From Left to Right: Erick Hernández, Partner at Greenberg Traurig, Martín García, Sustainability Manager of Cinepolis, Gabriela Larenas Ruiz, Sustainable Projects Director at NAFIN, Leonardo Beltrán, Deputy Minister of Planning and Energy Transition at the Ministry of Energy and Moderator Jordy Herrera, Former Minister of Energy

From Left to Right: Erick Hernández, Partner at Greenberg Traurig, Martín García, Sustainability Manager of Cinepolis, Gabriela Larenas Ruiz, Sustainable Projects Director at NAFIN, Leonardo Beltrán, Deputy Minister of Planning and Energy Transition at the Ministry of Energy and Moderator Jordy Herrera, Former Minister of Energy

Mexico finds itself at a crossroads as it embarks on a political transition while it is determined to reach its clean energy goals, combining renewable energy generation, energy efficiency and reducing greenhouse gas emissions. During a networking cocktail organized by Mexico Energy Review and Mexico Business Events and sponsored by Envision and Vive Energía, industry experts, development banking representatives, private off-takers and government officials gathered in a panel to discuss what is in store for Mexico’s new energy model for 2018-24.

 

Energy Model Milestones

 

At its core, Mexico’s Energy Reform was meant to inject greater competitiveness to the country’s economic activities with cleaner and cheaper electricity. “By encompassing a short, mid and long-term vision and designing an integral cover of all the energy industry’s sectors, we encouraged the participation of all players, including civil society, the private sector, academia and government agencies to set the stepping stones of Mexico’s future energy industry,” said Leonardo Beltrán, Deputy Minister of Energy Transition and Planning at the Ministry of Energy.

 

By absorbing global best practices across the oil and gas and electricity value chains, Mexico was able to craft an energy model to cater to its specific needs. “There is no other precedent in obtaining tangible results over such a short period of time,” Beltrán said. Case in point, Beltrán shared with the audience that IEA’s Energy Policies Beyond IEA Countries Mexico 2017 estimated Mexico needed US$600 billion in investment to reach crude oil production levels well over 3 million b/d and retain a leading crude oil exporter status by 2040. “Only five years after the reform’s implementation, Mexico has raised over US$200 billion in investment,” he said.

 

Mexico’s first steps in renewable energy can be traced back to 2010, when the first wind farm in the Yucatan peninsula was being developed. “Eight years later, the country obtained record-breaking prices in wind farm projects during the third long-term electricity auction. Compared to 2013, Mexico increased its solar and wind capacity five-fold as of December 2017, representing close to 21 percent of Mexico’s energy mix. Given the growth curve of the country’s renewable energy projects, we expect to reach our 50 percent clean energy generation landmark 12 years earlier than the set objective of 2050,” said Beltrán.

 

Building a Durable Regulatory Framework

 

The country’s favorable business environment, showcased by the inflow of investments in the energy industry, stems from a solid regulatory framework and competitive financing conditions. “The Energy Reform started with a framework laid out to establish the basis of the subsequent secondary laws. It is a well-designed legal foundation that provides flexibility and paves the way for specific regulations. This intricate design was the first of its kind in Mexico,” says Erick Hernández, Partner at Greenberg Traurig.

He identified some areas of opportunity where the country’s regulatory entities should focus on next. “It is an ongoing process. ASEA is working full steam ahead to provide an assertive framework on industrial security based on success stories from more mature markets. The electricity chapter of the reform, embodied in the Electricity Industry Law, is sound. Its rules, norms and ancillary regulations designed the basis for open and transparent auctions to propose safe, clean and reliable power generation projects,” Hernández explained. Going further, Hernández believes regulators must focus their efforts on markets that have yet to be fully deployed, such as electricity transmission and distribution.

 

While industry players find themselves confronted with an increased amount of obligations and permitting procedures, Hernández insists that the complexity of Mexico’s new energy model is paramount to ensure the long-term success of the country’s power generation projects. “Prior to the reform, land tenure procedures often ignited social conflicts and inhibited international financing flows. Now, the reform’s specialized chapter on land occupation reduces risks by adopting a preventive focus to inject certainty to Mexico’s upcoming multi-million utility-scale generation projects,” Hernández said.

