Mexico Large-Scale Renewable Energy Development Project

(Ministry of Energy / World Bank / Global Environmental Facility)

SECRETARÍA

DE ENERGÍA

Juan MataEnergy Week, Washington, D.C., 8 March 2006

Background Power sector: A growing dependence on natural gas...

Elaborado a partir de la Prospectiva del Sector Eléctrico 2004-2013

350

TW

h /

año

Hidráulica

300

250

200

150

100

50

0

GeotermiaNuclear

Carbón

Combustóleoy diesel

Gas natural

“Libre”

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

Background

(US

$/M

Mft³)

Precio del gas natural en pozo en EUA

1990 1995 2000 20051

2

3

4

7

Fuente: Energy Information Administration

6

5

...and a growing volatility

The policy and political context

The current policy framework establishes State control of electricity transmission and distribution.

Since 1992 private sector has limited participation in power generation in two schemes: Self-supply and Independent Power Production (IPP)

The current electricity law presents barriers for RE development: The National Utility, CFE, needs to follow a least-cost principle for

acquiring energy from third parties A number of benefits of renewables (social, economical, and

environmental) are not valued

The current strategy

1. GEF/WB Large-Scale Renewable Energy Development Project

2. GEF/UNDP wind power project

3. CFE projects

4. Accelerated depreciation

5. New contract template for self-supply projects

6. Bill for a new renewable energy law

7. Other methodologies and policy instruments

Projects

Policies and regulations

1. GEF/UNDP Wind power project

Action Plan for Removing Barriers to the Full-Scale Implementation of Wind Power (US$11M) Technical center for wind power in South Mexico Installation of anemometers Incentives for pilot small-scale grid-connected projects

2. CFE projects

La Venta II turn-key wind project under construction in the Isthmus of Tehuantepec

More geothermal plants planned (220 MW included in the expansion plan of CFE 2005-2014)

3. Accelerated depreciation

The current income tax law already offers accelerated depreciation (100% on year 1) to all investments in renewable energy equipment

4. New contract template for self-supply

Given the current policy context of Mexico, self-supply remote projects offer good possibilities for renewable energy development (projects with a combined capacity of at least 1300 MW have already requested permits)

A new interconnection contract template for RE has just been published (30 January 2006)

The contract offers energy banking, favorable wheeling charges and capacity recognition (to reduce demand charges) to self-supply projects with intermittent generation from renewable sources

5. Renewable Energy Law

A new Law for renewable energy was approved by the Lower Chamber of Congress in April 2005 The Energy Ministry has provided technical advice It is compatible with the current electricity law

The Law includes a specific Fund to provide incentives for Grid-Connected RE, following a strategy similar to that of the LSREDP

In addition it confers new attributions to the regulatory body

6. Other methodologies and policy instruments

With the support of multilateral and bilateral cooperation (GEF, GTZ, REEEP, USAID), the government is developing: A methodology to assess the economic value of risk

reduction offered by RE A methodology to assess the contribution of intermittent

sources to grid capacity Instruments to enable small-scale self-supply (PV) Dispatch and planning models to incorporate wind power

into the electricity sector A long-term prospective study of RE (to be published soon)

7. GEF/WB Project

Large-Scale Renewable Energy Development Project: US$25+45M grant aimed at providing temporary, performance-based incentives for grid-scale wind energy

The State utility (CFE) will pay its avoided costs, and an additional, predefined, limited time, incentive will be given through a “green fund”

Incentive allocation based on a competitive auction mechanism In 2006 bidding for Phase I (100MW)

Main Objective

Stimulate and accelerate the commercialisation of renewable energy

applications and markets in Mexico, particularly at the grid-connected level, in

order to reduce greenhouse gas (GHG) and other emissions while responding to

increasing energy demand and energy diversification imperatives necessary for

sustainable economic growth

Costs

Payment bythe utility

(CFE)

Strategy

Subsidy

By offering a subsidy, the project seeks to compensate the current gap between the costs of renewable energy, and the price that the utility can pay

Costs

Payment bythe utility

(CFE)

Costreductions

This in turn will enable the industry to grow

and to reduce its costs

Subsidy

(due to the learning curve and economies of scale at both global and national levels)

Costs

Payment bythe utility

(CFE) Recognition of value

In addition, the project seeks to recognise the

value of renewable energy, namely:

Subsidy

Its contribution to the capacity of the electric system

Its environmental and health benefits, at a local, national and global level

The greater stability of its future costs

The benefits of diversification Its benefits on regional

development and job creation

Costs

Payment bythe utility

(CFE)

Costreductions

Recognition of value

Subsidy

The simultaneous effect of cost reductions and value recognition will reduce the current gap…

The rationale of convergence:

Costs

Payment bythe utility

(CFE)

Costreductions

Recognition of value

The simultaneous effect of cost reductions and value recognition will reduce the current gap…

The rationale of convergence:

Subsidy

Costs

Payment bythe utility

(CFE)

Costreductions

Recognition of value

…until the need for the subsidy eventually disappears

The rationale of convergence:

Subsidy

Activities

1. Implementation of a financial mechanism (“Green Fund”) that will provide additional incentives and hence assure the feasibility of renewable electricity projects

2. A progressive recognition of the real value of renewable energy

1. Green Fund

A performance-based incentive offered per energy unit produced, rather than a capital subsidy

A competitive process (IPP tender)Each winning project will receive a fixed

incentive during a 5 year periodThe incentive will diminish gradually in the

subsequent tenders

2. Recognition of Value of Renewable Energy Sources

Climate change mitigation (CDM)Accelerated depreciationRecognition of the capacity contribution of

intermittent renewable energy technologies Recognition of the implicit value of price

stability (portfolio diversification / free hedging)

Project phases

Phase I: US$25MUS$20M for the Green Fund (incentives for a

single wind project: La Venta III)US$5M for technical assistance activities

Phase II: US$45MGreen Fund (other renewable energy sources

might be included)

Phase I: La Venta III

The La Venta III wind farm is included in the 2006 budget

CFE (the Mexican state-owned utility) will pay its avoided costs, and the PPA will establish a fixed per-kWh payment (adjustable only with inflation or exchange rate)

The Green Fund will provide the additional incentive

Tender in 2006, operation in 2008

Thank you!¡Muchas gracias!

www.energia.gob.mx

jmata@energia.gob.mx