Monthly interview –  March 2017

Even though there is a revolution in Latin America and the Caribbean towards a sustainable mix of renewable energy, the region mainly stills depends in hydroelectric energy and fossil.

One of the leader countries in the implementation of alternative renewable energy sources is Mexico. At the end of 2013, President Peña Nieto signed and economic reform law. The Amendment of the constitution opened the oil and gas energy market to private foreign and local investors.

I am talking today with Tabaré Arroyo Currás, he is the Regional Director Sustainable Energy Policy at WWF Latin America & the Caribbean based in Mexico City.   In this position, he leads regional policy and strategy development, as well as implementation, of WWF’s work on sustainable energy with focus on cooperation among countries of LAC region. Tabaré has over 10 years of combined experience in energy and climate strategies, policies and economics. In the past, he has been appointed as WWF delegate to the intergovernmental Panel on Climate Change (IPCC)  and the International Renewable Energy Agency (IRENA).

Background information:

It is expected that the electricity consumption in the Latin American and the Caribbean region increases around 3% per year, so that for 2030 it will be required to have double the installed electric capacity reaching 600,000 MW. (1)

Considering the challenges of infrastructure latent in Latin America, and the fact that for some alternative energy less construction is required. The renewable energy could become the main source of energy production.  Therefore it is expected that the energetic source mix will move towards a most sustainable model.  

Mexico has outstanding renewable energy potential. By the end of 2015 installed capacity was 17,8 MW –including hydropower- and supplied more than 15% of total electricity produced in the country. Wind energy accounted for over 4% of total installed capacity and ca. 3% of total power generation in the country. (2)(3)

Currently, Mexico is one of the most attractive countries for renewable energy investments in Latin America only after Chile (4).  During the period 2011-2015, total renewable energy investments cumulated 12.36 billion dollars; only in 2015, 4.1 billion dollars occurred in this sector, almost two times the level of 2014 and more than 30% the historical maximum of 3.1 billion dollars achieved in 2012. Over this period, most of the investment landed on wind energy projects.(5)(6)

The Mexican government has built a propositional regulatory and financial environment that offers certainty to investors. In 2003, there was an installed capacity of less than 1 MW of wind power operated by private companies. By the end of 2015, this has exceeded 2,800 MW. (2)

In México, power generation is dominated by conventional technologies, ca. 80%, almost entirely fossil fuels, and only the 20% remaining represented by clean technologies; being large hydropower responsible for 10% of total electricity generation. (3)

Observing the evolution of the Mexican wind sector, this energy represents technology with the fastest growing and highest penetration in recent years. During the period 2005-2015, wind energy grew at 107% on yearly average. It is estimated that by 2030, wind energy could supply at least 10% of total electricity in Mexico, 5 times more than what it supplies nowadays.

Q1: Is there a common strategy between the Latin America countries?  cooperation between the countries?  Trend?

I do not think there is a common strategy; circumstances are different in each country. Nonetheless, it is clear countries have started thinking how to create more favorable business environments by strengthening energy policy and regulatory frameworks. For example, Mexico’s Energy Transition Law, approved in 2015, incentivizes investments in renewables by introducing energy certificates designed to support power generation from clean energy. This is an encouragement to use revenue from the sale of certificates in new renewable energy projects.

Mexico is a renewable energy champion among Americas countries. Mexico has clear long-term ambition of achieving 35% of its electricity by clean sources by 2024 (this includes nuclear and co-generation).  Additionally, Mexico, together with the USA and Canada, announced its commitment to strive to achieve a North American 50% clean power goal by 2025, based on scaling up clean energy through aggressive domestic initiatives and policies and collaborating on cross-border transmission projects (including for renewable energy), among many other strategies.

Under its Nationally Determined Contribution (NDC), Mexico is committed to reduce unconditionally 25% of its greenhouse gases (GHGs) and short-lived climate pollutants emissions (below business as usual) by the year 2030. Power generation will contribute to reduce 31% of the CO₂eq  (that is, about 63 million tons CO₂eq ) projected by 2030. Under current trends, renewable energy, together with energy demand reduction and energy efficiency improvements, will lead Mexico to achieve such goal and head towards at least 40% clean electricity by 2035 and 50% by 2050.

