Mexico has nearly a gigawatt of clean baseload, and a plant cannot buy it

An energy manager building a clean supply strategy for a Mexican plant in December 2018 has a shape problem before a price problem. Wind and solar deliver energy, not hours. Geothermal delivers hours. Mexico has 936.2 MWe of installed geothermal capacity, reported by Petroquimex in its November to December 2018 issue, which puts the country among the largest geothermal producers in the world. Almost all of it belongs to CFE, and almost none of it is procurable by a private offtaker.

That is the finding worth taking into a procurement review. Geothermal is the technology whose output profile most closely matches a three-shift manufacturing load, and it is the one technology a Mexican industrial buyer could not contract for in any volume in 2018. Clean supply offers reaching the market were built on wind and solar, and their value to a buyer therefore has to be measured in contracted volume and Certificados de Energía Limpia rather than in hourly matching.

What is in the ground, and who holds it

The Ley de Energía Geotérmica, published in the Diario Oficial de la Federación in August 2014 as part of the secondary energy reform legislation, created a regime of exploration permits and exploitation concessions granted by SENER. CFE's existing fields were assigned first, through the Ronda Cero of concessions approved in July 2015 (Inter-American Development Bank).

Petroquimex, in its November to December 2018 issue, reports SENER as having granted six exploitation concessions, five of them to CFE and one to a private company, and 26 exploration permits split evenly between CFE and Mexican private firms. The operating fields and their capacities:

• Cerro Prieto, Baja California: 570 MW
• Los Azufres, Michoacán: 247.9 MW
• Los Humeros, Puebla: 95.7 MW
• Las Tres Vírgenes, Baja California Sur: 10 MW

The one privately held concession is Domo de San Pedro in Nayarit. A correction is needed on a claim that circulates widely in coverage of this sector. Cerritos Colorados in Jalisco is often listed alongside Domo de San Pedro as a plant commissioned after the reform. It is not a plant. CFE holds a concession over the field, and a first phase of 25 MW has been proposed since the 1980s, but no generating plant has been built there. CFE began civil works in 1980 and suspended them in 1989 after environmental damage, and the project has been contested since on the ground that the field lies inside the Bosque de La Primavera, the forested area on Guadalajara's western edge (piensageotermia).

Read the concession list against the capacity list and the position is plain. Six concessions, five operating fields, one of them holding 61% of the national geothermal fleet, and that one sitting in Baja California.

Where Cerro Prieto sits matters more than how big it is

Cerro Prieto is the largest clean baseload asset in the country and it is connected to the Baja California system, which was not interconnected with the Sistema Interconectado Nacional in 2018. SENER had a 1,500 MW, plus or minus 500 kV DC interconnection of roughly 1,400 circuit kilometres out to tender during 2018 to link the two, with bids due 17 August 2018 and contract execution set for 16 November 2018 (Norton Rose Fulbright, June 2018). Until that line is built, Cerro Prieto's output is not available to a plant in Querétaro or Nuevo León at any price.

For a buyer, that converts a national capacity statistic into a regional one. The clean generation you can actually contract is the clean generation that can reach your node. We cover the connection and nodal pricing consequences in more detail in our review of Mexico's transmission and distribution constraints.

The pipeline is a risk programme, not a build programme

The instrument meant to bring private geothermal into the market is the Risk Mitigation and Geothermal Financing Program, approved by the Inter-American Development Bank in June 2014 at USD 120.1 million: USD 54.3 million from the Clean Technology Fund, USD 54.3 million from the IDB through Nacional Financiera, and USD 11.5 million from SENER. Of the total, USD 85.8 million is loan and USD 34.3 million is non-reimbursable. It works through convertible loans, guarantees and an insurance mechanism developed with Munich Re, all aimed at the exploration drilling stage where geothermal projects fail.

The programme's stated target is up to 300 MW of new capacity. IDB's own materials give the timeframe as six years in the 2014 announcement and as ten years on its financial markets pages, so treat the delivery date as unfixed rather than the capacity.

Larger figures for Mexican geothermal additions circulate without a source, and they sit against the only funded programme in the market, which targets 300 MW. Our judgment is that 300 MW is the number a procurement plan should use, and even that should be treated as a ceiling on what a risk-mitigation facility can induce rather than a committed build.

Research funding is also frequently quoted in this sector without a date. The Fondo para la Transición Energética y el Aprovechamiento Sustentable de la Energía was created by the 2008 Ley para el Aprovechamiento de Energías Renovables y el Financiamiento de la Transición Energética and continued by the Ley de Transición Energética of December 2015. SENER directs it and it is funded mainly by federal budget transfers. Geothermal research allocations attributed to it circulate with no reporting date attached, and we do not publish them, on the same basis set out in our note on financing renewable and clean energy projects.

What this changes in a clean supply contract

The Ley de Transición Energética, published in the DOF on 24 December 2015, sets a minimum clean energy participation in national generation of 25% by 2018, 30% by 2021 and 35% by 2024. Clean is broader than renewable. Under Article 3, fracción XXII of the Ley de la Industria Eléctrica it takes in nuclear generation and efficient cogeneration meeting CRE criteria as well as geothermal, wind, solar, hydro and biomass. Geothermal counts. So does a cogeneration unit on your own site.

Three practical consequences for a facility negotiating supply into 2019:

• A supplier offering clean supply is almost certainly offering wind or solar volume plus CELs. Ask for the generation source by plant and node, not by technology label.
• Hourly matching of a continuous industrial load to clean generation was not purchasable in Mexico in 2018 without storage or cogeneration. If a sustainability commitment is written in hourly terms, the commitment and the market are not aligned.
• Efficient cogeneration is the one clean option a plant with a thermal load controls directly, and it produces CELs against the facility's own obligation as a Participante Obligado.

What to ask before signing a clean supply offer

• Which specific plants back the offer, at which nodes, and what happens to the price if congestion separates those nodes from yours.
• Whether CELs are included in the quoted price, passed through, or excluded, and who carries the risk of a change in the annual requirement.
• The contracted volume in MWh per year against your actual consumption, and what you pay for the shortfall in hours the plants do not generate.
• Transmission and distribution charges, including porteo, stated separately from the energy price.
• For a site in Baja California, whether the offer assumes interconnection with the national system and on what date.

Review what is actually backing your clean supply offer

Mexico Energy Partners reviews clean supply proposals against the generation behind them, the CEL treatment in the contract and the nodal exposure a facility takes on. An initial review needs the draft offer or term sheet, 12 months of CFE billing and the site's connection voltage and location.

Request a clean supply contract review

Our energy procurement and project management teams work on these evaluations.