Solar Power in Mexico Enjoys Strong Fundamentals

November 05, 2019

Mexico was the first country to commit to specific targets under the Paris Climate Agreement, and achieving those targets is driving the adoption of solar energy

The development of solar power in Mexico benefits from several favorable factors. Mexico has a sunny climate that is ideal for solar energy production but more importantly, extensive reforms to the energy sector over the last decade made the Mexican solar power market exceptionally open and competitive.

Competition also helped to reduce technology costs by more than 70% since 2010. The structure of the renewable energy market is crucial to the future of solar power in Mexico, and we expect the positive fundamentals to continue to support its growth.

The Paris Agreement and Renewable Energy Auctions

Mexico was the first country to commit to specific targets under the Paris Climate Agreement, and achieving those targets is driving the adoption of solar energy. Mexico agreed to cut greenhouse gas emissions 22% by 2030. As part of this effort, the Mexican government is trying to raise renewable energy to 35% of electricity generation by 2024. Renewable energy auctions were chosen as a cost-effective way to increase clean energy production.

Mexican President Andrés Manuel López Obrador (AMLO) was critical of the auction process during his campaign, but he also pledged to honor the Paris Agreement. We believe that Mexico will continue to make progress on renewable energy and meet its emission reduction targets. As a practical matter, that means rapid growth for solar power. Solar energy projects won 55% of contracts during the third round of renewable auctions in 2017.

The Key Role of Auctions

Auctions have been the driving force in reducing greenhouse gas emissions in Mexico. About 4.8 GW of Mexico’s projected 5.4 GW solar capacity was allocated through energy auctions. Mexico had three successful auctions. The first auction resulted in contracts for 1.69 GW of solar capacity, the second 1.85 GW, and the third about 1.3 GW. By the third auction, advancing technology helped bring the cost of solar down to 18.93 US dollars per MWh, which was a record low price at the time.

Despite fears earlier in 2019, Mexico’s renewable energy auctions now appear to have a bright and sunny future. The fourth renewable energy auction was scheduled for late 2018, but it was postponed and then seemingly canceled. However, it now appears that the fourth renewable energy auction will eventually take place. We believe the delays occurred because the existing power lines could not handle all of the new power generation capacity.

Clean Energy Certificates

Clean energy certificates (CELs) play a central role in Mexico’s renewable energy efforts, and Mexico Energy Partners helps firms to use them effectively. The clean energy targets mentioned earlier are enforced by requiring companies that generate power for consumers and large industrial users to purchase clean energy certificates. The certificates purchased must equal a specific fraction of the total electricity used or generated by the company. The portion began at 5% in 2018, and it will gradually rise until Mexico reaches the goal of 35% clean energy.

Firms earn clean energy certificates when they produce power from clean sources. Clean energy sources do not have to be renewable, but many of them are in actual practice. Certificates can be bought, sold, and traded on the open market, so the system minimizes waste.

For example, forcing an old power plant to produce solar or wind power on-site in an unfavorable area would be wasteful. By requiring fossil fuel plants to buy certificates instead, the advantages of specialization are retained.

The Challenges of Power Transmission in Remote Areas

Issues with Mexico’s electrical grid already caused significant delays in renewable energy auctions, and the power network must be upgraded to prevent problems in the future. Many of the best locations for solar development also have poor connections to the national electric grid. For example, the massive 828 MW Villanueva solar park required new connections to the grid.

Fortunately, upgrading the power grid is a priority for the new government. The government kept control of the electrical grid, so there are no political issues related to privatization. AMLO also has a strong commitment to rural development. As a result, we can expect more funds to flow toward connecting remote areas to the national grid. Please contact us for more information about solar power projects in Mexico.