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IN DEPTH: The explosion of Mexican solar

Of all the emerging solar markets around the world, Mexico is arguably the most promising.

When legal reforms were passed last year that allowed large-scale private investment in the energy sector for the first time, Latin America’s second-biggest country simultaneously agreed ambitious targets for renewables — 35% of the electricity mix by 2024 and 50% by 2050 (up from 18% at the end of 2014, which was mostly large-scale hydropower).

The government subsequently unveiled a series of renewables tenders — the first of which was held in March, with the second one coming this month — as well as rules and regulations that encourage self-supply and distributed generation in both the commercial/industrial (C&I) and residential sectors.

Mexico is an ideal market for the PV industry, with among the highest solar irradiation in the world, says the Mexican Solar Power Association, Asolmex.

It also has a large power-hungry population of 120 million, with energy demand growing at 4% a year. Consequently, prices are high and rising fast — Mexicans pay around 25% more for electricity than their US neighbours, which has hurt consumers and businesses alike. Solar promises to be not only the environmentally friendly option, but a cost-saving one too.

“Mexico combines all the key ingredients that we look for in a market to invest: its resource is magnificent, it has growing demand for energy and the government has made very strong statements supporting renewables,” says Nam Nguyen, senior vice-president of SunPower.

The Mexican government has been smart about attracting private investment into its solar sector.

The power-purchase agreements (PPAs) awarded in the tenders are denominated in US dollars, so investors do not have to worry about currency instability, and the restrictions on importing solar panels are less strict than other countries, with only a 15% import tariff on Chinese-made cells and modules — compared to the 23.28% counterveiling duties and up-to-239% anti-dumping tariffs in the US.

At the March tender, bidding was highly competitive, with solar accounting for 70% of the energy sold (the remaining 30% was for wind). Twelve PV projects totalling 1.9GW, or 4TWh, were awarded, with America’s SunPower picking up the second-largest share, at 500MW. Other winning foreign players included China’s Jinko Solar, Italy’s Enel and Canadian Solar-owned US developer Recurrent Energy.

Few had predicted quite how low the winning bids would be — the average price was roughly $45 per MWh, with Enel bidding under $40. Analysts believe that some of these winning projects must be loss leaders, indicating how keen some companies have been to get an early foothold in this fast-growing market.

But the March tender has been heavily criticised, with many of the winning bids being seen as unrealistic — not only for their low prices. Some had not received environmental licences and did not have the rights to build at the project location — in other words, they did not have the go-ahead from the land owner or the authorities.

“I don’t think there are too many positives from keeping prices below $50/MWh,” says Manan Parikh, senior Latin America analyst at GTM Research, adding that he believes many of the winning projects will never be built.

Many of the 110 companies that had paid to formally register for the March auction — including Spain’s Iberdrola, Acciona Energia and Solatio — decided not to enter bids, seemingly waiting for a more stable playing field.

Parikh says many of those companies that stayed out of that auction will bid in this month’s tender and that prices will be much higher this time around, close to the ceiling price of $63/MWh. A total of 10TWh in 15-year PPAs are up for grabs, with 60-70% of winning bids expected to be solar.

Mexican energy secretary Joaquín Caldwell said he expects $2.6bn to be invested through 2018 in the 18 solar and wind projects contracted at the first tender.

Asolmex goes further, predicting that $5bn will be invested in solar power by 2020 — including $1.8bn in the 12 solar PV plants contracted at the first tender — expanding utility-scale solar installed capacity to 4GW, from less than 100MW today.

Parikh expects 7GW to be installed by 2020, including C&I and residential.

Self-supply

Under new regulations laid out in last year’s reforms, by 2018 all C&I consumers — as well as the distribution companies — need to guarantee that 5% of their electricity supply is renewable or they can acquire Clean Energy Certificates issued by investors in clean-energy operations. From 2019, this requirement will be increased to 5.8%.

By buying solar power through self-supply contracts, savings of more than 5% can be achieved. It also means businesses can fix power prices for a longer time period, avoiding fluctuations in the cost of energy.

Although self-supply has been allowed since the early 1990s, it wasn’t until last year’s reforms and the resulting drop in solar prices that this market really took off, says David Muñoz Andrade, director of Mexico development at Texas-based Buenavista Renewables.

“The energy reform created a stable policy that opened up markets that weren’t available before,” he says.

“Our main focus is commercial and industrial small and medium businesses who are the backbone of the economy and who pay a very high electricity rate.”

The opportunities in this market are larger than one might expect. Buenavista signed a contract to build a 15.8MW plant in the northern state of Chihuahua to supply a local schools network and a car parts manufacturer. It is already preparing another project of 68MW.

Rooftop

The government has also created several programmes to boost rooftop solar — ranging from state utility CFE’s own support for urban rooftops and rural electrification to net-metering legislation, electric car incentive programmes and official financing schemes. For the rooftop sector, cost-savings are the main driver due to the high price of electricity.

Asolmex and the Mexican Institute for Competitiveness have drawn up some measures that they want the government to adopt in order to speed up distributed generation, including clearer and faster grid connection regulations, simpler contracts and the regulation of the role of CFE to guarantee competition.

By the end of 2015, more than 117,000 rooftop PV contracts had been signed, up from 63,000 at the end of 2014.

According to the government, rooftop solar — both residential and C&I — will top 1.2GW by 2028, up from a measly 41MW today.

Manufacturing/module supply

According to a study by Pricewaterhouse Coopers, seven local module assemblers have set up in the country, including SunPower — with a 1GW plant in the Mexican-US border town of Mexicali — Japan’s Kyocera and Sanyo, and four local companies. Yet about 60% of locally made modules are exported, mainly to the US and Chile.

Javier Durand, executive president of the Mexican Photovoltaic Equipment Makers group, AMFEF, says exports are closer to 90%, but he believes that figure will fall quickly as solar installations ramp up, adding that some Chinese firms are considering setting up local factories.

In total, there are more than 170 companies importing, installing and maintaining PV equipment in Mexico, says Pricewaterhouse Coopers,

and if the sector grows according to the government’s plans, the solar industry could add 24,000 jobs by 2022 and increase the country’s GDP by 50bn pesos ($273m).

Asolmex president Héctor Olea says: “The energy reform has opened new ways for the participation of the private companies in the power sector. A few months ago, the materialisation of these reforms seemed very far away. But now the changes are a reality that are transforming Mexico.”

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