Having established a presence in Turkey and Dubai, British solar developer Hive Energy continues its international expansion into Mexico, where the newly created wholesale energy market and upcoming electric-power auctions offer new opportunities for growth.
The company is considering 300 megawatts' worth of projects in the country. But obstacles remain, said Bernardo Fernandez, Hive Energy’s director of Mexico operations.
“The energy reform still needs to iron out a few wrinkles; they’ve been running a little fast,” he told GTM in an interview. “But the foundations are there, and as time goes on, we will see some minor modifications to the legislation to address minor issues.”
Mexico’s energy reform puts an end to the monopoly of state utility CFE by opening up the market to outside bidders. CFE will participate in auctions both as supplier and offtaker, while remaining in control of the country’s transmission infrastructure. The first electric power auction is slated for March 31.
Hive Energy has installed around 30 solar farms in the U.K. totaling 300 megawatts of capacity. In Mexico, the company is targeting CFE, private firms and public institutions as potential offtakers.
“Our business model targets any institution that can provide a long-term PPA,” Fernandez said.
“The CFE and energy ministry (Sener) are offering 15-year PPAs in this auction, while there are private companies willing to sign 20-year PPAs. The way the market evolves over the next 12 months is crucial, because companies are more than happy to sit it out for one year and see the reality of the new market and what the prices are compared with what CFE is offering.”
He said Hive Energy would also likely sit it out and watch the market evolve before committing itself to a long-term PPA, while seeking to spread itself out. “We don’t know what the electricity market is going to be like.”
“We need a healthy mix of offtakers in both the private and public sector, because if we just focus on the private sector, we might find ourselves with projects but no offtakers, and then have a company offer us less than the current CFE price, which is unbankable.”
However, he said public-sector projects are harder to develop because, as a federal state, Mexico has so many layers of government.
“Every layer is a hurdle, whether due to bureaucracy or personal relationships, and we need to navigate through that. Also, this country has a big problem with corruption, and while we don’t want to get involved in that, we will unfortunately be competing with companies that don’t care about that.”
He cited Mexico’s national water commission (Conagua) as a potential client as it seeks to reduce water-pumping costs with sustainable energy use across its vast aqueduct network. Local governments seeking to reduce their municipal lighting costs are also potential customers.
Harnessing its experience as a rooftop developer in the U.K., Hive is targeting companies looking at distributed generation projects between 5 megawatts and 10 megawatts.
But first the company will watch to see how the market plays out. Energy prices dropped month-on-month in 2015 as a result of increased natural-gas use and a 40 percent spike in hydroelectric generation, according to the CFE. That makes solar less competitive.
Industrial tariffs are now around 20 percent lower than in 2014, the CFE claims.
“As the energy reform settles in and the first couple of auctions take place, electricity prices will show a tendency,” Fernandez said. “In 12 months’ time, that tendency will indicate whether trying to provide rural distributed electricity to small schools is a profitable enterprise or not. It’s something to keep an eye on, but we think there are way more opportunities out there in large-scale utility projects.”
That uncertainty regarding the future of electricity prices is holding back PPAs.
“It’s a long and difficult road, and it’s much more difficult to build relationships in Mexico than in Europe,” he said. “But, unlike in Europe, once the relationship is established, the benefits can be greater from a business point of view. Once you’re in that inner circle, it helps.”
He highlighted the mechanisms that have been created to favor renewable energy development in Mexico, such as the clean energy law that establishes generation goals and the clean energy certificates (CECs), similar to carbon credits, that Sener will issue from 2018.
However, “the rules of how they are going to operate are still not clear. There are a few gray areas that, in my interpretation, will eventually require new legislation,” he said.
He also expressed concern as to how the electric power auction would work, given that Sener has yet to announce which projects will be put out to tender.
“We anticipate that the first auction will be messy, and there are several factors that make it less interesting, regardless of what the big players say. Anybody that produces clean energy can participate, including enormous co-generation plants," said Fernandez. Natural gas plants will compete against renewable energy plants, which could impact the competitiveness of solar.
He also expects a scramble for development that could drive prices down.
“The solar industry in Mexico is so attractive. It has been attracting a huge amount of interest over the last three or four years, and there is an enormous array of developed projects out there which cannot find a PPA or an offtaker. I think they will be in the auction because they are desperate to flip their projects and willing to accept lower prices," he said.
Mexico added 100 megawatts of solar in 2015, bringing the country's total capacity to 260 megawatts. It is expected to add a similar amount this year, according to Anes, the country's National Association of Solar Energy.
Fernandez cited one last challenge: narcos. The region most ripe for solar development, the country’s northwest, is also a stronghold for drug traffickers. “It’s something that you try to put under the rug and hope it doesn’t affect you, but the more time you spend in the country, the more you realize it’s an important factor,” he said.
“In the north of the country, there are companies that don’t pay their utility bill to the CFE -- they pay it to the narcos. And there will come a time when the narcos will educate themselves about solar, and projects could be affected. For the first couple of years, nothing will be done, until they realize the money that can be made."
Make sure to tune in to our live stream of this week's Solar Summit Mexico, available only to GTM Squared members.