Francisco Barnés de Castro, one of the five Commissioners of Mexico’s Energy Regulatory Commission (CRE), explains that the regulator has a fundamental role to play in the country’s energy transition, since it has helped develop the renewable energy sector in Mexico, even before the related laws or subsidies existed. “We helped with the development of the wind sector in Oaxaca, we helped to build it up on other sites, and we have done the same for solar and hydro. But there is still much more to do, such as seizing the opportunities that small producers provide,” he says. “We have to use private investment because the public sector cannot afford the funding and operation of renewable energy plants.”

The Law on the Use of Renewable Energies and the Financing of the Energy Transition and its Regulation (LAERFTE), mandates that 35% of Mexico´s energy mix has to be generated using renewable energies by 2024. For Rúben Flores García, another of CRE’s Commissioners, the real issue is not the percentage of energy coming from renewables, but the amount of greenhouse gases emitted into the atmosphere. “The US made the effort to change its main energy generation source from coal to natural gas and as a result, it is no longer the most polluting country in the world. This happened by changing from a highly pollutant fossil fuel to a less polluting fossil fuel,” he says.

Flores García notes that renewable energies are more competitive compared to fossil fuels in certain regions of Mexico, such as Oaxaca and Tamaulipas. However, he stresses that the main problem is that the 35% goal is at odds with the mandate of the Federal Electricity Commission (CFE) to always produce or purchase electricity at the cheapest possible price. “Energy should be purchased at the cheapest cost for Mexico, not for CFE. The costs are calculated mathematically, taking into account future expansion, but this law distorts the problem.” Externalities also have to be taken into account when calculating the cost of energy. Barnés de Castro mentions the tax established to recognize the externalities from the use of fossil fuels, but acknowledges difficulties remain. “It is complicated to determine the cost of externalities because climate change is global, and not just located in one country,” says Flores García. He explains that SENER uses a methodology developed by the Mario Molina Center to calculate the externalities but he believes it still lacks precision. “The law must be changed to decrease emissions in Mexico to a precisely determined level, instead of just setting a long-term goal. If a commitment is made to decrease emissions to a specified level, achieving it would entail setting very clear targets,” adds Flores García.

NATURAL GAS AS TRANSITION FUEL

The National Energy Strategy (2013-2027) fosters the use of natural gas as a transition fuel and notes that “the use of this fuel will bring benefits for the evolution of the energy mix of Mexico.” The Mexican government has declared that priority will be given to natural gas in the coming years since it has become the cheapest fossil fuel available in North America. “The technological development of shale gas in the US already allows for bigger production while Canada and Mexico have a great potential to join in. The cost of natural gas is lower than that of fuel oil. Fuel oil prices still depend on oil while natural gas has become cheaper, at least in North America,” Barnés de Castro explains. Another reason for boosting natural gas use has to do with the fact that its greenhouse gas emissions are much lower than when burning fuel oil. “Its use in the industrial and residential sectors is less harmful and much safer than other alternatives. It is also easy to use and transport,” claims Barnés de Castro. “This is why natural gas is seen as a transition fuel, until we can develop other energy alternatives. But it will take decades for these alternatives to be developed up to the level where they can become viable replacements.”

One of the rules of any electricity system is to try to diversify generation as much as possible, in order to avoid too heavily depending on one source. “The next factor is the need to understand how the loss of any single energy source would affect the economy,” says Barnés de Castro, citing the example of Brazil. The country depends massively on hydro resources for energy generation but found itself forced to ration energy during periods of drought until it developed a strategy to further diversify its energy mix. “In Mexico, it would be a mistake to let our energy generation depend only on natural gas, but that does not change the fact that natural gas remains the best option at this point.”

How will Mexico promote healthy competition between natural gas and renewables? Guillermo Zúñiga Martínez, another of the five CRE Commissioners, acknowledges this is a thorny issue. As natural gas becomes cheaper, CFE will allocate generation needs to natural gas plants, removing some renewables from the equation for being more expensive. Nevertheless, the mandate to produce 35% of Mexico’s electricity from renewable resources by 2024, added to the sector’s continuous technological development, will enable renewables to become competitive as well. “The two have to complement each other. Renewable sources are very profitable because natural gas in Mexico is scarce, although this will change when we have abundant natural gas production. But even then, renewables will continue to become cheaper and will receive constant support from the government,” Zúñiga Martínez says. However, due to the intermittent nature of renewable resources such as wind and solar power, back-up capacity is essential and must be considered as well. “Nuclear energy could provide a good base energy option, while geothermal is a very interesting renewable energy source from the base energy perspective. There are studies that show that we have only been utilizing about 10% of our geothermal potential,” he adds.

TRANSMISSION INFRASTRUCTURE

The development of transmission infrastructure exemplifies an ongoing concern between CFE and CRE. The Open Season scheme is mainly responsible for this as it enabled the acquirement of the funding needed to develop feasible clean energy projects. “If CFE does not have the necessary incentives to develop and create infrastructure, regulation can help market forces find their own way,” Zúñiga Martínez says. Transmission capacity is often the main hurdle when developing a renewable energy project. “Up until now, the legal framework established that CFE has a monopoly regarding transmission infrastructure. But even with regulatory instruments for interconnection put in place, the processes and requirements for obtaining an interconnection contract with CFE have not been clearly developed through transparent legal instruments,” Zúñiga Martínez adds.

Flores García stresses that given the cost differences between energy sources, areas with large renewable energy resources are not often taken into account at the strategic planning level. “This has led to a lack of transmission infrastructure connecting renewable energy sites to the customers because the grid was not designed to accommodate them,” he says. Now regulators say that any expansions have to be paid for by those that will benefit from them. With that frame of mind, CFE is seeking for the private sector to invest in expanding that grid, allowing investors to come together and jointly pay for development under the Open Season scheme. The cost attached to the last Open Season in Oaxaca was calculated at about US$250,000 per MW of newly installed capacity. But given the excellent conditions that state presents, investors have not balked at this price tag. On the other hand, as part of the Energy Reform approved in December 2013, CENACE (National Energy Control Center) will be created and will be in charge of providing open access so that all energy generators, private and CFE alike can transmit all the energy they generate. Cheaper energy will be given priority during the distribution process. The impact CENACE will have on the Mexican energy market will be fully defined in the upcoming months when the operating framework is defined.

Zúñiga Martínez believes the Energy Reform will enable Mexico to become more competitive by decreasing costs. “Currently, private companies are dependent on CFE and cannot compete against it. The reform will enable private companies to invest in generation infrastructure, decreasing their dependence on the utility. It will also create the necessary framework so a private firm can generate electricity and sell it to its customers, be it in a city or in an industrial park. With this new framework, CFE will find itself having to compete with private parties in the market. This will be a huge incentive for it to invest in better resources and technologies, which will result in lower prices for customers,” he concludes.

Smart grids provide instant two-way communication, allowing the supplier to watch consumption trends in real time and provide the consumer with key information. “Smart meters can help pinpoint where energy leaks are taking place and even remotely cut the electric supply to that area. Another advantage is self-healing, in which a grid can reorient transmission to avoid damaged areas and reestablish supply,” he describes. But Mexico still has a long way to go as only a small amount of smart meters are used in the country so far, mainly due to the large investment they represent. “Regulators in every country authorize a part of the cost to be included in the tariffs, but if developments are expensive and do not provide an immediate cost-benefit, the regulator is not going to allow those costs,” Flores García explains