Off-Takers Have Potential To Shape Future of Mexico's RenewablesBy Cas Biekmann | Thu, 03/25/2021 - 19:17
As savings and sustainability grow in importance, large energy users have an opportunity to shape the future.
Whenever there is an opportunity to kill two birds with one stone, the smart investor acts. That scenario has developed for off-takers, prompting these large energy users to look more closely at their supply. “Interestingly, by meeting sustainability goals, consumers can save money too. Technology costs have decreased dramatically in the last decade and are predicted to drop much further,” says María José Treviño, Country Manager of Acclaim Energy, referring to the reduced levelized cost of energy (LCOE) associated with renewable technologies.
A BloombergNEF analysis demonstrated that wind and solar are the cheapest ways to build new energy capacities around the world. In addition, a slowdown of the drop in LCOE is not even in sights. In fact, from 2H19 up to April 2020, the indicator fell 9 percent and 4 percent respectively for onshore wind and utility-scale solar.
The growing awareness surrounding sustainability also implies ramifications for those who do not change their strategies accordingly. For example, KPMG has indicated that since the signing of the Paris Agreement on climate change in 2015, 105 countries have pledged to tackle the issue via net-zero targets and plans for some form of carbon pricing. Mexico also has pledged to meet specific clean energy targets, aiming for 35 percent renewables in the mix by 2024. Furthermore, investors continue to raise concerns regarding ESG (Environmental, Social and Governance) criteria, forcing listed companies to adapt their approaches in response.
Developments in the market, where CFE aims to favor the firm-energy based stability of its own plants over cheap but intermittent private renewables, might have an adverse effect on Mexico’s energy prices. Due to this rise in energy prices, off-takers will be encouraged to arrange their energy supply elsewhere, Gilberto García-Ruiz, Business Development Director at Edison Energy told MBN. “Specifically, due to these changes, clients are looking to safeguard their energy supply, knowing that at some point CFE will increase its rates. They are also looking for alternatives in terms of what they can install on-site to generate their own isolated supply.”
As to potential price increases, García-Ruiz cites the government’s plan to favor CFE power plants in the dispatch. “We know that these older plants have higher costs. At some point, clients will be affected by the government’s inability to further subsidize low energy costs.”
Despite the potential gains, there are several hurdles for new off-takers in securing cheaper, cleaner energy supply through the private sector. For starters, many are not yet aware of the opportunity. “There are many companies that have the amount needed to be off-takers, with more than 1MW, but many are not aware of this,” says Yolanda Villegas, Head of Legal Affairs at Eon Energy.
As a result of this lack of awareness, renewable energy developers are having a hard time finding off-takers. “Finding bankable off-takers to sign PPAs is another challenge. Apart from CFE, there are not many possibilities in the market,” affirms Fernando Salinas, Managing Director Mexico and Central America at Fotowatio Renewable Ventures (FRV). While developing a renewables project without previous off-takers arranged through a full-merchant scheme was a possibility not too long ago, PPAs are essential today more than ever, especially now that uncertainty has taken root in the sector.
Furthermore, a drastic slowdown in permitting compounded by the pandemic makes it difficult for new companies to make the switch to the electricity market, even if they meet the 1MW use requirement and are fully aware of any potential benefits. New energy projects find it difficult to achieve interconnection as well. “According to CRE documentation, the government has not approved 285 generation permits in the past year, which puts Mexico’s consumers at risk of not seeing demand met. These projects take years to develop and complete,” Treviño points out.
Players in the distributed generation (DG) segment, especially in the area of solar, expect to see more business. After all, as long as a project stays below the 0.5MW threshold, extensive permitting processes will not be needed at all. “For anyone owning a large rooftop in Mexico, a solar system below 0.5MW should be a no-brainer,” says García-Ruiz.
An increase in supply, either through the Wholesale Electricity Market (WEM) or through PPAs, might come from Mexico’s oldest renewables players: the self-supply market, which was allowed for the first time in 1992. Sean McCoy, Director of Energy Services Mexico of Edison Energy, sees that companies working with self-supply contracts are concerned by recent regulatory developments, which include a hike in transmission and distribution costs and the possibility that their licenses could be revoked. “Because of that, they are looking to secure more competitive rates for the near future if these self-supply contracts are dissolved due to the changes introduced by the president’s bill,” McCoy says, referring to President López Obrador’s proposed changes to the Electrical Industry Law (LIE) that strengthens CFE. Congress approved the bill in March 2021.