Will President-Elect Nieto Unlock Mexico's Vast Wind Energy Potential?

Allan T. Marks & Francisco Luna, Thursday 02 August 2012 - 16:20:59



For nearly two decades, Mexico has walked slowly down a path of energy regulatory reform that could lead to a future where Mexico is less dependent on hydrocarbons and its consumers benefit from renewable energy generation that taps into Mexico's vast resources. Further reform is necessary to arrive at the destination; it is not clear that Mexico will stay the course.

The upcoming return of the Institutional Revolutionary Party to the presidency after 12 years of opposition rule presents an important opportunity for Mexico to confirm its commitment to energy reform and to create a robust market for wind energy. Whether President-Elect Enrique Pena Nieto will take advantage of this opportunity remains to be seen.

Mexico enjoys great wind resource that could be exploited to reduce the country's dependence on carbon-based energy. The Mexican government estimates the country’s wind power potential at 11 GW just for sites with capacity factors over 30%, and up to 71 GW taking into account sites with lower capacity factors, according to the Global Wind Energy Council.

Experts have estimated that the Isthmus of Tehuantepec in southern Mexico (which includes the state of Oaxaca, where the vast majority of Mexico’s operating wind farms are located) alone has enough wind resource to supply the entire electricity demand of Mexico, assuming that transmission constraints, site access and other issues could be solved. Despite such great promise, at the end of 2011, Mexico had an installed wind generation capacity of only 873 MW and authorized permits sufficient to reach 1,399 MW capacity over the next few years.

The Mexican government has taken initial steps to incentivize wind generation. For instance, developers have been granted an accelerated depreciation of 100% of the qualifying investment in the first year of operation. However, more wind-related initiatives are needed for wind energy to take up a noticeable share of the Mexican energy portfolio.

Under the current energy regulatory regime, the direct sale of electricity (whether at wholesale or retail) to persons other than the state-owned utility company, CFE, is considered a public service over which CFE has a monopoly. CFE may build, own and operate its own wind generation projects directly. Private developers may either sell all wind farm output to CFE under independent power producer procurement contracts or may build and operate wind facilities pursuant to a regulatory exception that allows parties to self-supply energy.

So far, most of the wind capacity installed or under development in Mexico falls under the self-supply regime, whereby large and sophisticated private consumers (like mining companies or big-box retailers) partner with developers to operate wind farms for their own benefit. These projects often still depend on cooperation with CFE for transmission line access or backup power, since wind is an intermittent resource. As such, continued progress may stall without a significant commitment from CFE to continue to support wind energy development in Mexico, either by its own initiatives or through mandates set forth by the Mexican government.

Self-supply producers may "bank" their surplus output subject to time-of-delivery adjustments to be "drawn" at a later time. The CFE and the Mexican Energy Regulatory Commission have developed and made publicly available the methodology used to calculate transmission charges for delivery of output from wind facilities to their end consumer, indicating a positive step toward greater transparency, but additional barriers still need to be overcome.

De-monopolizing power generation to allow renewable projects to compete with CFE would spur significant new investment in wind energy projects in Mexico. Short of ending CFE's monopoly, steps could be taken to improve transmission line access. Wind farms are frequently developed at sites far removed from load centers (like populous cities or industrial facilities) and thus require transmission lines to deliver power from the project. Current transmission capacity is limited and biased toward existing power plants or new gas-fired plants under CFE control. The planned expansion of the Mexican grid is insufficient to satisfy the projected development of self-supply wind generation.

The planning of the network’s expansion should place greater emphasis on the needs of self-supply generators and not just on the CFE’s own need to satisfy its demand load.  The cost to develop the self-supply network is already passed down to generators through fees, so they should benefit from system upgrades. The incoming administration should make sure that the transmission functions of CFE operate, to the extent possible, independently of its generation function as utilities are obligated to do so in the U.S. Otherwise, conflicts of interest could crowd out private development of wind energy projects.

Mexico may also directly promote wind energy development either through the creation and operation of wind generation facilities or through energy purchases from independent producers. These methods offer ways in which the incoming Pena Nieto administration could pursue the reduction of Mexico’s dependence on carbon-based fuel sources; there is little reason why wind energy should not be granted priority equal to or better than that of carbon-based energy.

It will soon become clear whether President-Elect Pena Nieto is sufficiently committed to resolving these challenges and developing Mexico’s renewable energy resources. While outgoing President Calderon made significant attempts to reform the electricity sector and increase the use of renewable energy in Mexico, critics within his own party who claimed he was too keen to privatize a national asset hampered his efforts.

Yet if the new president commits to expanding the development of wind energy, he could legitimately explain such reforms as being necessary to allow the population to benefit from clean energy at competitive rates without giving up control over the sector.

Allan T. Marks is a partner, and Francisco Luna is an associate, at Milbank, Tweed, Hadley & McCloy LLP, where they are attorneys in the firm’s Global Project Finance Group, based in Los Angeles. They can be reached at amarks©milbank.com and fluna©milbank.com.


Photo: President-Elect Enrique Pena Nieto



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