Navigant Research Blog

Reforms Drive Renewables, Grid Modernization in Mexico

— 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.

 

New York Details Its Vision for the Future of Energy

— March 2, 2015

On February 26, the New York Public Service Commission (PSC) released its long-awaited Phase 1 Order on its Reforming the Energy Vision (REV) proceeding. The order lays out the PSC’s vision for how the future retail electricity market in the state should operate to maximize efficiency, improve reliability, engage customers, and create clean, affordable energy products and services. I can’t cover the entire 328-page order in one blog, but I’ll hit on the major decisions that affect the current utility world order.

The biggest variable in the REV equation was whether the PSC would require an independent party to perform the function of the distributed system platform (DSP), the central role of REV. According to the order, the DSP’s functions include load and network monitoring, enhanced fault detection/location, and automated voltage and volt-ampere reactive (VAR) control. That list covers a lot of what the utilities currently do, so taking those tasks away from them would have caused a major shift in the market landscape. However, the Phase 1 Order outright supports utilities acting as the DSP as a way to minimize the redundancy of actions. This singular decision vastly limits the potential impacts to the state and the utilities. Utilities must be breathing a sigh of relief.

Metering Alternatives

A second thorny issue was whether utilities should be able to own distributed energy resources (DER) or whether DER should be the sole domain of the competitive marketplace. Many market players wanted to prohibit the utilities from competing with them when they might have a natural advantage in acquiring customers. Under the order, utilities will be able to own DER if they run a solicitation to meet a system need and they are able to show that competitive alternatives are inadequate or more costly than a traditional infrastructure alternative. They will also be able to invest in storage to the extent it functions as part of the transmission and distribution (T&D) system. This seems like a reasonable compromise that should work for most parties.

The last major component is advanced metering infrastructure (AMI). Earlier communications from the PSC hardly mentioned metering at all, so it was unclear how the final rule would play out. In fact, the Phase 1 Order does not mandate AMI deployment by utilities. Rather, the PSC prefers the term “advanced metering functionality” (AMF)—meaning that other technologies, including ones provided by third parties, may be able to achieve the desired functionality cheaper and more efficiently than AMI. It states that “each utility Distributed System Integration Plan (DSIP) will need to include a plan for dealing with advanced metering needs; however, plans that involve third party investment may be preferred over sweeping ratepayer funded investments.” This indicates that utilities should consider AMI alternatives before choosing a path forward.

Ticking Clock

As far as next steps, the utilities’ integration plans must be filed by December 15, 2015, so the clock is ticking. Phase 2 of REV will consider reforming the PSC’s ratemaking process so that utilities do not have disincentives to further developing DER. Utility income is tied to bond funds now, but they should depend more on creating value for customers and achieving policy objectives. A draft proposal is expected by June.

It was interesting trying to guess which way the PSC would fall on these and other major issues. Now the real fun begins: implementing the vision.

 

Oil Price Retreat Could Spur Government Action

— February 24, 2015

Although the oil market has been historically volatile, the circumstances of the latest price dive suggest that low oil prices may be the new norm. If that’s the case, it could negatively affect both oil companies and the markets for clean transportation technologies like alternative fuel vehicles (AFVs).

Because of U.S. and some state government policies that mandate automakers produce more fuel-efficient vehicles and/or AFVs, low oil prices mean that it’s more expensive for automakers to improve fuel efficiency and produce AFVs to make these vehicles competitive with less fuel-efficient, and less costly, conventional vehicles. If they don’t absorb these costs, they’ll likely wind up paying penalties for being out of compliance with fuel efficiency standards and AFV mandates.

Raise the Tax

Federal and state government subsidies and incentives for AFVs provide some insulation from these costs. Yet, these policies were designed in an environment where oil prices were 30%–50% higher than they currently are. More recently, two policies have been proposed that would be beneficial to automakers seeking to comply with stringent fuel efficiency standards and AFV mandates. The first is an increase in the gas tax; the second, an increase to the U.S. federal incentive for plug-in electric vehicles (PEVs) and the inclusion of natural gas-powered vehicles in that incentive.

