The postponement of the December auction by the new government, delays caused by environmental permitting and community consultations, and low prices at previous auctions having dampened banks’ appetite for financing are among the market challenges.
The postponement of the December auction by the new government, delays caused by environmental permitting and community consultations, and low prices at previous auctions having dampened banks’ appetite for financing are among the challenges facing developers.
Mexico has taken big strides in solar, awarding around 5 GW of solar generation capacity in the three long-term auctions held since 2015, but the postponement of the fourth long-term electric power auction, originally scheduled for December, has cast a shadow over the continuation of the sector’s recent growth trend.
Energy control centre Cenace attributed the auction postponement to its internal restructuring, and that of the energy ministry and energy regulatory authority CRE, following the entry of President Andrés Manuel López Obrador’s government on December 1. Part of that restructuring includes a proposed 30-percent cut to CRE’s 2019 budget as part of the new government’s bid to trim costs.
Cenace has said a new date will be announced for the auction in due course.
The fourth auction had attracted fewer players than on previous occasions, with 26 companies having qualified to participate by late November, compared with 49 for the third auction, which was held in 2017. However, unlike in the previous auctions, the fourth was to allow for the participation of private buyers of electricity in addition to state utility CFE, with five companies having signed up to participate.
One week into office, López Obrador (known by his acronym AMLO) presented his National Electricity Plan, stating his aim to return the country to self-sufficiency in power generation, which, he claimed, had been relinquished due to previous governments’ preference for purchasing electricity generated by private companies while mothballing CFE-operated plants.
Instead, AMLO plans to increase energy generation by boosting the output of the country’s 60 state-run hydroelectric plants, thus reducing the government’s demand for privately generated power and which may reduce the frequency of electric power auctions.
The National Electricity Plan made no mention of renewable energy generation.
During his election campaign, AMLO had pledged that the renewables sector would generate at least 16 percent of the country’s electricity by 2024, equivalent to around 60,000GWh, while creating around 350,000 jobs in the sector.
AMLO’s plans could offer opportunities for small-scale solar and distributed generation, however.
"AMLO has shown pragmatism with regards to the energy sector, but there is not much in the way of ideology"
His campaign manifesto proposed widening access to renewables for 45,000 communities of fewer than 300 inhabitants that are off-grid, and the creation of technological development centres for skills training, as well as the promotion of renewables installation in the residential and services sectors through investment and fiscal stimuli.
The manifesto also proposed the positioning of renewables as a strategic sector, by providing fiscal stimuli, credits and simplified regulations for companies involved in the sector, as well as for the electric vehicle segment, for which he plans the installation of a network of 1,000 solar-powered charging stations, as well as a sustainable energy program for federal government buildings and installations.
In addition, communal rural landowners, known as ejidatarios, will be entitled to apply for support to set up distributed generation projects.
However, conference panellists at Solarplaza’s Mexico and Central America Solar Asset Management conference in Mexico City last October agreed that the incoming government has lacked clarity regarding its plans for the renewables sector.
“AMLO has shown pragmatism with regards to the energy sector, but there is not much in the way of ideology,” according to Santiago Barcón, CEO of local publication Energía Hoy.
However, “auctions will continue to be a significant driver of solar growth”, according to Carlos Egido, country manager Mexico at renewable developer X-Elio.
Mexico contracted more capacity in its first three auctions than all of the auctions so far held in Latin America. Furthermore, the 2017 auction achieved record low prices for generation projects, of $20.57 per MWh, a drop from the $33.47 registered in the second auction, and which in turn was a reduction from the $47.78 recorded in the country’s first auction in 2015.
However, “for the fourth auction, there are factors that impede prices from continuing to drop, although areas with extraordinary levels of solar resources mean that prices will still remain low”, according to José Luis García Pérez, chief development officer at Zuma Energía.
Solar has dominated all three auctions so far, with a 55-percent share in 2017, 54 percent in 2016 and 74 percent in 2015, and, as a result of the first three auctions, 18 of the country’s 32 states will see the construction of renewable plants, while solar capacity is expected to increase from the current 5.6 GW to 8.3 GW by 2024, and which could mean that 7.3 million households are running off solar by the end of the current administration.
“The paradigm has changed in Mexico, it’s no longer a question of how much renewable energy is available, but how much of the cake are we going to take,” García Pérez said.
But one of the industry’s biggest concerns is project delays, according to García Pérez.
“More measures need to be taken to combat those delays,” he said.
More delays on the horizon?
