Capitalizing on Opportunities in Renewable Energy Projects

An aging grid system and an uncertain market environment represent great obstacles to renewable energy investments, which hinder the operations of private players. According to experts, Mexico will nonetheless embark on an accelerated energy transition sooner or later, regardless of the issues ahead. By looking toward adequate risk management, many of these issues can be handled as companies work to supply much-needed clean energy.

“The energy transition is here to stay. All the actors involved must collaborate to find opportunities since there is a lot of interest from foreign players to invest in renewable energy projects,” said Omar Castillo, Vice President of Energy Industry, BBVA.

Investment is a crucial factor in further accelerating Mexico’s energy transition. While critical decisions taken in the energy sector may be guided by political ideology, experts agree it is important to keep strengthening the renewable power sector.

“We are at a pivotal moment; we must develop new businesses based on renewable energy while taking into account our commitment to future generations,” said Érika Santiago, Senior Manager of Foreign Affairs, Communication and Sustainability, AES Mexico. 

An accelerated increase in renewable energy-based power production will not only benefit the world in terms of climate change. This topic is also strongly related to other areas such as health and even the global economy since global warming can negatively affect between 5% and 20% of the global GDP, explained Santiago.

Mexico’s environmental ministry, SEMARNAT, has reported that power production accounted for 49 percent of the country’s CO2 emissions in 2021. According to the International Renewable Energy Agency (IRENA), renewable energy is one of the key technologies that will help achieve a reduction in harmful emissions.

Furthermore, growth in renewable energy would foster more investment, enhance energy accessibility and improve Mexico’s power system. According to the US National Renewable Energy Laboratory (NREL), the country could attract US$17 billion of direct investment if Mexico were to achieve its goal of supplying 35 percent of its energy production with clean energy.

Among the benefits of higher integration of renewable energy are lower industrial production costs, a decrease in the sill somewhat polluting natural gas-fired electricity generation, lower regional marginal electricity generation prices, less fuel consumption, smaller increases in emissions and a positive impact on transmission congestion, as the most congested interconnections generally see less congestion with more renewable power present.

Mexico has many advantages that increase its attractiveness as a country to invest in renewable energy projects, including good solar and wind resources and a growing energy demand. “Energy development in Mexico is a parallel business to the electricity market. This allows big players to manage prices and ensure profitability,” highlighted Santiago. Also, the projects that already exist in Mexico are among the most competitive in the world, their levelized cost of energy unmatched.

However, some challenges are hampering the progress of these projects in the country. “Although our grid is well-designed, it requires a lot of planning and investment. This may be a limitation for the inclusion of renewable energies,” said Brice Clemente, Managing Director Renewables Mexico, ENGIE Mexico. What is more, grid operators must deal with the intermittency linked with solar and wind projects. To face this problem, different projects have been developed such as the use of batteries in solar parks, which make the network more stable and help maximize its potential. 

“Mexico must eliminate its energy distribution bottleneck. This is the first step to take advantage of the country's considerable renewable energy potential,” said Daniel Hermann, Market Manager Power and Renewables, DNV. “Consumers are seeking competitive, reliable and clean energy,” he added, highlighting that Mexico has plenty of incentives to further develop such renewable energy sources.

Amid uncertainty, risk management has become critical. According to the experts, developers must to execute a continuous risk-management strategy through their energy supply contract, in addition to analyzing different scenarios and monitoring the market as well as the changes that may lie ahead.

Due to this issue, financiers such as banks grow in relevance since they are in charge of accompanying all investors in projects related to decarbonization and ESG, explained Castillo. "Previously, banks focused on profitability. Now, a bank wants a project to have ESG components as well as a great scope in economic terms, that it has the potential to contribute to the country and that its financial projections are adequate,” he said.