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QuickTake: Mexico and its new clean energy slow down

Alejandro Cegarra/Bloomberg

Lopez Obrador is trying to protect from competition the state-run companies like public utility CFE.

By Justin Villamil/Bloomberg

MEXICO CITY
Petroleumworld 07 17 2020

When a fight erupts between a populist head of state and the business community over renewable energy, you might expect the leader to take the green side of the debate. Not in Mexico, where President Andres Manuel Lopez Obrador has recently taken steps that would block some existing wind and solar power projects and make it harder for new ones to get going.

1. What's happened?

On May 2, the nation's grid regulator, known as Cenace, indefinitely halted the testing required before new clean-energy plants can go into operation, blaming the coronavirus. In mid-May, Mexico's Energy Ministry fast-tracked a set of rules that would expand its ability to limit production, add new tests for solar and wind projects and give Cenace the power to reject new plant study requests.

2. What impact did this have?

In theory, the new rules -- especially the Cenace ones -- could hit renewable projects across the board. However, they have been suspended them in response to a lawsuit filed by Greenpeace . They were also suspended by the Supreme Court after a request by the country's antitrust agency Cofece. If enforced, the new rules would hurt new-built plants that need to get tests to start running. Factories now in operation may get hit by new limits to generation (and potentially new tests). Even projects still in the planning stages are subject to new tests. The measures present a departure for Mexico, which had previously tried to boost private participation in the market. Last year, the Lopez Obrador administration suspended a renewable power auction program that had been rolled out in 2016.

3. Why is the government doing this?

The major justification for the new rules is that Mexico must protect the integrity of the electrical grid. The government says there have been grid failures in southern Mexico, but so far has not identified any of the companies involved. An analysis by environmental think tank Plataforma Mexico Clima y Energia ( PMCE ) found no specific failures attributable to renewable generators over the month of April, when Mexico's virus lockdown came into effect. In the eyes of many investors, however, the pandemic is only a pretext. They see the limitations on renewables as just another example of Lopez Obrador trying to stifle private investment in order to protect large, state-run companies, like public utility Comision Federal de Electricidad , known as CFE.

4. What's happened with CFE?

The firm has been hurt by a drop in demand amid the spread of the coronavirus. According to Brian Gaylord, a Wood Mackenzie analyst in Madrid, it was this decline in demand that may have forced the government's hand as typically the significantly cheaper renewable energy is dispatched first. Lopez Obrador himself claims that private renewables are responsible for the shutdown of CFE's hydroelectric plants, which he considers capable of bringing clean power to the general public.

5. Who's getting hurt?

When Cenace's measures were set to be implemented in May, 17 solar projects and 11 wind projects were in their final stages, representing a combined 4.8 billion-peso ($216 million) investment, according to PMCE. While several of those companies have already received temporary court injunctions to let the tests proceed, most company's names have not been disclosed in Mexican court records. Among the projects we do know about, however, is Italian energy giant Enel SpA 's Dolores Wind plant in Nuevo Leon state. Still, with much of the process still mired in court battles, no company has said anything publicly about plans to change their investment strategy in the country.

6. What does this mean for consumers?

The measures could raise final prices for consumers, as they hurt intermittent energy providers like solar and wind producers that typically sell energy at a much lower cost. According to Greenpeace, the average megawatt/hour from an intermittent provider sold for $60, while energy companies in Mexico that burn fossil fuels, like CFE, typically sell a megawatt/hour for $138. In the country's last renewable energy auction, in 2017, the average price of 16 bids was just $20 per megawatt/hour. BloombergNEF analyst James Ellis says that while consumers may be insulated from actual tariff increases as rates are low and highly subsidized, the government and therefore taxpayers are on the hook for the final cost.

7. What does this mean about Lopez Obrador and business?

Relations between the government and Mexican business have been fraught since Lopez Obrador canceled an airport project in Mexico City -- over the objections of businesses involved and bondholders -- before even taking office. He also put a program opening up Mexico's oil sector to private participation on ice, with no clear plan to restart it. The president has made a point of trying to rescue the nation's aging state-run enterprises like CFE and oil company Pemex since his campaign.

8. What does this mean for Mexico's renewable energy future?

Mexico 's Energy Transition Law and General Climate Change Law set targets of 30% renewable energy generation by 2021, and 35% by 2024. As it stands, Mexico is far off track on that goal, and the actions of the Lopez Obrador administration have only worsened prospects, according to research at the Climate Action Tracker, a consortium of research institutes that measure progress under the Paris Agreement. The researchers said that in many respects, Lopez Obrador has taken multiple steps backward by pledging to construct a new oil refinery, and promising to modernize several coal, diesel, gas and oil power plants -- many of which had been slated for retirement.

The Reference Shelf

  • BloombergNEF on Lopez Obrador's assaulton Mexican clean energy.
  • CFE head Manuel Bartlett on why he's demanding an immediate price hike for rival companies.
  • BloombergNEF on the wind and solar projects endangered by Lopez Obrador.


By Justin Villamil from Bloomberg

bloomberg.com
07 16 2020

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