Proving that Large-Scale Solar Works

Where some players enter the Mexican solar industry sector with little experience in the country, the same cannot be said for Héctor Olea, Gauss Energía’s President and CEO. From 1995 to 2000, Olea was President of CRE (Energy Regulatory Commission), playing an integral part in designing the regulatory framework of the Mexican electric sector. While this door remains ajar at the moment, the Energy Reform should kick it open. The opening up to the private sector proved a savvy move for Olea as in 2004, he found himself heading up Gauss Energía, one of Mexico’s leading renewable energy firms. With his cross-sectorial background, Olea is able to judge what the public sector still needs to do to help make private investments more productive. “A crucial element for all infrastructure projects, especially in energy, is that the regulatory environment provides a measure of certainty for investors. Without that, it becomes very difficult for any infrastructure project in the power sector to get off the ground,” he says.

One recurring concern among energy companies is whether enough is being done at the institutional level to solicit private involvement in the power sector. How does Olea respond to claims from some private developers that CFE is not inclined to create a level playing field for private companies that could become its competitors in power generation? He dismisses any conspiracy theories and encourages ambitious private projects to challenge CFE, saying that “as long as a project can provide energy that is competitive with CFE rates, it will be successful. Mexico has a good energy supply thanks to CFE, but this does not mean that challenging CFE is pointless, it is simply about knowing how to compete successfully.” A further difficulty is that project developers are also competing amongst themselves in wind, hydro, and solar projects, all trying to bring energy prices from renewable sources down. But those able to distinguish themselves and deliver a project to a private off-taker in better conditions than CFE will reap the benefits, vows Olea. He believes that CFE has changed and realizes that private sector energy projects can contribute to the good of Mexico. “Companies need goodwill from CFE to develop their projects. Six years ago, CFE saw private companies as outsiders but its attitude has changed and it wants to work together with companies for the good of the country.”

As for the concept of subsidies for renewable energy, Olea is skeptical, saying that projects that combine commercial sense and financial viability should not require them. This is of direct concern to the solar industry which is competing with cost competitive wind technology, although the price gap is closing. This perspective of change has encouraged Gauss Energía to move ahead with solar projects, particularly Aura Solar I, the largest solar plant in Mexico to date. Gauss Energía is involved in other renewable energy sectors, but it sees solar as the easiest to work with. Hydro is competitive, but involves exhaustive searches to locate sites, says Olea, while wind is booming but its heartlands such as Oaxaca are becoming crowded. Both of them also present difficulties in being linked to existing transmission infrastructure, which is a problem that does not affect solar. As Olea explains, “with solar, it is easier to put up a project near current infrastructure. This is a real competitive advantage, along with the speed of development. With Aura Solar I, it took 15 months to go from initial development to commercial operation.”

The importance of Aura Solar I cannot be overstated as with this project, Gauss Energía answered a lot of questions that the industry was pondering. Firstly, its site in Baja California, although abundant in resources, is an electric island not connected to Mexico’s national grid. This would have made any power generation attempts extremely costly for CFE, Olea points out. But since the small prower producer scheme mandates that CFE buys all energy generated from renewable sources at 98% of its own margin cost of generation, the ensemble became attractive for Gauss Energía. After identifying the opportunity, Gauss Energía contracted Portugal’s Martifer to provide EPC while the financing for the project was completed when NAFINSA and IFC provided the last US$75 million needed. CFE is the only off-taker for Aura Solar I under a 20-year PPA that makes this the first utility-scale PV project in Mexico, and one that multiplies the country’s installed PV capacity.

Fresh from pulling off this coup, Olea is aware that seeking to emulate such projects might be risky for competitors. “We have CFE as an off-taker so there is very little risk. But finding other bankable off-takers will be a big challenge. There are maybe 10 AAA off-takers who have already bought all the energy they need. It is a challenge to look for other off- takers with strong financials outside the AAA scale.”