Mexico’s renewable energy market

Considered one of the largest economies in Latin America and located in a privileged geographical location to expand and support the exploitation of renewable energy, Mexico plays a big role in the sustainable development of the region, however, most energy is actually obtained from fossil fuels and therefore a big task is still ahead of the country in this sector.

Business opportunities are currently arising from renewable energy projects, primarily from wind, solar, biomass and biofuels. In this regard, expectations of further opening on this market in the face of worldwide demand are growing every day.

In accordance with the most recent information published by the Federal Commission for Energy Regulation (CRE), around 76% of the energy in Mexico is generated from fossil fuels; the second most important source is the hydroelectric with 19%, whereas only 3% is produced from renewable sources and 2% from nuclear plants.

The energy legal framework has experienced several important modifications in the past few years and has provided a clearer legal background for foreign and national investors looking towards this expanding green business in the country.  The renewable energy framework is found in the Political Constitution of the United Mexican States, the Law for the Public Service of Electrical Energy (1975), and more recently with the Law for Sustainable Exploitation of Energy (2008) and its Regulations (2009), as well as the Law for the Exploitation of Renewable Energy and Financing of Energy Transition (2008) and its Regulations (2009).

Due to international and national environmental policies, several national strategies and programs have been published by the federal government to set the objectives to be achieved by the state in the short, medium and long run in order to reduce greenhouse gas emissions and increase the capacity of generating energy from renewable resources.

The Special Program for Climate Change (2009 – 2012) provides for a long term vision by reducing green house gas emissions in 50% for 2050, with respect to 2000 emissions.  On the other hand, the National Energy Strategy (2010) sets objectives for 2024, where natural gas exploitation should range in 94% and the capacity of renewable energy in 35%.

As mentioned before, there are also short term objectives set forth by the National Strategy for Energy Transition and Exploitation of Renewables (2011).  The goals for 2012 are to reduce fossil fuel generation by 4.75% and increase generation from renewable energy by 3.95%.

In connection with the roles played by the government in this sector, we could divide them into policy setting, which is carried out by the Federal Ministry of Energy (SENER), and policy implementation by the CRE and the Federal Electricity Commission (CFE).

The applicable legal framework provides that the rendering of energy services to the population is considered a state monopoly executed through the CFE, though the private sector is allowed to carry out activities, regarding self-supply, cogeneration, small scale generation (up to 30 MW), medium scale generation (up to 500 KW), big scale generation (more than 500 KW), as well as energy export and import.

The most popular trend in this market is to develop renewable energy projects under a self-supply or cogeneration scheme, where joint ventures are incorporated between investors and developers, and the beneficiaries of such schemes are included as minority shareholders of such joint venture schemes.  The beneficiaries are usually local government bodies, such as municipalities, governmental buildings, states, as well as a wide branch of companies in the private sector.

To illustrate an example of these schemes, we could mention the BENLESA renewable energy project in the northern State of Nuevo León, which is considered the first renewable energy project in Mexico and Latin America using the biogas from a landfill as fuel.

BENLESA is the result of a joint venture between the private company Bioeléctrica de Monterrey, S. A. de C. V. and the government of the State of Nuevo León.  The electric power generated at BENLESA is destined to about thirteen associated public entities, such as municipalities, Monterrey City Metro Station and other public buildings.  The BENLESA biogas plant was opened in September 2003.  The plant’s current generation capacity is 7 MW, and it has recently modified its cogeneration permit to expand its generation capacity up to 12.72 MW.

Provided in the country’s renewable regulations, we have several mechanisms to promote foreign and national investment in renewable energy, such as renewable portfolio standards included in the aforesaid national policy; net metering methods and specific models for grid interconnection agreements with the CFE; tax instruments consisting in benefits for the purchase and import of equipment to be used for the generation of renewable energy; as well as a financial instruments such as the National Fund for the Energy Transition and Sustainable Exploitation of Energy.

Another important incentive is the initiative between the Mexican Government, the World Bank and the Global Environment Facility (GEF).  The initiative will be supported by a donation of up to USD$70 Million (in two phases) and aims to compensate for the differences that exist between conventional electricity generation costs and generation utilizing renewable sources.

These instruments, already existing in Mexico, show the efforts the Government is making to develop a market for renewable energy.  However, it is uncertain that these measures are sufficient to attract the private investment necessary to reach the renewable energy capacity targets established.  On the other hand, we also have several barriers affecting this market, for instance the obligation of the CFE to find the lowest price for the purchase of energy, the deficiency of infrastructure for grid connections, the scarcity of financial mechanisms and other economic incentives for this market.

In spite of the fact that there are still some barriers to investment in the branch, the Mexican renewable market is a fast developing sector which is being significantly supported by the federal government.  In this regard, there are several actions to be implemented in order to offer more incentives, as well as to provide the adequate infrastructure and financing mechanisms to boost investments in this rising market.

Edmond Grieger is a senior associate at Von Wobeser y Sierra, S.C., and specialises in environmental and energy law.  He provides legal counsel on environmental and energy matters and disputes and has successfully represented national and international clients. He obtained his law degree from the Universidad Anáhuac and a Masters in Law (LL.M.) specialising in environmental and energy law at the Johannes Gutenberg Universität Mainz, Germany.  He is a member of the Mexican Bar Association, the Environment and Energy Committee of the ICC, and the Environment and Energy Law Commissions of the IBA.  He can be contacted on +52 (55) 5258 1016 or by email: egrieger@vwys.com.mx