Solar Sector Study TechBA AZ FV Jan 2010

Solar Energy Sector StudySolar Energy Sector StudySolar Energy Sector StudySolar Energy Sector StudyTechBA ArizonaTechBA Arizona

December 2009

Confidential Document

Table of Contents Section 1 Executive Summary Section 2 California and Arizona Solar Market 1 Energy Market Context ............................................................................................. 2‐1 2 Energy Market Framework ........................................................................................ 2‐1 3 Electricity ‐ Global Solar Market Size ........................................................................ 2‐4 4 Drivers for California/Arizona Solar Electric Market .................................................. 2‐5 5 California/Arizona – Best Solar Market to 2020 ........................................................ 2‐6 6 California/Arizona ‐ Solar Electric Market Demand Through .................................... 2‐7 7 Supply Side to the Solar Electric Market .................................................................. 2‐10 8 New Distributed Generation Electricity Markets .................................................... 2‐13 9 Solar Hot Water Market .......................................................................................... 2‐13 10 Summary of Solar Market Potential in Arizona and California ............................. 2‐14 11 Business Models .................................................................................................... 2‐13 12 Trends in Solar incentives ...................................................................................... 2‐17

Section 3 Solar Sector Market Opportunities 1 Introduction ............................................................................................................... 3‐1 2 Profiles of Mexican SMEs .......................................................................................... 3‐1 3 Supply Chain Demand for California and Arizona Solar Markets .............................. 3‐6 4 Climate Change Pressures on the Supply Chain Creates Opportunities ................. 3‐10 5 Export Sales of Solar Electricity to U.S . ................................................................... 3‐11 6 Global Thermal Energy Market ............................................................................... 3‐17 7 Industrial Process Heat ............................................................................................ 3‐18 8 Solar Cooling ............................................................................................................ 3‐20 9 Thermodynamic Converters for Solar Thermal ....................................................... 3‐22 10 PV‐Thermal for "Green Building" Markets ............................................................ 3‐24 11 "Low‐Carbon" Industrial Parks with Renewable Electric/Thermal Micro‐Grids .... 3‐25 12 Need for System Integrators and Multi‐Disciplined Engineering .......................... 3‐26 13 Export of Proprietary Solar Products .................................................................... 3‐27 14 Off‐Grid Solar Products ......................................................................................... 3‐28

Section 4 Overview of México's Solar Sector 1 México's Solar Markets ............................................................................................. 4‐1 2 Government Policies ................................................................................................. 4‐5 3 Government Support Programs for Solar ................................................................. 4‐9 4 Market Trends ......................................................................................................... 4‐11 5 Key Organizations, Research Institutions and R&D Focus ...................................... 4‐13 6 Foreign Direct Investments in Solar Industry .......................................................... 4‐15

Section 5 Financial Enables 1 Introduction ............................................................................................................... 5‐1 2 Approaches to Financing the Solar Sector ................................................................ 5‐1 3 Traditional Governmental Support Programs ........................................................... 5‐2 4 Solar Manufacturing Financial Support Programs .................................................... 5‐4 5 Solar Generation Financing Support Programs ......................................................... 5‐5 6 Private Investment/Tax Equity Financing .................................................................. 5‐6 7 International Development Financing ..................................................................... 5‐10 8 Carbon Finance ........................................................................................................ 5‐12 9 Foreign Direct Investment ....................................................................................... 5‐14

Section 6 Solar Sector Policy Recommendations 1 Supply Chain Development ....................................................................................... 6‐1 2 Alternative Energies and Sustainable Technologies .................................................. 6‐2 3 Leverage Recent Climate Change Agreements .......................................................... 6‐3 4 Leverage New R&D Relationships ............................................................................. 6‐5 5 Solar Thermal Demonstration Projects ..................................................................... 6‐6 Section 7 Company Screening Process and Company Profiles Appendix 1 Solar Technology Value Chain Appendix 2 Solar Policies and Incentives Overview Appendix 3 Solar Sector Market Opportunities (Presentation)

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Section 1 Executive Summary

Context Significant opportunities exist for Mexican companies to participate in all segments of the various solar value chains and solar markets including the emerging Mexican market along with the enormous export markets of the southwest U.S., the Americas and the world. As solar becomes increasingly part of Mexico’s export trade and climate change initiatives, companies performing in this space will be increasingly valued for their “triple‐bottom lines” of financial, social and environmental returns.

California and Arizona Solar Markets California has the 8th largest economy in the world and Arizona is the 2nd fastest growing state in the U.S. These states have exceptional solar resources, aggressive renewable energy requirements for utilities, and unprecedented growth in peak load demand. Solar will play a larger role in the renewable energy mix in these 2 states in the future than anywhere in the world. Nowhere else will there likely be a greater investment and concentration of all forms of solar energy collectively contributing to electricity production, greenhouse gas reductions and economic development. It is also expected that solar in California and Arizona will be the first markets in the world to achieve “grid‐parity” where the price of solar is at or below the price of grid electricity. Utilities in California and Arizona are projected to require some 22.1 GW of in‐state renewable energy capacity to meet state self‐imposed mandates for Renewable Energy Portfolio requirements by 2020. Utility‐scale solar thermal electric and PV will account for more than 50% of this new renewable capacity which represents a market over $90 billion. This market will require an extraordinary near‐term expansion of a global a supply chain. Grid‐parity is the point in time at which electricity generated from renewable energy is either equal in cost or less expensive than grid power. The well respected Silicon Valley venture capital firm of Khosla Ventures makes the following projections:

Peak‐parity for Solar Thermal Electric in 2009 – utility‐scale solar thermal electric plants are considered to be at parity with the electricity costs of California’s natural gas‐fired peaker power plants at a peak price of $.175/kWh.

Grid‐parity for Solar Thermal Electric in 2011‐2012 – By 2011, utility‐scale solar thermal electric plants is expected to reach parity at $.15/kWh with conventional power plants.

Grid‐parity for Distributed PV in 2015‐2018 – PV is expected to achieve parity with natural gas peaker plants in 2015 at $.25/kWh and parity with conventional power plants at $.22/kWh in 2018

Declining incentives are directly related to “grid parity”. As the costs for PV decline, the costs of grid power will be increasing each year. PV grid‐parity will likely be greatly influenced by geography and will come sooner to California and Arizona than to other U.S. states because of superior solar resources, lower installed PV costs, and rising electricity rates. Grid‐parity will be achieved from predictable volume‐based cost reductions and the next‐level “big” market for solar is expected to take off after unsubsidized solar is cheaper than grid electricity.

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Solar Market Opportunities There are numerous and diverse niches in the various sectors and segments of the global solar market which present a wide‐range of opportunities for Mexican companies to participate in the growth of exports to the U.S. and especially in the southwest states of Arizona, California, Nevada and New México. There is a fast growing domestic solar market in México along with Latin and South American. México is well positioned to benefit from the continued growth of a domestic solar market and to be a leader to the export of solar goods and services. These opportunities range from the export sale of utility‐scale solar thermal electricity from northern México to the global distribution of solar products such as photovoltaic panels, solar hot water systems and solar street lights. Perhaps the largest market potential is positioning Mexican companies as strategic players in the supply chain for the enormous capacity additions for utility‐scale solar power plants near the border in southern California and Arizona where there are enormous opportunities to supply mirrors, reflectors, solar receivers, structural supports and engineering services. There are numerous business models and market entry strategies for Mexican companies expanding into U.S. markets. These options include third‐party distributor/supply agreements, joint‐ventures and wholly‐owned subsidiaries as system integrators, direct‐sale Power Purchase Agreements with U.S. utilities and large commercial customers and large self‐generation/carbon projects using solar. Global climate change initiatives will create increasing pressures to reduce the carbon footprint of all aspects of the solar supply chain and to reduce the embodied energy content of materials used in solar components and parts. These climate change initiatives will also create new opportunities in the solar supply chain for existing, new and emerging Mexican companies which understand and anticipate these trends by implementing carbon‐reducing policies and practices which go far beyond previous “Greening the Supply Chain” initiatives. Additional opportunities will come from companies working to provide materials with lower “embodied” energy. Perhaps the largest near‐term solar opportunity for Mexican companies is to initiate the development and construction of utility‐scale solar power plants in México for the export sale of electricity to the United States. Specifically there is a new and emerging market for the export of renewable electricity from northern México to California by Mexican Independent Power Producers (IPPs). The export of renewable electricity to California has already begun with recent sales of geothermal and wind by Federal de Electricidad (CFE) and by IPPs to California utilities. For California to meet its Renewable Portfolio Standards of 33% by 2020, the California Public Utility Commission expects that 17% of its renewable electricity will come from out‐of‐state which equates to 4.1 GW of renewable capacity additions which will provide more than 12,000 GWhs of electricity. The market potential for utility‐scale solar thermal electricity, solar hot water and PV is well known. The use of direct solar thermal energy for process and for conversion applications is the least known and least developed sector of the solar industry. There may even greater opportunities to use low‐ and moderate‐temperature solar thermal heat in direct applications to displace fossil‐fuel electricity generation and to replace the direct combustion of fossil‐fuels for heat. Most of the world’s energy is used to generate heat which consumes more than 2 times the energy that is used for electricity and 50% more than is used for transportation. Thermal energy represents 54% of the global final energy demand with electricity accounting for just 17%. Significant opportunities exist for Mexican companies in all aspects of the emerging commercial/industrial solar thermal market. These opportunities apply to system integrators, engineering services and manufacturers of the solar thermal generation systems along with the thermal conversion equipment and systems used to transform heat into productive “work”. Key products of direct solar thermal which present great opportunities for México are industrial process heat and process hot water, cooling, heating, desalinated water and “distributed‐scale” thermal power blocks for electricity and heat.

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Several Mexican SMEs have developed and are now manufacturing proprietary solar products for the domestic market and are starting to export to Europe and to Latin and South America. These are low‐cost, high‐quality products which are strong candidates for export to the California and Arizona markets.

México’s Solar Sector Mexico’s solar resources are among the best in the world and far superior to Germany and Spain which are the recognized world leaders in installed photovoltaic systems. México’s average solar resources for PV are more than 60% higher than the best solar in Germany which has 5.4 GW of installed PV. Spain and Germany are the global PV leaders with a total of 8.7 GW which is 67% of the world’s PV installed capacity. The “energy return factor” (ERF) for PV installed in most of México is very favorable and produces 17 times the electricity that is required to manufacture the PV system. This figure is 1.5 times higher than the ERF for Germany and is equal to most of Spain. México’s extraordinary solar resources have largely gone untapped with just 135 MW of installed solar capacity in 2008. Currently, there are no solar thermal electricity plants in México. Some 80% of PV installations in México are for off‐grid/rural electrification and 78% of all solar hot water installations are for swimming pool heating. Mexico’s solar resources have largely gone untapped but the potential is huge with a photovoltaic and solar thermal market potential estimated to be as large as 45 GW which is approximately 75% of México’s 2008 electricity generation capacity. Photovoltaic electricity is “unsubsidized” in México and competes against “subsidized” residential electricity rates. Residential electricity rates in México are subsidized by the government and were described by a recent World Bank report as among the largest electricity subsidies in world. In 2006 residential electricity subsidies accounted USD 9 Billion which represented more than 33% of total electricity sector revenues and equated to 1% of the gross domestic product. Over 66% of electricity subsidies go to residential consumers and the volume of subsidies to residential customers increased by 46% between 2002 and 2006 in real terms. Photovoltaics module prices are dropping faster than all predictions and are driving unprecedented PV growth in México during 2009; PV prices are now approaching the GTZ Report’s “optimistic pricing” scenario (2009‐2014) already in 2009. In the past 2 years México has seen dramatic reductions in the installed costs for PV ranging from 30% to 60% with the variation depending under system integrator and whether the module uses silicon or thin‐film cells. In 2009, the general payback periods for solar hot water systems are 1.5 to 3 years and for photovoltaics 5‐9 years depending upon regional solar resources, energy consumption, equipment selection and installer pricing. The Federal government’s new “Renewable Energy Development and Financing for Energy Transition Law” (LAERFTE) became effective in November 2008 and mandated SENER to produce a National Strategy for Energy Transition and Sustainable Energy Use and a Special Program for Renewable Energy. The main objective of the Law is to regulate the use of renewable energy resources and clean technology and to establish a national strategy and financing instruments to allow México to scale‐up electricity generation based on renewable resources. As a global leader in climate change, México is one of the first developing countries to commit to a specific reduction of emissions through the use of clean and efficient energies. In near future, solar is expected to play a major role in the country’s ambitious climate change initiatives during the Kyoto Post‐2012 period. Government programs, often in conjunction with international development entities, are most often the sponsors of large‐scale solar development. Often solar is a key component to programs focused upon providing affordable housing and promoting rural development. Key entities promoting solar in Mexico are the Instituto de Investigaciones Eléctricas (IIE), Centro de Investigación en Energía, Universidad

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Nacional Autónama de México (CIE‐UNAM), La Asociación Nacional de Energía Solar (ANES), and GTZ, the Germany sustainable development organization.

Financing Enablers The general types of support programs, solar incentives and financial tools used by “enablers” to leverage investment in the various value chains of the solar industry which include:

Economic Development – traditionally consists of targeting individual companies with conventional grants, loans, and tax incentives to solar companies locating and/or expanding in certain regions or locations; some efforts are marketed at promoting new “solar cluster development” along with “green jobs”.

Export Trade Development – existing initiatives which use direct loans and credit enhancements to assist foreign customers buying solar products, goods and components produced domestically; some countries are targeting the renewable energy sector for export trade initiatives.

Targeted Financing for Solar Manufacturers – consists of national and state tax credits targeted to assist the financing of solar manufacturers along with utilities receiving “Renewable Energy Credits” for payments to solar manufacturers for sales leading to in‐state solar generation.

Renewable Energy Generation Incentives and Portfolio Requirements – the “market drivers” for the explosive growth of solar in the US is due to a mix of voluntary incentives and mandatory requirements for generating solar energy in California and Arizona which makes large and small solar projects “bankable” which leverages equity and debt investments in solar manufacturing and in the solar supply chain.

Private Investment/Tax Equity Financing – comprised largely of institutional and tax equity investors, private syndicated investments and private bond placements offering equity, debt and leveraged investments with tax‐offsets and pass‐through net operating losses.

Carbon Funds, Kyoto Protocols and Post‐2012 Funds – consists of international players buying “certified emission reduction” credits from renewable energy projects which assists in financing projects and assists countries meet their carbon reduction commitments under the Kyoto.

International “Donor Trust Funds” – established to buy the environmental attributes of solar energy projects in long‐term contracts which are used to secure conventional financing.

Foreign Direct Investment and Strategic Alliances/Partnerships – usually consists of equity and debt financing to build manufacturing capacity in low‐cost countries with local strategic partners in order to guarantee a supply of solar products for fast growing markets.

Policy Recommendations Several policy recommendations are presented for consideration as tools to accelerate the development of a solar industry in México. To a great extent the solar sector plays a part of a larger, fast‐changing global “carbon market” in which the dominate drivers will be greenhouse gas (GHG) reductions and reduced “carbon footprints”. Many steps can be taken to further build the capacity of México’s emerging solar sector to compete in a dynamic global and national marketplace while also meeting goals to reduce greenhouse gas emissions. Recommendations include:

Enhance competitiveness of the SME “Gazelles" in the new carbon market

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Focus on financing SMEs which can lead in the implementation of all aspects of climate change initiatives

Leverage recent climate change agreements to accelerate formation of strategic partnerships between U.S. and Mexican SMEs in the solar sector

Form new linkages for SMEs with the European solar industry

Export renewable electricity to U.S.

Export proprietary solar products and integrated systems

Leverage new R&D Relationships

Increase awareness of solar thermal capabilities with high‐profile demonstrations

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Section 2 California and Arizona Solar Markets

1 Energy Market Context California has the 8th largest economy in the world and Arizona is the 2nd fastest growing state in the U.S. These states have exceptional solar resources, aggressive renewable energy requirements for utilities, and unprecedented growth in peak load demand. Solar will play a larger role in the renewable energy mix in these 2 states in the future than anywhere in the world. Nowhere else will there likely be a greater investment and concentration of all forms of solar energy collectively contributing to electricity production, greenhouse gas reductions and economic development. It is also expected that solar in California and Arizona will be the first markets in the world to achieve “grid‐parity” where the price of solar is at or below the price of grid electricity. Utilities in California and Arizona are projected to require some 24 GW of renewable energy capacity to meet state self‐imposed mandates for Renewable Energy Portfolio requirements by 2020. Utility‐scale solar thermal electric and PV will account for more than 50% of this new renewable capacity which represents a market over $90 billion. This market will require an extraordinary near‐term expansion of a global supply chain. This section describes the California and Arizona solar market through 2020 in order to provide an overview of the size, diversity and scale of the market demand along with a review of current developments in market supply. All costs in this section are in US Dollars.

2 Energy Market Framework

2.1 Electricity Markets

2.1.1 Utility‐Scale Electricity

Utility markets are characterized by companies generating electricity in central plants and acquiring additional electricity which is delivered through a transmission network to distribution centers which step‐down the electricity which is then delivered through local distribution loops to end‐users. Electric utilities obtain electricity in several ways:

Generation from their own power plants

Acquisition of electricity through competitive long‐term supply contracts (Power Purchase Agreements ‐ PPAs) from third‐parties such as Independent Power Producers (IPPs)

Purchases on the spot market Utilities classify electricity by product values which correlate to how and when electricity is generated:

Baseload power plants operate nearly continuously

Intermediate‐load power plants operate to supply daily periods of increased power demand

Peak‐load plants operate for limited hours as needed to meet peak power needs

“Non‐firm” /Intermittent power is generated only when renewable resources are available such solar and wind. An advantage of solar is that production is highly correlated to the load profile of utilities in the southwest US and northern México

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2.1.2 Distributed Generation ‐ Electricity

Distributed Generation (DG) is sometimes called “distributed power” or “distribution energy” and refers to the production of electricity at, or close to, the point of consumption. DG can be grid‐connected or off‐grid. Distributed generation can support a single‐family residence, a commercial/industrial facility, a group of facilities or a micro‐grid. DG is generally referred to generation occurring on the customer side of the electrical meter. DG is also used by utilities to site distributed generation at or near a load center which can off‐set expense for expanding a central power plant and for additional transmission capacity. DG is connected to the grid at distribution voltages. More particularly the DG market is segmented as follows:

Residential – Includes single‐family residences and multi‐family housing; energy‐generated is used on‐site

Commercial/Industrial – Includes government, schools, hospitals, ect.; energy‐generated is used on‐site

Utility DG – Generation facilities usually with capacities under 20 MW which are grid‐connected in the distribution loop

Off‐Grid – Generation that is isolated from the distribution grid; often called “remote” power, “village” power, micro‐grids, etc.; energy generated is used within a local loop or for a specific home or building

2.2 Distributed Thermal Energy Markets

The direct use of thermal energy is inherently Distributed Generation with the place of heat generation at or near the thermal point‐of‐use. Thermal energy can be generated though combustion processes (coal, natural gas and biomass) and the conversion of geothermal and solar radiation through heat exchange systems. Thermal energy is usually segmented by temperature ranges and defined as low‐, medium‐ or high‐temperature markets.

Thermal Energy Market Segments by Temperature and Applications

High‐Temperature Industrial Process Heat > 250°C > 480°F

Utility‐Scale Solar Thermal Electric 400°C‐1000°C 750°F‐1800°F

Medium‐Temperature Heat 80°C‐250°C 176°F to 480°F

Industrial Process Heat

Industrial Process Hot Water

Thermal‐Based Cooling

Electricity Generation

Desalination

Low‐Temperature Heat < 80°C < 176°F

Industrial Process Heat

Domestic Hot Water

Space Heating

Thermal‐Based Cooling

Desalination

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2.2.1 Low‐ and Medium‐Temperature Applications

Process Heat – washing, pasteurizing, boiling, sterilizing, heat treatment, drying, dehydration

Cooling – absorption cooling, adsorption cooling, desiccant cooling, dehumidification, refrigeration

Space Heating – boiler pre‐heating, industrial facilities, district heating, residential homes, commercial buildings

Conversion Processes – o Electricity from heat‐driven thermodynamic turbines and converters o Kinetic energy for mechanical applications (water pumping, grinding, belt‐drives, etc.)

Water – industrial process hot water, domestic hot water, commercial laundries, water purification, multi‐stage flash desalination (MSF), multiple effect desalination (MED), swimming pool heating, kinetic water pumping

2.3 The Value Proposition of Solar Conversion

The value proposition for solar energy in the various segments of the energy market is directly correlated to the manner and efficiency by which the solar technology converts sunlight into useful energy. The primary products from the direct conversion of solar energy are DC electricity and thermal energy. Solar energy can be understood in 4 conversion processes each of which presents its own unique value proposition in the solar and energy markets:

Solar‐to‐Electricity. Photovoltaics (PV) use Global Horizontal Radiation (GHI) which includes direct and diffuse radiation and which means that PV performs on a cloudy day. PV modules use semiconductor materials to convert approximately 10‐15% of solar energy directly into DC electricity which is converted to AC power or used directly for off‐grid DC applications. PV panels become thermal absorbers during mid‐day and 85‐90% of this thermal energy received is dissipated and lost as waste heat. There is an annual drop‐off in performance of PV .5 to 1% due to degradation which is factored into PV output. The high ambient temperatures of the southwest U.S. can further reduce the performance of PV.

Solar‐to‐Thermal‐to‐Electricity. All solar thermal systems use Direct Normal Irradiance (DNI) which is direct beam sunlight which means that solar thermal does not perform on a cloudy day. Solar thermal systems use reflectors and mirrors to concentrate direct beam irradiation which is collected and used in a thermodynamic conversion process to generate electricity. Concentrating solar thermal systems generally have solar‐to‐thermal conversion efficiencies of 50‐70% with technologies consisting of parabolic trough, power tower, parabolic dish, and linear Fresnel. Thermodynamic conversion is accomplished by using the thermal energy power blocks such as: conventional steam Rankine cycles to drive a turbine; Stirling engines powered by external heat to create mechanical energy to drive a generator; and Organic Rankine Cycle (ORC) and Kalina Cycle turbines which use low‐temperature heat to generate electricity. Net solar‐to‐electricity efficiencies range from 9‐25%.

Solar‐to‐Thermal ‐to‐Electricity and Thermal Energy. Combined Heat and Power (CHP) solar concurrently generates electricity and thermal energy. The exhaust heat from an ORC turbine can be used to generate hot water, space heating or process heat. New PV‐Thermal technologies convert photons directly into electricity and collects thermal energy off of the PV cells for useful purposes. These solar CHP systems offer net solar‐to‐energy conversion rations of more than 60%.

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Solar‐to‐Thermal –to‐Thermal‐Based Applications and Processes. Direct beam radiation is collected and converted to thermal energy which is directly used in thermal‐based processes

with working temperatures of ≤ 82°C to 400°C (170°F to 750°F). Solar thermal collector

technologies consist of flat plate collectors, evacuated tube collectors, and a new generation of “distributed”/micro parabolic troughs. Thermal applications include space heating, residential and industrial hot water, industrial heat and hot water, drying, cooling, dehumidification, refrigeration, water purification and desalination, etc.

3 Electricity ‐ Global Solar Market Size

3.1 Current Market Share by Country

Germany and Spain have dominated the global solar markets for years and held 55% of the market in 2008 driven by PV installations with California and Arizona accounting for 7.2% of the global market. For more than 20‐years, California has been the global leader in utility‐scale solar thermal electric. In the near future, it is clear that California and Arizona will dominate the global market place as “the” location for utility‐scale solar thermal electric projects and for the sale of solar electricity.

Global Installed Capacity PV + Solar Thermal Electric

2008

Market Share Total MW PV MW

Solar Thermal Electric MW

World ‐‐‐ 13,679 95% 5%

13,000 679

Germany 39% 5,400 5,400 0

Spain 26% 3,517 3,300 217

US 9% 1,217 789 428

California 7% 914 526 388

Arizona 0.19% 26 25 1

México 0.16% 22 21.8 0

3.2 Off‐Grid is 14% of U.S. PV Capacity

Grid‐connected PV accounts for 86% of all installed capacity. There were more than 30,000 PV installations in 2008. Grid‐connections accounted for 62% of these sites and 86% of the installed capacity.

US PV Grid Installations 2008

Installations Capacity

Grid‐Connected 18,600 62% 86%

Off‐Grid 11,400 38% 14%

Total 30,000

3.3 California and Arizona have 70% of the PV market share in U.S.

The cumulative installed capacity for grid‐conned PV in the U.S. was 789 MW at the end of 2008. California accounted for 67% of installed capacity with 526 MW and Arizona was ranked 5 in state capacity at 25 MW installed. 1

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US ‐ Grid‐Connected PV Ranked by Cumulative Installed Capacity through 2008

MWDC

Market Share

1. California 526 67%

2. New Jersey 70 9%

3. Colorado 36 5%

4. Nevada 34 4%

5. Arizona 25 3%

6. New York 22 3%

7. Hawaii 14 2%

8. Connecticut 9 1%

9. Oregon 8 1%

10. Massachusetts 8 1%

4 Drivers for California/Arizona Solar Electric Market

4.1 Convergence of Market Drivers

There has been extraordinary demand for utility‐scale and distributed solar in the southwest U.S. over the past 2 years due to the convergence of numerous market drivers:

Procurement by utilities for utility‐scale solar projects driven by State‐mandated Renewable Portfolio Standards (RPS) in California, Arizona, Nevada, New México and Texas

General acceptance that there will some form of National RPS

A new U.S. President who has reversed long‐term policy and now puts renewable energy at the lead in economic recovery and global warming policies

New Federal incentives for solar such as the 30% Investment Tax Credit, accelerated depreciation, loan guarantees

A growing recognition that emission reduction of greenhouse gases (GHG) through a “carbon tax” is inevitable and that the U.S. will become a major global player in “carbon markets”

Market entry in utility‐scale solar by Spanish, German and Israeli solar developers with extensive project portfolios in Spain’s highly favorable but small solar thermal market

Significant Foreign Direct Investment is being made in North America for PV manufacturing to supply the U.S. markets

Independent of GHG and RPS mandates, the world’s electricity load growth demand is far behind supply and that 65% of power plants needed around the world in 2030 are yet to be built.2

Explosive load growth in the southwest U.S. –

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o California’s electricity load was 52 GW in 2005; the 2020 load is projected to be 69 GW.3 o Peak loads in the California, Arizona, Southern Nevada and New México are forecasted

to grow by nearly 2,000 MW per year for the next 15 years.4

4.2 Pending Federal Government Actions – New Drivers

EPA to Regulate Power Plant Greenhouse Gases – In September 2009, the U.S. Environmental Protection Agency (EPA) adopted new rules to regulate greenhouse gases from power plants and large industrial facilities. EPA will be assuming authority for the greenhouse gas emissions of 14,000 coal‐burning power plants, refineries and big industrial complexes that produce most of the nation’s greenhouse gas pollution. The net effect of such regulation is expected to increase the cost of fossil fuel generation for environmental compliance with greenhouse gas emissions and thereby make the use solar thermal energy for power generation and industrial process heat more financially viable.

