Mexico energy overhaul could renew interest in green power

HOUSTON — Electricity from renewable sources could be headed for big growth in Mexico under policy initiatives that are shaking up the nation’s energy sector.

The change that’s drawn most attention — allowing private investment in Mexican oil production for the first time in decades — is just part of an overhaul that also affects how Mexicans will keep their lights on and how much they’ll pay for the power.

Legislation passed last year that effectively ends the monopoly status of Mexico’s state oil company Petroleos Mexicanos, or Pemex, also will transform the state power company, the Federal Electricity Commission — establishing an independent grid operator and creating an energy trading market.

The overhaul as it affects electricity doesn’t focus on renewable power generation directly. But climate-related legislation passed several years ago could combine with the overhaul to boost wind, solar and other renewable power generation.

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A Mexican official charged with restructuring the electricity sector said during a recent visit to Houston that a priority will be ensuring growth in renewable energy to meet the steep climate targets while avoiding government subsidies of renewables.

“In Mexico, the current companies that are in the wind energy business, they are making money,” said María de Lourdes Melgar Palacios, the undersecretary of hydrocarbons for Mexico’s Ministry of Energy. “When we go to the new system, that is what we are working on with market experts — how do you make sure that the incentives do not disappear?”

Melgar said she and others will have to meet the ambitious climate change targets as they work under an April deadline to develop the legislation needed to put the energy overhaul into effect.

The climate laws enacted in 2012 require  30 percent reduction of greenhouse gas emissions by 2020 and 50 percent by 2050.

They also cap fossil fuel power generation at 65 percent of the nation’s demand by 2024 — creating a big potential for renewables.

And while the country will be able to meet part of the 35 percent non-fossil target with existing hydropower projects, it will need more solar, wind and geothermal energy.

Mexico now generates about 13 percent of its electricity with renewables, mostly big, state-owned hydroelectric plants.

But government officials say its potential is much greater: While Mexico has about 1,500 megawatts of wind power installed, as much as 12,000 megawatts of wind power could be developed in the next decade — enough to power several million homes, according to Mexico’s Ministry of Energy.

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The government plans to establish a system of clean energy and emissions credits that companies will be able to buy and sell to comply with the new requirements.

Melgar said policymakers still are working out the details of the certificate system.

Gabriel Salinas, an attorney with Mayer Brown, said a provision in existing Mexican law allows manufacturing and industrial companies to provide their own generation despite a general ban on private generation powering the state grid.

That exception has provided an opening for some private sector power generation, including renewables.

“Electricity is one of the sectors that will be more immediately benefit from the reforms, because there is a precedent for private sector participation,” Salinas said.

Besides the law, high electricity prices in Mexico provide an incentive for investment in renewable and non-renewable generation.

“The opportunities are driven by the high cost of power in Mexico, which makes renewables competitive,” said Carlos Sole, a partner with Baker Botts who focuses on international energy issues. “You have started to see investment interest grow in the last few years, and it will continue to accelerate.”

Companies touting green power agree that their interest has been piqued.

“We have monitored the Mexican renewable market quite closely and believe it has great potential for renewable energy development,” said Adam Renz, a spokesman for Houston-based wind power developer EDP Renewables North America. “We are optimistic that the recently passed energy reform will only increase the number of opportunities in the market.”

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But Melgar acknowledges a paradox: One of the goals of the market overhaul is to lower the high prices that also provide an incentive for generators to enter the market.

Mexicans typically pay twice as much for electricity as customers north of the border, she said, and a challenge facing renewables will be to make a profit while providing cheaper power.

“We have been discussing our objectives with the consultants who are helping us draft the rules of the market — how to decrease the rate of electricity and to increase renewables,” Melgar said. “These two objectives can seem contradictory, so the question is, how do you go about it?”