Solar stocks tumbled at the end of last year as oil prices fell to dramatic lows. Many were quick (and correct) to point out that this was an economic non sequitur; oil andsolarlargely serve different markets.

However, there is one place where the fall in oil prices really has hurt the solar market: Mexico.

First, let’s dispense with the fallacy. Cheaper oil almost never leads to cheaper electricity. Even in places where oil is used for generation, the fall in oil prices hasn’t shored up confidence as much as it’s served to underline the volatility of oil dependence and re-entrench a desire for resource diversification.

But there is another way that oil can wreak havoc on a solar market, at least when you have the deadly trifecta of commodity reliance, import dependence, and tight capital controls.

Mexico currently gets about 33 percent of its national revenue from oil and gas extraction through the state-owned oil company, Petroleos Mexicanos. Despite a very astute hedging strategy, the Mexican peso has weakened significantly against the U.S. dollar as the price of oil has fallen -- down about 15 percent since last June. The currency issue touches both the distributed and centralized PV market, which we’ll put in context with data from the Latin America PV Playbook.

About 60 percent of the cumulative solar PV in Mexico to date has been installed by companies operating in the distributed generation segment. Because most modules and inverters are still imported, a weakening currency equates to a premium on purchasing foreign-made equipment. This premium is particularly significant given the budgets of the companies that are paying it: the distributed solar generation market was worth between $100 million and $200 million last year, scattered over 200 to 300 companies. These are small businesses, and they really don’t have much of a margin to cut into -- extreme competition has led to a 39 percent average cost decline year-over-year for residential PV systems, even while a 15 percent tariff raised the price of Chinese modules.

Furthermore, a reduction in consumer electricity tariffs has already elongated payback times and hurt solar business models based on fixed-percentage reductions on electricity bills. Most of these companies only buy a container at a time, or purchase from a distributor with a markup, so they can’t really capture economies of scale and leverage discounts in tough times.

In terms of centralized generation, there are 6.4 gigawatts of solar projects currently under development in Mexico -- but only four large projects have been built so far. There are a slew of permits issued, and developers are striving to get their PV plants off the ground -- mostly by going after newly available industrial offtakers. Unfortunately, these companies happen to also pay the lowest electricity tariffs of any consumer class. So, to make these projects work, developers need to access very competitive financing.

But that financing is nowhere to be found, due to currency issues of today and yesteryear.

Mexican banks have notoriously high interest rates due to a risk premium that has roots in the Tequila Crisis in the 1990s. Mexico had to enact strict capital controls to qualify for a bailout after that currency crisis, with continued ramifications felt even today. On the other hand, foreign capital now also comes with a much larger price tag, as investors are required to hedge against power-purchase agreements that are contracted in Mexican pesos. So while many investors from abroad are very interested in solar, there are very few projects that offer sufficiently attractive returns in the current market. Developers don’t really have a credible option at the moment, at least for debt.

Despite all these macroeconomic headwinds, we do expect the near-term pain to yield to long-term gain. The Mexican market is ranked the best long-term market for solar in Latin America; it is expected to install 7.5 gigawatts through 2020 with a huge market upside and growth across all segments. It is very likely that the peso will recover and electricity tariffs will rise, and new regulations begin to apply in January, leaving only the fundamentals: a strong foundation of electricity demand, a newly open market, high insolation levels, and the rapidly improving economics of solar.

***

Interested in Latin American solar? GTM Research will be launching a new conference, Solar Summit: Mexico, in January 2016. Also, stay tuned for the upcoming Q1 Latin America PV Playbook with analysis, data and forecasts on solar in the region, and sign up for the Latin America Solar Newsletter.