The Success of Solar Distributed Generation in MexicoBy María José Treviño | Tue, 08/31/2021 - 13:04
To be successful in solar PV generation, the natural resource has to exist, and in Mexico, the quality or intensity of the radiation that covers vast regions of land throughout the country makes these projects viable.
In the last couple of years, distributed generation, which refers to on-site generation below 500kW, has grown significantly. The year 2020 closed with over 1,300MW of total accumulated installed capacity under this generation scheme, 99 percent of it representing solar PV technology. According to a couple of industry associations, between 2007 and 2018, about 700MW of distributed generation was installed, while in 2020, there was an addition of 350MW.
The growth in this field, which is attributed to many factors, including sustainability and cost reductions for C&I consumers, will certainly drive opportunity for this business and will consequently require strategy and investment around electrical infrastructure to support the integration of these technologies into the grid. The success of distributed generation in Mexico is mainly being driven by large industrial and commercial users that need to understand how to take advantage of the benefits and risks that this type of generation project adds to their energy procurement portfolio, and of course, make it a business homerun for them as well.
In Acclaim Energy’s experience as a consultant, companies in mid and high-tension are achieving IRRs of around 30-40% with a payback period of three to four years. To reach these returns, a consumer must have knowledge of how to structure the financials around the project and properly apply fiscal benefits to the model. Companies consuming 20-200MW typically focus solely on supply contracts through the qualified supply scheme in the Wholesale Electricity Market (MEM). This level of consumption doesn’t see much benefit from a distributed generation project because of the small project scale that the regulation limits them to.
However, some companies dismiss the business case and focus only on the image it provides to their customers and investors when they visit their facilities. It publicly acknowledges a company’s commitment to decrease their carbon footprint, which, in turn, both strengthens a brand and generates more business. Distributed generation projects also help consumers understand regulation and the market environment on a small scale, which justifies carrying out a pilot project, which supports their energy transition gradually.
Companies consuming anywhere from 3-20MW typically combine supply schemes by incorporating distributed generation into each facility in addition to a qualified supply contract. Currently, many qualified suppliers are offering this diversified structure to optimize consumer benefits. Hospitals, commercials and hotel chains are using this model and more easily replicating a great portion of the project to many of their locations, therefore, multiplying their benefit. As a C&I consumer, the trick lies in the details of how exposure to the MEM is managed, how excess generation is distributed commercially and how terms and conditions are negotiated.
On the other hand, companies below 1MW are constrained from participating and benefiting from the MEM; therefore, distributed generation projects are one of the only actions they can take aside from energy efficiency and waste management, for example, to improve their carbon footprint. To them, distributed generation coming from a renewable source really exemplifies a strong commitment to the environment and to their bottom line as technology costs decrease every year and CFE tariffs are still relatively high.
Options are offered to consumers based on their investment appetite. For example, some might have a specific corporate budget directed to on-site renewable energy projects. Others lack the liquidity to cover these projects and, therefore, focus on analyzing financing structures, leasing options or Power Purchase Agreements (PPAs). Consumers can also elect the type of technology that aligns to corporate goals. Batteries, for example, seemed light-years away some years back and now are frequently being considered in the Mexican marketplace. There are many other elements that need to be contemplated based on consumption and risk profiles, economic structure, geographic locations, temperature, interconnection, physical space available to install generation assets, facility ownership and company corporate strategy.
Another crucial aspect attributed to the success of distributed generation in Mexico is the shortened transition process. It is no secret that for the past year, permitting has been delayed significantly in all aspects regarding energy. Fortunately, establishing a distributed generation project requires minimal paperwork and approvals from the government while service providers typically have a good grip of the steps to be taken to carry out the installation effectively and efficiently. Consumers are taking advantage of this due to their immediate need to comply with sustainability commitments for 2022.
Engagement in carbon-reducing projects is transitioning from being a competitive advantage to becoming an obligation for C&I consumers as more and more companies commit their suppliers to aggressive goals for the upcoming years. This trend will, of course, increase the development of distributed generation projects throughout the country. As a matter of fact, the Ministry of Energy recognizes that by 2025, the installed capacity for these projects is estimated to reach around 6GW and by 2035 could increase to 14MW. Because the life of the asset is typically around 20 to 25 years and most financial models around the projects are also long term, consumers must dive deep to solve the puzzle around regulation, the risks, opportunities and structures needed to bring success to their own company, optimizing costs, meeting sustainability goals and measuring and reporting continuously and accurately.