Mexico is turning into a rising clean energy investment hot spot, in what the Institute for Energy Economics and Financial Analysis (IEEFA) calls an under-publicized but “powerful market example of what can happen when an emerging economy is committed to clean energy.”
IEEFA traces the turnaround to a series of reforms originally targeted at the country’s petroleum sector.
The analysis notes that two electricity supply auctions in 2016 in Mexico drew a combined 126 bids from renewable energy developers. The country accepted 41 bids for a total of 2.5 gigawatts of supply, broadly distributed between solar and wind. The average price of bids in the second auction in September, at US$33.47 per megawatt-hour, was 30% lower than in the previous auction, in March,
“One reason such auctions are attracting enormous interest,” the IEEFA writes, “is that Mexico’s energy reform mechanisms are driving investor appetite.” Controversial reforms undertaken by Mexico’s deeply unpopular President Enrique Peña Nieto early in his six-year mandate “streamlined and simplified the permitting process for new projects and created a wholesale electricity market, which allows large industrial customers to purchase electricity directly from wholesalers.”
Peña Nieto’s 2013 initiative included commitments to tap renewable sources for “more than half of the 120 gigawatts of new power generation capacity expected to be installed by 2040, halving the electricity sector’s emissions intensity while materially lowering real electricity prices,” IEEFA notes. A more immediate target mandates that 35% of Mexico’s electricity must come from clean sources by 2024, “effectively doubling renewable energy’s current market share.”
But the research group cites other factors that help position Mexico for clean energy development. Its geography in the dry, clear-skied sub-tropics delivers a solar resource “comparable to some of the other best locations in the world, including in the Middle East and North Africa (MENA), and across Chile.” Mexico has also enjoyed access to relatively low-cost financing that keeps costs down for large projects.
On those strengths, the report concludes that “Mexican wind and solar power have already achieved grid parity with traditional fuel sources, mostly because electricity prices historically have been very high. It has done so without feed-in tariffs, tax credits, or other subsidies.”
That’s not quite correct: power bills are subsidized across the board in Mexico. However, Luis Muñozcano, deputy general director for renewable energy in Mexico’s energy secretariat, revealed in an interview with Bloomberg New Energy Finance that the government is considering shifting its subsidies from energy consumption to the purchase of home rooftop solar systems that would eventually save the state money.
“Removing the subsidy completely would be ‘politically suicidal,” IEEFA notes, citing Muñozcano. But designing an alternative system, in which households produce their own energy locally, would change the energy generation landscape for the better.
The biggest cloud on Mexico’s investment horizon, of course, is the uncertainty surrounding incoming U.S. President Donald Trump’s intentions toward the country. After speaking with Muñozcano, however, BNEF declared the nation’s energy strategy, at least, to be “resilient to Trump-led U.S.”
But the main reason is a barbed one for Mexico, IEEFA acknowledges. “Because it is a net importer, not an exporter, of energy products,” Mexico will be spending money in America, and for now, has not much riding on sales there.
That said, Muñozcano emphasized to BNEF that with new grid interconnections on the drawing board, “there is a great potential for energy exports on both sides.”