“Current Trends & Expected Development” in Mexican Renewable Energy Market

By Edmond Grieger

Posted: 21st June 2012 08:43

Business opportunities continue to arise in our country’s renewable energy market, primarily from wind and solar projects.  Geothermal, mini-hydro, biomass and biofuels projects are being developed as well by transnational and national companies and further opening in this market is expected following the worldwide trend.
 
The Mexican energy legislation has been modified in important aspects over the past few years, specifically in 2008 with the enactment of several laws in the energy sector, among them, and most importantly through the Law for the Use of Renewable Energy and the Financing of Energy Transition (“LAERFTE”) and its Regulations which entered into force in 2009.  The purpose of the LAERFTE and its Regulations is to provide a clearer and specific legal framework for investors looking to enter into this expanding energy business in the country and to support alternative clean technologies to fight and mitigate the consequences of climate change.
 
The federal government, through the Federal Ministry of Energy (SENER) which is responsible for policy setting, and through the Federal Commission for Energy Regulation (CRE) and the Federal Electricity Commission (CFE) which are responsible for the implementation, has adopted several regulatory instruments and schemes to encourage local and foreign companies to invest in the development of renewable energy projects in our country.
 
From recent studies carried out in Mexico the following information has been made available by the CRE. The estimated wind potential in our country is around 10,480 MW, the installed capacity about 519.8 MW and the objective for 2012 is 1,826.7 MW.  The actual estimated solar (photovoltaic and solar thermal technology) potential is around 5 kWh/m2 per day, the installed capacity approximately 1.67 million m2 and 28.6 MW, and the objective for 2012 is 2.7 million m2 and 34.6 MW.  Biomass and Biogas projects have a potential of 2,675 to 3,771 PJ per year, and installed electric capacity of more less 565 MW, and the objective for 2012 is 637.9 MW.  Other renewable sources such as mini-hydro and geothermal have their objectives as well for 2012, which are 466.8 MW and 891 MW respectively.
 
Pursuant to the current Mexican legal framework the activities consisting of transmission, transformation and distribution, as well as the selling of energy to the public in general, are to this date still considered a State Monopoly.  In light of the above, in 1992 the Law for the Public Service of Electric Energy was amended in order to create six legal schemes that allow the private sector to contribute to the generation of electric energy, which schemes are used today to generate electricity from renewable energy sources.
 
These schemes are (i) self supply; (ii) cogeneration; (iii) independent power producer (IPP); (iii) exportation; (iv) importation for self supply purposes; and (v) small producer.
 
The most popular trend is to develop renewable energy projects under self-supply or cogeneration schemes, where joint ventures are incorporated between investors and developers, and the beneficiaries of such schemes are included as minority shareholders of such corporate schemes in order for them to be directly supplied from the electricity generated by the corporation in which they are shareholders, benefiting from attractive tariffs in contrast to the tariffs offered by the CFE to the public in general.  On the other hand, the Small Producer’s scheme is also getting significant attention and support from the CRE in order to increase private investment in this scheme (for renewable projects under 30MW), where basically the CFE, in accordance with a specific methodology which will be issued soon for such purposes, will purchase through specific public bidding procedures the electricity produced from renewables directly from private producers.
 
In Mexico we do not have “Feed In Tariffs” or similar governmental subsidies for renewables, however regulatory instruments are being implemented by the federal government to incentivize renewable projects, such as a Virtual Energy Bank, Net Metering for small (up to 30kW) and medium scale (30kW up to 500kW) electricity producers, Fixed Transmission Costs and conduction of Open Seasons in order to develop renewable projects in the regions of our country lacking transmission infrastructure.
 
Among other tools used to promote investment in renewable energy, the CRE published a resolution which governs the model contracts between suppliers and generators that use renewable energy, as well as the model Connection Contract for a Renewable Energy Source which is to be executed between the CFE and the generator.
 
Having mentioned the above, I would now like to discuss the steps that, based on our  experience in this emerging practice, an investor should take into account for a successful development of a renewable energy project in our country in compliance with the applicable legal framework: (i) Site assessment, selection and execution of the corresponding agreements with the land owners; (ii) Technical measurements and studies, land use authorization, environmental permits, and other applicable local authorizations and permits such as the construction license; (iii) energy generation permit in the specific desired scheme (i.e. self-supply or cogeneration) before the CRE; (iv) execution of the corresponding grid connection, transmission and service agreements with the CFE; and (v) negotiation and execution of PPAs.  Once the development of a project successfully complies with these stages it is considered a “Ready to Built” project.  It is worth mentioning that the moment for the execution of PPAs varies from one project to another and there are also subsequent steps to be carried out in order to legally operate a renewable energy plant in Mexico.
 
Other mechanisms used to promote renewable energy developments are certain tax incentives such as an accelerated depreciation for projects which use renewable energy sources and Tariff “0” for the import and export of non-polluting or energy efficient equipment and its accessories.
 
We may conclude by mentioning that the Mexican renewables market continues to expand rapidly thanks to the significant and constant support of the federal government.  There are still several efforts underway to offer more incentives, as well as to provide the necessary infrastructure and financing tools to increase the viability of this green business. 
 

Edmond Grieger is a senior associate at Von Wobeser y Sierra, S.C., head of the Energy, Environment and Natural Resources practices of the firm.  He provides legal counsel on environmental and energy matters and disputes.  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 member of the Mexican Bar Association, the Environment and Energy Committee of the ICC, and the Environment and Energy Law Commissions of the IBA. 
 

Edmond can be contacted on +52 (55) 5258 1016 or alternatively via email at egrieger@vwys.com.mx.


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