What Does Mexico’s Energy Reform Really Mean for Renewables?

What Does Mexico’s Energy Reform Really Mean for Renewables?

Since the Energy Reforms in 2013, Mexico Has Become a High-Potential Market for Renewable Energy Investors

Mexico’s Regulatory Framework

Until recently, Mexico had a limited regulatory framework for private investment. Small generators with their own power supply were allowed to generate electricity either as Independent Power Producers (IPP) or Self-Supply Generators (SSG). However, long-term contracts were the only way they had to sell energy, and their only buyer was the Federal Electricity Commission (CFE).

Electricity supply of IPPs and SSGs only reached 30% in 2013. This was especially dire since CFE had to rely on them during some of its many generation expansion projects. Moreover, there was little investor confidence.

CFE, the only electricity buyer, was highly indebted and faced several corruption and bribery scandals. This added to the difficulties to contract remote generation due to old and insufficient transmission lines. CFE also faced significant distributions losses attributed to non-technical causes. All of this caused higher electricity prices when compared to many other countries in the region.

The reform was aimed not only to open the market but also to improve efficiency in the electricity and oil & gas sectors, which eventually would bring confidence especially for renewable energy investors.

In 2016 the reform took effect and led to the division of CFE into ten independent companies. Six of the companies oversee generation, one oversees transmission, and another one oversees distribution. The other two work as utility companies for regulated and deregulated customers (known also as basic and qualified users).

The reform also established that all generators, including all six CFE companies, should compete and sell energy through three mechanisms: long term contracts, wholesale market (spot price), or Power Purchase Agreements (PPAs) (granted through auctions).

Clean Energy Certificates (CELs) Are a Key Incentive for Project Developers

The reform also introduced Clean Energy Certificates (CEL). CELs are a great incentive for renewable energy developers. One of their valuable characteristics is that they are “bankable” and will not expire for a period of 20 years. New clean energy developers will be granted a CEL for each MWh they generate.

Mexico has also secured its CEL market by mandating all electricity consumers to buy a CEL quota. The biggest piece of the pie is the one corresponding to basic users, all residential and small consumers, whose quota will be acquired by CFE – Basic Users. We expect significant growth for the CEL market in Mexico.

The government sets the CEL quota three years in advance, and it is set to increase progressively. In 2015, Sener set the CEL quota at 5% for 2018, and at 5.8% for 2019. Penalties for non-compliance are between 6 and 50 minimum salaries per MWh. So far there have been three successful auctions and new participants are expected in the upcoming ones.

We Expect Lower Power Prices and Better Energy Efficiency in Mexico

The reform has improved the visibility for all stakeholders and will provide a template for other countries in the region. The results of the first three auctions have demonstrated that the path toward a clean future requires a suitable legislature and regulatory framework to stimulate the market. And although Mexico still has many efficiency challenges, it now has the legislative structures in place to take advantage of renewable energy and improve domestic energy efficiency.

This new framework also gives businesses a relatively low-risk opportunity to diversify energy sources and lower operating costs. We offer strategies for large and mid-size businesses to maximize profits via energy efficiency, with relatively low levels of incremental capital spending. Please contact us today to learn more about how we can create value by optimizing your renewable energy strategy.