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Analysis

What Routes Could Evade Utility Solar’s Development Blockade?

By Cas Biekmann | Wed, 04/06/2022 - 10:35

When the López Obrador administration took office, the outlook on private utility-scale solar energy developments shifted to the negative. With a new reform underway, the possibility to finance, permit and construct a successful project might look further away than ever. Still, by focusing on public projects, good locations and advanced technology, some still see opportunity.

For years following the 2014 Energy Reform, developing large-scale solar projects was relatively straightforward. The technology to deliver record-low levelized costs (LCOE) of energy has only gotten better over the years. Mexico is quite literally sundrenched: its solar radiation, especially in the north and along the western coast, is world-class. Boosted by the certainty of the publicly backed long-term auctions, solar projects were safe investments.

For the global industry, the supply chain issues the COVID-19 pandemic brought about are becoming problematic, with many developers putting projects on hold. However, in Mexico, the government’s barriers against private renewable energy development play a much greater role, acknowledge industry insiders. Without the regulatory certainty and market stability required to warrant million-dollar investments, the development drive has almost disappeared. “The challenge is to present viable projects to interested parties that are not alarmed by this transitory administrative direction,” says Oscar Scolari, CEO of Rengen Energy Solutions.

Part of the issue is the government’s stark rhetoric against the alleged misconducts and corruption of Mexico’s private industry, which it says it seeks to remedy by regaining control of the sector. “It has been a tough year. Considering the government’s discourse, there were only two weeks in 2021 where it did not directly address the energy sector, causing a great deal of uncertainty,” says Julian Willenbrock, Co-Founder and CEO of Enlight. “The government’s reform proposal from late 2021 has caused even more doubts.”

Even bigger changes could be coming soon with a new energy reform. Manuel Rodríguez, President of the Energy Commission in the Chamber of Deputies and founding member of ruling party MORENA, spoke to MBN about the matter. Rodríguez says that the proposed constitutional reform, which seeks to put control of the energy sector largely back into the public sector’s hands, requires a two-thirds majority in Congress. This means that if all deputies are present, MORENA would require 57 more votes. “If our proposal does not reassure those deputies, we will not gain their support,” Rodríguez says. Some parties have already ruled out their support. However, the biggest opposition party, PRI, remains on the fence.

Whether voted through or not, solar developers still expect to be in limbo regarding energy sector regulation. If the reform is rejected, the sector’s uncertainty could very well continue to linger. If it is passed, it will take a while before the new status quo takes shape. Within this environment, solar developers and engineering, procurement and construction (EPC) companies are struggling to find viable projects. As a result, they might look to invest in other countries or leave Mexico entirely. Similarly, commercial and industrial (C&I) companies looking to gain control by securing their own clean energy supply see fewer options available. “Many companies are seeing how the government tackles big power producers and are afraid that contracts and deals are at risk. For this reason, they are turning to other options, such as on-site solar,” explains Willenbrock.

For companies focused on distributed generation (DG), such as Willenbrock’s Enlight, this provides opportunity. Those sticking to the utility-scale segment face challenges. Fortunately, challenges can be overcome. Mexico’s energy industry insiders acknowledge the menu has become shorter but choices remain.

 

Feasible Options

Perhaps unsurprisingly, companies could look to government-backed projects to find business in EPC. Many see CFE as a world-class company but it is a new player in the renewable energy environment. Because of this, CFE’s landmark 1,000MW Puerto Peñasco solar project could see significant private sector participation. “The investment of US$1.6 billion in Puerto Peñasco contributed to Mexico having the most important solar power plant in Latin America and the seventh globally. The investment shows our commitment to integrate more renewable energy sources,” says Rodríguez.

CFE is looking into more solar energy developments, such as an 18MW power plant to be installed on top of Mexico’s Central Market. “We welcome the state company’s investment in renewable energy and hope to see its continued commitment to the adoption of these technologies,” says Oscar Scolari, CEO of Rengen Energy Solutions. Scolari’s Rengen has two projects with permits pending, both commissioned by CFE: a 180MW solar project in Chihuahua and an estimated 40MW project in the Yucatan peninsula.

For developers, the situation is a little more complicated but some still see space for new projects, says Héctor García, Co-Founder and Managing Director of Kolya. The company aims to develop merchant projects to cater to the Wholesale Electricity Market (WEM), so signing power purchase agreements (PPAs) is a possibility, as well. The company has looked to develop projects in the State of Mexico, close to Mexico City’s uncongested energy-generation hubs. The stability of local industry could then become a driver for business. “This avoids congestion in transmission lines and substations, which is a major issue for energy traveling from north to south, which has even created blackouts,” explains García.

Once the government fosters further change in the sector, García believes that new space for private development will materialize if companies are willing to meet stringent requirements regarding the location of projects and how they would serve the market. “Developers need to account for how the grid will operate because previously planned developments to boost the network would be taken off the table,” he says. 

Here, storage could come into play as it can help balance solar energy’s intermittency. “In other countries, it was not necessary to receive an interconnection permit without adding storage to the mix. This situation has completely changed since 2018, just like in Australia. Mexico has similar grid issues to Australia, in relation to large distances without population, so storage can solve many problems created by a spread-out transmission infrastructure and high energy demand,” García says, adding that green hydrogen could also become an interesting hybrid toward the future.

Even though companies continue to explore opportunities where possible, the outlook on greenfield solar energy development remains uncertain. For the long term, industry insiders are positive that this panorama will change, driven by growing energy demand. “Soon, these energy needs will be compounded by the added demand of completed projects like the Mayan and Transisthmian trains or the Felipe Angeles Airport, which some estimate will require 10 industrial energy generation projects,” says Scolari. “This market’s exigency is more than one market actor can meet on its own, thus pointing to an opportunity big enough for contractors, investors and Mexico’s state companies to coalesce and benefit,” he says. With that, solar could then play an important role on a large scale.

Cas Biekmann Cas Biekmann Journalist and Industry Analyst