A favorable regulatory environment is positioning Mexico as the top market for distributed solar in Latin America.

The country is set to double its distributed generation capacity this year, with more than 300 megawatts of new installations, after Mexico’s regulatory commission increased the upper limit for net metering plants to 500 kilowatts, according to GTM Research solar analyst Manan Parikh.

Meanwhile, a report from the Mexican Banks Association (Asociación de Bancos de México, or ABM) projected the market for on-site, distributed energy technologies will see a compound annual growth rate of 121 percent, and is set to exceed 8 gigawatts and $13 billion by 2025. Growth will be led by solar.

That compares to the $110 billion going into Mexican energy-related infrastructure projects in the next 15 years, according to an EY note on Mexico’s National Electric System Development Program.

Mexican authorities are working to foster distributed generation as a slice of its 40 percent renewable energy target by 2035. For this to happen, the country will need to get around 18 percent of its generation from solar, compared to less than 1 percent at present.

Net metering will help. “There are several ways in which distributed generation projects can slot in,” said Parikh, including net metering itself, where excess solar energy is credited against future consumption, or net billing, where excesses are sold to the utility.

Net metering has already stimulated sales of sub-20-kilowatt residential solar systems, which this year could make up around 18 percent of all solar capacity in Mexico, based on GTM Research data.

Commercial-scale systems, of up to 1 megawatt, could represent another 10 percent. So far, the residential solar sector in Mexico has mostly been based on homeowners buying PV systems for their own use.

But companies are starting to offer financing packages as demand expands. In 2017, said Parikh, “several larger installers in Mexico, such as Galt, Enlight and Bright, formed partnerships or received financing for portfolios of systems.”

Up to 4.6 million customers could benefit from below-500-kilowatt net metering arrangements, the Mexican Banks Association said. Of these, most would be commercial or industrial users, but more than 431,000 could be on residential tariffs, the association said.

ABM said Mexican distributed solar customers are benefiting from the cost of PV systems, which fell 11.2 percent a year between 2013 and 2016, and rising electricity prices, with a compound annual growth rate of 3.8 percent between 2005 and 2015.  

Residential customers can usually recoup their distributed solar investment within three years, enjoying an internal rate of return of up to 35 percent, said the association.

For commercial users, the payback period is up to seven years and the internal rate of return could be up to 25 percent. “In both cases, the recovery period coincides with the financing terms offered by commercial banks,” said the ABM.

With such a favorable policy and economic environment, Mexico’s distributed generation market will be hard for other Latin American countries to beat. There are a couple of minor clouds on the horizon, though.

There is a spat between Mexico’s Energy Regulatory Commission (Comisión Reguladora de Energía or CRE) and Federal Electricity Commission (Comision Federal de Electricidad or CFE) over the net metering law.

“Some of the 2017 installations were in peril of not being interconnected by CFE because of a blocking of the new net metering limits set by CRE,” according to GTM Research.

“CFE was selling electricity in the industrial segment for $13 per kilowatt-hour in Merida and Baja California. Under the nodal scheme, customers would get back $4 per kilowatt-hour in those locations. CFE was concerned that it would have to pay for the difference.”

Longer term, Parikh said it's unclear whether tariff prices, some of which have been on the rise in recent years, will be affected by the outcome of national elections in 2018.

The constitution bars current president Enrique Peña Nieto from running for a second term, and recent polls hint at a possible shift in power from Nieto’s centrist Institutional Revolutionary Party to the left-leaning National Regeneration Movement.

Nevertheless, the Movement, formed in 2014 by former two-time presidential candidate Andrés Manuel López Obrador, claims to support scientific and technological progress in renewable energy.

If so, Mexico’s full-throttle progress on distributed generation would not seem to be under any serious threat just yet.

Interested in Latin America's solar market? Join GTM February 13-14 in Mexico City for an in-depth look at the country's rapidly expanding solar market. Solar Summit Mexico will leverage GTM Research’s expertise in Mexico to ensure your company is uniquely positioned to capture specific opportunities while appropriately managing regulatory, political and market risks. Find out more here.