“Cap‐and‐Trade”/”Carbon Tax” Legislation –The U.S. Congress is considering legislation which will establish a mechanism that sets pollution reduction targets and then uses market incentives to find the most affordable paths to achieve the targets with limits being set on the amount of Greenhouse Gases (GHG) that companies could legally emit. The “cap” would set the upper limit of GHG that could be emitted into the atmosphere while the “trade” would allow for companies to invest in pollution‐reducing technologies or buy and sell credits to reach the cap. Once adopted, “cap‐and‐trade” will provide another market to drive the U.S. solar industry.

25% National Renewable Portfolio Standard Legislation – Numerous efforts are before the U.S. Congress to establish a federal RPS that would require electric utilities to produce 25% of their electricity from wind, solar and other renewable energy sources by 2025. A National 25% RPS is considered an essential component to any greenhouse gas emission reductions.

5 California/Arizona – Best Solar Market to 2020 No place in the world has both the best quantity of solar resources and the most aggressive Renewable Energy Portfolio Standards than California and Arizona. Together there is a supply and demand dynamic which is unparalleled.

5.1 Superior Solar Resources in California/Arizona

The quantity and quality of the solar resources in California and Arizona are among the best in the world and are 30% to 47% higher than solar resources in Germany and Spain which continue to be the recognized leaders in the solar global market.

5.1.1 GHI Resources

The Global Horizontal Insolation (GHI) available for photovoltaics in California and Arizona is more than 47% higher than the GHI available in Germany. For Los Angeles the GHI is 5.0 kWh/m² a day compared to Berlin at 2.7 kWh/m².5 In 2008 the installed capacity of PV Germany grew to 5 GW in 2008.6 In comparison, 2.5 GW of PV in southern California and Arizona would produce about the same amount of electricity as 5 GW of PV in Germany.

GHI By Locations

GHI kWh/m²

Day Year

Los Angeles, CA 5.0 1,816

Madrid, Spain 4.5 1,660

Berlin, Germany 2.7 999

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5.1.2 DNI Resources

The Direct Normal Insolation available for solar thermal energy in southern California and southern Arizona is well above 7.5 kWh/m² per day which is about 30% higher than the best solar conditions in Europe. The German solar developer Solar Millennium, who built the 150 MW Andasol trough project in southern Spain, reports that a new 726 MW trough project site in Blythe, California, has a Direct Normal Irradiation of almost 7.67 kWh/m² which is more than 30% higher than southern Spain.7

DNI by Locations

DNI kWh/m²

Day Year

Blythe, CA 7.67 2,800

Southern CA + AZ 7.50 2,738

Andasol Project, Spain 5.37 1,960

Almería, Southern Spain 5.21 1,900

5.2 California Governmental Actions to Accelerate Demand in the State’s Solar Market

New 33% California RPS and 20% GHG Reduction Targets – On November 17, 2008 Governor Schwarzenegger signed Executive Order S‐14‐08 which created the highest Renewable Portfolio Standards in the U.S. and established an aggressive target for greenhouse gas reduction. The California’s Renewable Portfolio Standard was raised from 20% to 33% by 2020. Under the order, California must also reduce greenhouse gas emissions by 25% by 2020 which is leading to the adoption state‐wide carbon cap‐and‐trade program.

$12.9 Billion in 3 GW Distributed PV Market Leveraged by California Solar Initiative – Continuing program which provides cash incentives for residential and commercial/industrial projects. Target is 3 GW of new Distributed PV by 2017. 8 Every $1 in incentives leverages another $6 in private investment.9

$4.5 Billion in 750 MW Utility Distributed Generation Market Leveraged by Feed‐in‐Tariffs – New legislation in October 2009 requires California utilities to expand utility purchases of electricity from solar facilities up to 3 MW in capacity at a guaranteed feed‐in‐tariff. This incentive provides a fixed price for new renewable generation sold to utilities at an above market rate and will apply until a 750 MW capacity cap is reached. The estimate of new Utility DG market is based on average of $6,000/kW installed costs.

$12 Billion invested in New “Renewable” Transmission – To deliver the new renewable electricity generation needed in 2020, 7 new major transmission lines are needed at a cost of $12 billion.10

6 California/Arizona ‐ Solar Electric Market Demand Through 2020

6.1 108 TWhs of Renewable Energy Needed in 2020

The 2020 Renewable Portfolio Standards (RPS) for California and Arizona will require 108 TWhs of renewable energy. In 2020 California will have retail electricity sales 3 times greater than Arizona.11 However, because of higher RPS requirements and load growth, California will have a renewable energy demand 15 times higher than Arizona.12

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2020 Comparative RPS Requirements for Renewable Generation California and Arizona

RPS Requirement

Total Retail Sales RPS

Requirements

TWh TWh

California 33% 308 102 94%

Arizona 15% 97 6.8 6%

Total ‐‐‐ 405 108.8 100%

6.2 26 GW of Renewable Energy Capacity Needed in 2020

California and Arizona are projected to require some 26.2 GW of renewable energy capacity to meet RPS requirements by 2020. The California Public Utility Commission (CPUC) expects that 19.7 GW of new in‐state renewable generation will be needed in 2020.13 The expected renewable resource mix for Arizona is expected to be 65%

California Renewable Resource Mix 2020 33% RPS Reference Case (In‐State and Imports)

Renewable Resource MW Share

Biogas 279 1.2%

Biomass 478 2.0%

Geothermal 1,497 6.3%

Hydro‐Small 40 0.2%

Solar PV 3,235 13.6%

Solar Thermal 7,298 30.7%

Wind 10,972 46.1%

Total 23,799

2020 Arizona Renewable Resource Mix

In‐State

MW Share

Solar Thermal 1,529 63%

Solar PV 340 14%

Wind 401 17%

Geothermal 85 3%

Biomass 74 3%

Total 2,429 100%

In 2020 solar is expected to account for 51% of California’s in‐state renewable energy installed capacity and generate 38% of the renewable energy production. The disproportion between installed capacity and energy production is explained by the lower capacity factor for solar compared to other renewable energy sources.

For Arizona in 2020, solar is expected to account for 77% of the state’s renewable energy installed capacity and to generate 65% of the renewable energy production. Arizona will be more reliant upon solar to meet its renewable demand than any state.

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Utility‐scale concentrating solar thermal is expected to meet 70% of solar demand in 2020 in California and Arizona.

In Arizona there are active efforts to increase the RPS from 15% to 25% by 2025. In total, the construction of solar power plants to meet the Arizona Corporation Commission’s RPS requirements is estimated to cost approximately $22 billion in cumulative capital expenditures by 2030.

A renewable energy assessment14 commissioned by Arizona utilities reported:

Solar is expected to account for 65% of Arizona’s RPS requirements

Beginning in 2017, Arizona will need to be adding 200 to 400 MW of new solar thermal installed capacity to be built each year through 2025

2020 Solar Demand from California and Arizona RPS Requirements

Renewable Energy

Capacity MW Solar Share

MW PV MW

Utility‐Scale Solar

Thermal MW

California 19,706 9,999 3,235 6,764

Arizona 2,429 1,869 340 1,529

Totals 22,135 11,868 3,575 8,293

Technology

Share> 30% 70%

6.1 $60.3 Billion of Solar Energy Capacity Needed in 2020

The market size for solar energy installation by 2020 in California and Arizona is estimated at $60.3 billion with PV accounting for 52% of the market value and utility‐scale solar electric accounting for 48%.

2020 California and Arizona RPS Solar Demand, Market Size by Technology

California MW Costs/kW Capital Costs

PV 3,235 $7,000 $22,645,000,000

Solar Thermal 7,298 $4,000 $29,192,000,000

Totals 10,533 $4,921 $51,837,000,000

Arizona

PV 340 $7,000 $2,380,720,588

Solar Thermal 1,529 $4,000 $6,115,806,667

Totals 1,869 $4,546 $8,496,527,255

California and Arizona

PV 3,575 29% $25,025,720,588

Solar Thermal 8,827 71% $35,307,806,667

Total 12,402 100% $60,333,527,255

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7 Supply Side to the Solar Electric Market

7.1 Supply Side of Utility‐Scale Solar Thermal Electric Market

On the supply side, the first application for a permit to construct and operate a large solar plant in California since 1989 was submitted just in July 2008 for a 50 MW trough project in Victorville. Since then, more than 10 GW of near‐term utility‐scale solar electricity projects in California and Arizona are being developed. These projects have announced contracts or Power Purchase Agreements and in various stages from development and permitting to having been approved and are in pre‐construction. There is a pipeline of another 80 utility‐scale projects proposing another 60 GW of additional capacity in the deserts of southern California and Arizona which are advancing through the process of acquiring rights‐of way from the U.S. government. Of this 70 GW of potential projects, there will certainly be projects which will drop out due to a variety of reasons such as permitting issues, land and environmental compliance costs, inability to secure financing or water for “wet cooling” processes, and lack of access to timely transmission.

7.2 Near‐Term Grid‐Scale Solar Supply

California’s long‐term 33% RPS estimates that 10 GW of installed solar will be needed in 2020. The market appears to have responded and there are 10 GW of near‐term grid‐scale solar projects with construction starts in 2010 to 2013 which appear capable of meeting the 2020 targets much sooner.

7.2.1 10 GW in Projects with $40.6 Billion in Project Costs

As of October 2009, the California Energy Commission has listed 35 utility‐scale solar projects which are under permitting review or officially announced as being under a Power Purchase Agreement. The Arizona Corporation Commission has approved a 280 MW parabolic trough plant which is in pre‐construction. The estimated capital value of these projects in California and Arizona is some $40.6 billion.15

Announced Utility‐Scale Solar Projects in California and Arizona ‐ October 2009

ProjectsCapital Costs

per kW Total MW Capital Investment

CSP Parabolic Trough 12 $4,500 4,536 $20,413,350,000

CSP Power Tower 14 $3,000 2,547 $7,641,000,000

CSP Dish Stirling 2 $2,000 1,600 $3,200,000,000

CSP Compact Linear Fresnel 1 $2,825 177 $500,025,000

PV Thin‐Film 5 $5,000 1,153 $5,762,500,000

PV 1‐axis Tracking Silicon 2 $7,000 440 $3,080,000,000

Totals 36 10,453 $40,596,875,000

7.2.2 Annual Electricity Sales is a $3.2 Billion Market

The annual market for RPS‐related solar electricity sales to utilities by IPPs in California and Arizona is estimated at $3.2 billion. This figured is based upon annual PPA sales by near‐term additions of utility‐scale solar projects using an average sale price of $140/MWh.

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Projects

Capital Costs per kW

Total MW Capital Investment


CSP Power Tower 14 $3,000 2,547 $7,641,000,000

CSP Dish Stirling 2 $2,000 1,600 $3,200,000,000


PV Thin‐Film 5 $5,000 1,153 $5,762,500,000

PV 1‐Axis Tracking Silicon 2 $7,000 440 $3,080,000,000

Totals 36 ‐‐ 10,453 $38,208,725,000

Details of the status of this project inventory follow:

4.9 GW Utility‐Scale Solar Projects in Permit Review by California Energy Commission – Over the past 2 years, developers of 13 utility‐scale solar thermal and PV projects representing 4.9 GW of capacity have submitted “Applications For Certification” (AFC) to the California Energy Commission (CEC).16 The estimated project costs are estimated to be $17 billion. The AFC process takes at least a year of review leading to CEC approval and a certificate to construct and operate the project.

California Energy Commission Utility‐Scale Solar Thermal Projects Under Permit Review ‐ October 2009

Projects MW Project Costs

Parabolic Trough 9 2,703 $10,811,200,000

Power Tower 1 400 $1,200,000,000

Dish Stirling 2 1,600 $3,200,000,000

Compact Linear Fresnel 1 177 $500,025,000

Totals 13 4,880 $15,711,225,000

PPAs Announced for 3.7 GW of Utility‐Scale Solar Thermal Projects – Another 15 projects with a capacity of 3.7 GW and estimated projects costs of $13.4 billion have received or have announced PPAs in California. These projects have not yet submitted permitting applications.

California Energy Commission Announced or Under Power Purchase Agreement ‐ October 2009

Utility‐Scale Solar Thermal Projects


Parabolic Trough 2 1,554 $6,214,000,000

Power Tower 13 2,147 $6,441,000,000

Dish Stirling 0 0 $0

Compact Linear Fresnel 0 0 $0

Totals 15 3,701 $12,655,000,000

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PPAs Announced for 1.6 GW of Utility‐Scale PV Projects

California Energy Commission Announced or Under Power Purchase Agreement ‐ October 2009 Utility‐Scale PV Projects


Thin‐Film 5 1,153 $5,762,500,000

1‐Axis Tracking Silicon 2 440 $3,080,000,000

Totals 7 1,593 $8,842,500,000

Arizona’s 280 MW Solana Project – Abengoa’s Solana Project in Gila Bend, Arizona, is a 280 MW parabolic trough solar plant with 6 hours of storage which will produce approximately 900,000 MWhs annually. Abengoa executed a PPA with Arizona Public Services in 2008 with announced projects cost of $1 billion and a 30‐year PPA contract value of $4 billion.17

7.3 Another 60 GW of Utility‐Scale Solar in the BLM Pipeline for California and Arizona

Nowhere in the world is there more evidence of the explosive growth in utility‐scale solar than in the southwest U.S. over the past 2 years. There has been a literal "land rush" since 2007 by solar developers and speculators who have made massive filings for rights‐of‐ways to lock‐in large tracts of U.S. government‐owned desert lands to site central solar projects. In November 2008, there were approximately 119 applications before the California and Arizona BLM requesting land for some 83 GW of solar projects. In over a year, 81 of these applications representing 60 GW of projects have moved forward in development and advanced to filing required “Plans of Development” as of October 2009. The step between filing a BLM right‐of‐way application and submitting a major technical and engineered document such as the “Plan of Development” requires resources and separates out the land speculators. The project developers for most of these 81 projects have demonstrated commitment and have gone the additional step of submitting the required “recover fee” deposits to compensate BLM for application processing. Projects which have filed “Applications For Certifications” to CEC and the other projects which have announced PPAs which involve BLM lands have been screened out of the 81 projects. As such, the table below represents a reasonable profile and inventory of potential new capacity additions which shows the enormous scale of the solar thermal electric market in the southwest deserts.

Utility‐Scale Solar Projects with Active* BLM Applications

California and Arizona October 2009

Projects MW PV Thermal Electric

California 49 39,358 13,920 25,456

Arizona 32 20,913 800 20,095

Total 81 60,271 14,720 45,551

22% 78% *Active means projects which have advanced by filing a "Plan of Development" filed with BLM

The dominant technology for grid‐scale solar is trough which is the proposed system for approximately 50% of the pending BLM projects. PV accounts for 22% of proposed projects with equal installed capacity of PV silicone and Thin‐film.

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Utility‐Scale Solar Projects with Active* BLM Applications

California and Arizona, October 2009

Projects MW PV PV Thin Film CPV Trough

Power Tower

Dish Stirling Fresnel

Not Known/ Other

California 49 39,358 7,335 6,585 0 14,223 750 2,545 7,938

Arizona 32 20,913 800 0 14,895 4,300 900

Total 81 60,271 7,335 7,385 0 29,118 5,050 2,545 900 7,938

*Active means that either a "Plan of Development" has been filed with BLM

8 New Distributed Generation Electricity Markets The California and Arizona DG electricity market for Distributed solar thermal electric is estimated to be at least $7 billion through 2020. This market represents more than 1.1 GW of new installed capacity which will drive demand for collector fields and power blocks for installations ranging from 250 kW to 3 MW.

Distributed Generation Electric Market ‐ California and Arizona

2008 ‐ 2020

MW Market Value*

CA Utility Feed‐in‐Tariff ≤3 MW 750 $4,500,000,000

AZ Non‐Residential Utility DG 413 $2,478,000,000

Total 1,163 $6,978,000,000

* Assumes average costs of $6,000/kW

9 Solar Hot Water Market

9.1.1 Solar Hot Water Systems

Domestic Solar Hot Water (SHW) systems require 50°C (120°F) heat and a variety of collector systems can deliver such low‐temperatures. In the U.S. and México glazed flat plate collectors are most often deployed and, for the balance of the world, evacuated tubes are the most common collector worldwide primarily due to low‐cost evacuated tubes made in China.

9.1.2 New $1.3 Billion California Solar Hot Water Market

As it has with Distributed PV, California has been equally aggressive in providing incentives to develop a massive solar hot water (SHW) market in the state. California has invested $250 million in a new SHW market development program which will provide cash incentives to install 200,000 solar hot water heaters by 2017. The scale of the massive program is evident since annual installations will need to

Solar Hot Water Collectors

Installed Capacity MWth

US México World

Glazed Flat Plate 1,329 311 46,391

Evacuated Tube 405 ‐‐‐ 74,120

Air Collector Glazed 151 ‐‐‐ 197

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increase from 1,000 to 25,000 units.18 In 2009, there were only 2,000 SHW systems installed in the entire U.S.

New SHW Installations to 2017 200,000

Residential Collector Area 8,000,000 ft² 740,000 m²

Per Unit Area 40 ft² 3.7 m²

New Installed SHW Capacity MWth 518 MWth

kWth/m² Collector 0.7

New Annual Installations ‐ California SHW Program

25,000

Average System Costs $6,500

Program Incentives $250 million

Market Value of Installations $1,300,000,000

Businesses and residential owners who install solar hot water systems also qualify for the new 30% Federal Investment Tax Credit which is available through 2016 with no cap on equipment costs.

10 Summary of Solar Market Potential in Arizona and California

10.1 Solar Market Demand

The size of the solar market in California and Arizona between 2009 and 2020 is projected to be over $90 Billion. Projections of market demand were collected from the various governmental programs and from renewable energy requirements for utilities through 2020. An estimate of the demand‐side to the solar market was calculated using industry standard “installed unit costs” by solar technology and official projections from incentive programs and mandatory RPS requirements. The demand‐side of the solar market in California and Arizona projected to be more than $90 billion. The basis for this projection is provided in the following table:

Demand‐Side to Solar Market – Estimated Market Value of Installed Solar Capacity for Existing Programs and Policies in California and Arizona in 2020

MW Installed Costs

$/MW

Market Value of Solar Projects Leveraged by

Incentives

CA RPS Utility‐Scale Solar Thermal 7,298 $4,000 $29,192,000,000

CA RPS Utility‐PV 3,235 $7,000 $22,645,000,000

CA California Solar Initiative ‐ Distributed PV 3,300 $7,800 $25,740,000,000

CA 750 MW Utility Distributed Generation 750 $6,000 $4,500,000,000

CA Solar Hot Water + 200,000 systems 520 $6,500 $1,300,000,000

CA New "Renewable" Transmission ‐‐ ‐‐ $12,000,000,000

CA Total 15,103 ‐‐ $83,377,000,000

AZ RPS Utility‐Scale Solar Thermal 1,529 $4,500 $6,880,282,500

AZ RPS Distributed PV 340 $7,000 $2,380,720,588

AZ Total 1,869 ‐‐ $9,261,003,088

CA+AZ Total Projected Demand‐Side Market 16,972 ‐‐ $92,638,003,088

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10.2 Solar Market Supply

For comparative purposes a supply‐side estimate for the solar market in California and Arizona was prepared using active project information from utility‐scale solar projects that have been permitted or are in permitting, projects that have been announced with a PPA, and projects which are active with BLM in advancing their applications for rights‐of‐way and have incurred costs including engineering and preparation of plans of development. Supply‐side to the market could be as large as $109 Billion which assumes that only 25% of the BLM projects advance to commissioning.

Demand‐Side to Solar Market: Estimated Market Value of Solar Installed Capacity for Existing Programs and Policies 2020 in California and Arizona

MW Installed

Costs $/MW

Market Value of Solar Projects Leveraged by

Incentives


CA RPS Utility‐PV 3,235 $7,000 $22,645,000,000

CA California Solar Initiative ‐ Distributed PV 3,300 $7,800 $25,740,000,000




CA Total 15,103 ‐‐ $83,377,000,000



AZ Total 1,869 ‐‐ $9,261,003,088

CA+AZ Total Projected Demand‐Side Market 16,972 ‐‐ $92,638,003,088

11 Business Models Business models vary greatly between solar thermal electric and PV, between utility‐scale and distributed markets and between solar generators and the solar supply chain. Unlike PV, business models for utility‐scale solar thermal companies are structured around the vertical integration of most, if not all, parts of the value chain from R&D and manufacturing to IPP project development and long‐term solar plant operations. This difference is due largely to the massive size and costs of solar thermal projects along with the fact that power tower, trough and Dish‐Stirling technologies are not “products” and are unavailable for 3rd party sales. PV is scalable, modular and based on 3rd‐party sales. PV project developers and system integrators can choose PV modules from a variety of technologies and from a variety of vendors as PV fast approaches commodity‐status as the market matures with grid‐parity predicted in 5‐8 years. For generators, the business models throughout the various segments of the solar market are structured to optimize opportunities to create investment‐worthy businesses and projects with strong returns by leveraging know‐how and proven solar technology along with and construction and operational experience.

11.1 Utility‐Scale Solar Generation A prime business model for developers of proprietary large‐scale concentrating solar thermal technology is to develop and execute PPAs or feed‐in‐tariff contracts which generate long‐term revenues for subsidiary project companies which in turn place orders for solar equipment from the company’s manufacturing/supply chain subsidiary.

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11.1.1 Turn‐Key Joint Ventures

This model leverages a partner’s proprietary and exclusive use of certain solar technology with the capabilities and experience of other partners which join together for project development, turnkey construction and financing of large‐scale solar thermal power plants. A recent example of this model is Solar Trust of America LLC (STA) which was formed in October 2009. STA19 is a vertically‐integrated industrial solar company formed through a joint‐venture to integrate the capabilities of its partners in Project Development, Engineering, Procurement and Construction (EPC), financial resources and Operational Management. Solar Trust includes the German industry giants Solar Millennium and MAN Ferrostaal AG who formed MAN Solar Millennium GmbH as a 50‐50 joint venture in August 2009. CitiGroup and Deutsche Bank joined STA to raise $6 billion in project financing for utility‐scale solar projects under Power Purchase Agreements with California utilities. Solar Millennium had previously acquired Flagsol to gain exclusive use of its proprietary trough technology.

11.1.2 “Post‐PPA Acquisition of Technology Developer” Model

This model applies to developers of proprietary solar technology who have advanced the technology sufficiently to win a major Power Purchase Agreement with a utility but without the financial strength to raise financing and overcome perceptions of financial institutions of “performance risk” of new technology. The company could yield equity with new investors or leverage a large capable industry partner and share control. A variation of this model is that the company becomes an acquisition target which is what happened to Solargenix and Stirling Energy Systems (SES). Solargenix developed trough technology which was the center piece of the “U.S. Trough Initiative”. In 2004 Solargenix won a PPA with Nevada Power for a 65 MW project and was acquired by the large renewable energy Spanish company Acciona. Nevada Solar One was commissioned in 2007 as the first large solar project in more than 20‐years. Recently Acciona won a major PPA in California. SES developed proprietary Dish‐Stirling technology and made international news by winning 2 PPAs in California for a total of 1750 MW. In 2008 SES was acquired by the Irish company NTR plc.

11.1.3 PPA/IPP Project Company Model

In this model Independent Power Producers (IPPs) develop and acquire Power Purchase Agreements (PPA) after which a project company is established to execute and perform under the PPA. The project company is isolated for liability issues and for structuring project finance in which the value of the PPA contract, project equity investments and project leveraged financial incentives are the only sources of revenues to retire debt which is usually structured in an 80:20 debt‐to‐equity ratio. Ownership of the project company includes the project developer with various provisions for equity and tax equity shareholders. A characteristic of a PPA is that the electricity generated is not used on‐site and is sent to the grid through a transmission line to a sub‐station.

11.2 Distributed Solar Business Models

11.2.1 Commercial Customer‐Owned PV Model

In the company ownership model the company puts up the capital to install the commercial PV system and bears the performance risk of ownership. All incentives such as tax credits, accelerated depreciation and Performance‐Based Incentives accrue to the benefit of the company. The company also benefits through deferred operating expenses with the output of the PV system off‐setting electricity expenses. The value of the deferred electricity expenses will increase over time due to inevitable and volatile annual rate increases. The PV may also contribute to significant reductions in demand charges through peak shaving. Companies use different payback periods for capital investments and a PV project would under

11.2.2 Residential/Commercial Solar Services Agreement Model

More than 80% of the commercial/industrial solar installations in California are accomplished through a third‐party ownership model using a Solar Services Agreements (SSA)/Power Purchase Agreement (PPA).

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11.2.3 Public Entity SSA Model

Most schools, cities, counties and other public entities in California use SSAs for PV installations as a means to benefit indirectly from federal and state solar tax credits. For example the 30% Federal Income Tax Credit (ITC) on PV installations is not available to non‐taxable public entities. If such entities pursue a direct acquisition of solar equipment, they pay the full installed costs where taxable entities pay the full costs but can recover 30% through the Federal ITC. California public entities have many choices of companies in a highly competitive SSA market place. A typical SSA is structured with the public entity entering into long‐term agreement with the SSA company and agrees to buy solar electricity generated on‐site at a fixed kWh price (usually the current price) for the term of the agreement which is generally 10‐20 years. The SSA company leverages the tax credits to buy down the cost of the installation.

11.2.4 SSA Company Model

Companies offering SSAs are generally joint ventures between system integrators, installers, PV suppliers and financial partners with access to tax equity investments and debt financing. National banks such as U.S. Bank and Wells Fargo are very active in the market and often set up dedicated “solar funds” with system integrators. Banks, corporations and large‐net‐worth‐individuals provide the tax equity investment funding. Some projects are also structured to generate pass‐through losses to investors. A variation of this model is when a PV manufacturer establishes an SSA company with installation and financing partners to provide a reliable project pipeline for sales.

11.2.5 Solar Equipment Lease Model

Under this leasing model, the solar leasing company installs finances and owns the solar system and leases the solar system equipment to the property owner who benefits from the lease by consuming the solar electricity output and by off‐setting electricity costs from the local utility. The solar leasing company accrues the benefits of tax credits, accelerated depreciation and utility incentives. The lease payments are calculated on annual PV production and on an agreed upon fixed long‐term price per kWh.

12 Trends in Solar Incentives

12.1 Declining Incentives for Distributed PV There are multiple public purposes driving government mandated Renewable Portfolio Standards (RPS) and renewable incentives. Public policy drivers are:

Reductions in greenhouse gases by off‐setting fossil generation

Demand‐side market development by establishing required renewable generation targets

Supply‐side market development by subsidizing the high capital costs of renewable systems as the market develops in order to stimulate supply and accelerate deployment

Economic development leading to jobs and private investments in the manufacturing and installation of renewable products and systems

Energy security through domestic‐based electricity generation to reduce energy import dependency

As the market develops, volume‐based cost reductions are expected to lower the price of renewable products, systems, and electricity as installed renewable capacity increases. Generally, incentives are structured to decline in direct proportion to the reduction of renewable energy costs or as installed capacity limits are reached.

