Financing Renewable Energy in Mexico
By Paola Moreno
Mexico has been one of the Latin American countries who has embraced climate change action. For instance, in March 2015, it submitted a climate action plan to the UN Framework Convention on Climate Change (UNFCCC), being the first developing country to do so. As a part of its efforts, Mexico has set policies and laws to increase energy efficiency promote clean energy.
Regulatory Environment Provides a Tailwind for Renewable Energy
The primary law enacted to promote renewables was the 2008 Law on Renewable Energy Utilization and Energy Transition Financing (LAERFTE). This law was later updated with the Energy Transition Law (LTE) in 2015. Both aimed to promote the use of renewable energies and create instruments to finance their adoption.
The LTE established mechanisms to achieve the renewable energy goals set in the recent energy reform: a 24% share of of renewable energy and efficient cogeneration by 2018, growing to 35% by 2024. As a finance mechanism, LAERFTE created the Fund for the Energy Transition and Sustainable Use of Energy (FOTEASE), maintained and reinforced by LTE. Most FOTEASE resources come from public federal funds, the government has also captured private resources to develop eligible projects.
FOTAESE has approximately MXN 8,325 million (USD 440 million) with roughly 70% allocated to energy efficiency projects and 12% to renewable energy/energy efficiency combined projects. The balance is largely allocated to renewable energy projects (12%), research (3%), and education (2%).
Most of the FOTEASE resources allocated to energy efficiency projects are deployed in the residential sector. These include projects such as incandescent bulbs replacement and the updating of obsolete appliances. FOTEASE resources for renewable energy are granted mainly to wind and photovoltaic rooftop projects in remote and low-income areas.
We expect the allocation to research under the FOTEASE program to significantly advance the mapping and resource data available. Mexico has detailed information on sun radiation, wind speeds and biomass. Access to these large data sets will help to decrease the risks surrounding potential renewable energy projects.
Who Benefits From These Programs?
The loans and fiscal incentives are important instruments for the adoption of renewable technologies. For the residential sector, the Development Bank of Mexico has a budget of MXN 1000 million (USD 52.8 million) to finance users installing photovoltaic cells and solar thermal water systems.
Above all, the industrial sector is benefitting. For example, the wood sector has been granted with FOTEASE resources to develop biomass self-generation plants fueled by wasted wood. Renewable energy developers can claim rebates for up to 100% of depreciation on renewable equipment in one fiscal period. We expect this benefit to drive the adoption of large-scale renewable penetration across various industries, particularly in manufacturing.
Larger renewable energy projects can also benefit from attractive financing. Developers can benefit from the IDB ME-L1172 program, aimed to finance Gas and Clean Energy Projects. It channels resources for up to USD 200 million in direct and contingent loans to cover market risks. We typically recommend this financing for projects in unexploited and remote areas. With this program, we expect almost 400MW of clean energy projects to come online.
Our Outlook Remains Positive
We expect the financing and loan programs to drive renewable energy penetration in Mexico. To achieve strong returns, companies must monitor prices and technological developments to direct resources to the most undervalued sectors, without distorting the market.
Financing has played a crucial role and in some way, this is reflected in the success of the auctions, and via the growing adoption of solar and wind technology. We expect the positive financing trends to continue, supporting solid returns for renewable energy investors. Please contact us to discuss renewable energy financing structures or to learn more about the regulatory environment in Mexico.
New pipelines have enormous potential to support increased natural gas production in Mexico and also reduce the costs of imports. Although there is already an impressive pipeline infrastructure for transporting natural gas from the U.S. into Mexico, it does not reach the entire country. Most of the less expensive piped gas goes only to the northern states of Mexico, in part to provide power for factories.
For many years, the market for clean energy was limited by unstable prices. Energy prices are generally difficult to predict, but clean energy adds the uncertainty of new technologies and the weather. Within a small area, spot prices for wind power can literally go whichever way the wind blows. However, virtual power purchase agreements (PPAs) are creating new ways to reduce price volatility and expand the market for clean energy.