State of the Industry: Driving Forces for Solar Energy in Mexico
We recently participated at MIREC Week 2017 in Mexico City, where we exchanged insights with other industry leaders on the local energy market and what’s driving the unprecedented growth expected in coming years. Many factors are priming Mexico to become a major market for renewable energy, and solar specifically with 2018 predicted to be a “take-off” year for the industry. As the Mexican solar market gets set, let’s take a look at the driving forces behind this expected growth.
Independent Power Auctions
While Mexico has approximately 400 MW of installed PV capacity to date, that number is expected to grow to over 2 GW by 2018. This massive growth is primarily being driven by independent power auctions, resulting in historically low power prices. The first two power auctions, in March and September 2016, have resulted in average power prices in the ranges of $40/MWh and $30/MWh, respectively. A third auction is scheduled to take place in November, which could potentially bring even lower power prices than the previous two.
This is significant because the first two energy auctions alone represent over $6 billion in investment. The opportunities associated with this figure are unprecedented, especially in a country that is investment grade rated, has a low cost of labor, and next-door access to the world’s largest market.
Government Influence and CFE
Additionally, the Mexican government has a mandate that requires commercial users of electricity to get 5% of their energy from renewables by 2018. They can either produce the energy themselves or buy the green credits from others. While industrials were initially unenthusiastic about this energy reform, the low power prices generated from the auctions have largely changed their perspective. Pre-energy reform, their costs could have been in upwards of $200/MWh. With the auctions bringing power prices in the $30-$40/MWh range, industrials are steadily more interested to enter long-term power purchase agreements (PPAs).
Prior to the auctions, many had been waiting to see just how low prices would go and were unwilling to enter 15 or 20-year PPAs, which is essential for the project financing of greenfield development. This froze renewable development between the enactment of the energy reform in 2013 and last year, with a 9 GW pipeline of pre-reform projects put in development limbo. Coincidentally, those same projects had a competitive advantage in the recent auctions.
In 2016 alone, Mexico awarded about 5 GW of PPAs with CFE, Mexico’s state-owned electric utility. The majority of these were renewable energy projects, with less than a GW for combined cycle, natural gas generation. Solar PV made up the bulk, with about 3.6 GW awarded in the auctions. To put this in perspective, less than 400 MW of solar PV is currently in operation, but CFE Mexico says some 3.8 GW of solar PV is either under construction or about to commence construction. Many of the projects awarded in the first two auctions must start energy production in 2018, making 2017 a year of construction that will jumpstart Mexico’s plentiful solar market.
In addition to the government’s support for energy reform and independent auctions, Mexico’s abundance of solar PV resources is among the world’s best. Approximately 85% of the country’s land area receives optimal solar irradiation year round. The higher the solar irradiance level in a country, the more efficiently a solar power plant can produce electricity. Mexico’s average Global Horizontal Irradiation (GHI) is approximately 5 kWh/m2/day, compared to a global average of approximately 1.2 kWh/m2/day.
The Solar Tracker Advantage
From a solar tracking perspective, Mexico is in a prime location to fully take advantage of the additional energy boosting capabilities that trackers provide. Many locations across the county can expect to see an annual production gain of nearly 20% over fixed-tilt solutions. With the auctions bringing historically low power prices, the added energy boost from solar trackers will help solar asset owners maintain a viable return on investment from their sites. However, it’s important to note that not all solar trackers are created equal, and the choice of tracker can significantly impact ROI and long-term costs. As every penny counts, solar trackers with proven reliability and the lowest cost of ownership will secure the best long-term results for solar asset owners.
|Cuidad Obregon, Sonora||5674||4762||19.2%|
|La Paz, Baja California Sur||5936||4950||19.9%|
The Time is Now
For many years market experts expected Mexico would become a major player in solar energy generation, due its abundance of solar resources. However, multiple projects were put on hold because of uncertainty and speculation of where government policy was going. Now with the energy reform underway and power auctions providing clarity, as well as the resulting competitive power prices, it appears the age of solar has finally arrived in Mexico.
We recently opened a new office in Mexico City to support the region’s massive growth expected in the coming years. For more information, check out the official press release here.