Common Sense and Profit Make Solid CombinationWed, 02/19/2014 - 14:20
The journey that took Donald Walter from inside the Beltway to inside Mexico has been a curious one. From having worked in Washington, DC, as Director of Research and Policy in the White House for the Reagan administration, he moved to developing public policy and governance initiatives in countries such as Colombia, Venezuela and Peru throughout the 1990s and 2000s. Walter first came to Mexico in 2002 to work on a political campaign in Sonora. With a background in public policy, rather than engineering or environmental advocacy, Walter takes a different approach to the Mexican solar industry than many competitors. “Internationally the industry is typically driven by greed and dysfunction. Highly developed countries, like the US, Spain and Germany, have artificially propped up the solar industry through feed- in tariffs and public land giveaways. This was corruption, feeding itself upon a broken financial model,” says Walter. “The US poured billions of dollars in public funds into advancing private interests. So, my approach is different as it is based on common sense and profits.”
His interest in solar grew after he settled down in Sonora and looked at the real estate needed to make solar work. Walter and his partners bought several parcels of land across northwest Mexico. One of these is next to an existing CFE power plant, which allowed for very easy access to the grid. He sees it as possible to build more than 10 projects in that area that will all benefit from easy grid access and low costs. Their company, Sonora Energy Group Hermosillo (SEGH), is now building a utility scale, private PV plant after having received its production permit from CFE.
The project, dubbed SEGF CFE 1, and located in Puerto Libertad, Sonora, will be the first project at the utility sale to sell electricity directly to CFE and to several private off- takers, with a planned capacity of 250MW. Walter states that the first phase of the project, at 46.8MW, is quite small from the perspective of an international developer. “But for us, our project is the biggest and most important facility in the world. Despite its initial installed capacity, our model is threatening to others because of what it represents. First, our project is developed by industry outsiders proving that a PV project is not complicated. Second, our project is in Mexico demonstrating that this country, like so many others stereotypically ignored by US-based banks and investors, is a safe place in which to work. Third, our project makes solid returns,” he explains.
To Walter’s mind, many competitors from around the world will not succeed in the Mexican market, despite a wealth of experience. He links this to the track record of the European solar market, which he says was hooked on “welfare from feed-in tariffs.” He adds that “while such projects are receiving US$0.10 a kilowatt, the developers often borrowed at around 9%. That means that if anything happens to the feed-in tariff, they are done as they will start losing money for every single kilowatt they put into the grid.” SEGH will be sidestepping any such problems by seeking to buy its components economically. “Our development strategy is to buy the best panels, trackers and parts without owing allegiance to anyone.” This attitude towards efficiency and economy is one that Walter sees as a direct challenge to all developers. Under SEGH’s strategy, if a rival team cannot operate a utility scale solar project in Mexico at under US$1,500 per installed kilowatt, they simply do not represent competition.
The confidence Walter exudes about the Mexican solar market is based on SEGH’s strategy to profit from the fast price drop of PV panels and inverters combined with Mexico’s strong solar resources. However, matching his point about companies failing here, he expects the Mexican solar market to experience a contraction sooner or later. “Just because there is a new market does not mean that your product is going to work in that market.” The Mexican solar sector presents certain particular traits that make it essential to develop a customized business model in order to be successful, which will determine which companies survive the market ordeal. Walter says that SEGH’s success is also based on its ability to select sites that sidestep many of the problems that can affect renewable energy projects. When selecting a site, solar irradiation is not the only important aspect to consider in terms of location, Walter says. Buying land fence-to- fence with CFE allows for easy interconnection to the grid. Furthermore, owning the land means SEGH does not run into land usage issues or other problems that can stagnate the development of a project.
Cost is also at the forefront of Walter’s mind as a critical success factor. The project development costs and the interest rates set by the financial backers are what determine the utility margin. “If costs and interest rates are too high, then the utility margin will be negative or very low. Developers want a safe investment with a solid return while consumers want cheap electricity,” Walter points out. This means that for solar energy to be competitive, solar parks have to be developed with very low costs.
According to Walter, it is essential to make optimal use of the supply chain for solar equipment. “Companies that claim they make panels rarely do. They may assemble the panels from the cells but if you follow the supply chain, they are being manufactured in China. We get panels directly from China and get the storage from Nadcap, the largest manufacturer of lithium-ion batteries in the world. Buying panels directly from the real producer dramatically diminishes costs. This results in US$80 million investment for SEGH, including the substation and 4-5% storage availability at our plant, instead of an investment of over US$100 million. If a park cannot be built at a reasonable cost, it will not generate profit. But if companies are not making money from renewables, they will turn to natural gas to develop more profitable projects and less renewable energy projects will be installed.”