed capacity, according to Deloitte México.
Transmission
One limitation to Mexico’s renewable energy expansion is infrastructure, as the country’s transmission network is saturated. Despite constraints, in January 2019 the CFE cancelled two tenders for direct current transmission lines that would have alleviated some of the congestion, citing financial analysis confirmed the projects were not priorities for the government. The first was the $1.1bn, 1400-km Baja California-Sonora transmission line slated to connect up to 1500 MW of electricity from the solar-rich peninsula to the national grid. The second was the $1.2bn, 600-km Ixtepec-Yautepec line that was set to move up to 3000 MW of power from windy Oaxaca to other parts of the country, originally scheduled to go into service in 2021.
The infrastructure problem could actually push more investment into solar projects, says ASOLMEX. “There are indeed some issues with saturation in transmission. This can cause blackouts, which is compounded by natural gas supply deficits,” Hurtado told OBG. “However, all of this creates an opportunity for solar power.” The government has not halted all plans for transmission, either. System upgrades are scheduled to take place over the next several years, with 18 projects to build new lines, and another six to upgrade and perform maintenance on the existing network.
Although the renewable energy industry has seen the cancellation of transmission line projects and additional auctions, the government is honouring previous contracts, which means construction continues. Investors remain optimistic that demand from private companies and the environmental concerns of younger generations will drive the country to reach its clean energy goals, regardless of internal or external headwinds.
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