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Mexico's Lopez Obrador may struggle to boost size of country's hydropower fleet

Mexico City — Mexico's incoming President Andres Manuel Lopez Obrador faces market challenges and social concerns in his effort to increase the country's hydropower generation capacity as he promised on the campaign trail, sources told S&P Global Platts. Setbacks to his plans for a hydro build-out could ultimately lead to increased natural gas demand from the US.

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Efrain Villanueva, director for renewable energy with Mexico's Energy Secretariat, or SENER, told Platts on Monday that developing hydropower projects in Mexico is not financially attractive.

"Currently, under the existing market structure, hydropower generation can't compete. At the last long-term electricity auction, CFE is contracted wind and solar generation in the low $20s/MWh," Villanueva said.

Lopez Obrador plans on increasing Mexico's hydropower generation by 12 TWh/year by the end of his six-year term by building hydro plants as well as rehabilitating existing facilities, according to his National Development Plan released during his presidential run. By doing this, the incoming president expects to reduce Mexico's dependency on gas-fired generation.

Mexico's wholesale electricity market does not recognize the value of firm capacity such as hydropower and geothermal generation, Villanueva said. Electricity generated by a new hydropower plant would be over $50/MWh, making it slightly more expensive than a new gas-fired plant, he added.

Also, hydropower projects face long development times. A hydro facility can take up to five years to develop compared with two to three years for a solar or wind plant, he said.

"Increasing Mexico's hydropower generation is feasible but complicated as there are social concerns with water usage and pollution that have halted several projects ... this is a problem we won't be able to solve in the short term," Villanueva said.

For example, farming and aboriginal communities stopped three hydropower projects in the state of Puebla via legal injunctions, Villanueva said.

According to Mexico's Environmental Secretariat, or SEMARNAT, one of these projects, the 30-MW Puebla 1 hydro project, has been stopped by a legal injunction despite receiving all required permits in December 2011.

Angel Larraga Palacios, the president of the Mexican Energy Association, or AME, told Platts on Tuesday that new hydropower projects face several social and environmental permitting issues. TIMING, FEASIBILITY ISSUES

"It is a good strategy to say we are going to increase hydropower generation, but I dare to say that due to timing issues, the country's share of hydropower generation won't increase under the incoming administration," Larraga said.

Mexico is a massive and growing power market, making it difficult to replace existing generation from combined-cycle facilities with hydropower plants, Larraga said.

"I don't see hydropower or renewable generation replacing gas-fired generation, but coexisting," he added.

Mexico's power demand will grow to 355.5 TWh in 2024 from 298.1 TWh in 2018, SENER data shows.

Currently, combined-cycle facilities supply 50% power, but this level will fall to 40% as the share of renewable generation grows by 2030, Larraga said.

As a result, the utilization rate of combined-cycle facilities in Mexico will fall to 60% in 2030 from over 90% today, Larraga said. This is still highly attractive compared with the average utilization rate of a combined-cycle plant in Europe, which is 25%, he added. -- Daniel Rodriguez, newsdesk@spglobal.com

-- Edited by Gail Roberts, newsdesk@spglobal.com