Latin America is about to find out whether unsubsidized solar can be an economic market reality.
While generous subsidies have driven the thriving solar markets of Germany, Japan, China and the U.S., botched efforts in Spain, Italy, and the Czech Republic have driven markets to overheat and collapse.
But with Mexico and the rest of Latin America, we're seeing renewable markets evolve with far less government largesse.
Although thermal power dominates Mexico's current energy mix, “Mexico is poised to be the hotbed for solar deployment in Latin America,” said Adam James, author of GTM Research's Latin America PV Playbook. He suggests that Mexico is the "bellwether" for an unsubsidized global solar future.
Can solar flourish in an unsubsidized solar region?
Indeed, Mexico today is "California five or six years ago," according to James. He suggests that business strategies will need to reflect that reality, with aspirants picking a niche market and broadening their base.
GTM Research just launched its Latin America PV Playbook -- and its author has some practical insight into this new solar frontier. James notes the analyst community in the past has made "big promises that didn't really materialize," basing its predictions on total available market instead of facts on the ground. James suggests that the growth of solar in Latin America will look more like the U.S. than Germany.
Mexico possesses the framework for a growing solar market, both distributed and utility scale. As reported by GTM Research, net metering was enacted in Mexico in 2007 and is administered the Comisión Federal de Electricidad (CFE), Mexico’s state-owned electric utility. CFE has owned and operated most power plants in the country, but IPPs have been gaining a foothold in Mexico, especially with renewables. CFE signed a PPA with a 46.8-megawatt project being developed by Sonora Energy Group.
James notes that there is "a line to cross" with retail electricity pricing in Mexico; typically, up to 150 kilowatt-hours will cost 6 cents to 9 cents per kilowatt-hour. In most regions, once you consume over 150 kilowatt-hours, the DAC rate (“De Alto Consumo,” or high consumption rate) is triggered and bumps up the price to as much as 22 cents per kilowatt-hour.
James pointed out that residential solar installers have focused on high-income clients first, in areas with high insolation and consumers who are likely to be paying the DAC rate. Household customers have net metering, and despite a small "wheeling" charge, the residential market has done well quarter-to-quarter since 2009. James notes that "experience is growing quarter-to-quarter" as developers and utilities better navigate the system and the technology. Envolta offers a third-party financing lease structure for residential customers.
Martifer already has a 30-megawatt merchant solar project with CFE in Mexico, while solar power plant developers SunEdison, SunPower and First Solar have merchant solar projects in development in Chile. More projects in Mexico will soon follow.
"You don't need incentives for solar," said James, suggesting that any market can grow as long as there is a transparent regulatory process -- along with high tariffs and high DNI.
James adds, "There is no cookie-cutter approach to developing solar in Latin America," going on to say, "It is more like developing a shale play rather than a tariff-based project in the EU."
In Mexico, James says it's best to start with an end user rather than with land and an interconnect permit. James suggests a pilot project in conjunction with a local producer: Aim for "1 megawatt, not 30 megawatts; prove the solar value proposition and then you scale. Don't start out building a big monster project."
According to James, “The Latin American market as a whole represents a huge opportunity for PV. However, the complexities of local markets, financing and regulatory hurdles, and policy risk have all played a role in preventing solar development in the region from reaching its true potential.”
"We are in a place where Latin America is poised for steady, although not explosive, growth," concluded the analyst.
There are currently 219 megawatts of utility PV projects under construction across all states in Mexico, nearly half of which are in Baja California Sur. The Mexican solar market’s demand will quadruple from 60 megawatts in 2013 to 240 megawatts in 2014, driven by projects approved under the Small Power Producers Program, strong residential demand, and self-supply projects for commercial, industrial, and agricultural customers, according to GTM Research.
GTM Research has launched a new product, the Latin America PV Playbook -- the most comprehensive analysis available of the Latin American solar market. This product will help companies gain a nuanced understanding beyond just the fundamentals, focusing on the strategies that are working (and not working), as well as identifying innovative new approaches to market. Markets covered include Mexico, Chile, Brazil, Peru, Central America, and the rest of South America. For more information, visit http://www.greentechmedia.com/research/report/latin-america-pv-playbook.