Some renewable energy projects in Mexico have been delayed by the need to carry out consultations among local communities, as stipulated by the energy reform, and much of Mexico’s agricultural land is communally owned, making acquiring or renting land complicated.
And while solar plants have faced less opposition than wind farms in Mexico, land occupied by PV plants cannot be used as pasture or arable land, which could foment landowners’ opposition to projects.
Two projects that suffered delays due to permitting and land rights issues are Sunpower’s 500 MW Ticul PV plant in Yucatán state, and Atlas Renewable Energy’s 100 MW Guajiro 2 project in Querétaro, both of which were awarded in the 2015 auction, resulting in lead-in times of more than three years.
“The element missing from the energy reform is the social mechanism to translate benefits to communities”
Some observers are also wary that planned PV plants in the Yucatán peninsula, a region of many as-yet unexcavated Maya archaeological sites, could face difficulties in being developed due to opposition from both local communities and the country’s archaeology and history institute (INAH), which is charged with protecting and conserving Mexico’s pre-Hispanic heritage.
“We have to see ourselves as the aliens in a land, and we need to know what the communities need so that we can contribute something,” according to Claudia Vargas, a marketing officer at Acciona México, which is building the Puerto Libertad PV plant in Sonora state.
“Communities need to feel part of the project and not feel that there are ‘aliens’ in their midst.”
“It has been important for the company to understand communities, and their uses and customs,” she added.
“The element missing from the energy reform is the social mechanism to translate benefits to communities,” according to Energía Hoy’s Santiago Barcón.
And Víctor Cervantes, business development manager at IEnova, the Mexican unit of US company Sempra Energy, also highlighted the need for solar projects to have a positive social impact, and the need for transmission infrastructure to be put in place.
But despite some delays, Mexico’s solar capacity buildout continues.
Iberdrola’s 170 MW Santiago PV plant in San Luis Potosí, which is the Spanish company’s largest PV plant in the world, and its 100 MW Hermosillo plant in Sonora state, were completed in 2018. The company has also received approval for the construction of the 200 MW Cuyoaco project in Puebla state, and the 190 MW Apaxco project in Mexico state.
Italy’s Enel Green Power completed the country’s largest PV facility, the 828 MW Villanueva plant in Coahuila state, in September, and is currently building the 500 MW Magdalena plant in Tlaxcala state.
Closing the gap: Financing and connectivity
A report published in October by the country’s business confederation CCE states that Mexico is already seeing transmission shortfalls, with around 44GW of solar and wind power awaiting connection. The report identifies the eastern region of the country as having the greatest transmission shortfalls.
“The success of the auctions means that transmission constraints will emerge, and the grid needs to be strengthened, which will require private companies to be allowed to enter transmission projects,” IEnova’s Cervantes said.
“We hope that the new government adds the ‘backbone’ that the reform needs to avoid such constraints.”
Financing is another hurdle, with many projects awarded at auction still to begin development, and which could prove key to how quickly Mexico’s solar buildout takes place.
But in general, solar in Mexico is seen as being ahead of the rest of Latin America, panellists at the Solarplaza conference agreed.
“We are happy with advances made as a result of the reform and how the bases have been set for distributed generation,” Jack Kahan, director general of IUSASOL, said.
“Mexico is well advanced compared with other Latin American countries, as well as in storage, and we are very optimistic, and not just for Mexico, because the world is taking giant steps, and we feel that we can participate with policymakers in the integrated storage system in Mexico, and the market is beginning to open up,” he added.
He said that growth in solar is also being driven by the rise in electricity tariffs in Mexico, which rose by 80 percent in 2018.
“While gas distribution remains deficient, solar will continue to be an attractive option,” he said.
“However, awareness of solar’s social benefit needs to be increased so that in the future net metering can be more widely adopted, and we can bring electricity to the communities that do not yet have electricity, as well as to schools, and to increase electricity reliability.”
There are currently around 1.3 million families, totalling some 4 million people, still without electricity in the country, according to energy ministry figures.
“Those people need to be educated in the benefits of solar. And after-sales service is very important. Companies must be capable of providing that service to rural communities,” Kahan said.
“As the industry grows, installations are not always optimal, and lifespan of components suffers as a result. Those entering the industry need to remain for the long term. All companies also have to recur to financing, and we need to incentivise and not subsidise, incentivising people to switch to solar,” he said.
He also highlighted the need for Mexico “to learn from its mistakes”.
“Right of way has been a cause of conflicts and delays in the gas industry, for example, and solar companies need to add value to an area, and not just through the creation of jobs, such as adding transmission infrastructure, and so that a project’s neighbours do not put up obstacles to a plant’s development.”