Q2: Mexico is one of the countries in the region with the biggest potential for developing sustainable renewable energy. What is the country strategy? Which initiatives have been implemented?

To some extent Mexico has started to visualize that the time to turn the energy sector around has finally come. Mexico, although economically diversified, has largely depended on oil exports. Only in 2014, one-third of fiscal revenue came from oil sales; this is particularly concerning given the price volatility of the energy carrier in international markets- as lower prices times have shown-. Moreover, gas imports from the US states has been increasing over the time and now imported gas covers about 40% of Mexico’s national demand. Finally, as signatory party of the Paris Agreement on climate change, Mexico is committed to contribute to global reduction of GHGs so average increase of temperature remains well below 2°C above preindustrial levels. All this, has encouraged Mexico to create and modify laws, rules and norms to foster the use of cleaner energy sources and reduce dependence on fossil fuels, while accelerating the energy transition towards cleaner technologies. Implicitly, Mexico has bet on non-fossil energy sources as a way to increase energy security and diversify the energy matrix.

Today, Mexico has a National “Energy Transition” Strategy, which fosters the use of cleaner technologies and fuels in accordance with the National “Energy Transition” Law, one of the results of Mexico’s Energy Reform. In this way, a solid energy policy framework is in place to ensure: barriers to investments are overcome; clear renewable energy goals are adopted; instruments that address environmental and social impacts of energy infrastructure projects are set in place; power commercialization takes place in competition; fiscal instruments to favour renewable energy upscaling are implemented; a regulatory shelter is given to distributed energy; and, new power transport infrastructure is incorporated in line with clean energy goals.

Q3:  In 2013, the energy reform in Mexico was signed. Which initiatives were implemented to facilitate the participation of foreign companies?  

One highlight worth mentioning is Mexico’s 2016 energy auctions. These auctions, by allowing different renewable energy technologies to compete for electricity, firm capacity and clean energy certificates, have proved to be a good mechanism to promote a long-term and healthy environment for businesses. The way auctions work is that government issues calls for tenders to procure capacity or generation of renewable energy power. Participants submit bids with a price (e.g. $/MWh or $/MW) at which they can compete. Bidders that fulfil criteria and pledge for the best price sign a long-term (usually more than 10 years) power purchase agreement. Simple. Auctions help driving renewable energy prices down quite fast, thus, accelerating competitiveness against other technologies. In the case of Mexico, this has not been the exception. For instance, second 2016 auction derived into average wind prices of USD 36.2/MWh (down from USD 54.3/MWh in first auction) and average solar prices of USD 32.8/ MWh (down from 44 USD/MWh in first auction). Together, both auctions will expand capacity in  1,658 MW of wind and 2,953 MW of solar.

Q4:  Switzerland has a wide experience in renewable energy, which would be your recommendation for these companies? Areas of opportunity?

I see massive potential for solar energy to uptake in Mexico; particularly in the distributed energy domain. Already in 2015, when solar prices were much higher than today, it was estimated that at least 500,000 homes with high power consumption would be potential clients for solar. Today the market value of solar distributed is above USD 250 million, and could reach USD 500 million by 2018. Furthermore, it is estimated that there is still a market opportunity of 60 GW of distributed solar yet to be untapped. 

In my view, real opportunities remain on innovation of businesses models. The “soft costs” account for a large share of the total cost of a rooftop solar system in Mexico. These soft costs include installation labor; customer acquisition; and other costs  (margins, financing costs, administrative costs, etc). Thinking outside of the box and bringing businesses models that target ways to decrease soft costs can deliver market advantages to companies aiming at investing at Mexico’s solar market.

About WWF

WWF’s mission is to stop the degradation of our planet’s natural environment, and build a future in which humans live in harmony with nature. To achieve this, we work with our many partners to save biodiversity, and reduce humanity’s impact on natural habitats. We strategically focus on conserving critical places and critical species that are particularly important for their habitat or for people.

Sources:

1. WWF, Líderes en Energía Limpia: Países Top en Energía Renovable en Latinoamérica, 2014.
2. SENER, Prospectiva de Energías Renovables 2016-2030, 2016
3. SENER, Prospectiva del Sector Eléctrico 2016-2030, 2016
4. E&Y, Renewable Energy Country Attractiveness Index, October 2017
5. BNEF,Climatescope 2016, 2016