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DG Consolidates Growth Under Adverse Renewable Energy Policy

By María José Goytia | Tue, 08/23/2022 - 16:35

Distributed Generation (DG) has seen unprecedented growth in the past years. With Mexico’s energy policy stalling renewable utility-scale developments, the private sector has turned to DG as the alternative to move forward with its decarbonization agenda.

In Mexico, DG projects often involve smaller solar generation systems with a maximum capacity of 0.5MW, the power equivalent to between 10 and 20 percent of a company’s energy needs. DG is a less-regulated sector than utility-scale projects, which have faced major setbacks since President López Obrador took office.

As utility-scale developments face a major slowdown due to a stop in permits and federal policy in favor of fossil fuels produced by state-owned PEMEX, the private sector in Mexico sees DG as “the only option available at the moment,” to pursue their energy transition goals, said Andres Friedman, CEO, Solfium to Reuters.

With DG projects, the development timeline gets drastically shortened, as they do not require a generation permit and approval takes just a few weeks. Installation is also faster, as solar panels are placed on a property. "Companies have said, 'that's it, we are going to be in control of our destiny with distributed generation. We can do it immediately,'" said Friedman.

Sector experts have estimated DG investments in Mexico have topped US$3.5 billion in the past eight years, with another US$500 million expected by the end of 2022. "Right now, in Mexico commercial and industrial (C&I) clients do not have any other options, so that has pushed more clients toward the DG market," said Valentina Izquierdo, Solar Analyst, Wood Mackenzie.

Meanwhile, the government has made efforts to avoid utility-scale development and discourage further solar and wind participation in the energy matrix. President López Obrador's policy shift has infused deep uncertainty in the renewable energy sector, as at least nine major projects amounting to more than 1,000MW by large developers such as BayWa and Enel are currently stalled as they await permitting from the state power regulator, CRE. A similar situation repeats with Iberdrola’s already-built 100MW wind farm, which was denied a power generation permits.

López Obrador’s policy bolstering CFE and PEMEX at the expense of private investors has increased tensions with its main trade partners, the US and Canada. The US has demanded dispute settlement talks with Mexico under the USMCA framework, arguing the moves against private investors are discriminatory and breach the free trade agreement. Canada has joined complaints.

The president denies this and stands behind his policy, assuring it is designed to restore equilibrium in a market he believes was rigged in favor of private capital by previous governments.

USMCA consultations are set to finish in September. In case no agreement is reached, a formal panel will be installed. If a panel decision went against Mexico, trade experts say the country could face billions of dollars in retaliatory tariffs.

Furthermore, even with DG’s explosive growth, Mexico is already certain to still fall short of its climate goals for 2024, given that government policies will continue to prioritize fossil fuels and state-owned companies over a stronger transition strategy. Mexico's most recent electricity development plan (PRODESEN) for 2022 through to 2036 the country's previous commitment to generate 35 percent of its energy from renewable sources by 2024 delays by seven years.

With President López Obrador’s term finishing in 2024, many industry experts hope for the much-needed policy shift during the following administration. Meanwhile, Mexico’s energy sector remains in an uncertain turmoil that inhibits the energy transition and the country’s economic development. Nevertheless, DG’s development still looks favorably.

The data used in this article was sourced from:  
Reuters, Mexico Business News
Photo by:   Pixabay
María José Goytia María José Goytia Journalist and Industry Analyst