Bet on Mexico Wind Pays Off

The US economy’s slower pace of growth in the last decade drove American energy companies to look south of the border for new business opportunities. Oak Creek Energy was among those that placed a strong bet on Mexico’s nascent energy industry, a wager that is now paying dividends. To establish a foothold the company acquired Frontera Renovable in 2012, a Mexican developer with a number of wind projects in the pipeline in northern Mexico. “Since that date, our company has dedicated a great share of its resources to Mexico, particularly after the implementation of the Energy Reform,” says Fernando Villarreal, Director of Project Development at Oak Creek Energy, a wind project developer with over 30 years of experience.

Oaxaca was the crown jewel of wind energy in Mexico when Oak Creek Energy decided to invest in the country’s renewables sector but the company went against the prevailing winds and instead targeted the north. “The region showed great wind potential but remained largely unexploited, making us one of the first companies to develop wind farms in Tamaulipas,” says Villarreal.

Three factors drive the company’s interest in other locations: availability of attractive wind resources, trends in energy demand and electricity grid interconnection capacity. The Energy Reform added nodal prices into the mix and those are now crucial to the attractiveness of a project’s location. Nodal prices were identified as the main factor behind Yucatan’s transformation into Mexico’s next renewable energy hub during CENACE’s first power auction. The state also benefited from the auction’s economic structure. To promote investment in regions with the highest energy needs, states like Yucatan were assigned an adjustment factor to reflect the real value of energy in that area. For instance, if a company offered energy at US$100/MWh in Yucatan, it was perceived by the system as US$78.02/MWh ( a factor of US$21.98/ MWh), giving it an advantage as the cheapest offers were selected first. Oak Creek Energy believes the auctions, the second of which was held in September, are beneficial to the wind business, even though solar energy projects won most of the megawatts tendered in the first two auctions. Wind did, however, win a higher percentage in the second round than the first, at about 43 percent. “In the present market environment, power auctions offer great opportunities and add certainty to project development in Mexico, particularly as they involve long-term PPAs with CFE, ensuring the energy produced has a stable off-taker,” says Villarreal. “Wind energy is quite competitive at the moment. Mexico is craving a diversified electricity matrix and we believe that wind energy will be an important component of the future energy system.”

CELs are another aspect introduced by the reform and have added value to renewable energy projects, contributing to the auction success of solar and wind. “We believe CELs are a good incentive to promote renewable energy projects in Mexico, but it is too soon to determine the extent to which they can boost the country’s renewable industry,” Villarreal says

Oak Creek Energy also is waiting to see the Ministry of Energy’s final regulations for Social Impact Assessments (SIAs) on energy projects. “SIAs’ guidelines are not yet completely defined, making the whole process more challenging for us. We will continue working with the communities, slowly incorporating the new guidelines until the definitive regulations are published,” Villarreal adds. The company has already worked with ejidos and rural communities for its projects in Mexico, which allows them to look at the new regulations with an experienced eye. “In the current regulations, we have identified certain areas related to land rights that we expect will be modified as the guidelines are improved.”