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12.2 Up‐Front Incentives

RPS incentive programs in California and Arizona use Up‐Front Incentives (UFI) for smaller PV systems which provide a one‐time per watt cash incentive. Incentives under the California Solar Initiative (CSI) for PV are structured to decline at a rate of 7% each year. In California the first 70 MW of small PV received $2.50 per watt for systems of 100 kW or less and are reduced after certain installed capacity targets are reached. Utility incentives in Arizona range from $2.25 to $3.00 per watt for smaller systems and can be adjusted annually by the utilities.

12.3 Performance‐Based Incentives

California and Arizona use Performance‐Based Incentives (PBI) for larger PV systems. The CSI program uses PBI for systems of 100 kW and larger. Arizona Public Services use PBI for all non‐residential systems and Tucson Electric Power for commercial systems more than 20 kW. The goal of the California Solar Initiative is to accelerate the installation of 3 GW of Distributed PV by 2017. CSI is using Up‐Front Incentives and Performance‐Based Incentives to leverage 2.6 GW of new PV capacity. The PV system owner receives a fixed per kWh payment based upon kWhs produced for 5 years. The program started at PBI payments based upon $.39/kWh moving to $.09/kWh after 1 GW to just $.03/kWh after 1.9 GW of cumulative installed capacity. The installed cost for the average system over 10 kW is $8.02 per watt.20 A scenario analysis of the value of declining incentives is illustrated in the table below which uses a typical 500 kW roof‐mount commercial PV systems as a base configuration:

California Solar Initiative

Scenario Analysis of 500 kW Commercial Installations Under Declining PBI Payments

Project Scenario

CSI Program Step

CSI Cumulative

MW Installed

PBI $/kWh

System Costs $/W

PBI Payments

PBI % of System Costs

No. 1 Step2 170 $0.39 $4,010,000 $8.02 $1,641,008 41%

No. 2 Step 5 520 $0.22 $3,609,000 $7.22 $925,697 26%

No. 3 Step 7 1,050 $0.09 $3,067,650 $6.14 $378,694 12%

No. 4 Step 10 2,600 $0.03 $3,067,650 $5.22 $126,231 4%

System Size 500 kW

Average Annual Output Over 5 Years of PBI ‐ kWhs

841,542

5‐Year Annual Average kWh/kW

1,683

12.4 Structure of Arizona Incentives for Distributed PV

Arizona Public Services (APS) and Tucson Electric Power (TEP) submit annual RPS Compliance Plans to the Arizona Corporation Commission for approval. The utilities establish core PV incentive programs for residential and non‐residential PV and adjust their incentive rates in the annual program plans. The APS PV incentive program for non‐residential will pay up to 60% of a project’s capital costs in a PBI over a 10, 15 or 20 year program. Though APS reduced its fixed kWh‐based PBI by 9% during 2009, this means that APS will be paying 9% less to purchase Renewable Energy Certificates (RECs) with the owner still receiving his total incentive payments but over a longer period of time.

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Arizona Public Services

Non‐Residential PV Declining PBI Rates

Term Apr 09 Oct 09 Reduction

10 Years $0.202 $0.182 9.9%

15 Years $0.187 $0.168 10.2%

20 Years $0.180 $0.162 10.0%

12.5 Internal Rates of Return and Incentives

The goal of public policy in providing and setting incentives and rates for renewable energy is to accelerate the development of a market and to inversely correlate the amount of incentive payments to installations. Installed costs of PV are expected to decline as the installed capacity of PV increases due to an assumption that costs are reduced through increased volume. In California incentives are reduced in steps as installed capacity increases with the assumption that as capacity increases, costs decline through volume reductions. The incentives are considered temporary market development tools and intended to improve the economics of solar ownership which will lead to market growth through volume additions. Other factors leveraging incentives for improved economics are rising electricity costs and declining installed costs. The following Internal Rates of Returns (IRR) are expectations in the following segments of the solar market:

Residential PV – Expected IRRs for homeowners in California ranges from 9.9% to 24.6% 21depending upon system size and which utility area the home is located since electricity costs vary considerable on tariffs, rate schedules and peak periods. The expected IRR for residential homeowners under the Arizona Public Services incentive program is 8.7%, the low‐rate in part explained by the lower electricity rates in Arizona.

Residential IRR by PV System Size

PV System Year, State, Utility, Size and Rating Type

Pre‐Solar Monthly Electric Bill

Usage kWh

/month

Cost Before

Incentive Final Net Cost

Pre‐Tax Annual IRR

2009 CA PG&E 9 kW CEC $499 1650 $81K $48K 24.60%

2009 CA SDG&E 9 kW CEC $460 1650 $81K $45K 23.50%

2009 CA SCE 9 kW CEC $373 1650 $81K $43K 21.10%

2009 CA SDG&E 6 kW CEC $278 1100 $55K $31K 20.70%

2009 CA PG&E 6 kW CEC $258 1100 $55K $33K 19.50%

2009 CA SCE 6 kW CEC $219 1100 $55K $30K 18.30%

2009 CA SDG&E 3 kW CEC $97 550 $28K $16K 13.50%

2009 CA SCE 3 kW CEC $81 550 $28K $16K 12.80%

2009 CA PG&E 3 kW CEC $74 550 $28K $17K 9.90%

2009 AZ APS 5 kW STC $89 800 $41K $20K 8.70%

Residential Solar Hot Water – The expected IRR for residential solar hot water systems in approximately 9.3%22

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Commercial PV – Owners of commercial PV systems in California are expected to see after‐tax IRRs in the 3% to 8% range which is comparable to other business investments. The value proposition of PV also includes the un‐monetized value of “green marketing” to customers. Actual IRR depends to a great deal upon system costs.23

SSA Companies – The expected after‐tax financial returns for tax equity investors was 6% to 11% but, due to the shortage of tax equity caused by the global financial crisis, financial expectations have increased to 13%.

Utility‐Scale IPPs – IRRs of 10%–20% are generally expected from IPP projects although, depending on specific project risk, significantly higher IRR may be required.24

12.6 Legal Issues with SSAs in Arizona Legal issues regarding the regulation of Solar Services Agreements in Arizona have to a great extent stalled PV installations using this business model. It is legally ambiguous if the owners of SSAs who sell electricity to 3rd parties should be considered public utilities and therefore subject to regulation by the Arizona Corporation Commission (ACC). One structural steel company estimates that there is a backlog of $300 million in PV projects in Arizona which are on hold until the ACC resolves the issue. Some system developers in Arizona are using the solar leasing model until the ACC issue is resolved. The “safe harbor” provided by the solar leasing model is based upon the business transaction being a lease of equipment and not the sale of electricity.

12.7 Grid‐Parity Grid‐parity is the point in time at which electricity generated from renewable energy is either equal in cost or less expensive than grid power. The well respected Silicon Valley venture capital firm of Khosla Ventures makes the following projections:

Peak‐parity for Solar Thermal Electric in 2009 – utility‐scale solar thermal electric plants are considered to be at parity with the electricity costs of California’s natural gas‐fired peaker power plants at a peak price of $.175/kWh.

Grid‐parity for Solar Thermal Electric in 2011‐2012 – By 2011, utility‐scale solar thermal electric plants is expected to reach parity at $.15/kWh with conventional power plants.

Grid‐parity for Distributed PV in 2015‐2018 – PV is expected to achieve parity with natural gas peaker plants in 2015 at $.25/kWh and parity with conventional power plants at $.22/kWh in 2018

Declining incentives are directly related to “grid parity”. As the costs for PV decline, the costs of grid power will be increasing each year. PV grid‐parity will likely be greatly influenced by geography and will come sooner to California and Arizona than to other U.S. states because of superior solar resources, lower installed PV costs, and rising electricity rates. Grid‐parity will be achieved from predictable volume‐based cost reductions and no technical breakthroughs are required to achieve solar PV cost reductions.25

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Source: Khosla Ventures26

12.8 PV Grid‐Parity Will Come First to California and Arizona

There are a large number of predications from the solar industry as to when and how grid‐parity will “arrive”. Grid‐parity for Distributed PV will not arrive all at once but instead be achieved in certain market segments and will be strongly influenced by geography. Grid‐parity will also be influenced by the location of the PV project and the jurisdictional utility and its tariff rates and the hours scheduled for peak, semi‐peak rate, intermediate and base. It is expected that grid‐parity will come first to certain markets in California and Arizona. Grid‐parity will likely come first in certain segments of the Distributed PV markets which have the highest solar resources and utilize either the lowest cost thin film PV modules or the most efficient PV modules with 1‐axis tracking which adds approximately 20% more output over fixed flat‐plate PV. In comparison, New Jersey needs 2 GW of solar capacity to meet solar RPS state‐mandated RPS requirements. The average PV system performance in California and Arizona is 1,700 kWh of PV production per installed kW which is some 70% higher that New Jersey’s system output of 1,000 kWh per kW. The economic effect of New Jersey’s lower production is evident from the average payback period being over 20 years27.

12.9 Post‐Grid‐Parity Market for Distributed PV

12.9.1 Post‐Parity Boom for PV as the Market Matures

The global solar industry considers grid‐parity as the “Holy Grail”28 and most in the industry believe that once grid parity is achieve there will be an entirely new level of market expansion. As solar loses its reputation as being “expensive”, consumers in all market segments will have the choice to self‐generate their own electricity at the same or lower price as their grid supplied power with the added value proposition that solar electricity delivers environmental benefits.

12.9.2 Industry Shakeout as PV Moves to Commodity Pricing

For more than a year Stephen O‘Rourke, a senior analyst at Deutsche Bank Securities, has been on the international solar conference circuit speaking on the effects of grid‐parity and provided several predictions29:

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Enormous build‐out of capacity

Even greater corporate financing activity

Improved PV stock performance after a shakeout with PV cell and module manufacturers with the departure of many weaker companies

Cyclical growth of PV moving to a more mature industry

Broad cost convergence over the next 6 plus years

The most profitable parts of the value chain – o Selling energy on a commercial scale o Manufacturing and selling silicon when the shortage returns

12.9.3 Long‐Term Solar Competitiveness

Cap‐and‐trade programs for greenhouse gas (GHG) emission reductions are universally assumed to increase the price of electricity generated from fossil fuels which will make the costs of solar electricity increasingly more cost competitive and accelerate grid‐parity and below grid pricing. As solar incentives decline with the price of PV over the next 5‐7 years, the cap‐and‐trade programs mandated by the Governor of California and the President of the United States will be phasing in. During this period, utility‐scale solar thermal electric with energy storage will have reached grid‐parity at base and intermediate loads. As such, the cap‐and‐trade carbon market in the southwest U.S. will likely make grid‐solar the preferred generation source for new capacity additions based primarily upon competitive price with the environmental attributes important but secondary. Utilities will have an alternative compliance strategy and can buy Renewable Energy Credits (RECs) as carbon off‐sets but is unknown how the mandatory carbon market will affect the value of RECs. Most forms of renewable energy are expected to be competing at less than grid‐parity by 2020 and each will compete based upon its inherent strengths as a supply source in adding value to the Utility and Distributed energy markets. Technology innovation is expected to provide very low‐cost, long‐term energy storage systems for utility‐scale solar thermal electric. The ability of utility‐scale thermal electric to shift production to match a utility’s load profile through energy storage will likely give such projects increasing value in the energy markets.

* * * 1 Interstate Renewable Energy Council (2009) "2009 Updates & Trends Report", October 2009; See http://www.irecusa.org/fileadmin/user_upload/IRECGeneral/2009_annual_meeting/IREC_2009_Annual_ReportFinal.pdf 2 http://www.publicforuminstitute.org/activities/2008/tx2/Opportunities%20in%20Renewable%20Energy_v2.ppt 3 Kholsa Ventures (2007) “Mostly Convenient Truths from a Technology Optimist”, September 2007 4 http://www.azcommerce.com/doclib/energy/az_solar_electric_roadmap_study_full_report.pdf 5 International Energy Agency‐Photovoltaic Power Systems Programme (2006) “Compared assessment of selected environmental indicators of photovoltaic electricity in OECD cities”, May 2006; See http://www.eupvplatform.org/ fileadmin/Documents/Brochure‐indicateurs_26_pays.pdf 6 “Photovoltaic Solar Resource: United States and Germany Map”, National Renewable Energy Laboratory, May 30, 2008; See http://www.seia.org/galleries/default‐file/PVMap_USandGermany.pdf 7 Solar Millennium – “The parabolic trough power plants Andasol 1 to 3”; See http://www.solarmillennium.de/ upload/ Download/Technologie/eng/Andasol1‐3engl.pdf 8 See http://www.gosolarcalifornia.org/csi/index.html 9 California Public Utilities Commission (2009) “California Solar Initiative ‐ Staff Progress Report”, January 2009 10 California Public Utilities Commission (2009) “33% RPS Implementation Analysis Preliminary Results”, June 2009 11 California Public Utilities Commission (2009) “33% RPS Implementation Analysis Preliminary Results”, June 2009 12 Black and Veatch (2007) “Arizona Renewable Energy Assessment ‐ Final Report for Arizona Public Service Company, Salt River Project, Tucson Electric Power Corporation”, September 2007 13 California Public Utility Commission (2009) “33% RPS Implementation Analysis Preliminary Results”, June 2009 14 “Arizona Renewable Energy Assessment ‐ Final Report for Arizona Public Service Company, Salt River Project, Tucson Electric Power Corporation”, Black and Veatch, September 2007

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15 http://www.energy.ca.gov/siting/solar/index.html 16 Average capital costs by technology are derived from applications and industry data. Trough at $4,500/kW, Power Tower at $3,000/kW, Dish Stirling at $2,000/kW, Compact Linear Fresnel at $2,850, Utility 1‐axis tracking silicone PV at $7,000 and Utility thin‐film at $5,000; data See http://www.energy.ca.gov/siting/solar/index.html 17 Abengoa “Application for a Certificate of Environmental Compatibility ‐ Solana Generating Station”, submitted to the Arizona Corporation Commission on August 4, 2008; Also see http://www.SolanaSolar.com 18 “CSI‐Thermal Program Energy Division Staff Proposal for Solar Water Heating Program”, California Public Utility Commission, July 15, 2009 19 http://www.solartrustofamerica.com

20 Lawrence Berkeley National Laboratory (2009) "Tracking the Sun II: The Installed Cost of Photovoltaics in the U.S.

from 1998‐2008," LBNL‐2674E, October 2009 21 On‐Grid Energy Systems (2009) “Payback on Residential PV Systems with 2009‐2016 Uncapped 30% Federal Investment Tax Credit”, Presented at Solar 2009, Buffalo, New York, May 2009, to the American Solar Energy Society 22 http://www.humboldt.edu/~ccat/econprojects/Econ309solarhotwaterheaterII.xls 23 http://www.ongrid.net/papers/PVAdvancedCommEconAndFinancingSlides.pdf 24 National Renewable Energy Laboratory (1999) “Financing Solar Thermal Power Plants”, NREL/CP‐550‐25901, Prepared for the Proceedings of the ASME Renewable and Advanced Energy Systems for the 21st Century Conference, April 11‐14, 1999, Maui, Hawaii 25 O‘Rourke, Stephen (2008) “Solar Photovoltaic Industry ‐ Solar PV Economics and Industry Outlook –November 2008”, Deutsche Bank Securities 26 “See Scalable Electric Power from Solar Energy”, KhoslaVentures; See http://www.theclimategroup.org/assets/ resources/Scalable_Electric_Power_from_Solar_Energy.pdf 27 Blue Summit Consulting and New Jersey Board of Public Utilities, “The Cost of New Jersey’s Solar PV Transition” 28 BP Solar Frontiers (2005) “Going for grid parity”, February 2005; See on‐line newsletter at http://www.bp.com 29 O‘Rourke, Stephen (2008)

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Section 3 Solar Sector Market Opportunities

1 Introduction There are numerous and diverse niches in the various sectors and segments of the global solar market which present a wide‐range of opportunities for Mexican companies to participate in the growth of exports to the U.S. and especially in the southwest states of Arizona, California, Nevada and New México. There is also an emerging domestic solar market in México and in Latin and South American. México is well positioned to benefit from the continued growth of a domestic solar market and to be a leader in the export of solar goods and services. These opportunities range from the export sale of utility‐scale solar thermal electricity from northern México to the global distribution of solar products such as photovoltaic panels, solar hot water systems and solar street lights. Perhaps the largest market potential is positioning Mexican companies as strategic players in the supply chain for the enormous capacity additions of utility‐scale solar power plants near the border in southern California and Arizona where great opportunities exist to supply mirrors, reflectors, solar receivers, structural supports and engineering services. There are numerous business models and market entry strategies for Mexican companies expanding into U.S. markets which include third‐party distributor/supply agreements, joint‐ventures and wholly‐owned subsidiaries as system integrators, direct‐sale Power Purchase Agreements with U.S. utilities and large commercial customers and large self‐generation/carbon projects using solar. Please also see Appendix 3 for additional information on “solar sector market opportunities”.

2 Profiles of Mexican SMEs This section describes various types of Small and Medium Enterprises (SMEs) and shows the range of companies that form the base of México’s current and emerging solar industry. Opportunities exist for Mexican companies to compete in all tiers of the solar supply chain such as:

Tier 1 Supplier – A direct designer and supplier to the solar technology construction company key systems, subsystems, assemblies or components and assists in continuous product development and improvements

Tier 2 Supplier ‐ A supplier to Tier 1 Suppliers or a direct supplier of less critical components, systems or subsystems.

Tier 3 Supplier – A supplier of engineered materials and special services such as rolls of sheet steel, bars, heat treating, surface treatments, etc.

2.1 Representative Profiles of SMEs

2.1.1 Business Type 1 – Small PV System Integrators

“Business Type 1” is generally a small company integrating solar photovoltaic systems primarily for rural off‐grid and grid‐connected commercial, industrial and residential systems in regional domestic markets. The work force for this company is between 4 and 12 employees with at least 2 engineers. As the price of PV has declined over the past 2 years, this type of company is emerging as one of the most common in the industry. The company does not develop technology and would likely have PV module supply

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relationships with distributors for Kyocera panels manufactured in Tijuana or for silicon or thin‐film (CIGS) panels from ERDM in Veracruz. Many of these companies also install solar hot water systems or evolve as small ESCOs (energy services companies) which integrate other products and services as described in Business Type 3 below. The annual income for such companies varies but is generally around USD 500,000 and USD 1,000,000. These companies have seen strong annual sale increases for 2009 as the costs of PV continue to decline. Such companies are the backbone to México’s emerging domestic solar industry but are not likely candidates for expanding into the U.S. market.

2.1.2 Business Type 2 – Energy Engineering Firm

“Business Type 2” is an energy engineering firm with experience in electrical and/or thermal industrial processes which has added capabilities to design industrial systems with solar PV and solar thermal heat for industrial process heat and process hot water. This type of business is generally a regional company servicing industrial clients and has developed new capabilities to offer low‐ and medium temperature solar industrial hot water and process heat using flat plat and evacuated tube collectors. The workforce may vary from 4 to 20 employees with at least 4 engineers and an annual income is at least USD 1,000,000.

2.1.3 Business Type 3 – ESCO (Energy Services Company)

An ESCO “Business Type 3” company designs, installs, maintains, and in many cases finances retrofit and upgrade projects to improve the energy efficiency of commercial and industrial buildings and facilities. Often the business model calls for the ESCO being paid from the energy savings over time. Some ESCO’s are incorporating PV and solar thermal energy into commercial and industrial projects to demonstrate to the public the company’s commitment to being “green”. A key aspect of the ESCO work is identifying energy efficiency measures with a payback analysis of energy savings from reduced usage and demand charges. The workforce is variable but many have 4 to 10 employees with companies having annual income after 5 years in a range of USD 1,000,000 to USD 5,000,000.

2.1.4 Business Type 4 – Solar Hot Water System Integrators

“Business Type 4” is a system integrator that installs solar hot water (SHW) systems for residential, commercial and industrial customers and is the most prevalent type of solar company in México largely due to low costs for SHW, a very favourable payback period of 18‐36 months and demand from government housing programs. These companies may also be distributors of imported and domestically manufactured solar hot water systems. Some companies may import evacuated tubes from China and manufacture the balance of the system in México. Many of these companies work in local and regional markets and have greatly benefitted and have expanded due to participation as subcontractors in governmental programs for large national housing programs through Infonavit which provides affordable housing for low‐income workers through programs such as Casas de Interés Social and Hipoteca Verde (“Green Mortgage”). Such companies are generally regionally‐based with a workforce of at least 5 employees with larger commercial/industrial focused companies having as many as 40‐50 employees. Annual income would likely range between USD 500,000 and USD 1,500,000 and the companies are seeing large sales increase in 2009 and are very optimistic about the future growth. Such companies are also a key part of the backbone to México’s emerging domestic solar industry but are not likely candidates for export markets.

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2.1.5 Business Type 5 – Design Engineering Firm

“Business Type 5” is a full‐scale design and energy engineering firm for large‐scale energy projects with electrical, mechanical, civil and structural capabilities. Such companies have a track record working for CFE and large Self‐Generation projects with many having experience in carbon projects under the UN’s Clean Development Mechanism (CDM) as part of the Kyoto protocols. Many of these companies are working in “turn‐key” project development teams on large‐scale wind and hydro projects and can easily expand to projects involving large‐scale solar electric. The workforce is generally 20 or 30 employees comprised of mostly engineers. Annual incomes are well above USD 1,000,000. Strong opportunities exist as outsourced lower‐cost engineering services for international utility‐scale solar projects and especially for the large Spanish technology providers/system integrators which are dominating the Southwest U.S. utility solar market and will continue to do so for the foreseeable future.

2.1.6 Business Type 6 – Large Commercial HVAC Contractor

“Business Type 6s” are existing HVAC design and installation companies working in commercial and industrial markets on projects such as manufacturing plants, malls, hotels, and universities. These companies work with conventional “commercially‐available” systems for heating, cooling and ventilation with no experience or knowledge of the potential to integrate solar thermal systems as a secondary heat source for thermal‐based heating and cooling systems. Such companies work in the national and regional markets with many having multiple locations and a workforce of at least 20 employees who are mostly technicians. Annual incomes are in the range of USD 1,000,000 to USD 5,000,000. Such companies are key candidates to become earlier adopters of solar thermal cooling using low‐temperature solar thermal collectors and the new medium‐temperature parabolic troughs.

2.1.7 Business Type 7 – Large Commercial Electrical Contractor

“Business Type 7s” are successful electrical contractors working on utility‐scale electricity and transmission projects for CFE and for large Self‐Generation for industrial and commercial customers. Such businesses are often part of Engineering, Procurement and Construction (EPC) companies and work in “turn‐key” project development partnerships. Some of these companies may have recently started development or construction on large‐scale wind, hydro and biomass CDM carbon projects. Companies without CDM‐type experience are likely new entrants to the market and have certainly watched the energy and carbon market trends in México for self‐generation and CFE projects. “Business Type 7” companies are strong candidates with significant financial strength which can provide EPC services for utility‐scale PV and solar thermal electric projects. These are strong companies with multiple office locations with capacity to work projects nationwide or in a team on international projects. The workforce of such companies is at least 60 employees with annual incomes well above USD 5,000,000.

2.1.8 Business Type 8 – Machine Shop

“Business Type 8s” are small‐ and medium‐sized machine shops and/or metal workshops with capabilities to make structural supports and components such as transmission towers, antennas, large‐scale billboards, and steel buildings. Such companies currently serve local, regional and/or national markets as Tier 1, Tier 2 and Tier 3 suppliers. Fabrication‐related processes are diverse and include Aluminum extrusion, water‐jet cutting, sheet metal, and high‐quality welding along with a variety of others process capabilities. The workforce varies depending on the degree of vertically‐integration but generally consists of 10 to 50 employees with mostly skilled technicians. Annual incomes are generally

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between USD 500,000 and USD 5,000,000.

2.1.9 Business Type 9 – High‐Precision Metal Work Shop

“Business Type 9” includes well‐established and technologically advanced “high‐precision metal shops” currently working for the automotive, aerospace, medical devices, optics and machine design industries. The level of precision and quality control requirements for components requires CNC equipment, metrology for Quality Assurance and industrial design engineering (CAD and CAM capabilities). Due to a high level of automation, the workforce is between 10‐25 employees with most employees working as individual equipment operators supported by design engineers. Annual income varies widely but, as a baseline, a company workshop with 10 equipment units operating at 68% capacity would generate USD 1,000,000 annually.

2.2 Non‐SME Business Profiles

2.2.1 Business Type 10 – High‐Level Construction Company

“Business Type 10s” are often part of Engineering, Procurement and Construction (EPC) companies and/or work in “turn‐key” project development partnerships. Such companies are critical components to building a domestic utility‐scale renewable energy sector and to export construction services for global renewable projects. The potential large role for such companies in global energy development is clearly evidenced by the dominance of large Spanish and German construction companies which have teamed with technology providers and have entered the California and Arizona utility‐solar market after successfully building‐out Spain’s solar thermal industry. Such large Mexican companies have the capability to lead large‐scale solar electric development in México along with selective markets in Latin and South America. Great opportunities exist also for teaming with the global solar development companies as they too consider entering new markets in the Americas.

2.2.2 Business Type 11 – Flat Glass Manufacturer

The “Business Type 11” glass company has the potential to play a significant role in the global supply chain for “solar glass” which crosses all segments of solar technology from PV modules and solar hot water collectors to large‐scale solar thermal concentrators. The existing global supply chain for solar glass can not come close to meeting the near‐ and long‐term market demand. This lack of an adequate supply chin is considered a barrier to solar development especially as solar approaches grid‐parity with expectations of commodity pricing. There are significant opportunities for Mexican flat glass manufacturers to form strategic supply partnerships with the PV module manufacturers and with the solar technology developers now entering the California and Arizona markets.

2.2.3 Business Type 12 – Mining, Chemical and Fertilizer Companies

“Business Type 12” companies are Tier 3 suppliers of raw materials used for many components and parts in the solar industry. These companies will likely see significant growth starting with expanded demand in the near‐term as many large projects in the U.S. move from permitting to construction. New opportunities exist to also supply the emerging energy storage market using phase‐change materials along with thermal and battery storage systems. These are new and emerging technologies and México has great potential in supply this market with extraordinary resources in cooper, silver, selenide, silicon, molybdenum, arsenide, cadmium, tungsten, zinc, and various salt banks for nitrates.

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2.3 Solar Value Chains

2.3.1 PV Industry Value Chain

2.3.2 Utility‐Scale Solar Thermal Electric Value Chain

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2.4 Matching México’s Supply Chain to Solar Value Chains

Enormous opportunities exist for México’s SMEs and large engineering, manufacturing, and construction companies to participate in all aspects of the various solar value chains while continuing to build a strong national solar industry and becoming a major diversified player in the long‐term global solar supply chain. México’s strong industrial base, world‐class manufacturing capabilities and “Asian cost” structure offers extraordinary opportunities for SMEs and for large companies. As large Mexican companies become Tier 1 suppliers of components and systems for utility‐scale solar projects, enormous opportunities open up for Tier 2 and Tier 3 domestic suppliers. This section matches the above “business‐types” to the PV and the solar thermal electric value chains.

