Legal reforms underway in Mexico will open new opportunities for private
investment in the renewable energy sector.
Mexico faces the double challenge of ensuring the energy resources to satisfy an increasing demand for electricity and other fuels and meeting the goals of greenhouse gas emission (GHG) reduction. According to official data presented in the National Energy Strategy 2013-2027, between 2003 and 2012, proven oil reserves decreased by 31% while probable reserves decreased by 27%.
Between 2000 and 2011, energy consumption in Mexico increased at an annual average rate of 2%, higher than the Gross Domestic Product (GDP), while primary energy production decreased at an annual rate of 0.3%. Should these trends continue in both energy consumption and production, Mexico could have a structural energy deficit by 2020.
Meanwhile, the Climate Change Law, approved in 2012, establishes as a goal (although an aspirational one, subject to availability of resources) a 30% reduction in emissions by 2020 compared to 2000 and a 50% reduction in emissions by 2050 compared to the same baseline year, and mandates that 35% of electricity by 2024 comes from clean sources. Furthermore, the current federal government’s energy and tax reform proposals seek to increase the efficiency of state-owned companies Pemex and the Federal Electricity Commission (CFE) and promote foreign investment to modernize the national energy sector.
While its details will be defined in the secondary laws, the energy reform proposal identifies environmental sustainability as one of its priorities. None of the new laws can ignore the strategic importance of renewable energies as an essential component for reconciling the goals of energy security with those established by the Climate Change Law, although it is clear that oil will continue to satisfy most of the country’s energy needs and natural gas will increase its share as a source of electricity generation.
Significant investments in renewable energies will not only increase energy security for Mexico but could become a key driver of economic growth while diversifying the country’s energy matrix, with the co-benefit of mitigating GHG emissions in a sector that contributes significantly (60%) to those emissions nation-wide. It is estimated that developing an installed capacity of 5,000 megawatts (MW) from renewable sources, with an annual generation of 13,150 gigawatts per hour (GWh), would avoid the emission of 4.6 millions of tons of carbon dioxide (CO2) into the atmosphere. In a similar estimate, according to the National Energy Strategy, the installation of 18,000 MW of renewable energy would lead to “an increase in the GDP of more than 230 billion pesos, equal to close to 2.0% of the GDP for 2011, creating close to 147,000 jobs. In environmental terms, its utilization would place the share of clean energies at 29% of the generation capacity by 2018 and mitigate the emission of 21 MtCO2 (in addition to the current scenario).”
Power Generation and its
Enormous Potential for
While the power supply in Mexico is quite diversified (with hydroelectricity providing about 12% of total electricity, coal 7% and nuclear 4%), conventional thermal generation still represents the overwhelming majority of Mexico’s electricity generation, with about 78% of the Mexican power output deriving from such fuels and the rest from alternative energy sources, mainly hydro. Since 2002, the mix from conventional sources has shifted from oil products to natural gas, with gas becoming the main source of energy used for the production of electricity in Mexico –the proportion of natural gas in total electricity output increased from 12% in 1990 to about 30% today, which compares with a fall in the market share of oil in the same year.
According to sector analysts and Business Monitor International reports, Mexican electricity consumption is expected to grow at an annual pace of 3.7% for the next 15 years. Electricity demand is projected to more than double by 2030, with the electricity market growing by more than 80% between 2009 and 2014, reaching a 67.8 billion Usd value. While the participation of natural gas in total electricity demand is expected to rise to over 50% by 2015, imports are projected to increase given Pemex’s limited ability to rapidly increase Mexico’s gas production capacity. However, a big concern for the private sector is the volatility of gas prices.
Although Mexico’s shale gas reserves are said to be the sixth largest in the world, it is not clear that the country will be able to tap these resources given the large amount of water needed to exploit them, which is scarce in the Northern region where most of that gas is located, and the significant cost in terms of emissions, particularly of methane, and other potential associated environmental damages. Renewable energy is thus the key for simultaneously achieving the country’s energy security and climate change goals.
Boosting renewable energies became a priority goal in the Climate Change Law, approved in 2012, which set the objective of increasing the participation of renewables (including hydropower) to 35% by 2024 and 50% by 2050. The diversification of primary sources has the additional advantage of coping with the price volatility of fossil fuels, such as gas and oil. Solar and wind represent the most significant areas of opportunity in Mexico, as suggested in the data shared in other parts of this publication, and the energy and fiscal reforms proposed offer an opportunity for private investment to take a lead in developing renewable energy for a rapidly growing electricity demand.
