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Transitioning to Renewable Energy in Mexico

By Karen Lellouche Tordjman - Boston Consulting Group (BCG)
Managing Director and Senior Partner


By Karen Lellouche Tordjman | Managing Director and Senior Partner - Mon, 09/18/2023 - 09:43

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The green energy transition is coming – and faster than many companies in Mexico are prepared for. As more and more large, consumer-facing companies make very public commitments regarding Net Zero or other ambitious emission-reduction targets, these promises create challenges – and opportunities – for their suppliers. Mexico has been riding a wave of manufacturing growth over the past three years as companies look to near-shore their supply chains in the country. As those same companies promise to drastically cut emissions over the next five to 10 years, their suppliers, many of whom have recently set up shop or expanded in Mexico, must now also work to minimize their emissions. For most, the first step is to find sources of renewable energy (RE) given the relative importance in Scope 1 emissions.   

Last November at COP-27, Mexico pledged to reduce greenhouse gas emissions by 35% and add 30GW of renewable energy capacity by 2030. This commitment is already resulting in action, with the recent announcement of the “Sonora Plan,” which envisions at least six new CFE-run solar facilities in northern Mexico. Unfortunately for those who are just now starting their search for renewable energy in Mexico, they are already behind the curve. The transition toward renewable energy has been underway in Mexico for well over a decade. Over 850 companies in the country have already registered as qualified energy users, which allows them to receive renewable energy via the CFE Transmission grid – and this number is expected to grow. National champions and many prominent multinationals have begun addressing emissions by procuring renewable energy for their facilities via power purchase agreements (PPAs), as well as building on-site generation. 

Now is the time for more companies in Mexico to launch similar efforts toward renewable energy or else risk losing key clients who are imposing tougher emissions standards. However, navigating the renewable energy market in Mexico and identifying suitable alternatives for themselves or their suppliers can be challenging: for years, many companies have relied solely on CFE for their electricity needs, which has hindered the development of internal capabilities for procuring electricity from private entities. Through the work we have done with our clients in their journey toward renewable energy, we have identified common challenges that many companies face. Here are some of the lessons we can share.

First, there is some misperception on costs: given high demand and limited new investments, renewable energy is scarce in today’s market, and most companies are worried that switching to renewable energy can lead to high cost increases. However, in recent work, BCG has found that, depending on location, the “green premium” for on-going renewable energy costs does not exist in Mexico – and some renewable energy players can offer a ~10-30% discount compared to CFE basic supply. Of course, there are other costs to be contemplated: one-time costs related to the transition to a new provider, including permitting, supplier selection, and operational shutdowns. But overall, the fact that recurring renewable costs can be cheaper than alternatives should be a powerful incentive to make the transition.

Second, traceability is a real challenge. Traceability of renewable energy is critical, especially for companies seeking to fulfill Net-Zero pledges and meet international standards like RE100. In Mexico, tracing the source of renewable energy can be difficult since companies and potential suppliers use the CFE-operated grid. Electrons traveling through a grid are akin to water droplets in a pool: once they mix, there is no way of knowing where they came from. To ensure the authenticity of renewable energy, suppliers therefore offer Energy Attribute Certificates (EACs), representing the renewable electricity purchased. However, not all suppliers can provide this strong traceability in the Mexican market.

Third, we’ve seen, in some cases, a lack of alignment on ambition. In the case of global manufacturers, one common issue is that Mexican operations may not align with global headquarters regarding the quantity of renewable energy needed or the timeline for the transition. Mexican operations are just one puzzle piece to unlock global manufacturers’ overall emissions reductions target. Given local regulation has hindered renewable energy development in Mexico over the past five years, some companies may need to set lower renewable energy targets for their Mexican operations or adjust the compliance timeline.

Overall, the process of finding the right supplier can be daunting, involving complex regulations, financial implications, and technical requirements. External support from financial and commercial experts can be valuable in analyzing costs, identifying risks, and negotiating favorable terms with suppliers. The whole process of transitioning to a new supplier can take several months: about two to four months just to identify the right supplier and then another eight to twelve months to realize the transition. This process often starts by selecting a Qualified Services Supplier (QSS). A QSS acts as an energy reseller, buying energy from renewable energy generators and selling it to customers. Over 50 QSS operate in Mexico, but they vary in price, service quality, traceability, and supply reliability. Companies must carefully assess criteria when choosing a QSS beyond just considering the price, taking into account operational stability and experience with CFE.

Even though renewable energy availability is currently limited in Mexico, starting the procurement process can lead to significant cost savings. Companies can begin sourcing energy from private generators and position themselves for accessing new renewable energy capacity, which may come online depending on changes in regulation after the elections in 2024. With increasing demand for renewable energy in the coming years, initiating the transition now is a strategic imperative. Mexico has the potential to become a renewable energy leader, and as companies diversify their supply chains in the country, newcomers must also contribute to the local green transition.

Photo by:   Karen Lellouche Tordjman

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