3 Supply Chain Demand for California and Arizona Solar Markets

3.1 Undersized Supply Chain and Unprecedented Demand Through 2020

The existing supply chain in North America cannot come close to meeting the demand for PV, utility‐scale solar or for solar hot water systems. A recent renewable energy assessment for Arizona utilities prepared by Black and Veatch1 characterized utility‐scale solar electric development as being “constrained in the near term due to the practical limitations of the industry’s supply chain”. It was expected that “demand for solar thermal equipment and for the supporting engineering and construction services is at an unprecedented level worldwide. It is assumed that the near term supply chain constraints in the industry will be alleviated by 2013”. This solar thermal demand is concurrent with the projected growth in global PV production at 5 times the current capacity by 2012 with monocrystalline silicone (c‐Si) dominant and with Thin Film seeing greater growth.2

3.1.1 Concentrating Solar Optical Components

The core components to the optical systems of concentrating solar thermal technologies are precision reflective materials to collect and concentrate direct sunlight. Much higher solar‐to‐energy conversion efficiencies are possible with concentrating solar technologies than for flat‐plate PV. The grid‐scale concentrating solar industry requires enormous quantities of high‐performance mirrors, reflectors and lenses for a wide‐array of types of solar modules, collectors and concentrators. A brief overview on the use of reflectors and mirrors for the main concentrating solar thermal technologies follows:

Power Towers – Thousands of ground‐mounted heliostats (mirrors) use 2‐axis tracking to focus direct beam radiation onto a tower‐mounted central receiver filled with a molten‐salt working fluid that produces steam. The hot salt can be stored extremely efficiently to allow power production to match utility demand, even when the sun is not shining. BrightSource is the largest developer of power tower projects in the southwest U.S.

o BrightSource’s LPT 550 heliostats consist of two flat‐glass mirrors, a support structure, a

pylon and a tracking system. The mirrors are mounted onto the pylon and track the sun in two dimensions, reflecting the sunlight onto a boiler atop a tower.

o BrightSource reports that it uses smaller, flat mirrors which are more efficient, simpler to manufacture, and cost less to install than parabolic mirrors used in solar troughs. The heliostats are highly accurate with a 35‐year useful life with practically zero maintenance with the exception of cleaning.

o The average BrightSource Energy solar plant is 100 MW and consists of 50,000 heliostats.

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Parabolic Trough – A parabolic trough system uses linear mirror collectors with 1‐axis tracking to maintain the optical focus of direct beam radiation upon a linear oil‐filled receiver to collect heat which is transferred to generate steam to power a steam turbine. The mirrors used for parabolic trough collectors are dual‐surface silvered glass mirrors which have the reflective silver layer mounted on the backside of the glass. The glass thickness is 4‐milimeters and is a thick, special low‐iron or white glass with a high transmittance. The mirrors have a solar‐weighted specular reflectivity of about 93.5%. A special multilayer paint coating protects the silver on the back of the mirror. Each mirror panel has an area of approximately 2 m². All current parabolic trough power plants use glass mirror panels manufactured by Flabeg GmbH.3

Parabolic Dish‐Stirling – A highly‐reflective parabolic dish is used to concentrate and focus direct beam radiation onto the head of a thermal receiver which external heat to drive a Stirling engine.

Linear Fresnel Systems – Ausra’s Compact Linear Fresnel Reflector technology consists of a series of slightly curved linear solar reflectors that concentrate solar energy on pipes in an elevated receiver structure approximately 17 m (56 feet) tall. The receiver carries a row of specially coated steel pipes in an insulated cavity. When the reflectors focus on the receiver, saturated steam at approximately 270°C (518°F) is produced as cooler water is pumped through the receiver pipes and thereby heated up. The steam is then used to drive a turbine to generate electricity.4

Reflector Area per MW Capacity – The size of the reflective surface area for 1 MW of concentrating solar thermal varies considerably between the technologies5:

Parabolic Trough 5,800 m²

Power Tower 5,500 m²

Dish Stirling 1,234 m²

Compact Linear Fresnel 9,519 m²

Key Reflector Materials – Glass Thick Glass (>3 mm) Thin Glass (~ 1mm) Mirror Coatings Equipment Vendors Non‐Glass Anodized Aluminium Polished Metal Silvered Polymer Films

Alternative Reflector Designs and Materials – A number of alternative mirror concepts have been under development to reduce cost, improve reliability, or increase performance. Several glass/mirror manufacturers outside of the solar industry are evaluating the market. Considerable R&D has been and is being conducted on options using silvered or aluminized films, thin glass, and front‐surface mirrored glass.6 Considerable R&D is also being done at the National Renewable Energy Laboratory in Golden, Colorado, on advanced reflectors that will be high‐reflective, long‐life and have reduced costs which are 50% less than traditional trough mirrors.7

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Key Suppliers – there is a very limited supplier‐base for manufacturers of solar mirrors and reflectors with 2 key German suppliers dominating the market:

o Flabeg GmbH – In August 2008, Flabeg broke ground on its first Solar Mirror Plant in the U.S. which will establish the production capacity for high‐precision parabolic mirrors which are used to help generate electricity at large‐scale solar power plants. The new 209,000‐square‐foot manufacturing facility plant is near Pittsburgh, Pennsylvania. The factory will have a capacity of up to 1 million parabolic curved mirrors and had orders for 700,000 mirrors at the time of ground breaking.8

o Alanod‐Solar GmbH & Co. KG – Alanod‐Solar9 of Ennepetal, Germany, is one of the world’s leading manufacturers of reflective and absorptive solar surface solutions. Alanod offers an alumized polished aluminium reflector with a nanocomposite oxide protective layer. Alanod’s reflecting surfaces use various materials with a total solar reflectance ranging between 85% and 95%. Many of the new generation of Distributed troughs use Alanod “brushed aluminium” reflectors.

3.2 Projected Component Volume for Near‐Term Solar Thermal Projects

3.2.1 Reflectors and Mirrors for Utility‐Scale Concentrating Solar Thermal Electric

The projected reflectors and mirror supply for concentrating solar thermal projects in the southwest U.S. through 2020 is almost 100 million square meters. Almost 75% of this reflector area is required for parabolic trough projects which totals approximately 24 million individual mirrors comprising some 74 million square meters of surface area.

Projected Quantities of Reflectors and Mirrors for

Concentrating Solar Thermal Electric Projects

in California, Arizona, Nevada and New Mexico

to 2020

MW Collector Area Share

Power Tower 4,217 23,193,500 m² 23%

Trough 12,753 73,969,140 m² 74%

Dish‐Stirling 2,236 2,759,533 m² 3%

Total 19,207 99,922,173 m²

Hectares 9,992

Acres 24,691

3.2.2 Receivers

There are only 2 German supplies providing receivers to the global trough industry – Schott AG and Siemens AG which acquired the Israeli company Solel Solar Systems in October 2009. Solel has self‐supplied its own project companies with receivers for projects in the U.S. and Spain. Schott Solar opened a USD 100 million production facility in Albuquerque, New Mexico in May 2009 to make components for the utility‐scale parabolic trough and photovoltaic markets. The peak production capacity will be 400 MW for trough receivers which incorporate coated steel absorber tubes in evacuated glass envelopes. The plant will also have a peak production 85 MW for 225‐watt polycrystalline PV modules.10

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3.2.3 Structural Supports

All utility‐scale trough systems require structural metal support system. These structures rotate in a 2‐axis or 1‐axis depending upon technology. A key design requirement is sufficient strength to withstand wind loads during maximum wind speeds to prevent catastrophic damage. Pedestals supports are used for each 2‐axis tracking heliostat mirror unit for power towers. The Stirling Energy Systems dish units requires a more substantial pedestal which holds an approximate 90 m² parabolic collector and a 25 kW Stirling engine mounted on a boom connected to the pedestal all of which tracks on a 2‐axis drive system. Trough systems use linear collectors which consist of pylons and mirror support structures which track on 1‐axis. Most of the trough structures use steel or aluminium for supports and space frames to hold the reflector. Solargenix/Acciona uses an organic space frame hubbing structure with extruded aluminium using 70 to 80% recycled content. Abengoa uses a Torque tube with stamped steel cantilever mirror support arms. The LUZ LS‐3 collector uses a bridge truss and galvanized steel. Some of the new smaller Distributed trough systems use a combination of metal and lightweight composite panel materials for reflector backing.11

3.2.4 Supply Chain Requirements for U.S. Trough Projects

This estimate uses detailed quantities and technical parameters from Nevada Solar One12 which went online in 2007 as the 1st utility‐scale trough installation in the world since the 1980's. Nevada Solar One was built by Solargenix/Acciona using a proprietary collector design. The metrics for the Acciona project were used as the basis for projecting the per MW volume of the supply chain for key components. The actual supply chain requirements will vary between projects and between various proprietary trough designs. The Nevada Solar One figures are used to show the magnitude of the supply chain requirements by key components and not to provide precise figures. The basis for 12.7 GW of trough projects is the combined total of: 12 trough projects with 4.8 GW of new capacity which is undergoing permitting by the California Energy Commission or have announced PPAs; 8 GW of future BLM‐sited projects in California, Arizona, Nevada and New Mexico which assumes just 25% of all trough projects which have completed “Plans of Development” will go online; 250 MW of Distributed trough which represents 33% of new capacity additions under California Distributed feed‐in‐tariff program; and the 280 MW Abengoa Solana project under a PPA with Arizona Public Services.

Projected Volume of Parabolic Trough Mirrors, Receivers and Structural Supports

for Concentrating Solar Thermal Electric Projects in California, Arizona, Nevada

and New Mexico to 2015

MW Collector Area Number Mirrors

Number Receivers

Space Frame Metal

Trough 12,753 73,969,140 m² 30,607,920 3,101,603 539,915 mT

7,400 Hectares 12,406 km

Unit Basis per MW of Trough

5,800 m² Mirror surface area

2,400 Mirrors ‐ number

243 Receivers ‐ number

4 m Receiver ‐ length

122 Spaces frames

42.3 Aluminum ‐ metric Tons

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4 Climate Change Pressures on the Supply Chain Creates Opportunities Global climate change initiatives will create increasing pressures to reduce the carbon footprint of all aspects of the solar supply chain and to reduce the embodied energy content of materials used in solar components and parts. These climate change initiatives will also create new opportunities in the solar supply chain for existing, new and emerging Mexican companies which understand and anticipate these trends by implementing carbon‐reducing policies and practices which go far beyond previous “Greening the Supply Chain” initiatives. Additional opportunities will come from companies working to provide materials with lower “embodied” energy.

4.1 Beyond ISO 14000

Traditionally the “greening of the supply chain" referred to buyer companies requiring suppliers and vendors to practice a certain level of environmental responsibility in core business practices which in the past may have required the company to become certified to ISO 14000 standards. ISO 14000 is a series of international standards on environmental management which were developed after the 1992 Rio Summit on the Environment. It provides a framework for the development of both the system and the supporting audit program. During the 1990’s “environmentally‐conscious manufacturing” and “waste minimization” were also terms associated with the “greening” of the supply chain. Suppliers will gain competitive advantages as the global solar industry will increasingly expect and demand reduced carbon‐footprints for all aspects of the supply chain. Manufacturers adopting self‐generation projects to provide renewable electricity, industrial process heat and process hot water will reduce their carbon footprints and enhance their value and position in the long‐term solar supply chain.

4.2 Opportunities for Alternative Materials with Lower Embodied Energy

There will on‐going opportunities for supply chain companies to identify, develop and source alternative and recycled content materials with lower embodied energy content for renewable energy systems, components, and parts. “Embodied Energy” is the total energy required to fabricate a given material or component, from extraction of raw materials to manufacturing, and all transport steps along this chain. In addition, “end‐of‐life” disposal options, including recycling, land filling, and incineration, are accounted for. This is often referred to as “cradle‐to‐grave” accounting.13 As an example, a recent analysis by the National Renewable Energy Laboratory found that the embodied energy of the curved glass mirrors which dominate all trough collector designs is 61% higher than a new alternative light‐weight solar film.

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The embodied energy of a new solar film‐based mirror is comprised of an Aluminum support substrate (62 MJ/m²), a new ReflecTech® polymer substrate (22 MJ/m²), and a Reflec ‐Tech® silver layer (1 MJ/m²) with a total embodied energy total is 85 MJ/m². The embodied energy of the EuroTrough’s curved glass mirrors is comprised of the curved glass (345 MJ/m²) which includes the silver layer and the back‐coated layers along with the transportation of the mirrors to the project site (20 MJ/m²) which totals 365 MJ/m². 14 The making of steel releases 2 tons of CO₂ for every ton of steel produced. With steel and Aluminum being the predominant material for the space‐frame support structures for trough collectors, considerable opportunities exists for companies looking at composites as an alternative light‐weight, high‐strength material with lower embodied energy content.

5 Export Sales of Solar Electricity to U.S. Perhaps the largest near‐term solar opportunity for Mexican companies is to initiate the development and construction of utility‐scale solar power plants in México for the export sale of electricity to the United States. Specifically there is a new and emerging market for the export of solar thermal electricity from northern México to California by Mexican Independent Power Producers (IPPs). The export of renewable electricity to California has already begun with recent sales of geothermal and wind by CFE and IPPs to California utilities. For California to meet its Renewable Portfolio Standards of 33% by 2020, the California Public Utility Commission expects that 17% of its renewable electricity will come from out‐of‐state which equates to 4.1 GW of renewable capacity additions which will provide more than 12,000 GWhs of electricity.15

5.1 U.S. Anticipates Renewable Export Electricity from México

5.1.1 US‐México Bilateral Framework on Clean Energy and Climate Change

The “US‐México Bilateral Framework on Clean Energy and Climate Change”, agreed to by Presidents Calderon and Obama in April 2009, builds upon cooperation in the border region and promotes efforts to reduce greenhouse gas emissions and to strengthen the reliability and flow of cross‐border electricity grids along with facilitating the ability of neighboring border states to work together to strengthen energy trade.

5.1.2 California and Arizona

California has anticipated that renewable energy generated in Baja California will contribute to state utilities meeting their Renewable Portfolio Standards (RPS). California’s Renewable Energy Transmission Initiative (RETI) has identified renewable resources in California and adjoining areas that can deliver energy to California to meet its RPS requirements and to identify the necessary transmission to deliver this energy. RETI has included the northern part of Baja California as part of the assessment area. Arizona also expects to import a portion of its renewable energy requirements.16

5.1.3 Western Renewable Energy Zones

The Western Governors’ Association and U.S. Department of Energy launched the Western Renewable Energy Zones (WREZ) initiative in May 2008. Participating in the initiative are representatives from throughout the Western Interconnection which includes 11 states, two Canadian provinces and areas in northern México.

5.2 5 GW of Solar Thermal Potential in Northern México

The quality and quantity of northern México’s solar resources are as good as anywhere in the world. México’s best solar thermal resources are in the northern states of Baja California, Sonora, and Chihuahua. There is 5 GW of solar thermal generation capacity in Baja California which has the potential

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to generate 11.6 GWhs of solar electricity annually.17 Though there has been considerable wind development planned for northern Baja for export to the U.S., there are considerably more solar thermal resources than wind.18

Solar Resources in Baja California

Renewable Generating Capacity (MW)

Solar Thermal Wind

DNI ≥7 kWh/m² day Class 4 & Class 5+ Baja

Baja North 3,980 1,684 5,664

Baja South 1,012 1,253 2,265

Total 4,992 2,937 7,929

Share 63% 37%

Renewable Generation (GWh)

Solar Thermal Wind

DNI ≥7 kWh/m² day Class 4 & Class 5+ Baja

Baja North 9,274 5,169 14,443

Baja South 2,357 3,745 6,102

Total 11,631 8,914 20,545

Share 57% 43%

5.3 Selling Electricity to California

There are 2 mechanisms to sell renewable electricity generated in México to the U.S.:

Direct sales by Comisión Federal de Electricidad (CFE) of electricity transmitted through the interconnected Western States Coordinating Council grid between Baja California and California

o In February 2009, CFE agreed to sell the City of Los Angeles 100 MW of geothermal electricity in a 3‐year agreement with the Los Angeles Department of Power and Water. The power comes from CFE’s Cerro Prieto geothermal facility in Méxicali, Baja California.19

Direct sales by Independent Power Producers of electricity transmitted through dedicated cross‐border interconnections to utility substations in Southern California which is then delivered to California utilities and/or large industrial customers

The United States and México have traded electricity since 1905, when privately owned utilities located in remote towns on both sides of the border helped meet one another’s electricity demand with a few interconnected low voltage lines.20 The 1992 reform of the Electric Energy Public Service Law21 made certain changes that allowed the private sector to invest and participate in activities for exporting electricity generated in México22 such as:

Independent Power Production – Private investment is allowed in larger generation plants with a minimum capacity of 30 MW for the sole purpose of selling electricity to or for export.

Import and Export – Private investors are allowed to participate in the import and export of electricity.

México has an active electricity trade with the U.S. and in 2007 exported 1,300 GWhs of electricity to the U.S. while importing 600 GWhs. Companies have built power plants near the U.S.‐México border with the aim of exporting generation to the United States. Any company seeking to establish private electricity generating capacity or to begin importing/exporting electric power must attain a permit from

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Comision Reguladora de Energia (CRE). Since 2007, CRE has issued permits to 4 private companies which has led to a major expansion of electricity exports to the U.S. totaling some 12.1 GWhs. The largest exporter is Sempra Energy’s 700 MW combined‐cycle natural gas plant near Méxicali.23

To meet the growing demand for electricity and natural gas, the cross‐border transfer of significant amounts of electricity and natural gas is increasingly being integrated into the energy sectors of both California and Baja California.24

Baja California and Sonora border California and Arizona which are the 2 states in the U.S. which have the greatest demand for renewable energy and which expect solar to play the a major role in the renewable supply mix. The border area of Baja California is an ideal location to generate solar electricity for deliveries in San Diego, Los Angeles and Phoenix which are within a 200‐300 mile radius. The Southern California grid is undergoing major upgrades in order to support large‐scale renewable capacity additions from the California desert and from Baja California.

5.4 Transmission Interconnection

5.4.1 Cross‐Border Grid Interconnections

México has 9 transmission interconnections with the United States and 5 of these lines are high‐voltage direct current connections that operate only in emergency situations. The electrical grid for Baja California is isolated from México’s National Electric System (SEN) and is connected to the Western Electricity Coordinating Council (WECC) in the Unites States and Canada. The main flows of electricity between the U.S. and México are between SEN in Baja California and the Western Electricity Coordinating Council (WECC), where there is a medium voltage (230 kV) connection capacity of 800 MW.

5.4.2 IPP Projects Require Dedicated Transmission to U.S. Grid

New IPP solar generation in northern México for export to the U.S. requires dedicated cross‐border transmission lines. Currently some major wind export projects in the La Rumorosa, Baja California, are being sited with transmission access to the U.S. just a few miles away. The siting of solar projects along the U.S./México border provides far more options for optimal locations close to grid interconnections than wind since wind must be located at a specific place due to the site‐specific character of the wind resources. Solar projects can be sited based upon proximity to transmission since the solar resources are inherently non‐site specific.

PowerLink Transmission Lines

5.5 Business Models for Mexican IPPs for Sales to California

Independent Power Producers (IPPs) develop, finance, construct, own and operate power plants and enter into long‐term contracts with utilities or large industrial customers to supply electricity in a long‐term Power Purchase Agreement (PPA).

5.5.1 Competitive RFPs and “Least‐cost, best‐fit” for Investor‐Owned Utilities

The procurement of renewable energy in U.S. markets is much different than in Europe. The standard business model for utility procurement of renewable energy is competitive Request For Proposals (RFPs)

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with the bidder proposing a long‐term price generally over a 20‐year PPA period. Utilities often issue annual renewable energy RFPs and file annual renewable energy procurement plans to the California Public Utility Commission (CPUC) or the Arizona Corporation Commission (ACC). Utilities use a selection process called “least‐cost, best‐fit” in reviewing renewable RFPs which allows the utility to select the project based on the value to the ratepayer and the utility. The utility selects and “short lists” a project and enters into negotiations with the IPP proposing the project. The terms of the PPA must then be approved by the CPUC or ACC which considers estimates of indirect costs associated with the project including new transmission investments and ongoing utility expenses resulting from integrating and operating the proposed renewable energy resources. Standard procedure is to negotiate utility PPAs with options for capacity additions in future phases. The terms of contracts are not disclosed but sometimes the kWh sale price of electricity can be inferred from Press Releases and permitting applications. For example Abengoa’s Solana Project for Arizona Public Services generates 600,000 MWh annual under a 30‐year PPA with the total PPA value of USD 4 billion. This would be the equivalent of a fixed price of USD 222/MWh. Multiple‐Party PPAs – A common energy purchasing strategy is for multiple parties to join in a multi‐party PPA to benefit from shared lower costs from larger contracts which no party alone could manage. Such multiple parties could be publicly‐owned utilities or large industrial customers or a combination of both. It is not unusual for a mine and an investor owned utility to joint‐venture in such agreements in the southwest U.S. states.

5.5.2 Export Sales to Publicly‐Owned California Utilities

A new niche market is the direct sale of renewable electricity to publicly‐owned utilities in California which provide 18% of the state’s electricity. In September 2009 publicly‐owned utilities became subject to Renewable Portfolio Standards (RPS) for the first time when the Governor signed Executive Order S‐21‐09 which increased the RPS requirement to 33% by 2020 for all publically‐owned and investor‐owned utilities. By 2020, the 6 largest publicly‐owned utilities are required to add 18.8 GWh of renewables into their electricity sales and 5 of 6 utilities are well within 200 miles of the Tijuana‐Méxicali border area. These publicly‐owned utilities include Los Angeles Department of Water and Power (LADWP), Sacramento Municipal Utility District, California Department of Water Resources, Imperial Valley Irrigation District and the Cities of Pasadena and Burbank‐Glendale. LADWP is the largest municipal utility in the U.S. and is larger than San Diego Gas and Electric, an investor owned utility. Using Abengoa’s Mojave Project as a baseline, it would require 30 x 250 MW trough projects with a combined capacity of 7.8 GW to meet the RPS requirements for publicly‐owned utilities in 2020. Abengoa’s Mojave project is a USD 1 billion 250 MW trough project with annual production of 615 GWhs.25

Renewable Requirements for California Public Utilities Planning Area Annual Consumption Forecast (GWH) and RPS

Utility Planning Area 2018 33% RPS 2020

LADWP 27,154 8,961

SMUD 12,851 4,241

California DWR 8,865 2,925

Imperial Valley ID 4,441 1,466

Burbank‐Glendale 2,305 761

Pasadena 1,301 429

Publicly‐Owned Utilities 56,917 18,783

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5.6 Specific Opportunities

The market demand from California presents significant opportunities for developing utility‐scale solar thermal electric and utility PV projects by IPPs in Baja California for exporting solar electricity.

5.6.1 Utility‐Scale Projects

It is assumed that the same global solar system integrators which are dominating the competitive utility‐scale solar markets in California, Arizona, Nevada and New Mexico are actively considering locations in Baja California. Prime locations are the flat desert areas just west and east of Méxicali and the area around San Luis Río Colorado bordering Yuma County, Arizona. The companies likely to be considering sites in the Méxicali/San Luis Río Colorado area are Acciona, Abengoa, Solar Millennium, Solel, Iberdrola and BrightSource.

Map of Méxicali and San Luis Río Colorado Area

Opportunities exist to locate utility‐scale solar thermal electric plants which are generally sized 250 MW to 1000 MW. A typical 250 MW utility‐scale parabolic trough project with no storage represents a USD 1 billion investment requiring substantial engineering services and some 1,200‐1,500 construction jobs along with 200 permanent jobs for operation.

5.6.2 Utility‐Scale PV

California utilities are diversifying their solar portfolios and are entering into long‐term PPAs for utility PV projects sized between 45 MW and 550 MW which use thin‐film or one‐axis tracking silicon modules. This part of the solar utility market offers additional opportunities and better access to the market for Mexican IPPs to develop projects since the PV technology is available and “on the market” unlike the utility‐scale solar electric market dominated by global project developers with proprietary solar technology.

5.7 Opportunities for Large‐Scale Carbon Projects on the Border

The large‐scale wind projects being developed in México are “self‐generation” where the electricity is used by large Mexican industrial customers and the either the entire project and its carbon credits or just the carbon credits are sold to European investors such as large utilities who are in a mandatory carbon market and require carbon off‐sets. These projects are qualified for under the United Nation’s Clean Development Mechanism (CDM) as provided under Kyoto. For large‐scale solar projects located in México, there are at least 3 conceptual scenarios for the sale of solar electricity with (“bundled”) and without (“unbundled”) the environmental attributes which maybe qualified as Renewable Energy Credits (REC) or as Certified Emission Reductions (CER):

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Export Solar Electricity and RECs to U.S. Utilities: A “bundled” IPP project with export sales of electricity with RECs to California and Arizona utilities which must comply with Renewable Portfolio Standards (RPS) and require the RECs for mandatory compliance; This scenario requires a project site near the border since a dedicated cross‐border transmission is required to interconnect with a U.S. utility sub‐station.

“Self‐Generation” Project for Mexican Industrial Customers/Sell CERS to Europe: An “unbundled” IPP “self‐generation” project which sells the electricity to large Mexican commercial/industrial customers and sells the CERs to European carbon investors; Project can be located near the customer’s location using a distribution interconnection; This scenario is the business model for most of México’s wind projects currently under development; Solar offers an interesting alternative to wind for self‐generation projects since wind requires higher transmission costs than solar due to the distance between remote wind farms and the industrial point‐of‐use.

“Self‐Generation” Project for Mexican Industrial Customers/Sell CERS to U.S.: An “unbundled” IPP “self‐generation” project which sells the electricity to large Mexican commercial/industrial customers and sells the CERs to the new carbon markets in the U.S. being implemented by the U.S. Environmental Protection Agency and the by the Air Resources Board of the State of California.

5.8 Carbon Off‐Sets for a Representative Utility‐Scale Solar Project

Using a USD 25 per Certified Emissions Reduction sale price for the offset of the equivalent of 1 metric ton of CO₂, carbon off‐sets would produce about USD 92.2 million annually in additional income for a typical 250 MW solar thermal electric project using trough technology in greater Méxicali area. This scenario uses an emissions factor of .62 for México which means that, for every MWh of renewable energy generated, the equivalent of .62 tons of CO₂ is offset. The sale of CER credits would add USD 285 million to project revenues over the lifetime of the project which is some 28.5% of the USD 1 billion capital cost for the solar plant. Using an electricity sales price of USD .15/kWh, the sale of CER credits would contribute about 10.3% in additional income from providing USD .016 more per kWh. This projection uses the average capital costs for a project in California. Cost reductions of 20‐30% or more are anticipated for a project located in northern México which means that the carbon revenues, as a share of total revenues, would be expected to be higher than 10.3%.

