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Analysis

Consolidating Clean Energy Security

Mon, 02/25/2019 - 13:42

In February 2018, CENACE reported Mexico’s National Electricity System consumption reached 22,248GWh compared to 21,687GW in February 2017, a 3 percent increase consistent with PRODESEN’s projections. In 2017, Mexico’s National Electricity System consumption totaled 309,727GWh. Should the growth estimations prove correct as stipulated in PRODESEN 2018-32, Mexico could reach a yearly electricity consumption of 482,545GWh by 2032, a 56 percent increase compared to 2017. Needless to say, CFE and Mexico’s IPPs will have their hands full catering to the country’s electricity demand in the foreseeable future.
On the power generation side, PRODESEN 2018-32 estimates that Mexico’s existing installed capacity of 75GW will remove 11GW of either contaminating or obsolete power generation assets and install an additional 66GW of installed capacity by 2032, bringing the country’s total generation capacity to 130GW. In this scenario, combined cycles, conventional thermoelectric, internal combustion and turbogas will retain the lion’s share of Mexico’s energy mix, with a combined 51 percent and renewable energy an aggregate 38 percent including wind, solar, hydroelectrics, PV, geothermal and bioenergy.
A NATURAL GAS-POWERED FUTURE
As showcased during the country’s long-term electricity auctions, renewable energy can compete head to head and win against conventional generation technologies due to reduced costs in PV and wind component manufacturing. Despite these positive advances, renewable energy’s prevailing Achilles’ heel remains intermittency. While battery-based energy storage is now a proven technology in more developed markets, it has yet to reach the scalability levels required to become competitive enough and be inserted as an integral component of a renewable energy project’s design. “Natural gas imported to Mexico from the US is the cheapest available on a global scale. There is no way for energy storage to compete in a market where natural gas is on hand at such a cost-effective price,” says Ramón Moreno, CEO of Mitsui Power Americas. “Battery-based storage does provide a set of characteristics absent in natural gas-fueled combined cycle plants. These are mainly short response times and frequency control for certain responses requiring an electricity grid. Mexico’s ancillary services structure does not provide a place for battery-based storage.” CENACE is still undergoing internal discussions to adapt ancillary services to storage characteristics. Moreno adds that combined-cycle plants fit renewable power generation well as they complement renewable energy intermittency, especially considering the capacity mechanism available that could prove sufficient to cover combined-cycle’s fixed costs. Variable costs can be covered by energy market prices. “Mexico’s energy model structure is made to inject renewable power complemented by combined cycles rather than incentivizing energy storage per se. From a regulatory and electricity system design standpoint, it remains unclear whether energy storage will serve generation or transmission purposes,” he says.
Despite renewable energy’s reliance on natural gas to maintain a baseload stable enough for a continuous, reliable and quality energy supply, it does not prevent IPPs, traditionally versed in conventional power generation, from turning to renewable energy. “AES’ goal is to invest a total of $2.5 billion in clean energy projects by 2023. Renewable energy’s cost structure makes it extremely attractive for meeting energy consumption needs. The primary advantage lies in renewable energy’s total autonomy from commodity price variations. Variation in renewable energy generation can be minimized by mixing with other technologies, even though resource studies are among the most critical parts of renewable energy development,” says José Arosa, President and CEO of AES Mexico.
GOING HYBRID
The first pages of Mexico’s renewable energy history were led by large-scale hydroelectric projects. The Necaxa hydroelectric dam was inaugurated in 1905 and remains operational today. Some industry insiders argue that water power should not be ignored in the mix; in fact, it could be an integral contributor. “Mexico is a megadiverse country, with large deserts in the north and excellent irradiation levels. Tamaulipas and Oaxaca have rich wind resources, added to rich geothermal and hydroelectric locations. There is no one winning solution. A successful strategy would be truly diversifying and capitalizing on the range of natural resources at our disposal instead of limiting ourselves to certain regions or a couple of power generation technologies,” says Jacobo Mekler, President of AMEXHIDRO. While hybrid renewable energy plants typically refer to PV and wind farms equipped with energy storage systems, water can also be considered for these innovative combinations, he says. “In addition to having much larger energy storage capacity, dams are the cheapest form of energy storage. This technology is not subject to a battery’s short useful life,” Mekler adds.
Battery-based storage, however, has started to gain relevance in the conversation as specialized companies take an increased interest in the technology’s potential in Mexico. “The key issue behind energy storage solutions in Mexico lies in finding an attractive business model for battery-based energy storage systems,” says Lionel Bony, Regional Director Mexico, Central America and the Caribbean of Neoen. “There are three ways of looking at it, based on how other markets started integrating them. First, imposing regulation such as that implemented in Baja California. Second, developing a business case around trading and ancillary services. Third, including the technology in the rules of the long-term electricity auctions in locations where the electricity infrastructure available makes energy storage attractive. Mexico has yet to develop an energy mix where the share of intermittent power generation technologies makes energy storage a necessity, except in highly congested nodes where we should soon see them appear.”
TECHNOLOGY-SPECIFIC AUCTIONS?
To guarantee the country’s energy security, industry players are raising their voice and arguing in favor of technology-specific auctions to go beyond the argument of cost-effectiveness, allowing that the new federal government restarts the auction process in time. Echoing Mekler’s call to use all of the country’s abundant renewable energy resources, Rafael Valdez, Managing Director Latin America and the Caribbean of Envision, called on Mexico’s authorities to reassess the objectives sought with the long-term electricity auctions. “The country’s long-term electricity auctions do not differentiate the type of technology used. While the mechanism has worked since the first edition in 2015, where Mexico proved to be the most competitive country with the lowest auction prices registered in any other market, this is not necessarily sustainable. The percentage of PV power awarded in the long-term electricity auctions is revealing. Although solar power has proven more cost-competitive compared to wind power, a large share of PV generation carries a specific set of risks. If PV takes the lion’s share of the energy mix, its intermittency can compromise not only Mexico’s energy mix balance but also the electricity grid’s stability,” he argues.
Technology-specific auctions can bolster other prominent technologies, such as geothermal. Mexico is estimated to have the fifth most important geothermal reserve but it remains unused due to its capital-intensive development. “Given the extremely low prices offered during the long-term electricity auctions, the lack of certainty in the execution of those projects and even the continuity of the auctions, we have decided to work mainly out of the wholesale electricity market by entering into bilateral contracts,” explains Gerardo Hiriart, Director of Grupo Enal. “While the development of a specific auction for geothermal energy can be an option but remains unlikely, the biggest market opportunity for geothermal technologies is with high-energy consumers that consider this technology’s costs less important compared to the reliability and security of the supplied energy,” he added.
Looking beyond the US$/MW benchmark is critical when gaging renewable energy projects, Mekler believes. “Gaging utility-scale projects according to development costs is insufficient," he says, adding that factors such as Mexico’s international standing and energy security should also be considered. "Hydroelectric projects are not playing on a level field with the other technologies under the long-term electricity auction scheme," he continues. "For instance, a hydroelectric project takes between three to four years to be built. Long-term electricity auctions call for two to two-and-a-half years of construction. Failing to differentiate hydroelectric’s virtues in a long-term electricity auction environment makes competition virtually impossible against cheaper technologies watt per watt." Moreover, he points out that the design of the long-term electricity auction overlooks the possibility of additional income from ancillary services to inject competitiveness into hydroelectric power. "As per the auction bases, when projecting nodal marginal prices, no differentiation is made between base, peak and average rates," he says. "Peak rates in the market are 250 percent higher than base rates. In the long-term electricity auctions this difference falls to 18 percent.”