RECAI: Country focus

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RECAI 41 - Country Focus: Mexico

The end of an era Mexico’s energy sector is undergoing a transformation. A late 2013 legislative overhaul will end the state’s 75-year monopoly on oil, gas and electricity production, establish a competitive electricity market open to private investment, and help create an independent grid operator.

Price wars. A deregulation program will inevitably also look to reduce electricity prices, not least to help Mexico position itself as a global manufacturing hub. In some parts of the country electricity prices are around 25% higher than in the US for example, making renewable technologies like wind and solar seem relatively cost competitive without subsidies. This is largely a result of Mexico’s reverse tiered retail pricing system creating low rates of US$60–US$90/MWh for consumption up to 150kWh but as much as US$200–US$300/MWh above this.

Feeling the pinch. As a result of this, developers have focused mainly on consumers, or regions likely to pay these higher rates, which also encourage large corporations signing direct PPAs with developers via Mexico’s self-supply scheme. However, a push to lower electricity prices by increasing market competition, and the fact much of the country benefits from low electricity prices under its tiered system mean renewable energy will come under increasing pressure to show its cost-effectiveness.

Self-sufficient. These energy reforms may affect the self-supply mechanism (or autoabastecimiento) that has so far supported more than 60% of Mexico’s wind power capacity. The scheme enables developers to use the state-owned transmission and distribution network via a fixed fee per kWh for supplying electricity to private offtakers, without plants having to be located close to end users. Under the scheme, large energy consumers like Walmart, Cemex and Grupo Modelo (InBev) have already partnered with wind developers to directly source wind energy.

PPA shift. The latest energy reforms, combined with a finite number of large, bankable offtakers, could shift the self-supply model toward a structure that sees IPPs signing bilateral PPAs negotiated in the wholesale market. The bill could also expand the market by helping the entry and exit of offtakers in power contracts, currently limited under self-supply.

Solar hot on the heels. With average solar insolation almost 60% higher than Germany’s, Mexico’s solar sector is long overdue a surge in activity. This looks about to change though, with GTM Research predicting it will become Latin America’s largest market by 2016. BNEF analysis indicates a current solar pipeline of almost 900MW, while Mexico’s Energy Ministry forecasts as much as 2,170MW by the end of the decade.

Transforming tomorrow. While the detailed secondary legislation supporting the energy reform bill is still being prepared, and a period of transition will inevitably result in some uncertainty, the potential impact is significant. Bank of America estimates the reforms could generate an additional US$20b of foreign direct investment as early as 2015, strengthen the peso, and boost economic growth. Meanwhile, an influx of new foreign and domestic companies into the market, combined with an already burgeoning renewables market, will forever transform Mexico’s energy landscape.

Also in this article:

  • Aiming high
  • Blowing a gale
  • Project frenzy
  • More to be done
  • Market proof
  • A helping hand
  • Carbon conundrum

Read full article pdf, 2.9MB


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   Koen van’t Hek