 

Panel attendance during Mexico Energy Review and Mexico Business Event's Networking Cocktail, sponsored by Envision and Vive Energía

Panel attendance during Mexico Energy Review and Mexico Business Event’s Networking Cocktail, sponsored by Envision and Vive Energía

 

Boosting Merchant Projects and Bilateral PPAs

 

Developing utility-scale renewable energy projects is in essence, a financial structuring exercise. The sizable amounts of investment required for the upcoming 8.8GW of installed capacity of Mexico’s first three long-term electricity auctions prompted the country’s development banking institutions to enter the fray. “To date, we have financed 6,000MW of renewable energy installed capacity, representing a total investment of US$6 billion, coupled with a committed credit of an additional US$1.5 billion,” said Gabriela Larenas, Sustainable Projects Director at NAFIN. “By establishing fixed electricity rates, relying on Triple A off-takers and scalability factors, we were able to consolidate a mixed portfolio of legacy projects and long-term electricity auction projects with 15-20-year PPAs that will start operations in 4Q18,” she added.

 

The increased competitiveness in each edition of the country’s long-term electricity auctions left several ready to build projects serious enough to be considered as auction contenders without a coverage contract. The answer for said projects, Larenas said, is the wholesale electricity market. “We are studying the country’s more than 2,400 electricity nodes to evaluate which projects can go fully merchant and inject liquidity into the wholesale electricity market. Durango is the first success story in that sense, as the home of the first full merchant PV farm in the country.”

 

Off-Takers’ Experience in the Wholesale Electricity Market

 

Energy consumption accounts on average over 30 to 40 percent of a company’s yearly expenses. Mexico’s energy model was designed for companies to be able to gradually allocate that expense share into strategic productivity increase investments to renew Mexico’s industries’ competitiveness both locally and globally. “It boils down to ensuring energy security, energy quality and long-term availability,” said Martín García, Sustainability Manager of Cinepolis. The Mexican entertainment giant started prospecting market variants in 2014. “We began with distributed generation projects in Baja California because of the electricity rate levels in that entity. Gradually, we were able to distance ourselves with previously critical commodities for our energy consumption, such as natural gas price variations and exchange rate fluctuations.”

 

While Cinepolis remains apprehensive over electricity rates’ volatility, it is convinced that a diversification strategy regarding its power sources to mitigate risks and that the wholesale electricity market has all the tools required to look at energy supply in the short, mid and long-term. “We are satisfied with the support the market provides for off-takers. We are closely looking at the opportunity to become qualified suppliers as soon as the country’s political transition is fully in place,” García said. Cinepolis is confident that the market will reach maturation levels within eight years. “In the meantime, we are riding the market’s learning curve slopes as it matures, reaching out to financial institutions such as NAFIN and market experts to make the most of the unlocked opportunities it includes.”

 

 

Discussing the areas of opportunity of Mexico's New energy model and the country's political transition

Discussing the areas of opportunity of Mexico’s New energy model and the country’s political transition

 

Preparing for the Future

 

Looking ahead, Mexico is preparing to welcome an increased fleet of electric vehicles and is consolidating its distributed generation niche. Beltrán announced that a corridor between Mexico City, Guadalajara and Monterrey was in the pipeline to develop the required infrastructure for electric vehicles. “While our current electric vehicle fleet is in the thousands, we expect it to grow to 25 million vehicles by 2033. It is critical for electricity supply to be ready to cater to that demand in an increasingly sustainable way,” he said.

 

On the distributed generation side, NAFIN, the Mexican Banks Association (ABM), the National Council of Certification of Labor Skills (CONOCER) and the Ministry of Public Education, are drafting a program to train qualified PV system installers. The continuation of Mexico’s energy transition strategy stems primarily from technology, training, market mechanisms and the regulatory framework. “We must make sure we are capitalizing on future areas of opportunity in consolidating Mexico’s energy market. The government’s purpose is to ensure the country’s well-being and economic growth. We must not be discouraged from consolidating a 100 percent clean energy mix,” Beltrán added.

 

 

Would you like to know more about Mexico’s Renewable Energy industry? Click here!

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