Sowing Seed and Reaping SuccessWed, 02/22/2017 - 12:20
We have bet on Mexico for many years now. Currently, we operate 729MW of installed capacity through wind, hydro and solar power plants. The Energy Reform has been a complete success because it has brought stability and many benefits to the country’s renewables market. We are now the largest player in the sector by installed capacity and project portfolio and our business will continue to grow at the same speed as the Mexican energy market, as long as the rules continue to be clear and transparent as they have been and as long as the level of competitiveness remains.
Given the price levels in the last two long-term power auctions and an upward trend in the cost of gas, our expectation is that the government will create a higher penetration of renewables, which makes Mexico an even more important market for our global business strategy. The Enel Group entered the Mexican renewables market in 2007, when it acquired three hydropower plants with a total installed capacity of 53MW in the country’s western states of Guerrero, Michoacan and Jalisco. In addition to these plants, today we operate 675MW of wind power. Overall, we have invested around US$1.5 billion since our arrival in the country.
During the first long-term power auction in March 2016, the Group’s Mexican renewables subsidiary, Enel Green Power México, was awarded three PV solar power projects with an overall installed capacity of around 1GW, more capacity than any other participant. Each project is supported by a contract providing for the sale to Mexico’s CFE of both specified volumes of energy for a period of 15 years as well as the related clean energy certificates over a 20-year period. We will invest approximately US$900 million in the construction of the three plants, located in Coahuila (Villanueva and Villanueva 3) and Guanajuato (Don José), all of which are expected to enter into operation in 2018. Additionally, at the country’s second long-term auction in September, Enel Green Power México was awarded the 93MW Salitrillos wind project in Tamaulipas, whose construction will require an investment of nearly US$120 million.
Private off-takers are key to our local business strategy, as we are leaders in energy self-supply. We had great success in Mexico’s long-term power auctions in 2016 and we are working to enter the short-term energy market in the near future. All three business models are extremely exciting for us and we are already planning the feasibility of other projects for the coming years. The latest auctions showed that the system works and we expect the other two models (self-supply and short-term market) will share the same success to have an adequately liquid market. This is only going to be achievable as long as the country pushes for more renewables, clear rules and the lowest prices possible. We are a global operator with a well-balanced and diversified portfolio. As far as Mexico is concerned, the latest auctions demonstrated that the most promising renewable technologies are mainly solar and wind. Our goal is to continue developing our business in those areas.
During the last 10 years, energy auctions with clear and transparent rules have been globally demonstrated to be the most efficient system with which to achieve a diversified energy mix and ensure competitive prices. In Mexico, the implementation of the Energy Reform and the success of the latest long-term power auctions are boosting the development of the country’s energy sector and have quickly established Mexico’s energy regulatory system as a best practice worldwide. For auctions to work and contribute to the creation of a healthy and competitive energy industry, they have to be backed by robust and strong planning to avoid price distortions that could occur due to limitations on the grid, reserve conditions and energy congestion. Regulatory authorities have to take into account that renewables are capital intensive and require long-term policy and price stability.
One of the major improvements that took place between Mexico’s first and second long-term auctions was the decrease in tariffs produced by the adjustment factors of generation zones. The prequalification and bid process evaluation was faster and linear, which clearly showed the experience acquired between the tenders. Another positive aspect is that the general rules of participation remained, proving the overall scheme is extremely successful. Some improvements can still be made with regards to participation criteria, such as assessment of the development status of projects prior to their participation in the auction. We have been able to position ourselves as leaders in the country’s auctions above all thanks to Enel Group’s lengthy and global experience in the renewable sector. We know how auction processes work. We participate with solid and technically well-developed projects that are at an advanced stage for acquiring permits, reducing risks in construction and creating an environment of trust among suppliers.
Of course, there are challenges we expect during construction of the awarded projects. First, Mexico could experience a congestion of permit processing that could cause delays or difficulties to the finalization of the plants. To mitigate this risk, we entered the auctions with projects that are already in an advanced stage of permitting. Secondly, social factors have to be taken into account given the quantity and geographical distribution of the projects. We do not foresee problems in this area for us because one of the key pillars of our philosophy and business strategy is based on sustainability, which forms part of the creating shared value (CSV) approach.
Enel’s 200MW Dominica wind farm in San Luis Potosi was awarded the Infrastructure 360º Award in the “Climate and Environment” category, due to its contribution to the diversification of Mexico’s energy mix, as well as its annual emissions reduction of around 300,000 tons of CO2. The Inter-American Development Bank (IADB) also praised Dominica’s activities in ensuring its harmonious integration with surrounding ecosystems, such as the construction of greenhouses to preserve local cactus species, production of sustainable cattle forage from maguey and the donation of two 3KW solar facilities to local schools to help them meet their energy consumption needs.
For some years now, as a group we have been developing an environmental and social sustainability strategy that goes beyond the legal requirements of each country and refers to the standards of the World Bank and other global best practices. Our philosophy builds upon the CSV model, which combines the business perspective of the company with the needs of communities in the areas where it operates, by pursuing decisions that create value for both sides. This model makes sustainability a key factor across the whole value chain, implementing procedures and tools that add value for all stakeholders, starting with Business Development, Engineering & Construction and Procurement right up to Operation and Maintenance. As a major power producer, we have a unique responsibility to our employees, the communities around our facilities and the environment. This responsibility offers a great opportunity to improve the quality of life in communities, as well as giving our company the opportunity to be more competitive in the current energy environment. Over one-third of our electricity generation already comes from renewable sources and we are constantly working with our partners to develop new, environmentally friendly technologies with the aim of achieving decarbonization by 2050. In Mexico, we have encouraged a range of CSV local initiatives. Through a Research and Technology Transfer agreement between Enel Green Power México and Fundación Produce San Luis Potosí, we add to the knowledge and experience gained in technical and operational agribusiness and food chains, driving local social and economic growth. Recently, we signed two agreements with Autonomous University of Chapingo to collaborate in research and technology transfer to promote community development and sustainability projects.
We will continue to work to keep growing in the renewables generation sector. As a consequence of the Energy Reform, we expect the market to open up even more and present new opportunities which we will be ready to take advantage of. As more participants appear in the energy sector with an increase in competition, we can expect a decrease in costs related to energy management and growing liquidity in the market in terms of suppliers and users, not just generators. This is why we think that one of the key points for the future are services to end users, in particular commercial and industrial qualified users. Likewise, as a result of the Energy Reform the market trend will move toward energy-efficiency services, user digitization, distributed generation, demand control and electric mobility.