Héctor Olea
President and CEO
Gauss Energía
/
Insight

Reform Clarity Essential for Solar Investments

Wed, 02/24/2016 - 12:36

Even though there is great potential in the solar market, there has been a significant reluctance to invest. Gauss Energía took a different approach, seizing business opportunities and investments when no other company saw the potential. Now the company is one of the most renowned players in the Mexican solar industry, as evidenced by its involvement in Mexico’s largest solar park, Aura Solar I. Like many others, Héctor Olea, President and CEO of Gauss Energía, believes that the enactment of the Energy Reform has brought about a renewed interest in the PV sector. “I was personally involved in the consulting process with Congress and I can say, with confidence, that it was very transparent and open,” he states. “From the other side of the negotiating table I have witnessed that the interest from policy-makers has been genuine.”

Mexico experienced a similar reform in 1992, one which also allowed for private participation. Since then, US$43 billion have been directed at private energy projects, with US$7.5 billion of that revenue eventually being claimed by these projects when the renewable energy regulation was passed in 2006. “That particular regime certainly began to lag, but the new Energy Reform is allowing Mexico to enter the global mainstream,” Olea points out. “The country will now be able to implement strategies that global players already understand, such as private participation across the board and competitive spot markets.” Olea believes that the changes are so profound that even knowledgeable companies have to adapt themselves to the new rules in the energy generation sector, while also ensuring that their roles are clear-cut and well defined. “The State is the policy- maker and the owner, the companies are the operators and the managers, and entities like PEMEX and CFE are taking on a new role as ‘productive enterprises of the State’, while CRE acts an independent regulator,” details Olea. For him, this differentiation was important because CFE was sometimes seen as the owner, regulator, and operator simultaneously, creating confusion in the industry.

According to Olea, the PV industry has two agendas. The first is to look forward and focus on the Energy Reform, while the second is to analyze certain factors that are not proving efficient in the current framework. In the latter, the sector is facing an important issue surrounding import tariffs, as Olea explains. “The PV industry was exempt from any import duties, especially regarding PV panels, but some projects have been obliged to pay 15% tax due to the misclassification of one tariff with another. This situation has caused great uncertainty because it will have a major economic impact on the projects. Gauss Energía is now working with the Ministry of Energy and the Ministry of Economy to clarify why we are exempt from one tariff and not another.”

Olea has found that projects like Aura Solar I are starting commercial operations without the proper rules for grid integration. “A grid integration protocol for PV projects is still lacking, so Gauss Energía is working closely with CRE and CFE to formalize the rules and to come up with a proposal for operating with CENACE. We have been asked by CFE to come up with a storage capacity mechanism. I am surprised that PV has been the only sector asked to provide this.” Before Aura Solar I, project finance structuring did not combine well with merchant risks. To deal with this, Gauss Energía has asked its equity participants and financiers to come up with creative ideas to mix these two elements together. One method for convincing banks to invest in its projects was an econometric analysis which revealed that the price of energy correlated with the price of oil. “While few companies understand the short-run marginal cost (SRMC) methodology, everyone understands the risks of West Texas Intermediate (WTI) crude oil,” explains Olea. “To increase awareness of SRMC, we mapped the correlation between that and WTI and discovered how changing technologies like fuel oil and gas can affect the cost of energy generation. The possibility of WTI reaching US$40 may be catastrophic according to the model, but the probability of that happening is rather small.” After Aura Solar I, there was an elated sense of satisfaction at Gauss Energía because the IFC was able to finance three projects in Chile with the same characteristics of merchant risk.

For Olea, solar energy is competitive enough for the retail market. “We can easily compete with a medium-voltage tariff, and if the cost of electricity goes down due to the use of natural gas, then we will try to lower costs, but this will pose a challenge for PV’s future development. If a project has a well-grounded commercial factor, the rest will easily fall into place; however, we have to be careful because the required regulations for making projects bankable are not yet clear. This issue has been recurring for off-takers that need to place a large bet on solar while considering what will happen to them in the future. The Energy Reform remains positive in the short term, but some projects have been put on hold while they wait to gain a better understanding of the new developments,” he concludes.