A Turbulent 2021 Sets the Stage for the Critical Year to ComeBy Cas Biekmann | Wed, 12/29/2021 - 15:48
2021 was characterized by an ongoing global pandemic and the development of the regulatory reordering coming from the federal government. Within this environment, private energy developments move at a glacial pace but publicly backed business opportunities remain in sight. Other areas of opportunity include behind-the-meter solutions and energy efficiency, important prospects that will carry the energy sector into 2022.
Regulatory reforms, or at least the government’s efforts toward them, have once again taken center stage in 2021. Though some changes originated from 2018 and 2019, 2020 was the year when López Obrador truly began pushing his vision for the energy sector: to rescue state utility CFE and ensure secure and stable energy. A “level playing field” is critical, the president said. But for Mexico’s private sector, it felt like a barrage of measures aimed at their possibility to participate in the market. Despite the barriers, the government continued to express its commitment to the clean energy transition, anchored in its development program PRODESEN, which included the possibility for private participation in the market.
Based on similar measures published by SENER, CENACE and CRE in 2020, President Andrés Manuel López Obrador sent a reform to the electricity industry law (LIE) to Mexico Congress in early 2021. Because this concerned regulation, the reform was voted through by the House of Representatives and Senate swiftly. But after these changes were presented, Mexico’s Supreme Court annulled the government’s “Policy for the Reliability, Security, Continuity and Quality in the National Electrical System (SEN)”.
Following a slew of litigation, the highest court has not yet ruled on the bill that passed in March 2021, as democratically backed proposals take longer to refute compared to public measures. Perhaps suspecting that the bill would not stand because it went against the constitution just as his previous measures had, López Obrador began readying his next big step: a constitutional change. With the new reform, the government would undo the status quo created at the onset of the 2014 Energy Reform, putting a private participation cap at 44 percent and handing the majority to CFE. “In terms of competition, the environment and the energy sector’s efficiency, the proposal has strong implications. It generates a great deal of uncertainty for investors. The reform basically aims to move the industry back to a centralized model, financed by public resources,” Veronica Irastorza, Principal, The Brattle Group, told MBN, adding that the private sector currently owns 48 percent of power producing capacity. “Furthermore, anyone can see that the proposal goes clearly against the concept of free competition. It eliminates independent regulators, who serve as referees for this market. They would be consolidated as a part of CFE, which would give the public utility all the advantage in the market, such as controlling the grid, as well as pricing transmission and distribution,” she said.
If the reform is passed, Irastorza expects another wave of litigation, whereas Minister of Energy Rocío Nahle recently stated she does not foresee major issues with the private sector. In any case, many experts see the reform’s passing as unlikely. The congressional supermajority needed to vote through such constitutional changes moved further away from the president’s reach after 2021’s mid-term elections. Collaboration with parties like PRI are not ruled out but considered improbable.
Reform or not, much of the damage has already been done to the market, say participants in the Wholesale Electricity Market (WEM), utility-scale energy developers and consultants. “Licenses, approvals and permits have almost come to a complete standstill,” said Juan Carlos Machorro, Partner, Santamarina + Steta, in an MBN interview. Regulatory body CRE has only handed out four generation permits to private companies over the course of 2021, all for relatively small-scale projects. “The current situation is unfortunately expected to continue for the remainder of this administration unless something surprising happens,” continued Machorro. Nevertheless, 2022 will be a decisive year for the future of Mexico’s energy sector. Following a vote on the electricity reform proposal, the government will know where it stands in its mission to reshape the regulatory environment. For private companies, this does not mean that uncertainty will disappear, although the government’s conclusions post-proposal could be decisive for the sector.
Bright Prospects Remain Despite Challenges
Yet, it is not all gloom and doom in Mexico’s energy sector. Public sector projects, for example, can still provide major opportunity for private developers and engineering, procurement and construction (EPC) firms.
These possibilities particularly reveal themselves in and around natural gas. CFE aims to expand its gas-fired combined cycle power project base with six new projects, for a total planned capacity of 4,322MW. Mexico’s government furthermore aims to provide more gas to the country’s Yucatan and Baja California peninsulas, which remain partly isolated from the grid. This gasification includes supply contracts and pipeline developments. Two flexible power projects of a total of 600MW to be constructed by Wärtsilä can be included in this lineup, although the flexible capacity not only allows it to provide baseload and grid balancing services, it can also run using fuel oil if needed. With the effects of the February blackouts coming from a lack of gas supply still felt, natural gas storage projects are also on the table for 2022.
According to government standards, natural gas is clean energy but not renewable. On this fully green front, CFE Director Manuel Bartlett and President López Obrador have championed the state utility as a major player, backed by its hydropower capacity. Recently, CFE awarded a roughly US$900 million contract to Andritz Hydro, with the aim of overhauling nine of the 14 total planned hydroelectric projects, increasing their useful life and generation capacity.
Nahle told Mexico’s Congress that the government is feeling positive about constructing a new nuclear energy-based power plant in the country. This could take shape either at the existing 1640MW Laguna Verde power plant in Veracruz or the less likely option of a new plant in Sonora. After basic engineering, the project could take around six or seven years to construct.
In the area of solar energy, Mexico’s government has begun its investment in the CFE-led Puerto Peñasco project, positioned to become the world’s eighth largest photovoltaic solar power plant. The project’s first phase will cost US$424 million and provide 120MW of the projected massive 1GW capacity. Overall, CFE has said it aims to invest US$4.85 billion in clean energy projects, adding over 8,000MW of green capacity to its generation portfolio.
CFE is not the only driver of Mexico’s 2022 energy industry. People close to the commercial and industrial (C&I) environment champion distributed generation (DG) developments based on solar, with other options such as small-scale cogeneration being very viable energy options too. Their greatest benefits include excellent energy quality because of their proximity to the end users and the possibility to carry out projects without requiring CRE permits, as long as the cap remains below 0.5MW. Nevertheless, the challenges in the solar supply chain are manyfold, including issues regarding raw materials, semiconductors, shipping and import restrictions from companies based in China. Even with these issues, industry insiders expect solar DG to grow significantly. Related to the C&I boom is an increased need for energy efficiency, which calls for specialized technology and software to monitor and optimize existing operations. In a world where net zero efforts are increasingly becoming a mainstay of business, examining energy efficiency represents the ever so important first step.
Finally, Mexico still stands at its earliest stages of green hydrogen and battery storage investment. In the former, Mexico can play an important role. “A McKinsey report financed by the EU Hydrogen Council found that Mexico would be able to produce green hydrogen at 65 percent of the cost, roughly US$1.4/kg compared to US$2.3/kg in other countries, a rather stark difference,” said Israel Hurtado, President, Mexican Hydrogen Association, in an earlier interview. As for storage, industry experts agree that Mexico’s regulatory framework and energy tariff structure are not optimal for development. Nevertheless, the possibility for load shifting, peak shaving and energy backup will soon become more relevant.