Mexico is among the world’s highest-potential producers of renewable energy. It has almost double the solar radiation and photovoltaic capacity of Germany, the country with the highest installed solar capacity. The so-called “Ring of Fire” ranks Mexico fourth in the world in the production of geothermal electricity, even though it currently taps only about 10 percent of its potential. As for wind energy, while the installed capacity has grown over 600 percent in the last five years to a current 1,200 megawatts (MW), this is still only a fraction of the potential total capacity of over 40,000 MW.
Mexico has one of the world’s most ambitious clean energy strategies that targets 35 percent of total power generation from renewables by 2024. As of 2012, the installed capacity for power generation through renewable energy was at 23 percent, which is still far from the targeted 35 percent. According to Mexico’s Ministry of Energy, as of September 2013, the gross generation of electricity in Mexico was 22,008 gigawatt hours (GWh).
Energy reform’s new rules
In December 2013, the Mexican Congress approved a constitutional amendment (the “Energy Reform”) to open to foreign investment and private participation the oil, gas, and power sectors. The Energy Reform will change the rules of the game for the whole sector, including renewable energy. It provides a formal opening for the private sector to participate in the generation of power in an open market. The underlying legislation for the Energy Reform is still on the table, and the rules for such participation shall be put in place in the upcoming years.
The Energy Reform establishes that the state will reserve the right to transmit and distribute power. It provides for private participation through the finance, installation, maintenance, management, and operation of infrastructure to carry out the transmission and distribution of power.
Once the new law that regulates power is in place, the Executive Branch will have one year to create the National Center of Energy Control. The agency will regulate Mexico’s electrical system, operate the wholesale market of power, and give private parties access to the transmission and distribution grid.
As for renewable energy, the transitory articles of the Energy Reform mandate the Mexican Congress to enact legislation within 120 days to regulate the survey, exploration, and exploitation of geothermal resources. By 2015, the Ministry of Energy shall include in the National Program for Sustainable Use of Energy a strategy to promote the use of clean technology and fuels.
Obligations and opportunities
The underlying legislation will establish new obligations in clean energy and reduction of pollutant emissions for players in this industry. This will spur private parties to seek the support of international organizations and government programs so they can access finance, social and environmental assistance, and other mechanisms that will help them create bankable projects.
Although new rules of the game have yet to be firmly established, PPPs will continue to play a strong role in the power sector. This is especially true for projects involving municipalities. These municipalities could become the vehicle that powers Mexico’s transition to renewable energy.
PPPs, power, and renewables—the role of municipalities
So far, public-private partnerships (PPPs) in power and renewables have been primarily used between municipalities and private parties for cogeneration and self-supply schemes, or through long-term off-take contracts between private parties and the Federal Electricity Commission.
PPPs have been common at the municipal level because of the municipalities’ obligation to provide public services such as streetlighting. They have provided an efficient and cost-effective mechanism to ensure high quality delivery of electricity. These PPPs will continue to light the way as Mexico’s Energy Reform takes hold.