Renewable energy in Mexico

The Mexican energy market has undergone significant transformations and challenges from 2019 to the present day. Over the past few years, the Mexican government has maintained a cautious and restrictive approach towards private-sector-led projects in the energy industry. This has created a complex regulatory environment, discouraging potential investors seeking to develop energy related projects in Mexico, especially those involving renewables for their intermittency. The government's continued reliance on traditional fossil fuels and oil, as seen by its prioritisation of the construction of a new refinery, Dos Bocas, has not only hindered the development of cleaner and more sustainable energy sources, but has also posed challenges in terms of meeting the growing energy demands of the country and fulfilling international commitments such as the Paris Agreement, which now seems unreachable. 

As a consequence of the government's restrictive policies, there has been a rise in clean distributed generation (generación distribuida) projects. These smaller-scale projects have gained popularity due to having less of a regulatory burden and a fast-track interconnection process to the National Electric System, thus avoiding the unclear regulations and regulatory paralysis of authorities surrounding larger energy projects, such as the energy ministry (SENER), the system operator (CENACE), the energy regulator (CRE) and the Federal Electricity Commission (CFE).  

Despite the government's approach towards private investment and renewable energies, we foresee in the following months the need of a change in the federal government’s energy policy to accelerate the transition to clean energy and to be able to meet the growing energy demands in the near future. As a consequence of global supply chain issues, Mexico is taking advantage of the “nearshoring” trend, where foreign companies serving the United States market are seeking to relocate their operations and productions closer to Mexico to leverage its competitive advantages. This “nearshoring” trend presents both an opportunity and a significant challenge, due to the fact that the Mexican government should provide the prefect conditions to private investors for the development of new transmission infrastructure in order to provide access to the grid, as well as new renewable generation projects.  

Derived from the global supply chain issues caused by the COVID-19 pandemic, and aggravated by the trade conflict between the United States and China as well as Russia's invasion of Ukraine, Mexico has become an ideal destination for companies seeking to relocate their businesses operations and production processes to maximise their productivity and growth, along with reducing cost and minimising the distance between their production centers and consumer markets. However, the increase in business activity has revealed the growing need for renewable generation projects and transmission infrastructure to support the escalating clean energy demands.  

Mexico's allure for nearshoring arises from various factors, including its geographical proximity to the US, favorable trade agreements (such as NAFTA, the free trade agreement between Canada, the United States and Mexico), a skilled workforce, and competitive labor costs. As a result, major companies across diverse industries such as Tesla, Amazon, and Microsoft have shifted their operations to Mexico, leading to an imminent surge in economic growth and continuous foreign direct investment (“FDI”). According to the Center for the Study of Public Finances, the FDI made and reported between January and December 2022 reached USD 35,291.6 million, which implied an increase of 11.61% with respect to that captured in the same period of 2021. 1 Centro de Estudios de las Finanzas Públicas. (2023, March 7). Comentarios al Informe Estadístico sobre el Comportamiento de la Inversión Extranjera Directa en México (enero-diciembre). cefp.gob.mx. Retrieved July 31, 2023, from
https://www.cefp.gob.mx/publicaciones/documento/2023/cefp0082023.pdf  

The increase in manufacturing facilities and businesses relocating to Mexico has resulted in a considerable increase in consistent and reliable energy supply and demand. However, the existing generation and transmission infrastructure in Mexico is struggling to keep up with the soaring electricity requirements brought about by nearshoring resulting in outages, interruptions, and inconsistencies in power supply, particularly during peak hours.  It is therefore vital to upgrade and expand the current generation mix and power grid.  

In order to achieve a rapid development in the electricity industry, it is foreseen that collaboration between the government and private sector in investments for the modernisation and expansion of the grid as well as for the installation of new low carbon and renewable energy generation infrastructure will be required.  

Today we are already beginning to see evidence of the above, with CFE recognising this need and has begun authorising and executing a series of transmission line projects as part of the National Electric System Development Program (Prodesen), such as the Leona Vicario Entq, Dzitnup-Riviera Maya (Quintana Roo) and Las Mesas-Huejutla II (San Luis Potosi and Hidalgo) projects. 2 https://www.cefp.gob.mx/publicaciones/documento/2023/cefp0082023.pdf
https://mexicobusiness.news/energy/news/cfe-announces-transmission-projects  This marks the beginning of a series of possible public-private collaborations that make foreign investment attractive to take advantage of the nearshoring phenomenon in Mexico

Mexico is witnessing a significant transformation in its energy landscape with the surging popularity of distributed generation (generación distribuida) projects, as the demand for reliable and sustainable energy continues to grow parallel with the population index and aforementioned nearshoring demands. 

