Hydropower’s Real Benefits Remain Undervalued

Q: How has the company dealt with the shifts in the energy sector during the past year?

A: It has been a difficult year, not only because of the pandemic but also because of the steps the government has taken to try to limit private participation in the energy sector. We have had all kinds of measures from CRE, SENER and CENACE, which have affected private investments. Many amparos have been filed in response to these regulations, often with success. Nevertheless, the environment for private participation has already been altered severely.

In April, CENACE’s reliability policy sought to limit interconnection of new renewable projects. As a result, many newly constructed projects were not able to go online, not allowing projects that had already been financed and built to commence operations. These decisions have had a big impact on the sector. Furthermore, projects operating under the old regime of Self Supply faced a huge increase in transmission costs, more than 500%. This has put companies that have been operating successfully for years in deep financial trouble, with amparos again being filed. All of Comexhidro’s projects have been affected by this measure.

Q: How has this situation influenced COMEXHIDRO’s project portfolio and pipeline?

A: We developed our first gas-based project in conjunction with a group of companies led by Invenergy, a 600MW open cycle gas plant called Los Ramones. We had all the financial resources to build this but the pandemic caused delay that pushed our project past the commercial operation permit deadline. As a result, for the past five months, we have been waiting to interconnect the completely finished plant and have not been able to do it because CRE had not responded on time because of COVID-19. Furthermore, the company has a pipeline of solar projects it has not been able to build yet. We want to be sure that if we build these on time they will be allowed to interconnect. Some hydroelectric projects that we had under development have been delayed because even though the project had the 'Free, prior and informed consultation' approved by SENER, the project has been delayed by three years. It is not unreasonable to say that the company has been strongly affected.

Q: How do you assess the competitiveness of small hydro-based projects compared to solar and wind?

A: It is a difficult time to compete for hydro. One of the greatest competitive advantages offered by hydropower is that it can start and stop very quickly, which gives the network the necessary flexibility to allow for the penetration of renewables. Currently, the market does not pay much for these charges, which are a very important part of the income that hydropower needs to be competitive. In other words, if we analyse only the energy price component, hydropower struggles to compete with wind and solar. This is simple mathematics: to build a large solar farm, the investment is roughly US$800,000 per MW. For a wind farm, it is US$1.2 million per MW. Hydro still hovers around US$2.4 million per MW, two times as the cost of wind and three times the cost of solar by comparison. Therefore, hydropower only becomes attractive if the market values anciliary services and Capacity as well. 

If you examine Mexico’s weak grid system, you would think that hydropower would be much appreciated because it brings stability to the grid. The dams of the hydroelectric plants work as a battery because of their storage capacity. Unfortunately, the market does not pay for this as it should, although this might change given President López Obrador’s push for more government-owned hydroelectric projects. If you want to incorporate a lot of intermittent renewables into the grid, hydro makes for a great combination. You can stop or start operations at any time, without needing additional backup. It can provide energy whenever the grid needs it the most. This would make the transition from fossil fuels to cleaner energy easier.

Q: Have you considered the viability of Comexhidro to use its expertise to build hybrid projects, combining wind or solar with hydroelectricity?

A: We have analyzed some opportunities to this end. These can incorporate wind and hydro and also hydro and solar. In China, a new trend is emerging to cover dams with floating solar panels, which provides an interesting opportunity. In hot areas, putting solar panels on top of a lake even helps to reduce water evaporation. This is a valuable added benefit for areas where water is scarce. Also new wind turbine inverters allow for a connection with the solar array that can maximize interconnection capacities as wind in some areas in Mexico blows in the evening and night while solar hours do it during the day making a great complement to maximize plant utilization and sharing interconnection costs.

Q: What challenges is Comexhidro facing when approaching private industry to sign PPAs?

A: We are experiencing a difficult time in this regard. An important challenge is that for a PPA to work as a base for financing and building a project, it needs to be long term. Industrial players are somewhat afraid of signing long-term contracts in Mexico. Industrial users participated frequently in the Self Supply Scheme but have been hesitant to enter the Spot market. Even though the Energy Reform was enacted seven years ago, many industrials have not switched to the electricity market yet because of the  hurdles imposed to become a market participant qualified user which only makes sense for companies that consume over 100 MW, but some industrials with demand over 1MW have decided to engage qualified suppliers in order to purchase energy from a private power producer and participate in the market.

Q: How does the company approach its project development to comply with social and environmental requirements?

A: All future hydroelectric power plants to be built they will need to comply the highest standards in terms of technological, environmental and social approaches. If this is not the case, projects will simply not be built. The social issue is the biggest factor when it comes to developing hydroelectricity. Modern projects are no longer those huge dams that would flood hundreds of kilometers and would have to relocate entire settlements. Now, we see small projects that flood 5 to 20ha, usually developed in areas where the population will not be displaced. One challenge is that the first priority for the water is human consumption, followed by agriculture. After this comes energy generation. Furthermore, it might seem easy to convince communities of the benefits of the projects, but this is not the case. For the most part, hydroelectric projects are located in the southern part of the country where big rivers abound.  Poverty is an issue there, as well as the fact that the government built several dams there many years ago. At the time, communities or social stakeholders were not taken into consideration and international best practices were absent as well. For example, some towns, including churches and graveyards were flooded after the people were moved away. People do not forget this easily, leading to a lack of trust in these projects.

It takes a great deal of effort to develop a hydroelectric project in this regard. The technical and commercial area is straightforward. We spend a lot more time and resources to convince people that the effects on their lives will be minimal. Comexhidro applies the highest standard to international regulations when it comes to its social approach. We have also established a shared benefits scheme. You have to take communities into account and understand their wants and necessities. Together with local government, you need a community management plan and must communicate the benefits of the projects. Nevertheless, surrounding communities lack many resources and even if you try to solve these issues, it might still not be enough to bring the community up to acceptable standards. This is one of the biggest challenges.

Q: What are COMEXHIDRO’s goals for 2021?

A: First, we aim to have La Ramones, our first natural gas fired power plant, operating by the end of 2020. We have decided not to start the construction of any new projects before 2021. Right now, we have paused our development and we will wait to see how the situation develops. Interestingly, Joe Biden appears to be well-positioned as a partner on the other side of the border for renewables. He is really committed to developing renewable energy and I believe we will see some changes in the bilateral relationship between the US and Mexico and also in the international arena US may join again the Paris accords. We will probably see a push from Biden’s administration toward Mexico to develop more renewable projects. For now, it is time to wait and see what changes will come.

COMEXHIDRO is a Mexican company founded in 1997 and specialized in the development of small-scale hydropower plants. Its portfolio includes hydropower, wind power and a gas pipeline.