Severo López
Director Mexenergy and Founding Partner

PV Dilemma: When Connecting to the Grid Is Not Enough

Wed, 02/19/2014 - 11:20

For solar energy to thrive, a good regulatory framework that creates a stable environment for investors is crucial. Stability can be a broad concept, but in solar it means predictable, simple and with incentives for innovation. These principles create conditions where investors are willing to risk capital given the predictable returns but are also continuously focused on reducing costs in the long run in order to remain competitive.

Could we say that the Mexican regulatory framework provides this stable environment for solar power? Simply put: no. There are several reasons for this, such as a subsidized and politicized electricity rating system, the lack of a solar policy model with specific targets and the adequate regulatory instruments to achieve them, as well as an interconnection and net metering policy that was forced into all of this. For the sake of this analysis we will concentrate on the interconnection agreements which constitute the only solar specific policy instruments created so far. These are the residential net-metering interconnection agreement, the commercial net-metering interconnection agreement and the small power producer (SPP) scheme.

The residential net-metering interconnection agreement is between the utility and the PV system owner. It allows for up to 10kW of renewable power to be installed. The energy produced can be offset with the energy consumed from the utility on a kWh per kWh basis. If there is any surplus for the system owner at the end of the year, it will not be awarded. The utility residential market in Mexico holds about 33 million clients. However, since there is no feed-in tariff and the rating system for residential power is heavily subsidized (the warmer the temperature in the locality, the more subsidy the area receives without socio-economic considerations) only about 550,000 homes out of the 33 million can be considered as viable candidates for PV. This is because they are the only residential group that actually pays the non-subsidized real price of electricity, which would be around US$0.26 per kWh. This represents “la crème de la crème” and the highest rate the system will pay in Mexico for a solar kWh in any scale. The name of the game in this segment is sizing solar projects up to the point where the reduced consumption level of the system owner qualifies him to reenter the utility subsidized residential rate category depending on the location (temperature) of his living area. The commercial net-metering agreement contract is also executed between the utility and the PV system owner. It allows for up to 500kW of on-site solar power. The energy produced can be offset with the energy consumed from the utility on a kWh per kWh basis. If there is any surplus for the system owner at the end of the year, it will not be awarded. Most of the attractive candidates for this contract (small and medium industries, malls, corporate office buildings, sports clubs and retail stores) are subject to a utility rate applicable to medium tension users with an overall power usage of 100kW or above. This commercial market obviously represents a very attractive and key segment for the solar industry to develop and also constitutes a very important sector to pursue and further urban renewable energy and sustainability policies. Unfortunately this market has remained largely untapped since the price at which the solar kWh is compensated by the utility is extremely low given the commercial interconnection agreement design. This rate level for commercial size PV projects either creates perverse incentives to deploy “cheap low quality equipment” which kills the market and/or makes the sponsors postpone and put on hold PV investments until “conditions change” in Mexico. The central problem is that the net-metered or compensation price for each solar kWh was anchored to the HM utility rate at the intermediate rate level, which has an average price of US$0.09 per kWh. This situation that could seem as a minor regulatory design flaw has proven to be the most important disincentive for commercial PV projects.

 The small power producer (SPP) scheme, has been an investment alternative in the Mexican power sector, along with self-supply, cogeneration and the independent power producer scheme, for the past 20 years. SPP is not a solar specific regulation but it has been creatively adapted for the purpose since it is the only viable structure to develop utility-size solar projects despite its limit of 30MW.

The SPP requires an agreement where 100% of its capacity shall be committed to CFE, the sole off-taker in the project. Not undermining the technical and developer merits of such projects, the SPP approach holds deep regulatory and policy concerns. The most relevant of them is the discretionary nature of these agreements. The SPP represents the only loophole in the Mexican electricity law where the utility can acquire capacity without a legally binding open public bidding process. This places the process in a dangerous discretionary limbo that has never been good for sound regulatory policy. How can a company qualify and get the signature from the utility for one of those agreements? At what price? Should companies simply approach them with a project?

Mexico has only taken a very small step in solar policy with a limited perspective by only granting interconnection rights to residential and commercial solar projects. There is no regulatory or policy vision of an overall solar industry model to seriously develop the solar sector to its full potential. We are at a crossroads with the Energy Reform changing the face of the Mexican energy sector. But up to this point, there is no express mention that the heavily subsidized and politicized rating system will be revised, for example. Sometimes policy making is more an art than a technique and, as in any other art form, you should never lose sight of the big picture: a stable environment for solar investors.