Projected tCO₂ Emissions Reductions

Typical 250 MW Trough Solar Thermal Electric Plant

Northern Baja California Location

Size

Electricity Production

MWh México Emissions Factor

tCO₂e/MWh tCO₂e

Certified Emissions Reduction (CER) Sales ‐

USD Electricity Sales

‐ USD

Annual 615,000 0.62

381,300 $9,532,500 $92,250,000

30‐Years 12,300,000 11,439,000 $285,975,000 $1,845,000,000

CAPEX USD1,000,000,000

CER Price tCO₂e USD 25

Electricity Sale Price USD .15 kWh Additional CER Price

Value USD .016 kWh +10.3%

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6 Global Thermal Energy Market Most of the world’s energy is used to generate heat which consumes more than 2 times the energy that is used for electricity and 50% more than is used for transportation. Thermal energy represents 54% of the global final energy demand with electricity accounting for just 17%.

Global Final Energy Demand26

Medium‐ and Low‐Temperature Heat ≤ 250°C (480°F) 44%

Transport Fuels 29%

Electricity 17%

High‐Temperature Process Heat 10%

The market potential for utility‐scale solar thermal electricity, solar hot water and PV is well known. The use of direct solar thermal energy for process and for conversion applications is the least known and least developed sector of the solar industry. There may even greater opportunities to use low‐ and moderate‐temperature solar thermal heat in direct applications to displace fossil‐fuel electricity generation and to replace the direct combustion of fossil‐fuels for heat. Solar thermal energy out‐performs PV in Greenhouse Gas reductions due to a much higher solar‐to‐energy conversion factor. Solar thermal will soon have a great advantage over PV as global incentives shift from performance‐based incentives on kWh produced to actual kgs of GHGs and CO₂ reduced. The replacement of direct combustion fossil fuels by solar thermal has a potential to reduce more GHGs than PV and even utility‐scale solar thermal electric.

6.1 Opportunities

Significant opportunities exist for Mexican companies in all aspects of the emerging direct solar thermal market. These opportunities include system integrators, engineering services and manufacturers of the solar thermal generation systems and the thermal conversion equipment and systems used to transform heat into productive “work”. Key products of direct solar thermal which present great opportunities for México are industrial process heat and process hot water, cooling, heating, desalinated water and “distributed‐scale” thermal power blocks for electricity and heat.

6.2 New Distributed Troughs for Medium‐Temperature Applications

A new generation of scaled‐down parabolic trough collectors is entering the market which will create great opportunities to generate electricity and drive thermal applications for cooling, industrial heat and desalination. There are now numerous companies from Europe, the U.S. and Australia entering the new market for Distributed solar thermal with new designs for “Distributed” parabolic troughs. Unlike any other solar technology, these types of Distributed solar thermal systems allow extraordinary capability and flexibility to reduce or replace fossil fuel‐driven, combustion‐based generation for a wide range of thermal applications and processes. Such solar thermal collectors can be configured in hybrid operations with natural gas or biomass and with energy storage system to extend the hours of operation to near base load capabilities as well as peak. The following list shows operating temperatures for representative Distributed trough collectors from 5 companies:

New Generation of Medium‐Temperature Troughs

DE – Trough Solarlite DSG 330°C 626°C

DE – Trough SOLERA Sunpower GmbH SPR 240/300 (oil) 90°C‐300°C 194°F‐572°F

DE – Trough SOLERA Sunpower GmbH SPR 120/300 (oil) 90°C‐250°C 194°F‐482°F

US – Trough Sopogy SopoNova Next Generation 204°C‐288°C 400°F‐550°F

US – Trough Sopogy SopoNova 4.0 93°C‐204°C 200°F‐400°F

DE – Trough NEP Solar PolyTrough 1200 220°C 428°C

DE – Trough Solitem 200°C 392°C

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There are great opportunities to manufacturer these Distributed trough collectors in México to achieve significant cost‐reductions which will accelerate market entry and create numerous opportunities for Mexican companies in product design, manufacturing, system integration, engineering , installation and operations and maintenance.

7 Industrial Process Heat Europe has long understood the potential of using solar thermal energy for industrial processes and has lead efforts for many years through the International Energy Agency’s Solar Heating and Cooling Programme and the European Solar Thermal Industry Federation’s “Intelligent Energy” initiative.

7.1.1 Industrial Thermal Markets

Industry accounts for 30% of global energy usage which is more than any other sector – For industrialized countries, the industrial sector has a 30% energy consumption which is higher than all other sectors such as transportation, services and residential sectors.27 Industry consumes 41% more thermal energy than electricity28.

More than half of the industrial heat used by industry is low‐ and medium‐temperature heat – More than 50% of the thermal energy needed by commercial and industrial companies for production processes and for heating large industrial facilities is below 250°C (480°F).

Key thermal markets by industry sectors: o Iron, steel and aluminum o Petroleum refining and fertilizer production o Cement, lime, glass and ceramics o Pulp and paper o Food processing

7.1.2 Process Temperatures for Industrial Applications

Industrial Process Heat Applications and Temperatures

Industrial Sector Process Temperature

°C

Food and beverages drying 30 90

washing 40 80

pasteurizing 80 110

boiling 95 105

sterilizing 140 150

heat treatment 40 60

Textile industry washing 40 80

bleaching 60 100

dyeing 100 160

Chemical industry boiling 95 105

distilling 110 300

various chemical processes 120 180

All sectors pre‐heating of boiler feed water 30 100

heating of production halls 30 80

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7.1.3 Applications

Low‐temperature solar thermal heat is below 90°C and can easily be generated by low‐cost flat plat and evacuated tube collectors. Direct solar thermal applications include:

“Useful process heat” for generating large quantities of hot water for bottle washing in the beverage industry, for and for commercial laundries and car washes

“Use supply heat” for preheating natural‐gas fired boilers

Drying and dehydration México’s solar industry is most experienced in solar thermal due to the growth and market share of solar hot water systems. Several Mexican system integrators have already made the transition from using solar hot water systems for domestic hot water to providing industrial hot wash water for large multi‐national beverage bottling plants and for pre‐heating boilers. These are fairly straight‐forward technical designs which require just the addition of an additional hot water inlet to the feed water for a boiler or for the bottle washing hot water tank. Several Mexican companies have developed proprietary industrial solar hot water units and integrated solar collectors and solar drying for agricultural products. Medium‐temperature solar thermal heat is between 90°C and 250°C and can be provided by evacuated tubes and by the new generation of small‐scale parabolic trough collectors. The global market for higher temperature industrial process heat is wide open with significant opportunities available for system integrators and industrial process engineers to integrate the thermal output of a solar collector field into industrial processes using direct heat or heat exchangers, thermal buffers and storage systems.

8 Solar Cooling One of the largest global applications for low‐ and medium‐temperature solar thermal is to drive thermal‐based space cooling. Perhaps no other solar application can contribute more to reducing peak electricity usage, peak demand and greenhouse gas emissions that solar cooling. There are 3 primary technical configurations for thermal‐based solar cooling:

Low‐temperature flat plat collectors providing 60°C heat to drive adsorption chillers for small commercial and residential applications

Evacuated tube collectors providing 90‐100°C heat to drive single‐effect absorption chillers for small‐ and medium‐size commercial/industrial applications

New generation of medium‐temperature parabolic troughs providing 150‐200°C to drive double‐effect absorption chillers for commercial/industrial customers with minimum cooling loads of 350 kW (100 Tons)

8.1 Available Thermal‐Based Chillers

The potential of solar cooling is well known by Europe policy makers, research institutions and a handful of SMEs. The potential is also well known by researchers at the Centro de Investigación en Energía, Universidad Nacional Autónoma de México (CIE‐UNAM), who have been participating in the Solar Heating and Cooling Programme of the International Energy Agency’s work. Specific opportunities exist for Mexican companies to enter into the manufacturing, distribution and/or channel partner relationships with the global technology providers of low‐ and medium‐temperature thermal‐based “chillers”.

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Type of Chillers and Thermal Requirements

Cooling Technology Thermal Requirement

Coefficient of

Performance

Absorption Chiller ‐ Double‐Effect 163°C 325°F 1.35

Absorption Chiller ‐ Single‐Effect 88°C 190°F 0.7

Adsorption Chiller 60°C 140°F <.5

The global manufacturers of commercial/industrial absorption chillers include TRANE/Thermax, Broad, Carrier, York, MacQuay, Toshiba, Hitachi, Ebara, Sulzer Escher Wyss, LG, Mitsubishi, Entropie, and Colibri. The size range of the chillers is 350 kW to 5.6 MW (100‐1600 Tons). Yazaki from Japan has dominated the small commercial market with single‐effect absorption chillers from 100‐350 kW (30‐100 Ton) and has some 100,000 units installed world‐wide. A new generation of smaller chillers has been developed in Europe which offers great potential for small commercial and residential markets world‐wide and particularly in the southwest U.S. and northern México.

New Small‐Scale Solar Chillers

Absorption

EAW (Germany) 15‐30 kW 4.3‐8.5 Tons

SolarNext AG (Germany) 12 KW 3.4 Ton

Sonnenklima (Germany) 10 kW 2.8 Ton

Pink (Austria) 10 kW 2.8 Ton

Climatewell (Sweden) 10 kW 2.8 Ton

Rotartica (Spain) 5 kW 1.3 Ton

Adsorption

SorTec AG (Germany) 5‐75 kW 1.5‐20 Tons

SolarNext AG 8‐15 kW 2.3‐4.3 Tons

InvenSor (Germany) 5‐10 kW 1.5‐2.8 Tons

8.2 Solar Cooling Opportunities

Significant opportunities exist for Mexican companies to participate in at least 2 aspects of the solar cooling value chain:

Companies which enter into manufacturing and distribution agreements with European technology providers of chillers

Energy/HVAC system integrators which develop the integrated engineering capabilities and standard designs for solar thermal collector fields and chillers for commercial/industrial installations

Low‐cost manufacturing of adsorption and absorption chillers in México will lead to an accelerated market entry for solar cooling in the hot arid areas of the Americas. Given the import barriers of high European manufacturing costs and the extremely high currency conversion for Euros‐to‐Pesos and Euros‐to‐US Dollars, México offers very promising near‐term low‐cost manufacturing opportunities. It is

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expected that Mexican manufacturing could reduce costs for solar cooling chillers by 40% or more over European manufacturing.

8.3 Solar Cooling Opportunities in Southwest U.S./Northern México

Perhaps no market in the world has more demand and better incentives for solar cooling than California and Arizona. Arizona Public Services and Tucson Electric Power offer owners of solar cooling systems performance‐based financial incentives equal to 60% of the capital costs of the solar collector field and the new chiller equipment. The incentive is paid based upon production which is measured using a BTU meter installed at the chillers’ inlet pipe to register inlet temperature and flow rates of the heat transfer fluid from the collector field. Monthly BTUs are divided by 3412 to produced kWhs and the utilities will then pay the owner approximately USD .119/kWh for kWh produced until 60% of the capital cost is paid back. California is adopting new incentives for solar cooling which will are expected to be comparable to those in Arizona. In exchange for this incentive, the utilities will own the RECs generated by the solar cooling system which are used by the utilities to comply with mandatory Renewable Portfolio Standards. As an emerging segment of the solar market, there are great opportunities for new companies to lead in the roll‐out of solar cooling in North America as the market is wide open with perhaps only 2 or 3 small system integrators/engineering companies with technical know‐how capable of serving the Arizona and California market. Perhaps the greatest opportunities are to add solar cooling to the large manufacturing plants along both sides of the U.S./México border which are facing increasing energy costs especially for summer intermediate and peak period rates/tariffs and demand charges. Such projects offer great potential for new and emerging companies entering the solar cooling market to package such projects for the sale of carbon‐offsets and to finance the installations with long‐term loans from the North American Development Bank for energy‐efficiency improvements.

9 Thermodynamic Converters for Solar Thermal The global commercial and industrial market for Distributed solar electric is estimated at USD 750 billion with the current market penetration at less than 1%.29 A substantial part of this market can be served by the new generation of medium‐temperature trough collectors integrated with several new technical approaches to generating solar electricity with smaller thermal‐based power blocks. The availability of the new scaled‐down solar collectors delivering medium‐temperature heat has led to an emerging market for scalable power blocks matched to the thermal outlet temperatures of the new collector fields. These new power blocks include thermodynamic converters such as Organic Rankine Cycle (ORC) turbines and new “distributed” steam‐based turbines. Unlike the conventional steam Rankine power blocks used for central solar plants, this new generation of turbines is smaller, scalable and modular and work at lower temperatures and can be sized from 30 kW to 20 MW. Distributed solar thermal electric can directly compete against Distributed PV in installations sized 30 kW and larger at lower installed costs while providing more electricity per installed kW.

9.1 New Approach to Distributed Solar Thermal Electricity

Until recently, the prevailing wisdom was that in order to be economic and successful, solar trough projects had to be larger, or integrated with natural gas plants, to achieve low‐cost economies of scale.30 Several initiatives were launched over the past 5 years in the U.S. and Europe to develop and demonstrate smaller parabolic trough technologies in the 80°C to 250°C temperate ranges. Parallel technical paths were taken with proven solar technologies. One path was to optimize non‐concentrating flat plate and evacuated tube collectors to deliver higher temperatures. The other approach was to scale‐down parabolic troughs for small distributed applications such as industrial process heat and to use smaller power blocks adapted from the geothermal industry to generate electricity.

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In 2005 the International Energy Agency (IEA) launched a development initiative to improve and demonstrate multiple approaches to medium temperature collectors with concentrating and non‐concentrating collectors. In the U.S., the National Renewable Energy Laboratory focused upon developing “Distributed Trough” which led to the 1 MW Saguaro Project, a demonstration project implemented by Arizona Public Services outside of Tucson. The project used a smaller Solargenix parabolic trough collector with a 1 MW Organic Rankine Cycle (ORC) turbine from Ormat, a leading geothermal developer and ORC manufacturer. In the 2006 the project was commissioned and recognized as one of the top solar projects in the world. Advantages of Distributed trough collectors include:

Collector fields can be sized from a few collectors to a 5 MW field and be operated unattended

Lower kW investment costs available on a Distributed basis which were previously only achieved through economies of scale on utility‐scale solar plants

Collectors are a half to a third smaller in height than utility‐scale collectors allowing the use of lighter weight structures and smaller drives motors

Operating at lower temperatures and lower pressures allows the use of less expensive and fewer high‐performance components such as hydraulic pumps, receivers and glass mirrors

Water can be used as the heat transfer fluids for systems operating at 200°C or less. For higher operating temperatures to drive power blocks for electricity the heat transfer fluid is mineral oil which is used in the large solar plants.

9.2 Organic Rankine Cycle Turbines

Organic Rankine Cycle (ORC) power blocks have been used very successfully for geothermal power plants and for industrial waste for decades. Minimum temperatures for ORCs are in the 95°C range with higher temperatures producing higher efficiencies. Traditionally ORCs were powered by waste industrial heat to provide cooling and then became used in the geothermal industry. The 1 MW Saguaro Project near Tucson, Arizona, was the first solar project to use an ORC turbine as the power block for a down‐sized trough collector and is largely responsible for driving the recent resurgence of interest in manufacturing new generations of ORCs to power the emerging Distributed solar electricity generation. Most of the new ORCs designed for waste heat and renewable applications are from Europe as shown in the following list:

Manufacturers of Medium‐Temperature Organic Rankine Cycle Turbines

Company Country Sizes Year

Introduced Inlet Temp

United Technologies Corporation US 200kW 2004 74°C + Global Energy US 30kW ‐250kW 2008 125°C + Conpower Energieanlagen GmbH DE 30kW ‐ 120kW 2008 75°C‐105°C ORMAT US 200kW ‐ 20MW 1980's 150 °C +

Turboden s.r.l. IT 450kW ‐ 1500 kW 1980 100‐265°C GET GmbH DE 220kW 2003 98°C + GMK GmbH DE 500kW ‐ 5MW 1999 95°C ‐ 400°C

Adoratec GmbH DE 300kW to 1.6MW 2004 320°C

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There may be opportunities to leverage the medium‐temperature solar thermal market and México’s low‐temperature geothermal potential to drive the market for domestic manufacturing of ORCs. The unexploited potential of base‐load geothermal energy is estimated at over 1,500 MW. México is currently the third largest producer of geothermal energy in the world, with an installed capacity of 960 MW, based on high temperature reservoirs. Low temperature reservoirs have been solely used for recreational purposes but a project is planned to assess and map the full potential of these low enthalpy reservoirs.31

9.3 Direct Steam Generation and Distributed Steam Power Blocks

Direct Steam Generation (DSG) has been considered an alternative and promising approach to thermal energy generation from parabolic trough systems. DSG generates steam directly in the receiver tubes with preheating, evaporation and superheating occurring in different row sections within the solar field. Traditional trough systems use a heat transfer fluid (oil) which is heated and pumped through the absorber/receiver which is transferred to the steam cycle of the Rankine power block through a heat exchanger. 32 One disadvantage of the conventional Rankine cycle is the limited upper temperature (400°C) of the fluid circuit due to thermal stability of the oil. With this temperature limit, the power cycle efficiency is limited as well.33 DSG eliminates the need for an intermediate heat transfer fluid and steam‐generation heat exchangers and allows the solar field to directly operate at higher temperatures resulting in higher power cycle efficiencies and lower fluid pumping parasitics.34 Much of the focus of DSG has been at the European solar test center at Spain’s Plataforma Solar de Almería where testing continues to be conducted by Spain’s Ceimat (Center for Energy, Environment and Technological Research) and DLR (German Aerospace Center). Solarlite GmbH has developed the highest medium‐temperature trough collector which generates up to 330°C which allows the use of direct steam generation with a new generation of small steam Rankine power blocks for projects as small as 2 MW. Recently small steam Rankine power blocks in the 2 to 8 MW range have become available in Europe from Siemens, ABB and MAN Turbo which offers new possibilities for Distributed Energy generation.

9.4 Stirling Engine Manufacturing

Of all solar technologies, Dish‐Stirling has the highest solar‐to‐electricity conversion efficiency and, in 2008, Stirling Energy Systems (SES) set the world’s solar efficiency record of 31.25%.35 There are just a handful of players in Dish‐Stirling due to the difficulty of producing reliable Stirling engines which require high‐precision, medium‐volume manufacturing. These companies include SES, Stirling Sun Power International which is commercializing the SBP 10kW and 25 kW EuroDish and Infinia which is bringing a 3 kW and larger units to market. SES has executed Power Purchase Agreements with 2 California utilities for 2 projects comprising 1.6 GW which requires the manufacturing of 72,000 25kW Dish‐Stirling units each of which has a 380cc, 4‐cylinder engine. SES has initially sourced the manufacturing of the Stirling engines with a medium‐sized Canadian engine plant which is a key supplier to the Detroit auto industry. SSPI planned on using SOLO, a German company, to manufacture its Stirling engines but insolvency led to its closing in 2007‐2008. It is understood that SES, SSPI and Infinia are seeking to develop and continuously improve their respective supply chains for the Stirling power block which consists of a high‐temperature thermal receiver, the engine block, a radiator, a generator and electronic controls.

9.5 Opportunity for México to be Global Lead in Distributed Solar Thermal Electric

The manufacturing of this new generation of power blocks is almost exclusively confined to low‐volume production in Europe which have the highest manufacturing costs in the world compounded by consistently high Euro conversion rates. The global market potential for Distributed solar thermal electricity will not be realized without significant cost reductions in the manufacturing of the

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thermodynamic converters such as ORCs, Stirling engines and small steam power blocks. Manufacturing such turbines are ideally suited to the capabilities of México’s automotive and industrial manufacturing industry base and represents a significant global solar opportunity by manufacturing and deploying Distributed solar thermal electric in the Mexican market place through targeted self‐generation and CFE projects which demonstrate the use of the new scaled‐down troughs for Distributed solar thermal electricity while reducing México’s GHG emissions. México could lead in developing this little known, but emerging, segment of the solar market which is potentially larger than utility‐scale solar thermal and PV.

10 PV‐Thermal for “Green Building” Markets Opportunities exist for México’s energy entrepreneurs, product developers and manufacturers to leverage existing capabilities in the design of new proprietary low‐cost, high‐quality PV‐Thermal systems products and systems. A PV‐Thermal (PV‐T) system uses arrays of modules with each module producing electricity from PV cells and thermal energy by collecting the unused heat off the PV cells through an active cooling system using air or a fluid which transfers the thermal energy from the modules to a central heat exchanger which is then stored or distributed for productive uses such as hot water, space heating and space cooling using adsorption chillers. PV‐T systems are roof‐mounted or building‐integrated into a south‐facing wall. The efficiencies of PV‐T systems are much higher than PV since the solar‐to‐energy conversion includes both the electricity and the thermal energy generated through an active cooling system of the PV cells. These systems will generate approximately 2 to 4 kWhth for every 1 kWhe which provides net solar‐to‐energy conversions of well more than 60%. Some PV‐T systems are actually Concentrating PV‐T and incorporate a linear concentrator or lens system. The active cooling system offers additional performance gains by preventing the overheating of the PV cells. The heat transfer fluid is typically water and the usable temperatures ranges from 50°C‐95°C with higher temperatures coming from concentrating systems. Much of the research being done on PV‐Thermal systems was started in 2005 through the International Energy Agency’s (IEA) work with the “PV‐Thermal Solar Systems" component to the Solar Heating and Cooling (SHC) Programme. The advantages of PV‐T are ideally matched to meet the requirements for low‐carbon, high energy‐performance for residential and commercial/industrial buildings. Perhaps no other building system can assist developers and owners meet the U.S. Green Building Council’s LEED (Leadership in Energy and Environment) certification requirements for “green buildings” than multi‐functional PV‐T systems. McGraw‐Hill Construction estimates that the size of the current green building market for residential and non‐residential buildings is USD 36‐49 billion and that the market will double in size by 2013 to USD 96 ‐140 billion. Over the past 4 years, more than 10 companies from Europe and Canada have developed and brought PV‐T products to the marketplace.

11 “Low‐Carbon” Industrial Parks with Renewable Electric/Thermal Micro‐Grids

11.1 Concept An innovative concept is being developed in Germany which integrates new approaches to incorporating solar thermal energy with power into “smart” electric/thermal micro‐grids, energy storage and sustainable industrial development. The tradition function of a micro‐grid is to improve the quality and reliability of electrical power. Industrial or commercial micro‐grids are typically connected collections of critical and/or sensitive loads requiring high power quality and reliability such as data centers, university campuses, shopping centers, residential neighborhoods and industrial facilities. The electrical loads can be further sub‐divided into groups within the micro‐grid according to the required grade of power quality and reliability. The micro grid can switch over to island operation in the event of a grid fault, during maintenance, periods of poor power quality, or when grid energy prices are high.36

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11.2 How It Works

The new micro‐grid model incorporates the functions of an electrical micro‐grid and incorporates for the first time solar thermal electricity into the electrical supply loop along with a parallel “hot water”‐based solar thermal energy micro grid. The process flow for such a “low‐carbon” industrial park follows:

An industrial park would be developed along with an adjacent concentrating solar thermal generation facility which would provide for the first time the full‐value chain of thermal energy products to the park’s industrial customers including electricity, cooling and process heat delivered through an integrated electric/thermal micro‐grid backed by energy storage and the national grid.

For solar, the new generation of commercially‐available Distributed parabolic trough technology would be used which is offered by multiple U.S. and German vendors. Distributed trough generates temperatures in the range of 90°C‐300°C (194°F‐572°F) which is ideal to generate electricity with smaller steam power blocks at less than 20 MW and to generate thermal energy for applications such as district cooling, space cooling, process heat, domestic and process hot water, etc. The solar generation would be sized to handle intermediate and peak loads for the industrial park tenants and backed up by the national grid for electricity and by natural gas for thermal energy. Bio‐diesel fueled generators would also part of the back‐up strategy. Short‐term 1‐4 hour energy storage could be achieved with low‐tech hot water or chilled water storage available at a central location and on‐site with the industrial facilities depending upon demand. The park would designed to be flexible, scalable and modular to integrate new generation and storage technologies such as advanced energy storage as they are deployed in the market. Options for thermal energy storage are well known but new technologies are entering the market to store electricity for load shifting and backup. For example, a technical team is developing a “virtual” grid project in Abu Dhabi which will incorporate the first use of NGK’s sulfur sodium Battery Energy Storage System which will provide a 300 MWhs of electricity over 5‐6 hours.

The energy performance goal of such a park would be to reduce the amount and load demand of grid‐supplied electricity and natural gas and reduce GHG emissions and serve as a model for sustainable development.

The park’s energy micro‐grid would balance the supply and demand of electricity and thermal heat by and between the individual electrical and thermal loads of the industrial buildings. The thermal micro‐grid would have a hot water distribution loop piped to each industrial building. Each tenant may use the heat to drive specific thermal‐based applications. The hot water for one building may drive a variety of thermal applications such as a double‐effect absorption chiller for space cooling and/or for cooling injection molding machines, or provide process hot water for a bottling or dehydration operation. The delivery of solar‐based industrial process heat provides unprecedented flexibility to meet an industrial customers needs. Each industrial facility would have different and varying thermal loads which can be accommodated by the thermal micro‐grid.

11.3 A New “Self‐Generation” Model Using Solar Electricity and Thermal for Carbon “Off‐Sets”

A conceptual business model for the industrial park’s owner would be to provide reliable, carbon‐free electricity and thermal energy which will reduce and provide predictability to the energy costs for industrial tenants while reducing their intermediate and peak energy demand and usage. Such a renewable electric/thermal micro‐grid is completely scalable and modular. The industrial property developer can recruit energy‐intensive companies and offer enhanced value to park tenants by being identified with “world‐class low‐carbon” sustainable development. Such solar‐based parks serve as an alternative to the self‐generation wind projects for large industrial energy users which requires

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extensive and costly transmission lines and/or wheeling costs for new wind projects. Solar’s ability to reduce peak energy usage and demand can offset the lower capacity factors for solar thermal compared to high‐quality wind projects. However, low‐cost thermal storage can easily be added to solar plants to not only increase capacity factor but to shift on‐demand solar thermal output for 1‐6 hours. This concept has great potential for developing low‐carbon, maquila‐like industrial parks across México and especially along the U.S./México border which can leverage the advantages of geography through proximity to the U.S. markets and to exploit the region’s world‐class solar thermal resources. The technical system integration expertise gained by Mexican companies in establishing and operating such a low‐carbon models for sustainable industrial development would provide a solid base for exporting the model and creating business opportunities for Mexican companies. Opportunities also exist for Mexican commercial and industrial real estate developers to replicate the business model as a new competitive advantage in the Americas as well as national markets.

11.4 Micro‐Grid Markets in North America

A recent market research study37 predicts that 3 GW of new microgrid capacity will come on‐line globally by 2015 which represents a cumulative investment of USD 7.8 billion. North America is expected to be the largest market for microgrids during this period with 74% of the total industry capacity. In North America, the largest functional use category will be institutional microgrids, followed by commercial/industrial and community grids. Industrial thermal heat at temperatures under 250°C represents some 44% of the global final energy demand38 which is more than twice that of electricity. As such the market potential for thermal microgrids could be much more than 6 GW world‐wide.

