Mexico’s Energy Reform: 3 Reasons to Act Now on Renewable PPAs

July 5, 2016 Ian Law

Author: Ian Law is Renewable Choice’s in-house expert on emerging markets for renewable energy in Mexico. 

In January of 2016, the Mexican government began the process of deregulating its electricity market, previously mandated by a law (Ley de la Industria Electrica) passed in August, 2014. Until this year, the state-owned utility CFE owned the rights to all transmission, distribution, and nearly 50% of all generation assets within the country. With new reform, the electricity market in Mexico will open to competitive distribution and generation as more developers enter the space to sell electricity to CFE and other Electric Service Providers (ESPs) via the newly established wholesale marketplace.

For commercial, industrial, and institutional (C&I) customers with high electricity consumption in Mexico, this is outstanding news. The primary result of the reform will be the expanded capability to sign bilateral renewable power purchase agreements (PPAs) directly with independent power producers in order to source electricity for Mexican operations. As the new wholesale market remains yet to be fully defined, however, the best opportunity for bilateral agreements can currently be found with renewable energy projects qualified under the self-supply regime. This regulatory structure leaves projects available to C&I customers for contracting for the next 6-15 months, with various regulatory deadlines (including potential extensions) considered within this stated timeline.

The primary benefits of participating in the self-supply regime rather than the new market are the significant reductions in costs, risk exposure, and operational limitations within its contracting structure. Three of these reductions are noted below:

1. The self-supply contract structure mimics a virtual net metering arrangement, allowing customers to realize the benefits of an agreed upon fixed price cost of energy at any time of day. Electricity produced by the renewable facility is delivered to the grid to be used in real-time, at which point CFE banks these fixed price energy credits to the buyer, to be applied when it is using energy. This allows consumers to be supplied with the benefits of their contract at all times, mitigating the price risk of intermittent generators like wind and solar.

2. The self-supply structure includes low fixed-cost wheeling charges, allowing C&I buyers to enter into a PPA with a renewable project located anywhere in the country. This contract structure removes the significant transmission risks that will apply to contracts in the new market scheme and allows companies flexibility in deciding to which facilities their contracted electricity is delivered.

3. C&I customers participating in the self-supply regime are relieved of the obligation to source a pre-determined percentage of electricity from clean energy through the purchase of tradeable Clean Energy Certificates (known as CELs), a mandate set to begin at 5% in 2018. As CELs are predicted to cost anywhere from USD$10-20, this represents an opportunity for significant avoided costs.

Given the lack of predictability in CFE tariff prices, signing a self-supply agreement for a period of 10-20 years affords buyers the stability in outlook that is currently projected to save them money. Companies have been taking advantage of this limited opportunity in recent years, with GM signing a 34 MW deal to power its Mexico facilities with Enel in 2015.

Because the PPA contract opportunity in Mexico is subject to expiration, it is time to start negotiations now and see what the options are for securing renewable electricity and creating a valuable hedge for your energy spend.

Reach out to our team of global renewable energy experts to explore this opportunity today.

The post Mexico’s Energy Reform: 3 Reasons to Act Now on Renewable PPAs appeared first on Renewable Choice Energy.

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