The federal gas tax is currently 18.4 cents per gallon of gasoline and 24.4 cents per gallon of diesel. The tax, which has not been increased since 1993, is used to fund the repair and update of U.S. roads through the federal Highway Trust Fund. In recent years, the fund has been on the brink of insolvency but kept afloat by stopgap measures that provide money from the U.S. general fund. The current proposal, which would increase the tax by 5 cents per gallon over the next 3 years, would provide $210 billion over the next 10 years. The following chart shows the effect the proposal would have on the average U.S. price of gasoline over the next 10 years if oil prices rise to $90/barrel by 2025.

Gas Prices Under Increased Tax Proposal, United States: 2002-2025

(Sources: Navigant Research, U.S. Energy Information Administration)

Getting Flexible

The federal incentive for PEVs currently maxes out at $7,500 per vehicle and is accessed by the PEV owner when they file taxes for the year they bought their PEV. Of note, a PEV owner has to accrue at least $7,500 of taxable income to receive the max incentive. The White House has proposed to increase the incentive to $10,000 per vehicle, provide it as a point-of-sale rebate, and include natural gas-powered vehicles as eligible. The point-of-sale rebate would enable AFV buyers to incorporate the incentive into monthly payments upon purchase and receive the full incentive irrespective of their income.

The effect of both policies would make AFVs more competitive with conventional vehicles on an energy cost basis and open AFVs up to a larger, lower-income market, making it much easier for automakers to comply with federal and state fuel efficiency programs. This is not the first time these policies have been proposed, and it’s likely they’ll meet similar fates as their predecessors. However, low oil prices do introduce a new dynamic that may provide some flexibility in Congress, as well as increased pressure from interest groups that may create the necessary support.

 

Energy Efficiency Economics 101

— February 18, 2015

The frequently overlooked component for unlocking the great potential of energy efficiency in commercial buildings is the bottom line: cold hard cash. For commercial building owners and operators, especially those managing small and medium (under 50,000 square feet) facilities, the idea of installing energy-efficient equipment or energy management tools is a nice-to-have, not a need-to-have.

Tenant improvement and making a profit by keeping expenses low come before improving or replacing equipment with state-of-the-art efficient alternatives. A recent report from the National Institute of Building Sciences’ Council on Finance, Insurance and Real Estate contains a set of findings and recommendations on how small commercial buildings can implement energy-efficient retrofit projects.

Live Data

The report lays out the case for focusing on small and medium commercial buildings, a dormant $36 billion market opportunity that could provide huge employment opportunities (424,000 job-years) and carbon reductions (87 million metric tons a year). According to Navigant Research’s Energy Management for Small and Medium Buildings report, the energy management systems and services associated with this market are expected grow from $231.3 million in revenue in 2013 to $1.3 billion in 2022. The benefits are clear; what can be done?

The report recommends a few multi-tiered sets of actions that could help invigorate this market, at least in the United States. These include federal action, such as expanding research from the Commercial Buildings Energy Consumption Survey (CBECS), which is a critical tool for understanding the state of energy use in commercial buildings, but is only updated every 5 years. CBECS data could be used with benchmarking data to make the collective understanding of building energy data a living data set, providing a meaningful performance-based evaluation of how energy efficiency is actually deployed in existing buildings.

Increasing the Pace

Another recommendation is challenging in this political climate. The Section 179 (D) tax code, a part of the Energy Policy Act (EPAct) that incentivized commercial building energy efficiency, expired at the end of 2013. At $1.80 per square foot for the full achievement of 50% energy reduction, the incentive was helpful. The reliance on modeling was a challenge, and the improvement of benchmarking data drawn from a living version of CBECS could change that.

Finally, the report focuses on the variety of financing that can be made more available to this market. If energy efficiency financing can be presented as a secure investment with known outcomes and well-understood risks, the adjacent available pools of financing could, with some urging, be made available.  Increasing the deployment of utility-based on-bill financing is one possibility, but not all utilities in the United States would be open to that approach. Property Assessed Clean Energy (PACE) programs enable energy efficiency (or solar deployments) to be financed by local bonds, and repaid via local property taxes over time. The White House recently announced it would use the success of PACE in the multifamily residential market in California and apply it to federal Housing and Urban Development Department housing.

 

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