The use of a Distributed Generation (“DG”) scheme brings multiple benefits such as relief of the national grid system at times of peak demand, cost-effective supply of renewable energy to rural regions, lower energy costs for residential consumers and small and medium-sized enterprises, increased reliability and quality of energy, and a decrease in greenhouse gas emissions. The DG scheme operates through the use of generation technologies that utilise water, wind, organic matter and heat from the sun to generate electricity on-site in quantities below 0.5 MW for self-consumption in low and medium voltage circuits of the general distribution networks. 3 PRODESEN. (2021). Demanda y Consumo 2021-2035. www.gob.mx. Retrieved July 31, 2023, from
https://www.gob.mx/cms/uploads/attachment/file/649612/PRODESEN_CAP_TULO-4.pdf   

Today in Mexico we can see a DG grow trend, derived from large companies participating in the energy industry worldwide, such as Enel Green Power, Enlight, Grupo Bimbo, ENGIE, Iberdrola, Tesla, who are implementing DG projects as part of their business schemes. 

One of the benefits arising from the GD scheme is the net metering system, where consumers pay only for the difference between the energy they inject into the grid and the energy they consume, while receiving credits for any excess energy supplied. The system is based on the local marginal price in the market, which determines the value of energy at a given time and place of the National Electric System. CENACE determines the local marginal price taking into consideration the energy, congestion, and losses components. 

However, in 2022, the National Commission for Regulatory Improvement published the draft of General Administrative Provisions (“DACG”) for GD on its electronic portal, where a new concept of self-consumption (autoconsumo) is introduced, which mandates that all generated energy must be consumed on-site. In cases where there is excess energy, compensation would be provided at a lower price than the market rate, based on the average cost of energy in contracts with the CFE Basic Services Supplier.  

The DACG represents a significant threat to the growth of GD; however, we anticipate that industry participants will take two positions, depending on the stage of their projects (i) challenge these proposed changes through the submission of injunctions (or amparos as they are called in Mexico). By asserting their potential unconstitutionality, these industry participants will seek to invalidate the DACG and safeguard the growth and progress of GD projects in Mexico, this position has been taken throughout the years with other proposed DACG and regulations that jeopardize industry participants projects; or (ii) accept the technical changes posed by the amendments to the DACG and carry on with their activities. The industry has not perceived the amendments as detrimental overall and therefore we do not foresee that such new rules will stop the development of this kind of projects. 

Before the current government took office, in 2013 Mexico became the forefront of energy reforms aiming to modernise its electricity sector and attract private investment. One crucial aspect of these reforms was the establishment of energy resale schemes, which allow private entities to participate in the electricity market by selling energy to third parties. 

The introduction of energy resale schemes in Mexico can be traced back to the Energy Reform of 2013. This landmark reform amended the Constitution to open up the electricity sector to private participation. As a result, private companies gained the opportunity to generate and sell electricity to both the wholesale market and directly to consumers. The goal was to promote competition, increase efficiency, and reduce electricity costs for end-users. 

The resale of energy is regulated by the Electric Industry Law (Ley de la Industria Eléctrica), and an interpretation criteria that provides specific conditions for the development of resale schemes and rules related thereto. 

These schemes posted a new framework for developing electric energy strategies for players outside the electricity industry, such as real estate owners and electric vehicle charging stations. Throughout the years, several real estate companies have embraced electricity resale schemes as part of their business models. These companies, both domestic and international, have recognised the sale of electricity as a new business niche that is worth investing in and developing. The profitability of operating in industrial parks and engaging in resale through leasing and power purchase agreements has provided real estate owners with market differentiators based on the possibility of avoiding the tenants the connection burden of their load centers to the grid and to offer lower energy consumption tariffs to tenants on a legal basis. In addition to that, the utilisation of renewable energy sources by the “end users” implementing the resale scheme further enhances the appeal to certain tenants, as it supports the consumption of energy generated from clean generation sources. The Mexican real estate market has been exploring and developing the resale structures, providing for an interesting way to further connect the real estate industry with the electricity industry, as it once happened with distributed generation.  

On the other hand, the electricity resale scheme has been implemented within the Mexican legal framework to provide and promote the development of EV charging stations. Apart from its successful application in the real estate industry, we anticipate that it will gain traction in the electric vehicle industry in the future. 

This initiative aims not only to incentivize the establishment of more charging stations but also to foster the use and adoption of electric vehicles in Mexico. By offering an effective charging infrastructure solution, it is expected to drive sustainable mobility and contribute to reducing greenhouse gas emissions in the country. As environmental awareness and the demand for electric vehicles continue to grow, this electricity resale scheme will play a key role in strengthening the electric mobility infrastructure in Mexico.