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Mexico's 'second energy revolution' reshapes its power sector

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Italy's Enel SpA developed the Villanueva solar farm in the Mexican state of Coahuila, using trackers from
U.S.-based NEXTracker Inc. Renewables have expanded rapidly
under Mexico's energy reforms.
Source: NEXTracker Inc.

More than 80 years after Mexico ousted foreign oil companies and nearly 60 years since it nationalized its power sector, the country is undergoing what the Mexico Institute at the Washington, D.C.-based Wilson Center in an October 2018 report called a "second energy revolution."

Ambitious energy reforms advanced under former President Enrique Peña Nieto in 2013 and 2014 restructured the country's energy sector, exposing state-owned oil company Petróleos Mexicanos SA de CV and electricity monopoly Comisión Federal de Electricidad, or CFE, to competition.

Those reforms face an uncertain future under President Andrés Manuel López Obrador, elected in July 2018. But some sectors have been drastically overhauled — in particular power generation, which has been reshaped by private investment.

Private sector companies now own 38,386 MW of operating capacity in Mexico, 43% of the country's 89,259 MW of total installed base, according to S&P Global Market Intelligence data. Private developers account for 30,554 MW of planned capacity, more than double the volume of planned public-sector generation projects.

Top among the foreign companies seizing opportunities under Mexico's newly competitive generation sector is Spain's Iberdrola SA. The company and several of its subsidiaries have completed more than 7,600 MW of capacity and have nearly 4,200 MW under development, Market Intelligence data shows. Italy's Enel SpA and its affiliates have installed 1,877 MW and have 1,253 MW under development, while Spain's Abengoa SA,, Japan's Mitsubishi Corp. and U.S.-based Sempra Energy have also developed significant projects in Mexico.

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Mostly renewables

The end of CFE's vertically integrated monopoly, combined with policies to encourage zero- and lower-carbon generating resources, triggered unprecedented growth in renewable energy in Mexico as well as continued investment in natural gas and a falloff in development of oil- and coal-fired resources.

Renewables make up the majority of planned new generation resources. More than 21,384 MW of renewable capacity is under development, including 11,641 MW of solar and 6,435 MW of wind, according to Market Intelligence data. Nearly 19,094 MW of gas is also planned.

That compares with 43,191 MW of natural gas capacity and roughly 26,000 MW of renewables in operation, including 13,671 MW of hydroelectricity, 5,786 MW of wind and 4,760 MW of solar.

In 2013, Mexico's installed renewable capacity stood at 15,138 MW, according to the International Renewable Energy Agency. More than three quarters of that was hydro, while wind accounted for 2,122 MW and solar only 82 MW.

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"We've done great in Mexico," said Alejo Lopez, who leads the Latin American sales and development business for California-headquartered sun-tracking specialist NEXTracker Inc. A subsidiary of Singapore-based manufacturing company Flex Ltd., NEXTracker has supplied its equipment to some of Mexico's largest solar projects, including the 828-MW Villanueva solar farm in the state of Coahuila, developed by Enel.

Since the new government came into power last year, solar project development has slowed. The apparent cancellation of the government's fourth round of power auctions in late January has added to concerns around the country's ongoing commitment to energy reforms.

"There's still a market. It's a little depressed [but] it's not dead," said Lopez, noting rising corporate demand for renewable energy, the advent of merchant solar projects and growing interest by commercial and industrial businesses in private auctions. Moreover, renewable energy projects are still proceeding under contracts awarded in the first three government-run auctions, which produced some of the world's lowest prices for renewable energy as well as a large project backlog.

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'A lot of opportunities'

While project developers are adjusting to the emerging policies of the López Obrador administration, growth in renewable energy will continue, said Calixto Mateos-Hanel, acting managing director of the North American Development Bank, owned by the U.S. and Mexican governments.

"We see a lot of opportunities coming and we are ready to tackle how it's going to be dealt with and try to finance more infrastructure," Mateos-Hanel said in an interview. That could include both generation projects and transmission infrastructure to access renewable energy. Government-sponsored power auctions are also "under review," he added, pointing to statements from Mexico's energy minister, Norma Rocío Nahle García, indicating that they may not be canceled indefinitely.

To date, the development bank has financed 16 renewable energy projects through the public auctions and through a prior procurement program. Among them is a 155-MW wind farm completed in Tecate in 2015 that the NADB co-financed with a syndicate of banks to send power across the border to Sempra Energy utility San Diego Gas & Electric Co.

"This project is unique because it was the first cross-border renewable energy project and it was a complete success," said Carlos Carranza, the bank's director of infrastructure financing and financial services. The bank is exploring its participation with private sector partners in projects underpinned by corporate power purchase agreements and private auctions, he added. A handful of projects are under active development.

"We hope some [projects] close financing this year and next," he said.