Green Way to Expand Mexico’s Wind SectorWed, 02/19/2014 - 11:29
Mexico Power Group was officially spun off from Cannon Power Group in 2011, but founders Brian O’Sullivan and Gerald Monkhouse took their first steps in the energy industry back in 1979. Cannon Power Group was created after Monkhouse decided to get involved in sustainable technologies before this became trendy, citing environmental concerns that led them into an industry that was not yet fully formed. Uncertain as to whether political changes in many countries would result in more support for renewable energy, he and O’Sullivan worked around the world. The entrepreneurs entered various European markets in the 1990s and partnered on projects such as the construction of a 450MW wind plant in Italy, the largest in Europe at the time, which was sold to Enel.
Eventually seeking to capitalize on emerging opportunities in Mexico, Baja California seemed like a good choice to set up shop. “We leased land 15 years ago to carry out wind studies. Meanwhile, the wind market in neighboring California deteriorated due to saturation,” says John Prock, Director General of Mexico Power Group. “This situation gave Monkhouse and O’Sullivan the idea of selling wind energy from Mexico across the border.” Mexico Power Group remains active in Baja California, where the company is finalizing deals with off-takers for its 72MW wind plant in La Rumorosa. A deal has already been inked for the new wind plant in La Rumorosa to supply energy for street lighting to the municipality of Tecate. Another of its wind farms, the 180MW La Bufa project in Zacatecas, will have Volkswagen Mexico as its principal off-taker, signing a 20-year PPA for 130MW. This move will generate estimated savings in electricity of US$3.6 million a year for Volkswagen once La Bufa begins operating in late 2014.
While self-supply strategies have delivered positive results for the country, companies along the border have also sought to import electricity and cheap natural gas from the United States. “Some of our biggest clients in Baja California were very interested but they changed their mind after they identified the opportunity to start importing low cost natural gas,” says Prock. “We seek clients who want to balance attractive prices with green energy.” When working with prestigious clients like Volkswagen, Mexico Power Group is looking for just one or two off-takers per project, particularly those who need to power sites in different locations since self-supplying each location separately is unviable. “The case of Volkswagen was very successful since they were interested in green energy and the cost of electricity we could offer was very attractive for them,” explains Prock.
With natural gas imports from the US now in full swing, Mexico Power Group is planning to build combined cycle plants in addition to its wind projects. While CFE sets the cost of wheeling for non-renewable energy sources based on distance, companies close to the border only need to pay small fees to transmit their energy over short distances. As for renewable energy sources, Mexico Power Group pays a staple price that enables the company to transmit power for the same cost regardless of distance, giving it a unique opportunity to benefit from this useful combination.
Another incentive is that producers can provide energy directly to consumers. “This is not possible in any other country that I have worked in,” declares Prock. Usually, the producer sells its electricity to a utility, but Mexico has only one middleman: CFE. “We have to look to supply companies that cannot afford to build combined cycle plants and that are not close to affordable power from the United States. This has changed our strategy,” adds Prock. However, the effects of the recently approved Fiscal and Energy Reforms must be taken into consideration, he warns. While the Energy Reform will attract foreign investment and promotes the development of renewable energy projects, the Fiscal Reform will become an important challenge to the creation of green energy projects in Baja California, Prock warns. The state’s VAT used to be 11%, as opposed to 16% in the rest of Mexico, but from the start of 2014, Baja California’s VAT will match the national rate. Since Mexico Power Group is based in Baja California and is opening a wind plant there, this governmental decision will inevitably affect its returns on investment.
Besides this setback, Prock sees that Mexico offers plenty of opportunities since only a few companies are well positioned to cover the nation’s power needs. “With the influx of new players following the Energy Reform, it is important to diversify. Although wind energy is Mexico Power Group’s main business, solar energy will become very important in the future as prices drop and technology improves,” states Prock. For the moment, well-developed wind projects will remain its staple. Further decisions may have to wait until the secondary laws to the Energy Reform are finalized in April 2014, given that their impact will be key to determining the future economic viability of different renewable energy projects, especially in border states.