12 Need for System Integrators and Multi‐Disciplined Engineering Perhaps the greatest gap in the value chain for Distributed solar thermal is a shortage of experienced system integrators, project developers and multi‐disciplined energy engineers who can package turn‐key solar industrial process heat, solar cooling, solar desalination and small thermal electric projects. Such commercial/industrial projects require extensive site‐specific engineering and integrated technical design at a level far beyond that required for PV or solar hot water. The technical challenges for low‐ and medium‐temperature projects is the integration of the solar collector field and the closed‐loop hydraulics of the heat transfer fluid (usually water) which is delivered either as a pre‐heat to a boiler or to a heat exchanger in an existing system with the solar usually supplementing the existing heat source. Complicating such systems is the need to provide thermal energy storage to buffer uneven cloud‐induced variations in solar resources. Roof‐mount collectors add structural, design and cost complications with existing roof‐mount HVAC equipment and with issues such as mounting structural supports, weight and wind effects. This new field of system integrators requires competencies in a wide‐range of engineering disciplines such as electrical, mechanical, hydraulic/plumbing, industrial processes, environmental, civil and structural as well as competencies in energy efficiency, analysis and management. There are significant opportunities for energy project developers, energy services companies, engineers and turn‐key energy or industrial equipment installation companies to enter this space by scaling‐up existing capabilities. Companies can specialize in clean water, cooling industrial heat or combined heat and power. Clear opportunities also exist for companies to enter into exclusive relationships with the technology providers of the low‐ and medium‐temperature solar collectors and of the conversion equipment such as the chillers, desalination equipment, and power blocks for local, national and regional markets. In addition to selling turn‐key Distributed solar thermal systems, a promising opportunity may exist for system integrators to design, install and operate a solar cooling system on the premise of a commercial/industrial customer and to sell to the customer process heat, cooling, clean water or electricity in a long‐term thermal‐type Solar Services Agreements now being extensively used in the U.S.

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The industrial customer benefits from reliability and from long‐term predicable energy rates. Such projects in México also have additional value by generating carbon off‐set revenues by being packaged as carbon off‐set projects.

13 Export of Proprietary Solar Products Several Mexican SMEs have developed and are now manufacturing proprietary solar products for the domestic market and are starting to export to Europe and to Latin and South America. These are low‐cost high‐quality products which are strong candidates for export to the California and Arizona markets.

13.1 Solar Hot Water Heaters

Most of México’s proprietary products are solar hot water heaters which is the largest segment of the domestic solar market. Recently 2 Mexican manufacturers were recognized among the world’s top solar hot water system providers. In June 2009, Sun and Wind Energy Magazine published a survey of 61 global manufacturers of solar hot water systems which included 2 Cuernavaca companies which have designed and manufactured proprietary systems:

Commercializadora General Solar, S.S. d C.V. (Módulo Solar)

Sunway de México S.A. de C.V.

13.2 PV Modules

ERDM is the largest domestic manufacturer of PV panels for domestic markets with some 40 distributors across México. The company uses both thin‐film from Global Solar (U.S.) and silicon cells from Q‐Cells (Germany) for its high‐quality panels. ERDM achieves very low production costs due to low setup, labor and operational costs leveraged with production facilities in rural Veracruz. Niche export opportunities exist as the company anticipates expanding production capacity to more than 50 MW over the next few years.

13.3 Solar Street Lights Several companies in México have developed, manufactured and installed proprietary solar street lights on national highway projects. These products use PV panels, batteries and LED lights and have great potential as an export product to the U.S. and to the rest of the Americas. These products will need UL certification and evidence of conformance to the standards of the U.S. Department of Transportation.

13.4 Certifying Mexican Solar Products for the U.S. Markets

Solar product manufacturers exporting solar products to the U.S. must have their products tested and certified under various standards. Product‐ and component‐level certification applies to concentrating and non‐concentrating PV modules, inverters, metering equipment, and solar thermal collectors (flat‐plate, evacuated tubes). Importantly, product certification is required if the product is used in installations subsidized by Federal or state renewable energy financial incentives. Key listings, certification programs and independent test laboratories for the California and Arizona market include:

California Energy Commission (CEC) – All solar equipment that is eligible for incentive programs in California is listed in the “eligible solar electric equipment” database.39 This is generally regarded as the most comprehensive database in the U.S. and is included as the reference baseline by the National Renewable Energy Laboratory which incorporates technical and performance parameters from the CECs database into the Solar Advisory Model software, a highly‐regarded simulation software for project analysis. The solar incentive program for Arizona Public Services refers to the “technology specific qualification requirements developed by the

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California Energy Commission” as an acceptable standard for solar equipment in Arizona.

Solar Rating and Certification Corporation (SRCC) – Located in Coca, Florida, SRCC operates a certification and testing program for solar collectors and evaluates the maintainability of solar collectors and the thermal performance rating characteristic of all‐day energy output of a solar collector under prescribed rating conditions. The scope of the program includes collectors used for swimming pool and recreational heating, space heating, cooling, and water heating. Residential SWH systems are certified to SRCC OG‐300 standards and solar collectors used in multifamily residential, commercial, or industrial water heating are tested and certified to the SRCC OG‐100 SWH System Certification40.

Nationally Recognized Testing Laboratories (NRTLs)41 – Compliance with electrical safety standards for solar equipment are certified by private 3rd party NRTLs which are recognized by the U.S. Occupational Safety and Health Administration (OSHA). There are 19 certified NRTLs with just 2 labs located outside of the U.S. (Canada and Germany). NRTL relates to solar‐related electrical equipment with California requires a NRTL Certification Letter all solar electric

generating technologies that are not flat‐plate non‐concentrating photovoltaic modules.

TÜV Rheinland Photovoltaic Testing Laboratory LLC (TÜV PTL) – Newly located in Phoenix, Arizona, TÜV PTL is an affiliate of the internationally recognized‐TÜV Rheinland and is a comprehensive independent laboratory capable of testing, evaluating and certifying all current international standards related to PV and solar thermal technologies such as the International Electrotechnical Commission (IEC). TÜV/PTL performs photovoltaic module qualification testing and related activities. It is one of three such unique facilities in the world testing modules from manufacturers around the world. Its staff is experienced in the analysis and full testing sequence of commercial Si solar cell technologies required by IEC 61215, IEC 61626, IEEE 1262, and UL 1703. The test lab can also run IEC testing and certification for parabolic trough collectors.

14 Off‐Grid Solar Products

14.1 Global Off‐Grid Market – 7 GW by 2020

The off‐grid market in the developing world is enormous with more than 1.6 billion people without electricity which represents more than one‐quarter of the world population. Some 4 out of 5 people without electricity live in rural areas of the developing world. The Off‐Grid market for solar electricity is expected to grow approximately 16% annually through 2012 and to account for 13% of the global PV market by 2020 with some 7 GWp of installed capacity expected.42 In México more than 6.5 million43 people live “off‐grid”. Globally off‐grid projects see much higher installed costs due to one‐off and small‐quantity equipment prices, remote mobilizations and installation logistics. However, rural electrification, as an autonomous micro‐grid, is considered a cost‐effective alternative to extending transmission lines and is becoming increasingly part of national grid plans. In the industrialized world, there is an off‐grid market which is mainly confined to remote residences, communities and industrial applications such as cell towers, highway lights, sensing equipment, etc. In the U.S., some 20% of PV installations are off‐grid. A major segment to this market is SMEs who use diesel‐generators for electricity to power inefficient AC appliances as part of off‐grid enterprises. These are ideal candidates for energy‐efficient PV‐powered DC appliances such as refrigerators which favorable payback and substantial less monthly expenses for energy. In addition, several Mexican energy entrepreneurs have designed and now manufacture patented “hot water”‐type flat plate collectors which heats air that is delivered to a self‐contained

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dehydration unit used to dry fruit, vegetables, meat and other products for rural agricultural enterprises.

14.2 Need for Products Designed for Off‐Grid Solar Applications Most off‐grid rural electrification projects in México are installed through international development programs for rural electrification which mainly bring imported PV systems, inverter/charge controllers and battery banks to remote communities and homes. Key to these projects is the unique skills and capabilities of the sustainable development/energy engineers and system integrators who design, install and train the rural communities on how to use and maintain the systems. Very often, the system integrator uses multiple small renewable technologies such as solar hot water, pico hydro, small wind and biomass. Almost all PV products are manufactured in Europe, Asia and the U.S. and are designed for grid‐connected applications in industrialized countries. These products are highly‐engineered, extremely efficient, feature‐rich and are not designed for the requirements of the off‐grid rural market. Great potential exists for Mexican companies to simplify, redesign and manufacture balance‐of‐systems for off‐grid PV. Such components can be redesigned and reengineered to match the requirements for remote applications in order to achieve lower‐costs and maintain high‐performance and reliability. This market needs high‐quality, durable, reliable and low‐cost products in order to transition from subsidized international donor projects to market‐based competitiveness. Such “off‐grid parity” is possible already in some niche markets due the high costs of “portable” fossil fuels and the disproportionately higher share of remote family income and business expenses going to energy. Some rural electrification system integrators are finding ways to directly compete against the current energy prices paid in off‐grid communities for candles, kerosene, and diesel.

14.3 Types of DC Products Needed for Off‐Grid Markets

With some 7 GWp of new PV capacity predicted by 2020, there will be significant demand from millions of new “consumers” in a market traditionally undervalued as being off‐grid and poor. This off‐grid PV market represents great opportunities for developing and manufacturing DC‐powered refrigerators, ice‐makers, air conditioners, fans, residential and street LED lighting, power tools, radios, TVs, hand‐helds, PCs, etc. Such electronic and electrical products ideally match the product design, engineering and manufacturing capabilities of many Mexican manufacturers. A well practiced strategy for Mexican companies is to enter into an exclusive manufacturing and distribution agreement with an off‐shore technology provider. The Mexican company may import certain keep components, source the balance of the unit domestically and assemble a low‐cost high‐quality product for the Americas and/or for global distribution. This strategy is now being applied by a few Mexican companies which are bringing lower‐cost DC products to off‐grid solar‐powered projects and consumers.

* * * 1 Black and Veatch (2007) “Arizona Renewable Energy Assessment ‐ Final Report for Arizona Public Service Company, Salt River Project, Tucson Electric Power Corporation”, September 2007 2 Renewable Energy Test Center (2009) “Solar Energy ‐ Harvesting the Sun and Reaping Its Benefits”, September 2009 3 Also see “http://www.flabeg.com/en/index.html” 4 California Energy Commission(2007) “Volume 1 – Application for Certification, Carrizo Solar Farm”, October 2007 5 Sources for collector area per MW: parabolic trough figure is an average per m² from Abengoa, Acciona and Solar Millennium collectors; power tower figure is from BrightSource; Dish‐Stirling figure is from Stirling Energy Systems; and the linear Fresnel figure is from Ausra 6 Kearney, Dr. David (2007) “Parabolic Trough Collector Overview”, Parabolic Trough Workshop, March 2007, National Renewable Energy Laboratory 7 U.S. Office of Energy Efficiency and Renewable Energy (2009) “DOE Solar Energy Technologies Program Peer Review, CSP Technical Track”, March 2009, Denver, Colorado 8 Flabeg GmbH (2008) “Start off for FLABEG’s first Solar Mirror Plant in the U.S.A.”, Press Release, August 25, 2008 9 See http://www.alanod‐solar.com 10 Schott Solar ‐ Press Release, May 11, 2009

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11 See http://www.nrel.gov/csp/troughnet/solar_field.html 12 Sources consulted for Nevada Solar One data include: Extrusion Americas Unit of Hydro Aluminum ‐“Seeing the Light ‐ The Use of Aluminum Support Structures in Concentrated Solar Power Energy Generating Facilities”, a White Paper; U.S. Office of Energy Efficiency and Renewable Energy, “Specialty Glass Needs for the U.S. Solar Industry Workshop” , 2008 13 See http://www.reflectechsolar.com/pdfs/EmbodiedEnergyWhitePaper(ReflecTech).pdf 14 See http://www.reflectechsolar.com/pdfs/EmbodiedEnergyWhitePaper(ReflecTech).pdf 15 California Public Utilities Commission (2009) “33% RPS Implementation Analysis Preliminary Results”, June 2009 16 “Arizona Renewable Energy Assessment ‐ Final Report for Arizona Public Service Company, Salt River Project,

Tucson Electric Power Corporation”, Black and Veatch, September 2007 17 Solar thermal resources were inventoried as part of the Western Renewable Energy Zones Project; see

http://www.westgov.org/wga/initiatives/wrez/WREZ%20Map%20and%20Tables%20Only.pdf 18 “Western Renewable Energy Zones Initiative Renewable Energy Generating Capacity Summary”, Western Governors Associations, June 15, 2009; see http://www.westgov.org/wga/initiatives/wrez/ 19 http://www.rechargenews.com/energy/geothermal/article171238.ece 20 United States‐México Chamber of Commerce; See http://www.usmcoc.org/b‐nafta10.php 21 “Comision Federal de Electricidad ‐ A Vertical Integrated Company”, Renewable Energy Forum, Eugenio Laris, February 1, 2006 22 The Global Energy Market: Comprehensive Strategies to Meet Geopolitical and Financial Risks – Nuclear Power Trends in the World”, Institute for Public Policy, Rice University, May 2008 23 http://www.eia.doe.gov/emeu/cabs/México/Electricity.html 24 “Potential for Renewable Energy in the San Diego Region”, San Diego Regional Renewable Energy Study Group, August 2005 25 California Energy Commission, “Abengoa Mojave Solar Project Power Plant Licensing Case Docket Number: 09‐AFC‐5 “Application For Certification” 26 Wohlgemuth,N. and Monga, P. (2007) “Renewable Energy for Industrial Applications in Developing Countries”, Proceedings of ISES World Congress 2007 (Vol. I – Vol. V) Solar Energy and Human Settlement 27 Weiss, Werner (2006) “Task 33: Solar Heat for Industrial Processes”, IEA Industry Workshop Lisbon, 13 October 2006 28 Salem, J. (2007) Solar Heat for Industrial Processes, United Nations Industrial Development Organization, Vienna, 2007. 29 Kimura, D. (2009) “Shrinking CSP to scale new markets”, CSP Today, November 2, 2009; See http://social.csptoday.com/ 30 National Renewable Energy Laboratory (2006) “Solar Trough Organic Rankine Electricity System (STORES) Stage 1: Power Plant Optimization and Economics”, NREL/SR‐550‐39433, March 2006 31 Inter‐American Development Bank (2009) “IDB Public‐Private Sect or CTF Proposal ‐ México Public – Private

Sector Renewable Energy Program” 32 http://www.nrel.gov/csp/troughnet/power_plant_systems.html#steam

33 http://www.flagsol‐gmbh.com/flagsol/cms/front_content.php?idcat=37 34 http://www.nrel.gov/csp/troughnet/power_plant_systems.html 35 http://www1.eere.energy.gov/solar/review_meeting/pdfs/prm2008_martin_stirling.pdf 36 “Industrial or commercial micro grids”, January 26, 2009, Leonardo Energy ‐ The Global Community for Sustainable Energy Professionals; See http://www.leonardo‐energy.org 37 http://www.pikeresearch.com/research/microgrids 38 Wohlgemuth,N. and Monga, P. (2007) “Renewable Energy for Industrial Applications in Developing Countries”, Proceedings of ISES World Congress 2007 (Vol. I – Vol. V) Solar Energy and Human Settlement 39 See http://www.gosolarcalifornia.ca.gov/equipment/index.html 40 See http://www.solar‐rating.org 41 See http://www.osha.gov/dts/otpca/nrtl/index.html 42 Wollny, M (2009) “Best Technological Solutions for Rural Electrification”, SMA Solar Technology AG presentation at European Union Sustainability Wee February 9‐13, 2009 43 See http://www.erdm‐solar.com/v2/proyectos.php

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Section 4 Overview of México’s Solar Sector

1 México’s Solar Market

1.1 PV Solar Resources in México

The quality of México’s photovoltaic (PV) and solar thermal resources is widely known as being among the best in the world.

1.1.1 Photovoltaic Resources

Average Global Horizontal Irradiation (GHI) is approximately 5 kWh/m² per day which is the energy equivalent of 50 times México’s annual national electricity generation.1

70% of the territory has GHI values greater than 4.5kWh/m²2

Just 0.06% of the Mexican national territory would be sufficient to generate the overall electricity consumption of México in 2005 according a GTZ report3.

1.1.2 PV Performance Compared to Germany and Spain

México’s average solar resources for PV (5 kWh/m² per day) is more than 60% higher than the best solar in Germany which has 5.4 GW of installed PV. Spain and Germany are the global PV leaders with a total of 8.7 GW which is 67% of the world’s PV installed capacity.4

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Comparative Solar Resources, PV Performance, Energy Pay‐Back and Energy Return5

GHI kWh/m² Energy Pay‐Back Time ‐

Years

Energy Return Factor Day Year kWh/kW

Guaymas 6.0 2,190 1,818 1.4 20.6

Cd. Obregón 6.0 2,190 1,818 1.4 20.6

Hermosillo 6.0 2,190 1,818 1.4 20.6

Chihuahua 5.9 2,154 1,787 1.4 20.2

Durango 5.7 2,081 1,727 1.5 19.5

La Paz 5.7 2,081 1,727 1.5 19.5

Guadalajara 5.6 2,044 1,697 1.5 19.2

Puebla 5.5 2,008 1,666 1.5 18.8

Nogales 5.5 2,008 1,666 1.5 18.8

Los Tuxtlas 5.5 2,008 1,666 1.5 18.8

Méxicali 5.5 2,008 1,666 1.5 18.8

Riviera Maya 5.4 1,971 1,636 1.5 18.4

Oaxaca 5.3 1,935 1,606 1.6 18.1

Acapulco 5.3 1,935 1,606 1.6 18.1

Poza Rica 5.3 1,935 1,606 1.6 18.1

Matamoros 5.3 1,935 1,606 1.6 18.1

México ‐ Average 5.0 1,825 1,515 1.7 17.0

Cd. Juárez 5.0 1,825 1,515 1.7 17.0

San Luis Río Colorado 5.0 1,825 1,515 1.7 17.0

Distrito Federal 4.9 1,789 1,484 1.7 16.6

Mazatlán 4.9 1,789 1,484 1.7 16.6

Cd. Altamirano 4.9 1,789 1,484 1.7 16.6

Culiacán 4.9 1,789 1,484 1.7 16.6

Sevilla, Spain 4.8 1,754 1,460 1.7 16.3

Tepic 4.8 1,752 1,458 1.7 16.3

Mérida 4.7 1,716 1,424 1.8 15.9

Reynosa 4.7 1,716 1,424 1.8 15.9

Cuautla 4.6 1,679 1,394 1.8 15.6

Madrid, Spain 4.5 1,660 1,394 1.8 15.6

México ‐ 70% of Country 4.5 1,643 1,363 1.9 15.2

Tampico 4.5 1,643 1,363 1.9 15.2

Piedras Negras 4.5 1,643 1,363 1.9 15.2

Monterrey 4.4 1,606 1,333 1.9 14.8

Barcelona, Spain 4.0 1,446 1,193 2.1 13.2

Munich, Germany 3.1 1,143 960 2.6 10.4

Berlin, Germany 2.7 999 839 3.0 9.0

Cologne, Germany 2.7 972 809 3.1 8.6

1.1.3 México has an “Energy Pay‐Back Time” Much Higher than Germany and Spain

PV installed in many cities across Northern and Central México has an “energy pay‐back time” (EPBT) of less than 2 years which is the time required for these PV systems to produce the amount of energy that was required to manufacture all of the PV components. The EPBT is based upon a figure of 2,525 kWh

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which is the electrical energy required to manufacture 1 kW of a complete PV system. This kWh figure includes PV panels, wires, and electronic connection devices. The EPBT varies according to the PV location’s solar resources. This 2,525 kWh figure was used by the International Energy Agency in a 2006 report titled “Compared assessment of selected environmental indicators of photovoltaic electricity in OECD cities”.

1.1.4 México has an “Energy Return Factor” Much Higher than Germany and Spain

The “energy return factor” (ERF) for PV installed in most of México produces 17 times the electricity that is required to manufacture the PV system. This figure is 1.5 times higher than the ERF for Germany and is equal to most of Spain. The ERF refers to the amount of electricity produced over a 30‐year period less the electricity required to manufacturer the complete system. The ERF is the number of times that the embodied energy from the PV manufacturing is produced over the life of the system. The average ERF for PV systems in México is 1.7 years compared to 2.6 years for Munich.

1.2 Solar Thermal Resources

Northern México’s Direct Normal Insolation is equivalent to best in the U.S. Southwest and in the North African deserts.

Assuming a net system efficiency of 15%, a square of 25 km in Chihuahua or in the Sonora desert would be sufficient to supply all of Mexico’s electricity.6

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1.4 Existing Market by Type of Solar Installation

México’s extraordinary solar resources have largely gone untapped but the solar sector is emerging with a very promising future.

México Solar Installations by Type 2007 ‐ 2008 Installed Capacity Annual Growth

MW

2007 2008 MW %

Solar Thermal Electric 0 0 0 0%

Solar Hot Water 108 116 8.0 7%

PV 18.4 19.4 1.0 5%

Totals 126.4 135.4 9.0 13%

There are no solar thermal electricity plants in México

80% of PV installations in México is for rural electrification and are off‐grid7

78% of all solar hot water installations is for swimming pool heating8

1.5 “Huge” Potential Solar Market

México’s photovoltaic and solar thermal market potential is as large as 45 GW which is approximately 75% of México’s 2008 electricity generation capacity. In 2008, México had approximately 59.5 GW of total installed electricity generation capacity9 and expects to add 10.8 GW in new capacity additions by the end of 2017.10

México Solar Market Potential11

Solar Thermal Electric

Western RE Zone Project ‐ Baja California 5 GW

Photovoltaics 15.8 GW

Institute of Electrical Investigations ‐ Off‐Grid 2015 0.02 GW

GTZ 28 Cities ‐ Residential Grid Connected 1.8 GW

GTZ Study (10% x 2.7 Million enterprises) 14 GW

Solar Thermal Hot Water 24.5 GW

SENER & GTZ ‐ m² collector area 35,000,000

kWth/m² 0.7

Total Potential Solar Market 45.3 GW

One estimate presented at the recent “Global Renewable Energy Forum – Scaling Up Renewable Energy” in León in October 2009, expects that solar thermal and PV electricity will account for up to 5% of the country’s energy supply by 2030 and 5‐10% by 2050. Solar thermal is expected to play a greater the role in heat generation rather than generating electricity with 5‐10% of México’s heat expected to come from solar thermal in 2030 and 10‐15% by 2050.

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Solar Potential in México by Use 2030‐205012

2030 2050

Electricity Generation

PV 0‐5% 5‐10%

Solar Thermal 0‐5% 5‐10%

Heat

Solar Thermal 5‐10% 10‐15%

1.5.1 5 GW of Solar Thermal Potential in Northern México

The quality and quantity of Northern México’s solar resources are as good as anywhere in the world. México’s best solar thermal resources are in the states of Baja California, Sonora, and Chihuahua. There is 5 GW of solar thermal generation capacity in Baja California which has the potential to generate 11.6 GWhs of solar electricity annually.13 Though there has been considerable wind development planned for Northern Baja for export to the U.S., there are considerably more solar thermal resources than wind.14

1.6 Potential PV Market

In 2009, SENER and GTZ released a landmark report on “Market Niches for Grid‐connected Photovoltaic Systems in México”15 and estimated that the potential residential market 26 cities under the “optimistic scenario is 1.3 GW of additional capacity with a market of at least 1.5 million homes. The potential industrial/sector market is 2.7 million enterprises which represents 98% of all enterprises.16 If just 10% of these enterprises installed 50 kW PV systems, the market potential would be 14 GW.

1.6.1 Potential Solar Hot Water Market

The potential for solar hot water is approximately 35 million m² of collector area which could provide 115 PJ of energy per year which equates to 2.5% of the final energy consumption in México.17 This is approximately 35 times greater than the current installed capacity and all of this potential is considered “economically feasible”. Using a factor of .7 kWhth for every m² collector, the market potential for solar hot water is 24.5 GW of installed capacity. The most developed market is unglazed collectors for water heating for swimming pools which accounts for 78% of all sales, followed by industrial and commercial applications which had 14% of sales.18

1.6.2 Rural Electrification

The Institute of Electrical Investigations (IIE) estimated a total potential for off‐grid PV systems at a range between 10 MW and 20 MW for the period 2005‐2015.19

2 Government Policies

2.1 “Subsidized” Residential Energy Market

Photovoltaic electricity is “unsubsidized” in México and competes against “subsidized” residential electricity rates. Residential electricity rates in México are subsidized by the government and were described by a recent World Bank report as among the largest electricity subsidies in world. In 2006 residential electricity subsidies accounted USD 9 Billion which represented more than 33% of total electricity sector revenues and equated to 1% of the gross domestic product. Over 66% of electricity subsidies go to residential consumers and the volume of subsidies to residential customers increased by 46% between 2002 and 2006 in real terms.20

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2.1.1 “Unsubsidized Renewables” in a “Subsidized” Electricity Market

México is a fundamentally different market for solar when compared to the industrialized countries such as Europe using feed‐in‐tariffs and the U.S. using tax credits and renewable portfolio standards as market drivers for solar. In México, low‐cost is the fundamental driver for PV market penetration since “feed‐in‐tariffs” are unconstitutional21. The 2009 SENER/GTZ report on “Market Niches for Grid‐connected Photovoltaic Systems in México”22 considered the PV market for 26 cities with varying tariffs rates under 3 PV cost scenarios from 2009 to 2014.

The “optimistic outlook” was expected to occur over 5 years with the installed costs for residential PV dropping by 50% to MXN 51,500 per kWp and for industrial/services costs dropping to MXN 50,500 to MXN 45,100 for 50 kW to 500 kW PV systems. The GTZ Report makes several key comments regarding the penetration of PV and the effect of subsidized electricity markets:

Subsidies cause significant market distortion to the disadvantage for the application of PV systems.

The subsidies currently granted to households pose a barrier to PV market development in México; above all if we take into account that those regions with the best conditions for the use of photovoltaic systems, i.e. the regions with the highest solar radiation in country, do ‐ for social policy reasons ‐ receive as well the highest subsidies. This makes it even more difficult for PV systems to be competitive against electricity prices since these are kept artificially low. Any cutbacks of these subsidies would directly increase market niches for photovoltaic systems in México.

Nevertheless and even with subsidies in place, it seems very likely that photovoltaic systems will become cost‐saving for middle and upper class households and most companies throughout México in the near future.

As PV approaches grid‐parity, reductions in residential grid demand and usage means a corresponding reduction from higher tariff blocks of electricity to lower tariffs. It is likely that the net effect of this market penetration of PV will increase the total amount of subsidies the Mexican government has to pay since less electricity is used at the unsubsidized tariff rates.

