Energy reform triggers wind take-off in Mexico

MEXICO: The fine details of Mexico's new legislation to liberalise its energy market have yet to be thrashed out, but experienced wind developers in Latin America's second-biggest market are pushing ahead with optimism and confidence.

“Mexico is lining up to become the world’s next big wind market”  Ramón Fiestas, Latin American committee chair, GWEC
“Mexico is lining up to become the world’s next big wind market” Ramón Fiestas, Latin American committee chair, GWEC

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The ongoing energy reform in Mexico has been holding back the take-off of its wind power market, but now the sector's engines are revving up and expectations are high. The federal energy secretariat (Sener) is targeting 12GW by the end of 2020, which requires around 1.5GW of new capacity annually over that period. More conservative observers expect the figure to be around 1GW a year. The country's optimism is underpinned by a federal objective to source 35% of electrical power from renewables by 2024, up from less than 5% today.

"Mexico is lining up to become the world's next big wind market," says Ramon Fiestas, chair of the Latin American committee of the Global Wind Energy Association (GWEC). It is already second only to Brazil in Latin America. GWEC puts Mexico's total online wind capacity by mid-2014 at 1.92GW, 300MW up on the total at the end of 2013 — an increase close to the 380MW installed in the whole of last year. Fiestas tallies 714MW currently under construction, with a further 3.77GW in development.

Potentially, Mexican market activity this year could top its 2012 record of 662MW of new installed capacity, but this is far from guaranteed. Newer development is less centrally controlled and uncertainties regarding the reform, especially those affecting electricity prices, could hold back finance. Meanwhile, Mexican wind association Amdee is pushing for assurances from the government to maintain existing agreements and conditions for projects already building or with building permits.

"There is a split in the market," says Brian Gaylord, Latin America specialist at Make Consulting. "Many experienced developers and savvy offtakers are still signing power purchase agreements (PPAs), but less experienced players are in wait-and-see mode," he says. Over 2014-15, Gaylord expects around 2GW to go up, although some of this could be delayed. After that, he expects around 1.3GW in new capacity annually to 2023.

"But what is important is the upward tendency, backed by political will, which is forcing through new renewables legislation," says Fiestas. Politicians simply need to turn the tap back on.

Ending the monopoly

The secondary legislation fleshing out the electricity reform law of December 2013 should be completed by the end of the summer. The law's core structure is already in place, centering on the liberalisation of all energy sectors and ending the 75-year state monopoly for fossil fuel and electricity written into Mexico's constitution. Until the 2013 law, state utility and grid operator Comision Fedral de Electricidad (CFE) had monopolised power generation and trading.

"Liberalisation is a game changer and will open the doors to a whole new wave of power customers and developers, including smaller developing outfits," says Mauricio Velasco, research coordinator at Amdee.

The oil and gas sectors are the prime movers behind the reform. Financing difficulties have kept state-owned fossil-fuel monopoly Pemex from drilling increasingly complex hydrocarbon sites. Yet there has been long-mounting foreign interest in those reserves, especially from the US. President Enrique Pena Nieto of the governing Institutional Revolutionary Party (PRI), which took office in 2012, has made something of a mantra of his own intention to remove all obstacles to foreign investors across Mexico's energy sector. And behind the renewables commitment is energy minster Pedro Joaquin Coldwell, a staunch supporter of wind power and a key architect of the overall reform.

Coldwell was responsible for the 35% renewable electricity target to 2026. This May he announced Sener's renewable-energy programme, aimed at meeting 33% of power consumption from renewables by 2018, including 9.5GW of wind. "(This is) optimistic and probably not attainable, at least not without huge grid improvement contracts being signed very soon," says Gaylord.

Still, this political will has already been translated into a draft regulation reducing the size of customers allowed to sign private power purchase agreements (PPAs) to a 3MW load, from 5MW previously. That partly explains this year's influx of membership applications to Amdee from foreign developers, claims Velasco.


Until now, the push by successive federal governments for more wind power needed loopholes to work around the electricity comission's monopoly. The bulk of online capacity came through a series of so-called open seasons starting in the mid-2000s. Through these open seasons, CFE "outsources" some of its power generation via auctions in which wind developers make competing offers to invest in new power lines and substations. In return they receive grid connection permits linked to a power contract with CFE, which sets the power price.

This was clearly aimed at deep-pocketed major corporations, says Jesus Zaldua, who chairs Spanish turbine maker Gamesa's Latin American division. So far, big Spanish wind corporations such as Iberdrola, Endesa (now part of Italy's Enel), Gamesa, Acciona, EDP (whose renewables headquarters is in Madrid) and Gas Natural, have dominated that scene.

Another loophole, behind nearly all the 1.92GW of pipeline projects, is called "self supply", by which developers sign private PPAs with big power consumers, mainly manufacturers and mining companies. Self-supply is legally defended on the grounds that it affects only private companies.

But the increasingly significant amounts of variable wind planned will affect the grid. Part of that problem is resolved by the creation of an independent central transmission system operator (TSO). The existing grid watchdog, the National Energy Control Centre (Cenace), will take over all TSO functions from CFE, which still acts as a distributor. Cenace is independent of generation interests and will ensure independent assessment of grid-connection applications as well as planning the much needed grid extensions and reinforcements nationwide.

Among the big uncertainties yet to be resolved is the shape of the liberalised market and possible mechanisms to support federal renewables targets. While there are talks of creating a wholesale spot electricity market, Velasco and Fiestas believe negotiations will leave wind and other renewables out of that.

Rather, they believe wind will continue operating through private PPAs and open-season calls, which are the options Amdee prefers. Current online wind in Mexico averages a capacity factor of 35%; much higher at many sites. With the price achieved for wind power in CFE's auctions hovering around the $65/MWh mark, according to figures for 2008-2012 handled by GWEC, and some self-supply contracts cited as high as $95/MWh in 2013, wind is an attractive option.

Earlier talk of introducing a green certificates system seems to be losing ground, says Velasco. And Spain's retroactive end to feed-in tariffs has warned reformers away from that possibility.

Community opposition

Meanwhile, Oaxaca state, which harbours nearly all of Mexico's online wind capacity, remains plagued by local indigenous community opposition to Spanish developers trampling over land rights. Most famously, the 396MW Marena project — sold by Spanish developer Preneal to a consortium led by Japan's Mitsubishi and Danish pension fund PGGM — is now more than two years past its commissioning schedule, without a single turbine going up.

CFE's plans to auction 1.2GW of wind development licenses have stumbled, with local opposition forcing the cancellation in 2013 of the 200MW Sureste I, Phase I, allocated to Spanish utility Gas Natural. Only Sureste I, Phase II, allocated to Italian utility Enel, is moving ahead, with construction announced end-2013. Amdee has set up a special agency in Oaxaca to bring wind developers and indigenous opponents together to discuss solutions regarding communal land right issues.

Last year the states of Tamaulipas, Nuevo Leon, Jalisco and Chiapas commissioned wind capacity, breaking Oaxaca and Baja California's exclusivity as wind power states. These regions are less dominated by Spanish developers. For instance, this year, Mexican cement giant Cemex announced its 252MW Ventika development in Nuevo Leon state and local corporation Mexico Power Group started building its 180MW La Bufa project in the central state of Zacatecas.

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