Energy Reform and the Role of the Private Sector in Electricity Generation
Renewable energy in Mexico remains relatively untapped largely due to policy and regulatory barriers, high entry costs for grid access and the lack of appropriate financing options. The proposed energy reform provides an opportunity to address these barriers which inhibit the kind of investments that are needed to take advantage of Mexico’s enormous potential in renewable energies. Historically, the regulatory framework impeded the development of a sound energy market in Mexico overall.
Article 27 of the Mexican Constitution states that: “all natural resources are property of the nation,” thus justifying existing public monopolies, Pemex and the CFE, in the production and distribution of oil, gas and electricity. However, and in contrast with oil, the electricity sector has progressively accommodated the participation, albeit a limited one, of private investments.
In 1992, legal reforms to the Electric Energy Public Service Law allowed the private sector to participate in the generation of electricity basically for self-supply, with the obligation of selling all excess electricity to CFE. The reforms were enshrined in the North American Free Trade Agreement (NAFTA), with section 6 stating that any enterprise “may acquire, establish and operate an electrical generating facility in Mexico to meet its own supply needs.” The Energy Regulatory Commission (CRE) was created as the principal regulatory oversight agency of the electricity sector and became responsible for granting all private electricity production permits and licenses. CFE exclusively controls the transmission, sale and distribution of electricity in the country. Mexico currently has an effective capacity of 63 GW, 64% of which is operated by CFE (with 20 billion USD in annual sales and 35 million users, with the industrial sector being the largest in the total market with 64% of total value and the residential sector with a 22% share).
The private sector generates 36% of capacity, whether under the Independent Power Producer (IPP), self-supply, co-generation, small producer (less than 30 MW), export or own use schemes. The large majority of private sector power generators fall under the category of IPPs and most of them use gas-fired and combined- cycle gas turbine technologies which may sell electricity to CFE under a 25-year purchase agreement awarded through competitive bidding based on the lowest average generation price. Private generators hold about 12,000 MW of generating capacity.
Private investments in electricity projects were seen by the Mexican government as a way to finance the growing demand for power. Allowing a commercial entity to build and operate its own generating plants enables CFE to bring more power into the grid without incurring additional debt and violating its constitutional mandate of purchasing electricity at the lowest cost. The current proposal of the federal government to reform the regulatory framework includes a larger openness of the generation market and the possibility of the CFE executing contracts with private entities to fulfill its State-exclusive tasks of transmitting and distributing energy. It emphasizes that the State has no interest in owning the resource, that is, electricity, but to bring it “to society at the best possible prices.”
While Articles 27 and 28 of the Mexican Constitution do not consider renewable energies amongst the nation’s assets, it was not until the 2008 reforms that secondary laws included directions to promote renewable energies. The Law for the Sustainable Use of Energy and Financing of the Energy Transition (reformed in 2012) was the first to make a distinction between conventional and renewable energies, and included wind, solar radiation, water, oceanic and geothermal energy and bioenergy in the latter category while strengthening the powers of the Ministry of Energy (Sener) and the CRE to promote and regulate renewable energies and cogeneration from private sources.
The federal government’s tax reform proposal includes a tax on carbon, which may help to level the playing field between renewable and fossil energies. While eliminating electricity subsidies is not proposed in the tax or energy reforms, the CFE has gradually adjusted the fees upwards, especially residential fees.
The only way to meet the goal of reducing the cost of electricity without offering subsidies is to turn to the participation of the private sector in energy generation, which is one of the main goals of the energy reform. According to the statement of reasons of the government proposal for energy reform, while it has considered a 1.1% annual expansion of the transmission grid, it forecasts a 4.1% growth in maximum demand between 2013 and 2026. In order to meet this demand, private investment will be necessary to complement any governmental efforts.
The federal government may consider allocating resources from the carbon tax to develop transmission networks and other vital infrastructure to make the national electricity system competitive, but private investment will be again needed in order to match the rapidly growing demand. This represents a huge opportunity to attract foreign direct investment.
By Isabel Studer, Founding Director, Global Sustainability Institute, Tecnológico de Monterrey. Originally published in October Negocios ProMéxico