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Analysis

How Much Is Solar DG Expected to Grow?

By Cas Biekmann | Tue, 02/01/2022 - 11:56

Solar technology’s excellent economics and its viability at any scale combined with a global drive to reach net zero position it for a boom have successfully pushed forward distributed generation (DG) projects in Mexico. However, regulatory uncertainty, a lack of financing options and challenges in the supply chain, as well as logistics hurdles could dampen its growth. Despite the difficulties ahead, experts agree that DG solar will continue to grow in the next year; the question is by how much.

Commercial rooftop and residential power production ties into the DG environment. DG technically refers to any distributed form of power generation, particularly to behind-the-meter solutions installed near the point of consumption. In Mexico, the term is used to refer to power generation below 0.5MW, the legal threshold after which point permitting becomes necessary. In other countries, such as Brazil, this threshold is higher. While this seems like a relatively low cap, 0.5MW of solar equipment can already take up an entire football field of space, just below 1ha.

There are many reasons why Mexico’s energy industry is warming up to DG solar energy. Photovoltaic (PV) technology makes it possible to install as little as one solar panel and gain the benefits, whether isolated or tied to the grid. Mexico has world-class solar radiation levels as well. The technology’s potential was clear from the beginning, but its earliest uses in the past decades made it look more like a novelty than a serious competitor to dominate the global power mix. Dropping technology prices have played a major part in changing this: NREL estimated that since 2010, there has been a respective 64, 69 and 82 percent reduction in cost of residential, commercial rooftop and utility-scale PV systems. Recently, supply chain bottlenecks and rising raw materials costs have driven up solar prices again. Still, PV systems remain cost-competitive compared to other technologies.

Along with these benefits, a real need to reach net zero is driving solar demand. “We are all responsible for reaching the same global sustainability goals in the end. To achieve this, we need to completely transform the energy systems that support our economies,” said Arturo Carranza, Independent Energy Advisor, at Mexico Energy Forum 2021. Governments, companies and consumers are demanding pathways to decarbonization. PV solar might be intermittent but many recognize it as an important part of the puzzle to meet net zero.

 

Collaboration Needed to Overcome Hurdles

Yet, while DG’s benefits are clear, there are several barriers that could slow its growth in 2022. The first issue that jumps out is the electricity sector’s overhaul that the López Obrador administration desires to carry out, introducing uncertainty and anxiety regarding the future in the market. “I have seen the government’s proposal to reform the Constitution and I do not believe it is a good idea at all because it can harm the country’s competitiveness,” explained Mauricio Chapa, Managing Director, Tecsolar, in a recent MBN interview. Yet, DG was not really hit by previous government measures and will likely stay out of shot this time, too, thinks Chapa. “The government is not touching DG because it is not altering Art. 68 of the Electricity Industry Law (LIE), which concerns non-restrictive access to the grid for such installations. If Art. 68 remains, DG users should not be concerned. SENER has also said it will encourage DG. Nevertheless, with the amount of noise going on in the sector, it is hard to tell what is happening.”

If the reform does get voted through Congress, it could paradoxically drive DG solar’s adoption further. “In fact, electricity prices will rise toward the midterm if the reform goes through because CFE is a less efficient power producer. Indirectly, this will push more people toward DG, especially if qualified users and self-suppliers are pushed out of their markets,” said Chapa.

Whether the electricity reform goes through or not, the market could benefit from certainty on this front. “Mexico’s distributed generation (DG) market is not being affected by the political changes impacting the overall sector, but companies are afraid to invest nonetheless because they are not sure what will happen in the future. Money talks, so when there is wariness in the sector, people put investments on hold,” Roberto Moreno, General Manager Renewable Energy Projects, Solar Power Group, told MBN.

Other problems originate from outside of Mexico. The global supply chain for solar modules has been massively impacted by COVID-19, with prices for polysilicon rising through the roof as a result of a perfect storm of negative factors. Similarly, module production is hampered by a global shortage of semiconductors. Logistics, particularly shipping, have become problematic, too, according to Moreno. “In 2020, the cost of shipping a container was around US$2,500. Today, that same container can cost US$16,000. This crisis will not be resolved any time soon. When it does, prices will still be relatively high, around US$8,000.” A trade war between China and the US only adds to the barriers manufacturers and distributors face, since many of the world’s leading brands manufacture in China.

Despite these global challenges, industry insiders remain positive about growth in the sector, even if a desired raising of the regulatory cap to 1MW stays off the table. “I think DG will hit its predicted 5 percent of installed energy capacity sooner than expected by the government,” said Santiago Villagómez, Co-Founder and CEO, Energía Real.

The main barrier that could prevent DG’s growth, therefore, lies elsewhere. “Developing economies represent two thirds of the global population but only one fifth of the clean energy investment. What is more, they only have access to 10 percent of the world’s financial capabilities,” Carranza emphasized. Several experts point out that projects outside of the utility-scale environment face even greater challenges. “Financing, for example, is a major obstacle because financiers care mostly about large-scale projects. If these funds want to boost their green investments, they need to look at smaller projects, as well,” said Moreno.

Fortunately, some see that this situation is already beginning to change for smaller projects: “Development and commercial banks only looked at projects on the large scale; 5-10MW projects were not considered interesting at all. But the situation is changing because banks are adapting and evolving,” said Ricardo Zúñiga, Country Manager Mexico, Capwatt, at Mexico Energy Forum. Now, the real challenge is to generate this level of attention for projects that are still several times smaller. José Zambrano, Director General, Galt Energy, thinks that looking abroad could be useful: “Thankfully, the global energy transition has generated a great deal of disposable capital, mainly from the US.”

The data used in this article was sourced from:  
NREL, ASOLMEX
Cas Biekmann Cas Biekmann Journalist and Industry Analyst