The GTZ Report concluded that, under the “optimistic scenario” for PV costs dropping by 50%, PV can provide cost savings to some 824,500 households over the 20‐year useful life of a PV system compared to grid‐electricity purchases. Importantly, the GTZ Report went on to conclude that the potential market penetration of PV could be 3 times greater if there were no tariff subsidies.

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"Optimistic Outlook" on Residential PV Costs

GW Households Market Size

"No Tariff Change" 1.8 824,533 USD 8.4 Billion

"No Tariff Subsidies" 7.3 5,607,111 USD 34 Billion

2.2 New Renewable Energy Law The “Renewable Energy Development and Financing for Energy Transition Law” (LAERFTE)23 became effective in November 2008 and mandated SENER to produce a National Strategy for Energy Transition and Sustainable Energy Use and a Special Program for Renewable Energy. The main objective of the Law is to regulate the use of renewable energy resources and clean technology and to establish a national strategy and financing instruments to allow México to scale‐up electricity generation based on renewable resources. SENER and Comisión Reguladora de Energía (CRE) are responsible for defining those mechanisms and establishing legal instruments to allow México to increase renewable power generation. With LAERFTE, the Mexican Congress took the first key steps to address the lack of regulatory and pricing certainty for renewable energy project implementation. Perhaps of greatest significance is that the LAERFTE shifts responsibility from CFE to CRE for developing a clear and transparent tariff system for power producers. The following functions are the responsibility of SENER, among others:

Defining a national program for ensuring a sustainable energy development both in the short and the longer term

Creating and coordinating the necessary instruments to enforce the law

Preparing a national renewable energy inventory

Establishing a methodology to determine the extent to which renewable energies may contribute to total electricity generation (such a contribution must be expressed in terms of minimum percentages of installed capacity and minimum percentages of electricity, and should take into account different kinds of renewables and regional available sources)

Defining transmission expansion plans to connect power generation from renewable energy to the national grid

Promoting the development of renewable energy projects to increase access in rural areas The CRE is responsible for developing rules and norms regarding the implementation of the Renewable Energy Law, including provisions for promotion, production, purchase and exchange of electricity from renewable sources. CRE, in coordination with the Secretary of Finance (SCHP) and SENER, will determine the price that suppliers will pay to the renewable energy generators. Payments will be based on technology and geographic location. In addition, CRE will set rules for contracting between energy generators and suppliers, obliging the latter to establish long‐term contracts from renewable sources.24

2.3 “Net Metering”

In July 2007 a resolution was passed by CRE allowing investors the possibility to set up small scale grid‐connected photovoltaic systems (up to 10 kWp for households and up to 30kWp for companies). This

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interconnection is regulated on the principle of Net Energy Metering that allows the owner to offset the cost of the electricity use with the energy fed into the grid. This resolution opens up opportunities for a wider use of photovoltaic systems in México – beyond the currently prevailing application as isolated systems. Net metering is an electricity policy for consumers who own (generally small) renewable energy facilities, such as wind, solar power or home fuel cells. "Net", in this context, is used in the sense of meaning "what remains after deductions" — in this case, the deduction of any energy outflows from metered energy inflows. Under net metering, a system owner receives retail credit for at least a portion of the electricity they generate. Most electricity meters accurately record in both directions, allowing a no‐cost method of effectively banking excess electricity production for future credit. However, the rules vary significantly by country and possibly state/province; if net metering is available, if and how long you can keep your banked credits, and how much the credits are worth (retail/wholesale). Most net metering laws involve monthly roll‐over of kWh credits, a small monthly connection fee, require monthly payment of deficits (i.e. normal electric bill), and annual settlement of any residual credit.25

2.4 Renewable Energy is Key to México’s Climate Change Strategy

México is internationally recognized for its increasing leadership role in global efforts to accelerate and expand new climate change initiatives to reduce greenhouse gas emissions after the Kyoto Protocols expire in 2012. México is one of the first developing countries to commit to a specific reduction of emissions through the use of clean and efficient energies. México initiated a landmark study of the economic impact of climate change on its territory which provided the first compelling evidence that concluded that the costs of mitigation and adaptation to climate change in México could be considerably lower than the no‐action alternative. A recent World Bank study on low‐carbon development concluded México could reduce its carbon emissions by at least 42% (or 477 million tons) per year by 2030 without sacrificing economic development. Approximately 61% of México's CO₂ emissions are a result of energy consumption, especially in the transportation, industrial, and residential/commercial sectors.26 Renewable energy will play a key role in GHG emission reductions in all sectors of the economy. The Mexican government is now implementing a National Climate Change Program (Programa Especial de Cambio Climático, PECC) that establishes short‐ and medium‐term mitigation and adaptation objectives and includes commitments with measurable results for priority sectors. A new Climate Change Policy General Directorate within SEMARNAT (México's Environment and Natural Resources Ministry) has been established to take charge of climate policy and the implementation and monitoring of the PECC. This will help consolidate efforts to link emerging scientific and technical knowledge under the responsibility of the National Institute of Ecology (known as INE), with the formulation of public policies at federal and state level.27

2.4.1 Recent Major Development Investments into México’s Climate Change Strategy

World Bank Provides USD 1.5 Billion Loan in October 2009: The World Bank approved a USD 1.5 billion loan aimed to develop public policies to support the stimulus of the economy while strengthening the framework for long‐term sustainable growth. In order to achieve this, regulatory, monitoring and financial frameworks will be developed for low greenhouse emissions evolution of the urban transport and energy sectors, key to generate a low carbon growth model.28 Inter‐American Development Bank provides USD 400 Million Loan in September 2009: Finally, under the new PBL México will set in motion a series of financial mechanisms to jump‐start investments in renewable energy and energy efficiency. These will include the Fondo de Transición Energética (energy transition fund) that was established under México’s recently adopted renewable energy law (LAERFTE, for its initials in Spanish); expanded participation in carbon markets; and new programs to finance green

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energy through México's national development banks (such as NAFIN).29 The following table is from SENER’s 2009 Report “Renewable Energies for Sustainable Development in México”30 and summarizes the different policies, programs and projects related to renewable energies, which are implemented by the Federal Government.

Policy/Program/Project Institutions Technologies Sectorial Program of Energy SENER All

Action Plan for Removing Barriers to the Full‐scale Implementation of Wind Power in México

SENER, IIE, GEF, PNUD

Wind

Large Scale Renewable Energy Development Project

SENER, GEF, BM,

Wind

Integrated Energy Services for Small Rural Communities in the Southeast of México

SENER, GEF, BM

Solar, hydro, wind, bioenergy

Solar thermal project Agua Prieta II SENER, GEF, BM

Concentrating solar power

Program for Sustainable Energy in México SENER, CONUEE, CRE, CFE, GTZ

All

Program for the Promotion of Solar Water Heaters in México

CONUEE, GTZ, ANES

Solar water heating

Draft Program for the Sustainable Production of Bioenergy Inputs and for the Scientific and Technological Development

SAGARPA Biofuels

Draft Program for the Introduction of Bioenergy SENER Biofuels

Program for the Substitution of Open Stoves by Ecological Stoves

SEDESOL Firewood stoves

Sustainable Rural Development Project for the Promotion of Alternate Energy Sources in Agri‐business, promoting energy efficiency in the Agricultural Sector

FIRCO Solar photovoltaic, solar heating, wind, bio‐digesters

Accelerated Depreciation SHCP All

Sectorial Fund CONACYT‐Ministry of Energy‐Energy Sustainability

CONACYT, SENER

All

3 Governmental Support Programs for Solar Government programs, often in conjunction with international development entities, are most often the sponsors of large‐scale solar development. Often solar is a key component to programs focused upon providing affordable housing and promoting rural development.

3.1 Government Housing Programs

The Mexican government has implemented several major housing programs which has driven the market demand for PV and solar hot water systems. Housing is a key sector in México’s efforts to reduce the greenhouse gas emissions that cause global warming, and that energy efficiency is an essential element in México’s sustainable national housing policy. Housing consumes more than one quarter of the electricity and most of the liquefied petroleum gas (propane) produced in México, and the demand for natural gas in the housing sector is growing.31 Many of these programs have been stimulated by GTZ and also serve as carbon off‐set projects for German investors.

3.1.1 “Hipoteca Verde”/ “Green Mortgage” Programme

INFONAVIT is the National Workers’ Housing Fund Institute headquartered in México City and is a

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national home lending institution that provides housing for low‐income workers through direct loans. INFONAVIT is the largest originator of residential mortgages in México and initiated a new lending program called “Green Mortgage” several years ago. The “Green Mortgage” program is aimed at improving the environment, promoting the incorporation of sustainability criteria in the homes that INFONAVIT finances, supporting the National Strategy for Climate Change, and ensuring energy and water savings that will make homes more affordable.32 Since its foundation, Infonavit has granted 5.3 million mortgage loans and 22.4% of México’s population live in a house financed by Infonavit. As part of its Vivir Mejor Strategy (Live Better), through the National Housing Commission, the Mexican Federal Government helps workers who earn less than USD 320 per month with a subsidy up to USD 4,000 for acquiring a home. “Hipoteca Verde” provides additional credits of up to MXN 16,000 with attractive interest rates which allow the borrower to invest in ecological technologies such as solar water heaters or energy‐savings. The investment costs of the solar water heater are not “subsidies” and can be refinanced by savings on monthly energy bills over a longer period with typically pay‐back in 4 years. Infonavit has granted more than 60,000 “green mortgage loans” during 2009, of which, almost 50 thousand have been acquired by low income workers with the subsidy from the Federal Government. The cost of the houses goes from USD 15,000 to 28,000 and it includes an average of USD 600 in green technology.

3.1.2 GTZ 25,000 Solar Roofs Programme

The German Agency for Technical Cooperation (GTZ) is funding a new EUR 2.5 million program which will assist in the installation of 25,000 new residential solar hot water systems in México beginning in 2010. GTZ will offer a subsidy of around EUR 100 per 2 m² and 150 liter tank system.

3.1.3 Procalsol

Procalsol is a national program to promote the use of solar collectors and is an initiative of the National Commission for Energy Efficiency (CONUEE) in collaboration with the National Solar Energy Association (ANES) and GTZ. The goal of the program is to accelerate the solar thermal market and to promote the installation of 1.8 million m² of newly installed collectors from 2007 to 2012.

3.1.4 México City

In 2006 a new environmental requirement went into effect in México City which requires new facilities which require hot water for their activities, including swimming pools and companies with more than 51 employees, are to cover 30% of the hot water demand through solar energy. This rule applies to all hot water that is used domestically, in kitchens, as well as for washing and cleaning. Private households and entrepreneurs with no more than 51 employees are not subject to this solar obligation.

3.2 Rural Electrification – Southeast México

The Ministry of Energy, through the Integrated Energy Services Project, will be providing solar electricity to 50,000 households and approximately 250,000 inhabitants. Beneficiaries of this program are mostly indigenous populations among the municipalities with lowest human development index in the States of Chiapas, Guerrero, Oaxaca and Veracruz. The resources for its development will consist of USD 100 million, including a World Bank loan of USD 15 million, a Global Environment Facility (GEFWorld Bank) grant of USD 15 million, and includes a contribution of USD 60 million by the participating States and beneficiary municipalities.

3.3 Planned Large‐Scale Solar Thermal Projects

Currently there are no grid‐scale solar thermal electricity generation plants in México but 3 small Solar Combined Cycle System (ISCCS) plants have been proposed for northern México. Of these, 2 projects with a combined solar thermal capacity of 61 MW may be operational in 2011. SCCS technology uses conventional parabolic trough systems to generate solar steam to assist in driving a conventional gas‐fired combined cycle generating plant.

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3.3.1 Sonora ‐ Agua Prieta 31 MW Solar Project ‐ 10‐years in Development

In 2006, the World Bank announced the funding of a $50 million grant for a Hybrid Solar Thermal Power Plant Project at Agua Prieta, Sonora. The project was initially approved in 1999 with the construction contract expected to be awarded in 201033. The project will demonstrate the benefits of integrating a 31 MW parabolic trough solar field with a 535 MW conventional thermal facility using combined cycle gas turbines which will contribute to reducing the long‐term costs of the technology to reductions in greenhouse gas emissions.34 The project grant is funded through the Global Environmental Facility Trust Fund of the World Bank.

3.3.2 Baja California ‐ Rosarito 25 MW Project ‐

A new ISCCS plant with a 25 MW solar component is planned at the Rosarito III generating plant scheduled to enter service in April of 2011.35

3.3.3 Baja California ‐ Méxicali 30 MW Solar Project ‐ Cancelled Due to Lack of Solar Expertise

CFE studied the excellent solar thermal resources in the Méxicali area and assessed the technical and economic feasibility of an ISCCS component to a new gas power plant. The solar component was incorporated into the tender requirements issued by CFE on March 14, 2002 for the Méxicali II plant to be located near San Luis Colorado at the eastern side of the Méxicali Valley. The total output of the ISCCS plant was to generate between 198 MW and 242 MW at summer design conditions. The unique and specialized expertise to design the solar component of the plant caused complaints from the prospective bidders until CFE agreed to separate the bidding for the traditional and solar components. The tender for Méxicali II was subsequently postponed to be re‐issued minus the solar component.36

4 Market Trends

4.1 Global Oversupply of Modules Driving Down PV Costs

Photovoltaics module prices are dropping faster than all predictions which is driving unprecedented PV growth in México during 2009. PV prices are now approaching the GTZ Report’s “optimistic pricing” scenario for 2009‐2014 already in 2009. In the past 2 years México has seen dramatic reductions in the installed costs for PV ranging from 30% to 60% with the variation depending under system integrator and whether the module uses silicon or thin‐film cells. México is benefiting from an enormous global oversupply of modules as additional PV production capacity has been added in the past 1‐2 years as demand in certain key markets has declined or slowed. An October 2008 market report37 predicted the overcapacity in PV module production in 2009 as the demand for solar was reduced due to Spain capping its feed‐in‐tariffs for PV, uncertainty in the U.S. markets, and slower adoption rates for PV in France and Italy. The predicted module oversupply in the fourth quarter of 2008 was approximately 400 MW which was expected to increase significantly to 3.9 GW in 2009.

4.2 Very Favourable Payback Periods and Near‐Term Grid‐Parity

Generally payback periods for solar hot water systems are 1.5 to 3 years and for photovoltaics 5‐9 years depending upon regional solar resources, energy consumption, equipment selection and installer pricing. Payback periods were reported by system installers during TechBA interviews during November 2009.

Payback Period in Years for Solar Installations México 2009

Residential

Commercial/ Industrial

Solar Hot Water Systems 1.5‐3 2‐3

Photovoltaics 7‐9 5‐7

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As PV prices decline and “subsidized” electricity prices increase annually, it is likely that México will see grid‐parity for PV sooner than in the U.S., Spain or Germany. Another key factor leading to early grid‐parity in México is that labor costs for PV and solar hot water installation are already market‐based and are unsubsidized through financial incentives which keep prices artificially high in the industrialized countries.

4.3 Annual Energy Costs Continue to Rise

National power consumption is expected to grow at an annual rate of 6.3% during the period 2005‐2015 (7.6 % in a high demand scenario and 5.4% in a conservative scenario)38. Annual electricity price increases of 8% is expected for the residential sector and increases of 7% are expected for the industrial and services sectors.39

4.4 More Solar Hot Water Capacity but Stronger Growth of PV in 2009

In 2008 there was 5 times more installed capacity for solar hot water systems than there was for PV but, between 2007 and 2008, the annual growth rate for PV was more than twice than the rate for new solar hot water capacity additions. For 2009, all indications are that the annual growth rate PV will increase and in the near future surpass solar hot water capacity. During 2006, the total installed capacity for PV was less than 1 MWp and during 2009 several companies have each reported installations approaching 1 MWp.40 SENER expects annual electricity usage by residential and by medium‐sized businesses to increase 3.7% annually to 2017 compared to the average for all sectors at 3.4%.41 These markets are key segments for photovoltaics and solar hot water and expectations are that these segments will see strong growth in solar penetration due to increasing energy consumption to 2017 and due to increases in grid tariff prices.

4.5 Solar Thermal Electric is Viewed as “High Cost” by CFE

Solar thermal electric costs for all CSP technologies are already seeing grid‐parity pricing in the U.S. for peak and for “dispatchable” solar from thermal plants using 3‐6 hour energy storage. Such projects in México are expected to more cost‐effective given domestic engineering, construction and operations cost structures. However, all indications are that solar is expected to play a large role in Distributed Generation and in industrial “self‐generation” but not in utility‐scale generation according to CFE’s future capacity plans. Currently, utility‐scale solar thermal electric is not projected to be a major player in México’s long‐term energy mix. A recent report42 by the Inter‐American Development Bank described the potential of renewable energy in México with no reference to solar as part of the mix and that, even with carbon off‐set funding solar is not considered “cost competitive”:

Despite having world‐class renewable energy resources and the prospect of wind power and other sources achieving economic competitiveness in the short to medium term, the renewable energy sector of México remains relatively untapped . . . Assuming a cost of CO2e of as little as USD 10/ton is factored in, low‐carbon energy technologies – hydro, wind, biomass, geothermal, and efficient cogeneration – could become cost competitive options replacing much of the projected investments in conventional fossil fuel based thermal power generation in the least‐cost scenario.

CFE expects wind and geothermal to be the dominant renewable resources in future capacity additions to 2018. The following figure shows CFE’s planned capacity mix for 201843 with no solar:

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Source: CFE

5 Key Organizations, Research Institutions and R&D Focus

5.1 Instituto de Investigaciones Eléctricas (IIE) The Instituto de Investigaciones Eléctricas (IIE) is a decentralized governmental research institution, with an operational focus on technological innovation and development. IIE was created by presidential decree in 1975. Its mission is to promote and support technological innovation within México’s electric industry, its suppliers and users, through applied research, technological development, and specialized technical services. It is organized in four technical divisions: Alternative Energy Sources, Electrical Systems, Electronic Control Systems, and Mechanical Systems. Planning, Finance and Administration functions are embedded in two additional divisions. The IIE has a staff of over 650 research specialists and over 20 experimental facilities located in different regions of the country.44 IIE represents México in the Photovoltaics Power Systems Programme of the International Energy Agency. In 2008, IIE finished the construction of a 1‐kW prototype inverter for grid‐connected PV systems.45 The actions of the PV Grid Connected Project GEF/PNUD‐IIE were focused on technology promotion, regulatory issues, and industry training. Two diploma courses on PV grid‐connected systems were offered during 2008 with an enrollment of more than 50 people. Course participants included project developers, members of PV industry associations, investors, industry professionals, and energy commission representatives of several Mexican states.

5.2 Centro de Investigación en Energía, Universidad Nacional Autónama de México (CIE‐UNAM), Cuernavaca‐Temixco

CIE is the principal research university in México for renewable energy with a major focus in solar R&D including the development of PV materials, optics, optical electronics, system evaluation, thin films solar control coatings, energy systems such as concentrating solar, solar water heating with low‐temperature system designs for domestic and industrial applications, solar drying systems for agriculture products, water treatment with high temperature solar heating systems, and solar thermal applications. For several years a team of researchers at the Centro de Investigación en Energía have participated in an international collaborative project “Task 38 Solar Air‐Conditioning and Refrigeration” in the framework of the Solar Heating & Cooling Programme of the International Energy Agency (IEA). The initiative

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implements measures to accelerate market introduction of solar air‐conditioning and refrigeration with a major focus on improved components and system concepts. The work in this Task wants to contribute to the process of rising acceptance of the technology and to overcome the main barriers on technical and information transfer levels.46 A short list of representative papers follows:

R. Best, “Recent Developments in Thermal Driven Cooling and Refrigeration Systems”

W. Rivera , “A Solar Absorption Refrigeration System operating with the Mixture Ammonia‐Lithium Nitrate”

A. Ordaz‐Flores, O. García‐Valladares and V. H. Gómez ,“Evaluation of the Thermal Performance of a Solar Water Heating Thermosyphon Versus a Two‐Phase Closed Thermosyphon Using Different Working Fluids”

5.3 Universidad de Sonora Developing Utility‐Scale Solar with U.S. Company

TxTec AC is the institute for technology transfer at the University of Sonora, which has a long history of cooperation with industry in areas of aquaculture, agriculture, metallurgy, geology, energy and the environment. TxTec promotes university‐industry collaboration for mutual support of technology development and technology transfer to improve the socio‐economic conditions and productivity of society. TxTec has experienced faculty and researchers as well as equipped laboratories in multiple specialties such as the National Laboratory of Solar Concentration Systems in collaboration with Universidad de Sonora and Universidad Nacional Autónoma de México (UNAM), and provides confidential industrial research facilities as well as economic and business consulting to nurture successful new technology developments in the region. In 2008, TxTec and Utility Scale Solar, Inc., (USS Inc.) of Palo Alto, California announced a collaboration agreement for development of advanced CSP power plant designs featuring TxTec’s contributions to tower receiver designs and USS, Inc’s breakthrough heliostat (sun tracker) technology. Under the agreement TxTec and USS, Inc. will jointly develop CSP plant designs suited for México’s Sonoran Plateau, one of the best solar regions in the world and ideally suited for the CSP plant configuration known as “power tower”. TxTec will deploy and test USS, Inc’s next generation heliostat technology at TxTec’s CSP lab plant, in conjunction with advanced tower receiver designs developed and tested by TxTec. The two parties are also working together on a 50 megawatt power tower plant that will supply enough power to the Mexican power grid for over 53,000 households.47

5.4 GTZ GTZ (Gesellschaft für Technische Zusammenarbeit) is a private sustainable development company formed and owned by the German Federal Government. For more than 30‐years, GTZ has been a cooperative strategic and development partner with México. The current focus of GTZ’s cooperative program with México is sustainable energy and expanding the use of renewable energy resources. In April 2009, development cooperation with México in the energy sector entered a new phase with the addition of KfW for financial cooperation. GTZ renewable programs will be supplemented with climate protection initiatives. GTZ has instrumental in launching major projects to promote renewable energy and energy efficiency and has prepared several major renewable energy assessments for SENER which includes:

“Renewable Energy for Sustainable Development in México”, 2009

“Nichos de Mercado Para Sistemas Fotovoltaicos en Conexíon a la Red Eléctrica en México”, 2009

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5.5 La Asociación Nacional de Energía Solar

La Asociación Nacional de Energía Solar (ANES) is the Mexican chapter of the International Solar Energy Society (ISES) and is the leading solar association in México. ANES was in 1980 is 29 years old and conducts an annual congress for solar researchers and industry stakeholders to meet and exchange technical information on all aspects of renewable energy. The association has been a catalyst for solar research in México and has been instrumental in establish industry standards for solar hot water collectors. Another key function of ANES is providing a national training program to increase the use of renewable energy which includes professional development and working with governmental programs which incorporate solar energy.

6 Foreign Direct Investments in México’s Solar Industry Solar is a promising and emerging sector for FDI investment in México which has been limited over the past few years due to the global financial crisis and the over‐supply of PV cells. More than 70% of FDI into México comes from the U.S. and the European Union.48

6.1 PV FDI in 2008‐2009

There were several PV‐related FDI investments announced during 2008 leading to 2 plant openings in 2009 by Kyocera and Sanyo and to Q‐Cells’ announced USD 3.5 Billion investment in Méxicali likely cancelled as the company struggles to survive with EUR 1 Billion in losses so far during 2009. There were at least 2 smaller FDI investments in manufacturing in European solar hot water systems and an additional FDI in a key supplier of copper tubes.

6.1.1 50 MW Sanyo PV Plant in Nuevo León

In November 2009, SANYO Electric Co. Ltd. of Japan opened a new PV production plant in Nuevo León operated by its subsidiary, México SANYO Energy S.A. de C.V. The plant will assemble SANYO's HIT (Heterjunction with Intrinsic Thin‐layer) solar modules with an annual production capacity of 50 MW which will be sold in North America.

6.1.2 Kyocera Solar’s New 150 MW PV Plant in Tijuana49

In March 2009, President Calderón helped inaugurate Kyocera Solar's second PV module manufacturing plant in Tijuana. The two‐story production facility will have a maximum annual output of 750,000 crystalline‐silicon modules which is equivalent to a nameplate capacity of 150 MW. President Calderón also announced his intention to implement a large‐scale program of renewable energy in México, which will include Mexican‐made solar modules such as those produced at Kyocera.

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6.1.3 Q‐Cells in Méxicali?50

In May 2008, the world’s largest PV manufacturer, Q‐Cells from Germany, announced its intentions to develop a major thin film photovoltaics manufacturing facility at the Silicon Border Industrial Park near Méxicali, México at a projected cost of USD 3.5 billion. The development is dependent on the future growth of the PV market in the US, México and Latin America and is part of a mid‐ to long‐term plan according to Q‐Cells. The German PV manufacturer referred to the planned plant as part of its “internationalisation strategy.” Plans for the Q‐Cell consisted of multiple buildings built in phases, with the construction of the first phase to have begun in the fourth quarter of 2008. In early November 2009, Q‐Cells announced that it just completed third straight quarter of losses and that it was closing manufacturing facilities in Germany and Malaysia. The company has lost nearly EUR 1 Billion in 2009 compared to a net profit of EUR 152.7 Million at the end of third quarter of 2008. In November 2009 Q‐Cells reported that the price of solar cells has fallen 20% during the previous three months and that prices are down 40% for the year.51 Q‐Cells will likely cease to be the world's largest cell maker in 2009 and many expect to company to collapse or be acquired.

6.1.4 Finish Investment – Cooper Tubing for Flat Plate Solar Water Heaters

Luvata has also expanded its manufacturing capacity by opening a USD 40 million dollar copper‐tube manufacturing plant in Guadalupe, Nuevo Leon, near Monterrey. This new facility began tube production in September 2008 and increases Luvata’s copper‐tube capacity in North America by approximately 50,000 tonnes annually for solar water heaters.52

6.1.5 Kioto in Guadalajara

In May 2009, Austrian Kioto Clear Energy AG established Kioto S.A. as a 100% subsidiary and began production of its proprietary flat plate collectors which consists of laser‐welded full plate absorbers with a high selective coating and tempered low‐iron glass. The factory has an annual capacity of 100,000 m² with 30 employs 30 people. The company developed water tanks and mounting systems with local suppliers in Guadalajara and Kioto S.A. expects the EUR 4 Million plant to supply distributors through the Americas.

6.1.6 Hydro’s Extrusion Americas Plants Supplying U.S. and Spanish Solar Projects

A smaller, but promising example of FDI in México is Extrusion Americas which is a unit of Norsk Hydro, a global supplier of aluminum and aluminum products, and is another example of FDI investments in facilities in Phoenix and Guaymas which are providing aluminum frames for large‐scale solar plants in the U.S. and in Spain. Based in Norway, the company employs 23,000 people in 40 countries and has activities on all continents. Hydro is the world's third‐largest aluminum supplier, the largest single manufacturer of primary metal and extruded aluminum products in Europe, and a leader in delivering innovative light metal solutions to the automotive and building industries worldwide.53 Hydro Aluminum is supplying the extruded materials for use in the trough frames for 2 Spanish solar power plants which will together utilize 17,800 aluminum frames. Hydro will ship nearly 15 million pounds of aluminum for the two projects during a 10‐month window. Both facilities are being built by Acciona, a Spanish energy company. The frames are desired for their rigidity, light weight, durability and tight tolerance to specifications. Hydro’s extruded aluminum frames will be produced in the company’s Phoenix plant and fabricated at its facility in Guaymas, México. Extrusion Americas also provided the frames for the Nevada Solar One Project in 2004 which was is a 65 MW trough project in Las Vegas which is also owned by Acciona.