“The Mexican market remains volatile, and there is no historical information on which to base forecasts”
“The [new] government could also foster solar growth by increasing local content in solar component manufacture, which would be a driver of job creation, although the transfer of new technology and knowhow is necessary,” according to Mohammed Alammawi, vice president of sales for the Middle East, North Africa and Europe for German engineering company Manz.
According to Juan Toro, director of Astris Finance, senior financing cannot be mobilised for small projects, such as below $30 million, because project financing is so expensive.
“The PV sector is Mexico is in a difficult situation to finance but it will be more difficult for the upcoming auction,” he said, citing a lack of certainty in terms of prices going forward.
“The Mexican market remains volatile, and there is no historical information on which to base forecasts.”
“If you were willing to have very low ROI, you were winning. Developers need to be prepared to put up their own equity, say 50 percent, to procure financing, because some financial institutions are concerned by the low prices at auction,” Toro said.
According to Angie Soto, Mexico director at Nexus Energía, “the Mexican market has much potential, the reform very well done and it is seen as a reference in many Latin American countries, but for suppliers to sign long-term PPAs market needs to mature”.
Storage: ‘the next big disruption’
“Storage will be key to increasing the solar power footprint in terms of reliability and handling load shifts,” according to John Padilla, managing director at energy consultancy IPD Latin America.
“Storage costs have fallen by 50 percent over the last two years as lithium-ion equipment costs continue to drop, based on more cost-effective batteries, better integration and lower-cost inverters,” he added.
He said solar costs in general are expected to decline by 10-20 percent over the next decade.
And while Mexico is rapidly tapping into its solar potential, Padilla said there is still much untapped potential, given Mexico’s high solar irradiation levels, and where there are multiple states in which solar projects can be developed.
“Mexico is one of the most interesting markets in the region,” he said.
Gauss Energía operates the Aura Solar I plant in the peninsula state of Baja California Sur, and Olea revealed that the company is to bring the first utility-scale battery storage project in Mexico into operation in the coming months in the state’s capital La Paz, and which he said will be the first solar-storage project in Mexico and the largest in Latin America.
“These are very exciting times, and we are breaking the glass ceiling,” he said.
“We need to convince the authorities to create a regulatory framework for storage"
“We believe in storage as a means of complementing solar, and we can use storage infrastructure to further the development of renewables.”
He explained that Baja California Sur, which runs on a separate grid from the rest of Mexico, is like an island in terms of its grid isolation, and that by using storage, the peninsula’s capacity can be increased.
However, he highlighted the need for the government to introduce a new regulatory framework for storage, given its importance in allowing for the solar power generated to be used outside daylight hours.
“We need to convince the authorities to create a regulatory framework for storage. We need to develop that in order to understand how we can monetise storage,” he said, explaining that storage is still seen as a generation asset, but must be regulated differently.
“The next big disruption we are going to see in the energy sector is storage, and we need to know how we are going to be positioned to take advantage of that opportunity. Any company not considering storage now is unwise, and storage will dramatically change the way we do business in two or three years, as quickly as that,” he said.
The outstanding issue however is how the authorities are preparing for that, he said.
“Mexico has high irradiation and with big potential, of up to 20GW of solar"
“We have to be proactive as investors because the regulators are not moving forward at the same speed. The private sector has a lot to say and the regulators are open to listen, which is a good thing, and we have to work with them and understand the limitations. Business has to come first.”
“Mexico has high irradiation and with big potential, of up to 20GW of solar. Storage is necessary to utilise power at night, but the key to developing storage in Mexico is regulation,” according to Pablo Araujo, a senior manager at GE Power.
“Storage is proven technology and the ROI is there, the price of batteries has dropped and that makes it a viable application,” according to Chuck Smith, executive vice president of O&M sales for the US and Latin America at German solar equipment supplier SMA.
“SMA has been in storage sector for 25 years, primarily in off-grid, and we see this market growing by about 25 percent per year, which is a pretty amazing clip, and we are seeing that spread between utility scale and commercial and the residential side,” he said.
However, in order that storage is effective, he said PV plant managers must take into account that a new skill set is needed to serve new components, and companies must ensure increased responsiveness, as extending the duty cycle requires 24-hour service availability, and the higher potential revenue losses demand faster reaction times.
Battery storage also requires monitoring and supervision, with a detailed collection and analysis of battery data, and long-term expertise is required, he said.
Agreements with battery manufacturers, and the availability of spare parts on-site that can be quickly switched, can avoid long downtimes, he added.
“Storage is an opportunity for more investment to enter the PV sector,” he said.
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