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Mexico City 2015 Blog: What's in Store for Renewable Energy Development in Mexico?

A wind farm in La Ventosa, Mexico. (Image: AP)

Friday, May 15, 2015

Given that Mexican oil sector is opening up 75 years after nationalization, most attention on the country’s landmark energy reforms has focused on state oil company Petróleos Mexicanos—better known as Pemex. But the underreported story is the development of the Mexican renewable energy sector, which stands poised to capitalize on its huge potential. The opening of the state electricity commission Comisión Federal de Electricidad (or CFE) could have even greater implications for Mexico’s energy industry.

In late 2014, renewables made up less than 14 percent of Mexico’s total electricity generation, but the country envisions that this figure could rise to 35 percent in the next ten years. Indeed, Mexico is endowed with some of the best conditions for solar, wind, and geothermal energy in the world. Up until now, the challenge has been how to match investment to opportunity. Fortunately, investors have been flocking to Mexico, given more affordable prices for renewable energy and attractive projects throughout the country.

Of the three types of renewable energy, Mexico’s solar industry offers the most potential. Several large-scale investments are underway, such as M+W Group’s investments in commercial projects running as high as 30 megawatts. However, the regulatory system is still being overhauled and local content restrictions continue to hamper investment. Solar, like wind, is an intermittent energy source and thus is not capable of serving as baseload power. Therefore, solar must be considered in the context of supplementing, rather than replacing, conventional energy sources. Most likely, developers will continue to target Mexico, especially the state of Chihuahua or the Sonoran Desert.

Energy experts watching the southern state of Oaxaca will observe that wind farms now dot the landscape. The country has installed capacity of 283 gigawatts of wind power, which ranks second only to hydro in terms of Mexico’s renewable energy. The south of Mexico is particularly suited to aeolic energy development due to its favorable windy geography. Barriers to investment include local content restrictions and difficulty in acquiring land rights to set up wind farms. Future challenges will involve navigating a new regulatory regime and accessing local electricity grids.

Unlike wind and solar, geothermal is a constant energy source, and Mexico is particularly well suited for geothermal production. Currently, there is 11 gigawatts installed capacity for geothermal in the country, which is a fraction of what could be. The economics of geothermal are challenging due to upfront investment costs, which can stymie potential investors. The energy reforms have laid out more favorable terms for investment in geothermal, which could lead to more interest. The potential for Mexico in the sector cannot be overstated, and officials should emphasize developing an investor-friendly framework for investment.

Given the falling price of oil, Mexico should take advantage of the lower prices of renewable energy and go headfirst in developing the renewable energy sector. As the old saying goes, "The best time to fix a roof is when the sun is shining." Mexico should capitalize on this opportunity to expand its renewable energy profile for a greater emphasis on clean, sustainable energy.