Navigant Research Blog

Reforms Drive Renewables, Grid Modernization in Mexico

Mackinnon Lawrence — March 3, 2015

A recent ranking of the most attractive power markets for investors in Latin America, based on a survey conducted by BNAmericas of power sector stakeholders, places Mexico at the top. The updated rankings cite reforms to the country’s power sector, which are expected to allow for greater levels of private investment and a loosening of Mexico’s state-owned Comisión Federal de Electricidad’s (CFE) monopoly over the national power grid.

Mexico, which ranks 16th globally in installed generation capacity, is among the largest power markets in the world. Currently, CFE controls more than three-quarters of the country’s installed generating capacity and holds a monopoly on electricity transmission and distribution. The status quo has made it difficult for the country to keep up with rising electricity demand, effectively acting as a headwind for broader economic growth across the country.

Reform and Renewables

Although Mexico is heavily dependent on fossil fuels for power generation—representing 86% of delivered electricity—estimates suggest that it has sufficient resources to meet 50% of its generation demand with non-fossil fuels by 2050. Among non-hydro resources, geothermal, biomass, and waste are currently the most utilized. But like Chile, which previously topped BNAmericas’ rankings, Mexico is increasingly being seen as a haven for solar PV and wind development.

Energy sector reforms are designed to enable private firms to sell electricity to commercial and industrial consumers, as well as partner with CFE to finance, build, and operate transmission and distribution infrastructure. Private sector companies can participate through an open permitting process for independent power producers and self-supplied and combined heat and power (CHP) facilities that are typically located at industrial plants. Ultimately, these changes are designed to create a more competitive electricity market, according to Fitch Ratings, and to encourage the use of renewables by awarding clean energy certificates.

As a result of these reforms, private investment inflows could mirror similar trends already underway in Chile. According to some estimates, Mexico will add 66 GW of capacity to its power grid over the next 15 years, with investments in renewables potentially reaching $90 billion.

Wind as Well

U.S.-based solar firms see Mexico as among the countries with the highest growth potential. According to Navigant Research’s report, Global Distributed Generation Deployment Forecast, the country is expected to add more than 800 MW of distributed solar PV over the next decade.

Mexico is rapidly emerging as a substantial wind market as well, second only to Brazil among Latin American markets. Deregulation is expected to accelerate the wind market. The federal energy secretariat (SENER) has targeted 12 GW of new development by 2020. CFE plans to commission eight wind farms, totaling 2.35 GW of capacity, by the end of 2018, and private investors such as Iberdrola, Pattern Energy, and Cemex have announced significant investment targets for the same period. These investments, along with projects under development in Baja California and southern Mexico, are expected to help fuel a 5.5 GW expansion in wind capacity across the country through 2019, according to Navigant Research’s forthcoming report, World Market Update 2014 – Wind Energy.

Mexico’s power generation system is plagued by inefficiency and regulatory rigidity. It currently has the highest distribution losses among Organisation for Economic Co-operation and Development (OECD) countries. While the reforms are designed to liberalize the sector, a likely flood of new intermittent renewable generation capacity and customer-sited distributed generation will likely further strain Mexico’s already inefficient, old, and outdated transmission grid. These challenges are expected to drive an estimated $36 billion in emerging transmission, distribution, and grid modernization technologies over the next decade.

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