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Analysis

Priorities of the National Energy Strategy

Wed, 02/19/2014 - 16:20

The National Energy Strategy (NES) 2013-2027, presented in early 2013 by President Enrique Peña Nieto to the Senate, outlines the federal government’s plan for the development of the energy sector. Its two main strategic objectives are economic growth and social inclusion. According to the strategy, both objectives are linked to energy demand, which itself stems from GDP growth, improving energy access and efficient energy consumption. The NES identifies 22 strategic subjects within the energy sector and presents a program to analyze the progress made during three defined periods: respectively by the end of 2018, 2024, and 2027. These are subsequently housed under three principal objectives: Sustainability, Energy Efficiency and Energy Security.

Mexico has set itself the legally binding requirement of increasing the amount of electricity generated from nonfossil fuels to at least 35% by 2024. More advanced IT infrastructure is enabling electricity systems to integrate their distributed generation capacity, a phenomenon that is modifying the design and operation of grid infrastructure. This has pushed Mexico to consider a broader energy portfolio, as well as to take bold steps to reach the targets defined in the National General Climate Change Law. This will require promoting renewable energy use on a large scale, as well as contemplating other non-fossil technologies such as nuclear energy. Nuclear itself could represent a viable option to achieve the 2024 target and is beginning to see a measure of support within SENER, despite lingering public anxiety. The energy transition process is not exclusive to the electricity sector, but it is where the energy sector will face some of its most significant challenges. The NES also establishes public policies for oil production, refining, distribution, transportation, and storage, although these issues will not be explored here. Its main relevant thrust for renewable energy is to establish a public policy for energy transition and a permanent shift toward clean technologies.

ENERGY EFFICIENCY

During the last decade, energy consumption has ticked along at an annual growth rate exceeding the country´s GDP growth. Today, more energy is required per capita to ensure economic growth compared to 10 years ago. If this energy intensity per unit of GDP continues to grow at this pace, Mexico’s energy demand will increase by more than 50% between 2011 and 2021. According to the NES, energy efficiency not only contributes to the reduction of the emission of greenhouse gases, but also supports growth and competitiveness goals. 

In this context, it becomes vital for the country to focus on energy efficiency elements that support economic growth, decrease energy losses across the value chain and allow consumers to choose higher efficiency alternatives with lower environmental impact. As a result, improvements in energy efficiency may reduce the need for infrastructure investments, mitigate the risk associated with the volatility of fuel prices, increase the competitiveness of certain industries, and lower the dependency on fossil fuels, while providing benefits such as reductions in emissions and pollutants. Energy tariffs are also taken into account. The main line of action is to create efficient tariff structures for energy prices that reflect the opportunity cost of primary energy, including environmental externalities and implement billing schemes for households based on income level and consumption ratio. On the other hand, the strategy acknowledges the need to develop fiscal incentive schemes for private users and companies that adopt energy efficient measures.

ACCESS TO ENERGY

The NES acknowledges that access to energy is crucial to improve people’s quality of life. While 98% of the population is now connected to the electricity grid, many small communities in isolated areas do not have access to electricity. The NES proposes strengthening the regulatory framework to allow the promotion of private investment in areas defined by law with the objective of increasing energy coverage and diversifying the energy portfolio. The improvement and adjustment of regulatory instruments would also provide certainty and incentivize private investment in renewable resources. The NES promotes self-supply schemes supported by public institutions and operating companies, as well as the entrance of independent operators into regions not well attended by CFE. It also improves collaboration channels across all levels of government for specific topics, such as the use of biogas from landfills, as well as agricultural waste and treatment.

ENERGY TRANSITION

Historically, Mexico’s energy mix has largely been focused on hydrocarbons. The NES acknowledges that Mexico’s energy transition has to strike the right balance between keeping the country competitive and technologically innovative while diversifying its energy sources. The three defining issues for Mexico’s long-term energy transition are: optimizing the use of Mexico’s natural gas reserves, quantifying the potential and environmental benefits of renewable energy, and reevaluating nuclear energy as a clean energy source.

NATURAL GAS

Natural gas is the preferred transition fuel in the NES, which includes strengthening the operation and reliability of the natural gas transportation, storage and distribution system as a priority objective. The expansion of the national pipeline system has advanced at a slow pace, and is currently insufficient to meet the rising demand for natural gas imports, combined with low prices following the US shale gas boom. The national pipeline system is close to full capacity, and this essentially rules out an increase in imports in the short term. The NES encourages the private sector to invest in the construction of new pipelines and has modified the current legal framework to create additional incentives. The strategy promotes the use of pricing schemes that reflect the real conditions of supply and demand and the cost of transportation.

RENEWABLE AND NUCLEAR ENERGY

The NES aims to diversify and optimize the current energy mix, and prioritizes the construction of combined cycle plants based on natural gas to substitute other energy sources such as fuel oil. It suggests that plans for this diversification must be based on the promotion of renewable energy and acknowledges the need for CFE to optimize its back-up capacity for the incorporation of renewable energy. However, the NES also requires putting together a technical proposal with the purpose of reviving the country’s nuclear program. To do so, the NES calls for a proper communication strategy, the training up of human talent and the strengthening of regulation. It also targets the permitting process that renewable energy projects have to undergo, calling for this to be streamlined while also laying out the economic requirements for renewable auto-generation wheeling from CFE. The design and creation of financial mechanisms and tariffs to incentivize renewable sources is also made a clear priority.

TRANSMISSION

The NES acknowledges that the main challenges facing the electricity sector are achieving increased efficiency, availability, reliability and safety in its transmission and distribution systems, as well as the development of smart grids. Other steps that need to be taken include building more transmission lines and increasing their capacity across different regions. This would enable the exchange of electricity between control areas to meet requirements for system reliability and safety. The latter might, in some cases, avoid the need for the installation of new generation capacity in certain regions. On the other hand, the expansion of transmission capacity is required to integrate clean technologies into the energy mix of the country. The transmission infrastructure in Mexico’s windiest regions is not currently sufficient to maximize the use of available wind resources. The NES proposes the expansion and upgrading of the transmission network to optimize resource use and seeks to guarantee investments that allow connections between regions to be improved through smart grid technology. To foster renewable energy interconnection, the NES suggests a strict enforcement of general rules concerning interconnection to the national grid, while facilitating transparent and non-discriminatory access. It also fosters facilitating interconnection with generation hubs for self-supply projects, independent producers and small power producers, using renewable energy. The NES also proposes coordination mechanisms between private developers and CFE that would facilitate the construction of transmission lines to secure future renewable energy projects.

SMART GRID DEVELOPMENT

The development of a smart grid would boost reliability, safety, efficiency and flexibility across the electricity network. It would also transform the traditional management and operation of the grid by acquiring and analyzing user data in real time to enhance decision-making, identify trends and improve predictions and strategic planning. In Mexico’s case, the implementation of a smart grid could also help to reduce costs by lowering electrical losses and reducing the overall environmental impact.