Succeeding in Mexico’s Energy Market is Still Possible

Constant regulatory changes, ambiguous public policy and the threat of a de facto absorption of regulating bodies has splintered investor confidence in Mexico’s energy market, bringing solar project development down to a trickle. Nevertheless, Mexico’s growing economy and market demand make these projects worthwhile. Through strict adherence to critical success factors, as outlined by Armando Gómez, Country Manager, X-Elio, companies can still successfully grow their project portfolios.

“Before the pandemic and the government crackdown, developing solar PV in Mexico was relatively easy, at least on paper. Today, Mexico remains an attractive market but development is much more complex,” said Gómez.

X-Elio, like many renewable energy companies, came to Mexico lured by the promise of a stable energy market. From 2016 onward, the company has steadily grown its asset portfolio across the country, now representing a generation capacity of 650MW. With the completion of its fifth power plant earlier this year, X-Elio now has a total of five projects, exemplifying a possible timeline in which companies can expect to build one of the largest privately-owned solar portfolios within Mexico’s regulatory environment.

The federal administration has actively attempted to shift the sector’s regulation in favor of its lumbering state companies, PEMEX and CFE, to the detriment of the wider electricity market and its end users. Three years after the administration took office, the complex navigation of Mexico's convoluted energy market has driven away foreign investment, which formed an essential building block of Mexico’s scarce capital market. With fewer investment offers coming in, companies have had to adapt by mastering the volatile regulatory environment via consultancy services. In turn, this has motivated companies to pivot toward new market opportunities, including distributed generation (DG).

According to Gómez, this is not to say that large-scale solar project developments are entirely unfeasible. Mexico’s energy market is facing considerable pressure to expand due to market growth and demographic expansion. Even though Mexico has added an impressive amount of solar capacity since 2017 by increasing its installed MWs around 1,800 percent in five years, industry experts anticipate that Mexico will soon reach an energy deficit unless it is able to produce more energy. This factor is often underrepresented in future projections, said Gómez. As this looming realization sets in, it is imperative to help companies get potential projects off the ground.

Focusing on malleable critical success factors will help solar companies to navigate the market with the flexibility they need, Gómez said. Primarily, a company’s development plans should be superseded by adequate short, medium and long-term plans. These plans should not only be informed by available market intelligence but should consider possible regulatory changes. Deliberating such possible outcomes is essential to generate flexibility and, ultimately, allow for company survival. Unprepared players will often encounter unforeseen challenges, making their pivoting time-consuming and costly. 

Based on an informed strategy, companies should prioritize risk management throughout the entire project development process. This involves a constant reassessment of risks, adapting mitigation strategies and refining flexibility. Companies also stand to benefit from formulating partnerships with regional partners, who already know how to navigate the local energy market. “Being prepared is key. This will make adapting or pivoting as efficient and cost-effective as possible,” said Gómez.

A key guiding principle relates to budget management, which depending on a company’s elected margins strategy will have an implicit effect on its overhead costs. It is an international assumption that solar project development in Mexico is cheap. Nevertheless, the low material, labor and further input costs are not comparable to the complexity of navigating regulation, which is what makes development expensive.

Overall, X-Elio still envisions an attractive future solar market, said Gómez. While the dust that regulatory changes created here settles, companies can still build out Mexico’s renewable energy sector in other niches.