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Analysis

Energy Demand Clashes with Restrictive Regulations

Wed, 02/19/2014 - 10:12

There is no single recipe that is certain to strengthen a country’s renewable energy sector. Each country presents particular social, cultural, economic, physical and regulatory traits which require a tailor-made regulatory framework and planning. Emerging economies and developing markets that possess the quantity and quality of resources needed for renewable energy development often lack a clear regulatory framework, long-term policies, or even the needed infrastructure to ensure smooth progress for sector. A murky framework does not necessarily stifle the expansion of the industry but does make growth harder, riskier and more uncertain.

Mexico is unique in its regulatory and cultural traits. Schemes that found success in Brazil or China would not have the same effect in Mexico. Any Mexican framework would have to contend with the country’s size, geographical position, diverse communities and regional conditions. Furthermore, the constitutional and regulatory implications of the energy sector are quite particular in Mexico. The constitutional conceptualization of public goods and energy resources stems from the actions of President Lázaro Cardenas in 1938 which led to the creation of two state monopolies: CFE and PEMEX. As a result, the Mexican government is the only party that can be involved in so-called strategic areas of the energy sector.

Another particular challenge facing the market is the regulation concerning usage rights and land ownership. These regulations also derive from historical events, starting with the Reform Laws promoted by Benito Juárez more than 150 years ago. The reform in 1922 established the concept of ejidos, or communal lands, to protect indigenous communities and their property. But as the lack of a clear framework was not resolved, the ejidos have become places where rights of ownership or land usage remain uncertain.

The energy regulatory framework in Mexico is full of provisions which can act as barriers to growth. CFE has a monopoly over the provision of electricity as a “public service” and handling transportation, which necessarily implies the building and designing of grid infrastructure. This presents issues for CFE and for project developers alike. Many sites are located far from the grid, greatly raising initial project costs, with many becoming downright financially unfeasible. At the same time, CFE needs to considerably expand its grid infrastructure in order to sustain further economic growth. However it lacks the resources – both human and economic – to facilitate such growth in tandem with meeting growing energy demand.

To deviate from the restrictive regulatory framework, the Open Season scheme was created. This public bidding process invites private interests to pay for the expansion of transmission infrastructure that CFE will eventually build and own. This process aims to develop projects that would otherwise not be financially viable for CFE to carry out alone. The self-supply scheme can only provide growth under certain conditions and is principally an option for large companies that can afford to invest millions of dollars to secure a source of renewable energy.

Unlike some European countries, where feed-in tariffs and subsidies have played an important role in the development of the renewable energy sector, the growth of the Mexican wind energy industry has been driven by market forces. However, the private sector is seeking for the Mexican government to support growth via a scheme that works around existing restrictive regulations, allowing for expanded infrastructure and the creation of a longterm planning strategy. The establishment of such a longterm plan would help to speed along the creation of a local supply chain. However, without guarantees about enforcement, it might not be enough to spark confidence in continued government support of the industry or dispel uncertainty regarding future growth.

Fortunately, Mexico’s GDP is expected to grow at more than 3% in 2014, a rate that is expected to continue matched or exceeded in the years ahead. In order for this to happen, the energy supply needs to be guaranteed in the medium and long-term. Relying solely on hydrocarbons is neither secure nor wise, given that Mexico has already become a net importer of natural gas and can support its energy independence by transitioning towards a low-emission energy industry. Therefore, ensuring the growth of viable and competitive renewable energy sources is destined to be one of the pillars of Mexico’s sustainable economic development.