* * * 1 http://www.cec.org/files/pdf/ECONOMY/Pres‐Elvira‐RenEnergyMeeting_es.pdf 2 Inter‐American Development Bank (2009) “IDB Public‐Private Sect or CTF Proposal ‐ México Public – Private Sector Renewable Energy Program” 3 GTZ (2009) “Nichos de Mercado Para Sistemas Fotovoltaicos en Conexíon a la Red Eléctrica en México”, June 2009

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4 IEA Photovoltaic Power Systems Programme (2009) “Annual Report 2008, International Energy Agency”; See http://www.iea‐pvps.org/products/download/rep_ar08.pdf 5 Sources: GTZ (2009) “Nichos de Mercado Para Sistemas Fotovoltaicos en Conexíon a la Red Eléctrica en México”, June 2009; International Energy Agency‐Photovoltaic Power Systems Programme (2006) “Compared assessment of selected environmental indicators of photovoltaic electricity in OECD cities”, April 2006 6 SENER and GTZ (2009) “Renewable Energy for Sustainable Development in México” 7 SENER and GTZ (2009) ”Renewable Energy for Sustainable Development in México” 8 SENER and GTZ (2009) ”Renewable Energy for Sustainable Development in México” 9 Inter‐American Development Bank (2009) “IDB Public‐Private Sect or CTF Proposal ‐ México Public – Private Sector Renewable Energy Program” 10 México Secretaría de Energía (2008) “Dirección General de Planeación Energética, Prospectiva del sector

eléctrico 2008‐2017”, March 2008 11 Sources: Western Governors Associations (2009) “Western Renewable Energy Zones Initiative Renewable Energy Generating Capacity Summary”, June 15, 2009; Inter‐American Development Bank (2009) “IDB Public‐Private Sect or CTF Proposal ‐ México Public – Private Sector Renewable Energy Program”; GTZ (2009) ”Nichos de Mercado para sistemas fotovoltaicos en conexión a la red eléctrica en México”, June 2009; and SENER and GTZ (2009) “Renewable Energy for Sustainable Development in México” 12 Ravindranath, Prof. N.H.. Center for Sustainable Technologies, Indian Institute of Science (2009) “Renewable Energy for Industrial Applications”, presentation at Global Renewable Energy Forum – Scaling Up Renewable Energy”, León, México, October 7‐9. 2009; See http://www.grefMéxico2009.org 13 Solar thermal resources were inventoried as part of the Western Renewable Energy Zones Project; see http://www.westgov.org/wga/initiatives/wrez/WREZ%20Map%20and%20Tables%20Only.pdf 14 “Western Renewable Energy Zones Initiative Renewable Energy Generating Capacity Summary”, Western Governors Associations, June 15, 2009; see http://www.westgov.org/wga/initiatives/wrez/ 15 SENER and GTZ (2009) “Nichos de Mercado Para Sistemas Fotovoltaicos en Conexíon a la Red Eléctrica en México”, June 2009 16 SENER and GTZ (2009) “Renewable Energy for Sustainable Development in México” 17 SENER and GTZ (2009) “Renewable Energy for Sustainable Development in México” 18 World Energy Council “Energy Efficiency Policies and Indicators – ANNEX 1” 19 Inter‐American Development Bank (2009) “IDB Public‐Private Sect or CTF Proposal ‐ México Public – Private Sector Renewable Energy Program” 20 World Bank (2009) “Residential Electricity Subsidies in Mexico Exploring Options for Reform and for Enhancing the Impact on the Poor“, World Bank Working Paper No. 160 21 From personal conversation with Peter Eschenbach, Director de Finanza y Desarrollo de Negocios, ERDM Solar, 14 November 2009. 22 SENER and GTZ (2009) “Nichos de Mercado Para Sistemas Fotovoltaicos en Conexíon a la Red Eléctrica en

México”, June 2009 23 http://www.diputados.gob.mx/LeyesBiblio/pdf/LAERFTE.pdf 24 World Bank (2009) “Low‐Carbon Development for Mexico”, October 15, 2009; See http://siteresources.worldbank.org/INTLAC/Resources/Medec_final_Oct15_2009_Eng.pdf 25 http://en.wikipedia.org/wiki/Net_metering 26 World Bank Group (2009) “World Bank: Green Growth is Possible in México, Report Concludes”, Press Release, October 26, 2009 27Inter‐American Development Bank (2009) “México partners with IADB to fight climate change, gets $400M PBL”, Press Release, September 17, 2009 28 World Bank Group (2009) “ World Bank/México: US$1.5 Billion to Stimulate Green Growth”, Press Release, October 20, 2009 29 Inter‐American Development Bank (2009) “México partners with IADB to fight climate change, gets $400M PBL”, Press Release, September 17, 2009 30 SENER and GTZ (2009) “Renewable Energy for Sustainable Development in México”; See page 54 31 http://ase.org/content/news/detail/6031 32 See http://www.infonavit.gob.mx 33 “México ‐ Second Agua Prieta Solar Thermal Project : procurement plan/México ‐ Plan de contrataciones especifico : procurement plan”, The World Bank, August 11, 2009; see http://go.worldbank.org/L0L83OXFL0 34 “Eco‐Innovation Policies in México”, OECD Environment Directorate, 2008.

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35 “Energy Supply and Demand Assessment for the Border Region”, California Energy Commission, May 2005 36 http://www.renewablesg.org/docs/Baja/RS_Baja_051805.doc 37 Lux Research (2008) “Solar State of the Market Q3 2008: The Rocky Road to $100 Billion” 38 Global Environmental Facility (2007) “México: Grid‐connected Photovoltaic Project – Medium‐Sized Project Proposal”, April 7, 2007 39 SENER and GTZ (2009) ”Nichos de Mercado para sistemas fotovoltaicos en conexión a la red eléctrica en México”, June 2009 40 Based upon TechBA interviews of solar companies during November 8‐20, 2009 41 SENER (2009) “Prospectiva del sector electric 2008‐2017”

42 Inter‐American Development Bank (2009) “IDB Public‐Private Sect or CTF Proposal ‐ México Public – Private

Sector Renewable Energy Program” 43 SENER; See http://gspp.berkeley.edu/programs/docs_EnergyForum/CEPP%20Berkeley%20August%2024‐25_Acosta.pdf 44 Global Environmental Facility (2007) “México: Grid‐connected Photovoltaic Project – Medium‐Sized Project Proposal”, April 7, 2007 45 International Energy Agency, “Photovoltaics Power Systems Programme, Annual Report 2008” 46 IEA – SHC Task 38 Solar Air‐Conditioning and Refrigeration (2009) “Industry Newsletter, First Edition, 01‐2009” 47 Utility‐Scale Solar Inc. (2008) “TXTEC and Utility Scale Solar, Inc. to Collaborate on Next Generation 50 Megawatt Concentrating Solar Power (CSP) Electric Plant for Sonora, México”, Press Release, August 14, 2008 48 http://www.proMéxico.gob.mx/wb/ProMéxico/reasons_to_invest_in_México 49 http://www.pv‐tech.org/news/_a/kyocera_solar_opens_new_pv_module_plant_in_tijuana_México/

50 http://www.pv‐tech.org/news/_a/q_cells_plans_35_billion_thin_film_manufacturing_complex_in_Méxicali_México/ 51 Recharge News “Q‐Cells takes axe to production as losses deepen”, November 12, 2009; See http://www.rechargenews.com/energy/solar/article198527.ece 52 "Solar Heating Industry Review 2009", Renewable Energy World, September 21, 2009; See http://www.renewableenergyworld.com/rea/news/article/2009/09/solar‐heating‐industry‐review‐2009 53 http://www.maquilaportal.com/news/index.php/blog/show/Hydro‐Aluminum’s‐Guaymas‐Plant‐Fabricates‐Extruded‐Aluminum‐Solar‐Arrays‐for‐Two‐New‐Therm.html

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Section 5 Financing Enablers

1 Introduction The purpose of this section is provide an overview of the “financing enablers” and key financing tools being used to drive the explosive growth of all segments of the solar industry in the U.S. and particularly in California and Arizona.

The financing strategies, programs and practices of these enablers can be of great support directly and indirectly to existing, new and emerging Mexican solar companies along the solar value chain who maybe new entrants to the supply chain and manufacturing sectors of the California and Arizona solar market.

The financing enablers range from national to local governments, from global solar companies and international development funds to cross‐border business‐to‐business relationships. The financing tools range from traditional programs and tools for economic development and export trade now focused on the solar industry to wide array of specialized incentives and support mechanisms to drive solar manufacturing and solar energy generation.

The tools of financing enablers can range from tax credits to tax equity funds, from donor carbon credit funds to performance‐based electricity payments, and from demand‐driven mandatory green energy delivery requirements to targeted Foreign Direct Investments.

2 Approaches to Financing the Solar Sector The general types of support programs, solar incentives and financial tools used by “enablers” to leverage investment in the various value chains of the solar industry which include:

Economic Development – traditionally consists of targeting individual companies with conventional grants, loans, and tax incentives to solar companies locating and/or expanding in certain regions or locations; some efforts are marketed at promoting new “solar cluster development” along with “green jobs”.

Export Trade Development – existing initiatives which use direct loans and credit enhancements to assist foreign customers buying solar products, goods and components produced domestically; some countries are targeting the renewable energy sector for export trade initiatives.

Targeted Financing for Solar Manufacturers – consists of national and state tax credits targeted to assist the financing of solar manufacturers along with utilities receiving “Renewable Energy Credits” for payments to solar manufacturers for sales leading to in‐state solar generation.

Renewable Energy Generation Incentives and Portfolio Requirements – the “market drivers” for the explosive growth of solar in the US is due to a mix of voluntary incentives and mandatory requirements for generating solar energy in California and Arizona which makes large and small solar projects “bankable” which leverages equity and debt investments in solar manufacturing and in the solar supply chain.

Private Investment/Tax Equity Financing – comprised largely of institutional and tax equity investors, private syndicated investments and private bond placements offering equity, debt

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and leveraged investments with tax‐offsets and pass‐through net operating losses.

Carbon Funds, Kyoto Protocols and Post‐2012 Funds – consists of international players buying “certified emission reduction” credits from renewable energy projects which assists in financing projects and assists countries meet their carbon reduction commitments under the Kyoto.

International “Donor Trust Funds” – established to buy the environmental attributes of solar energy projects in long‐term contracts which are used to secure conventional financing.

Foreign Direct Investment and Strategic Alliances/Partnerships – usually consists of equity and debt financing to build manufacturing capacity in low‐cost countries with local strategic partners in order to guarantee a supply of solar products for fast growing markets.

3 Traditional Governmental Support Programs Traditional economic development and export trade development programs are very active in all sectors of the solar industry and enable the leveraging of financing, incentives and development tools to support large companies as well and small‐ and medium‐sized enterprises.

3.1 Economic Development/Industrial Recruitment

The Solar Energy Industries Associations reports that approximately 90% of global solar cell manufacturing occurs outside the United States and that the U.S. is fifth in global solar manufacturing capacity with less than one‐third of the capacity of Japan, China or Germany.1 California and Arizona are very aggressive in recruiting global solar manufacturing and services to their respective states. Nearly all of the economic development/industrial recruitment groups in the major metro areas of California and Arizona are targeting solar companies. Traditional economic development tools that States and local entities offer are grants for R&D, infrastructure improvements and workforce training along with tax incentives such as personal income tax, corporate income tax, cash sales tax, property tax, etc. Examples of such successful efforts include:

New Automated Solar Thermal Component Plant in Nevada – In June 2008, Ausra opened a reflector production line at its first North American facilities in Las Vegas. The 130,000‐square‐foot, highly automated manufacturing and distribution center will supply the reflectors, absorber tubes, and other key components of the company's solar thermal power plants to the rapidly growing utility‐scale solar power industry in the Southwest states. Ausra has headquarters in Palo Alto and uses a Compact Linear Fresnel Reflector (CLFR) technology that was developed in Australia.2

Competition within China for Industrial Recruitment of International Solar Companies – It is being reported that Chinese governments at the national, provincial and even local level have been competing with one another to offer international solar companies ever more generous subsidies, including free land, and cash for research and development. State‐owned banks are flooding the industry with loans at considerably lower interest rates than available in Europe or the United States.3

$2.6 Million Spanish Grant to Assist Solar Manufacturer – In September 2009, the Ministry of Innovation, Science and Enterprise of the Andalusian Region of Spain awarded a $2.6 Million grant to Solel Solar Systems, Ltd. to be used for the construction and development of a solar thermal manufacturing facility to build solar fields components. The facility will be Solel's first manufacturing plant in Spain, and will include lines for the production of parabolic reflectors, metal supports for solar collectors, and other essential components used for conversion of sunlight to clean electricity. Investment by Solel in the first Spanish facility is $12 million, and

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total investment by Solel in manufacturing plants in Spain is expected to reach $140 million. Solel commenced operations in Spain in 2006 and is supplying 15 solar thermal power plants with a combined capacity of 750 MW which are being built in partnerships with Spain's leading infrastructure companies. In addition to being a technology provider, Solel has joined with Sacyr Vallehermoso, a leading Spanish construction company, in a joint venture to build three power plants with a total capacity of 150 MW.4

$58 Million German/EU Grant to U.S. Solar Manufacturer – In 2005 First Solar, the U.S. manufacturer of thin‐film solar, closed a project deal for a new manufacturing plant in which Germany and the European Union provided $58 million of the $150 million costs for constructing the plant. First Solar also received wage subsidies for local workers hired who was previously unemployed. By the end of 2007, the First Solar plant in Frankfurt/Oder was running at full capacity and now employs more than 600 people along with another 100 staff at its European sales and marketing offices in Mainz, Germany. The First Solar plant went on to leverage other manufacturers in the solar‐power industry to the region including Aleo Solar, Conergy, Odersun, PVflex, 5N PV and Yamaichi Electronics. There are some 3,700 workers in the solar industry in the region with more than $650 million having been invested which has lead Foreign Direct Investment Magazine to rank the region as one of the top 25 European locations for foreign investment in 2008.5

3.2 Export‐Import Bank of the United States6

The Export‐Import Bank of the United States (Ex‐Im Bank) is the official export credit agency of the United States with a mission to assist in financing the export of U.S. goods and services to international markets. Ex‐Im Bank provides working capital guarantees (pre‐export financing), export credit insurance along with loan guarantees and direct loans (buyer financing). The Ex‐Im Bank has established an “Environmental Export Financing” program to help mitigate risk for U.S. companies and offers competitive financing terms to international buyers for the purchase of U.S.‐made environmental goods and services. This program specifically targets U.S. exports of renewable energy equipment and provides financing products such as short‐term working capital, export credit insurance, medium‐term insurance, medium‐ to long‐term loan guarantees, project and structured finance, and long‐term direct loans. The Ex‐Im Bank supported the U.S. solar sector in 2008‐2009 with the following export financing:

Evergreen Solar (ESLR) received low interest financing (4.9% fixed over 18 yrs) from the Export‐Import Bank of the U.S. for overseas projects using ESLR panels. ESLR currently has 90MW of projects in varying stages of the loan app process with the bank which will cover 85% of the product cost and up to 30% of installation costs.

Spire Solar Inc. is a global solar company providing turnkey solutions for module and cell factories as well as individual equipment to feed the rapid expansion in the solar market worldwide. In 2009 Ex‐Im Bank approved a $5 million revolving working capital loan guaranty for Spire Solar as a credit enhancement to a direct loan from Silicon Valley Bank in Santa Clara, California.

SolarWorld USA, a manufacturer in Camarillo, California, exported photovoltaic solar modules for the construction of five solar‐energy projects at the Gochang Solar Park in Korea. Ex‐Im Bank is supporting the financing of this transaction with long‐term loan‐guarantees totalling $61 million.

United Solar Ovonic LLC in Auburn Hills, Michigan, used a $25 million revolving credit line guaranteed under Ex‐Im Bank's 'Fast Track' Working Capital Guarantee Program to finance the export of its thin‐film solar laminates to customers in Europe and Asia. The guaranteed lender is JP Morgan Chase Bank in Cleveland, Ohio.

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Applied Materials Inc. of Santa Clara, California used an Ex‐Im Bank €11 million loan guarantee to support the financing of $14 million in exports of solar‐cell manufacturing tools and equipment to Signet Solar LLC of Dresden, Germany.

4 Solar Manufacturing Financial Support Programs All segments of the U.S. solar manufacturing sector are benefiting from the major financing tools and incentives resulting from governmental actions at the Federal and state level which have been taken to stimulate the economic and to develop a the supply‐side of a new manufacturing base in solar. These governmental actions include adoption of the American Reinvestment and Recovery Act of 2009 (ARRA) and various manufacturing incentives at the state level.

4.1 ARRA 30% Advanced Energy Manufacturing Tax Credit

The ARRA authorized the award of $2.3 billion in tax credits for qualified investments in advanced energy projects which includes the support of new, expanded, or re‐equipped domestic manufacturing facilities. The new Advanced Energy Manufacturing Tax Credit (MTC)7 offers a 30% Federal tax credit to stimulate the growth of the domestic manufacturing industry in clean energy which will thereby support the larger goals of ARRA to stimulate economic growth, create jobs, and reduce greenhouse gas emissions. The $2.3 billion in MTCs can support total capital investments of almost $7.7 billion in new renewable and advanced energy manufacturing projects.

4.2 ARRA 80% Loan Guarantees

New ARRA loan guarantees are directed to open access to the traditional credit markets for debt financing during the recovery of the global recession. The U.S. Department of Energy is offering loan guarantees up to 80% of a renewable manufacturer’s cost for new facilities and equipment. The ARRA appropriated approximately $3.9 billion in funding for a new program for rapid deployment of renewable energy systems, electric power transmission and leading edge biofuels projects. The financing of solar manufacturing facilities and large‐scale solar projects are eligible activities under the loan guarantee program and at least 2 large projects representing $725 million in funding have been announced or are in final negotiations:

The 1st approval was announced in September 2009 with a $535 million Loan Guarantee awarded to Solyndra to provide debt financing for approximately 73% of the project costs which will allow the company to initiate construction of a solar panel fabrication facility in California. Once completed, the plant is expected to have an annual manufacturing capacity of 500 MW.

SoloPower is expecting a $190 million Loan Guarantee after being selected in July 2009 by the U.S. Department of Energy for due diligence and negotiation of funding to expand the production capacity of a manufacturing plant in California for SoloPower’s flat‐plate PV modules built from flexible CIGS (copper‐indium‐gallium‐selenide) cells.

4.3 ARRA “Buy America” Provisions

The American Recovery and Reinvestment Act includes a “Buy America” requirement that iron, steel, and other manufactured goods used in infrastructure projects are procured from domestic producers. On March 31, 2009, the U.S. government issued an “Interim Rule” to implement the “Buy America” requirements which provides that there is no restriction on the country of origin of components or subcomponents, nor is there any domestic content requirements imposed on such components or sub‐components. For manufactured goods, only the final product need be manufactured or produced in the United States. 8 As such Mexican suppliers can participate in “Buy America” solar manufacturing and solar projects if the final product is manufactured in the U.S. though there are some restrictions on steel. The largest PV cell manufacturer in the world is Suntech from China which announced in August

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2009 that it will be adding a factory with 75 to 150 workers in Phoenix or Texas to facilitate “Buy America” sales.9

4.4 Arizona Renewable Energy Manufacturing Incentives

In July 2009, the State of Arizona created new tax incentives intended to draw renewable energy product manufacturers to the state. Income tax credits and property tax incentives are now available for companies choosing to establish or expand their manufacturing facilities and corporate headquarters in Arizona. To be eligible the business must meet certain minimum requirements for the quantity and quality of new jobs created. The bill stipulates different incentive levels depending on how many full‐time jobs are created and the salary for those jobs. These incentives will be available starting January 1, 2010, and will expire on December 31, 2016.10

4.5 Arizona’s Manufacturing Partial Credit for Utility Renewable Requirements

In 2007, a little known provision was added to Arizona’s “Renewable Energy Standard and Tariff” requirements which allows utilities a “Manufacturing Partial Credit”11 and to receive Renewable Energy Credits” (REC) in return for investing in solar manufacturing plants or for recruiting solar manufacturers to Arizona. The text of this provision follows:

“An Affected Utility may acquire Renewable Energy Credits . . . if it owns or makes a significant investment in any solar electric manufacturing plant located in Arizona or if it provides incentives to a manufacturer of solar electric products to locate a manufacturing facility in Arizona.”

An example of the effective use of this provision to support solar manufacturing in Arizona is the annual payment made by Tucson Electric Power (TEP) to Global Solar which has a 40 MW PV manufacturing plant in Tucson. Global Solar is a major manufacturer of thin‐film photovoltaic (Copper Indium Gallium DiSelenide ‐ CIGS) solar cells using a flexible substrate. TEP’s plans to pay Global Solar approximately $1 million in 2010 for the cumulative RECs generated in 2010 by Global Solar PV installed in Arizona which represents 5% of TEP’s required utility‐scale generation 12 with future payments adjusted annually as new capacity is installed.

4.6 Oregon Renewable Energy Manufacturing Incentives

Oregon's incentives for attracting clean‐tech firms are among the most aggressive in the nation. Oregon's Tax Credit for Renewable Energy Resource Equipment Manufacturing Facilities was enacted in July 2007 and provides a tax credit equal to 50% of the construction costs of a facility used to manufacture renewable energy systems. Eligible costs the building, excavation, machinery and equipment which are used primarily to manufacture renewable energy systems. The credit may also be applied to the costs of improving an existing facility which will be used to manufacture renewable energy systems. The 50% credit is taken over the course of five years, at 10% each year. The original maximum credit of $10 million was expanded to $20 million (50% of a $40 million facility) in March 2008.13 From 2006 to mid‐2009, Oregon spent $386 million on tax credits for clean‐tech companies, according to the state Energy Department.14

5 Solar Generation Financing Support Programs An additional matrix of very attractive financial support programs is now in place in California and Arizona to support solar generation for Distributed Energy and for the utility‐scale projects. These financial tools are key drivers on the demand‐side in creating long‐term expanding markets across all segments of the solar industry.

5.1 Extension of 30% Federal Energy Tax Credit and Accelerated Depreciation

Crucial to the mix of financing and incentive tools is the ability for the owners of solar systems to be able to apply Federal tax credits to offset the installed costs with Federal tax liability. The Energy Policy Act

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of 2005 provided a 30% tax credit for solar installations for both business and residential owners for a 2‐year period which was to expire on January 1, 2008. In a companion bill to the American Reinvestment and Recovery Act of 2009, the U.S. adopted the Emergency Economic Stabilization Act of 2008 which among a number of provisions extended the 30% “Business Solar Investment Tax Credit” and the “Residential Renewable Energy Tax Credit” for solar energy property for 8 years through December 31, 2016. The economic impact of the extension of the ITC for solar was estimated to $14.3 billion15 just upon the PV sector. The extension of these Investment Tax Credits (ITC) are key tools used by financing enablers to finance both the Distributed Energy as well as utility‐scale solar projects. The extension of the ITC and the 5‐year accelerated depreciation are most important tools for financing the large‐scale projects where there is a mix of equity and long‐term debt which require pass‐through net operating losses and ITCs to offer an attractive rate of turn.

5.2 Mandatory Renewable Portfolio Standards

Renewable Portfolio Standards (RPS) are greatly responsible for the long‐term future growth of solar in California and Arizona and provide mandatory requirements for utility companies which results in the direct and indirect financing of solar projects. RPS is a state mandated requirement that public utilities generate an escalating fixed percentage of electricity generation from renewable energy with a future cap. RPS requirements are driving utilities to make extraordinary efforts to implement financial incentive programs to accelerate the development and use of solar energy from residential and commercial installations to large‐scale grid projects. For California, the RPS requirement is 20% renewable generation by 2010 and 33% by 2020. Arizona’s RPS ramps up to 15% by 2024 and has a requirement that 30% of all new renewable generation come from Distributed Energy for residential and commercial/industrial sectors in which on‐site generation of renewable energy is used for on‐site use. Utilities and states take diverse approaches to leveraging RPS as a market driver for the financing of Distributed Energy and for utility‐scale projects.

5.3 Renewable Distributed Energy Generation

State government and electricity utility programs offer an extensive array of upfront rebates, tax credits, and performance‐based incentives for the generation of solar by residential, commercial, industrial and public customers. Generally funded by rate‐payers, these financial tools are the enablers for mandatory compliance with Renewable Portfolio Standards and assist in driving the explosive growth of solar in California and Arizona. In exchange for financial incentives for customer‐sited solar generation, the utility company obtains ownership of the Renewable Energy Credits (RECs) generated while the customer saves money by offsetting electricity provided by the grid with the electricity provided by the new on‐site solar system.

California –The California Solar Initiative is part of the Go Solar California campaign and builds on 10 years of state solar rebates offered to customers in California's investor‐owned utility territories of Pacific Gas & Electric (PG&E), Southern California Edison (SCE), and San Diego Gas & Electric (SDG&E.) The California Solar Initiative is overseen by the California Public Utilities Commission and has a budget of $2,167 million (2007‐2016)16

Arizona – In Arizona all responsibility for compliance with RPS requirements is borne by the regulated utilities and regulated by the Arizona Corporation Commission (ACC). For commercial/industrial customer‐sited projects, Arizona Public Services (APS) and Tucson Electric Power (TEP) offers a significant financial payment up to 60% of the project’s capital costs in a performance‐based incentive that pays over time based upon actual solar production. For photovoltaic, APS and TEP both offer residential customers a one‐time up‐front payment of $3 per installed DC watt pay which significant with current installed costs at less that $7/watt and declining.

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5.4 Utility‐Scale Solar Generation

Utilities rely upon Independent Power Producers (IPPs) to produce the renewable energy resources required to assist the utilities comply with RPS requirements. An IPP is a non‐utility generator which owns facilities to generate renewable electric power for sale to utilities. Utilities in the California and Arizona use competitive “Requests For Proposals” (RFPs) for the procurement of IPPs to deliver grid‐scale generation and large Distributed Energy projects where new smaller generation projects under 20 MW are located near load centers. These RFPs offer 20‐year Power Purchase Agreements (PPAs) which contract for the electricity and the RECs generated from renewable projects at a guaranteed stipulated price which the IPP uses to secure long‐term project finance which is usually a combination of equity and debt. Sometimes solar is stipulated in the RFP and sometimes all renewable sources are encouraged to submit proposals.

California –There are currently 13 large‐scale concentrating solar thermal projects under permitting review by the California Energy Commission. These projects represent a combined installed capacity of 6.2 GW.17 The U.S. Bureau of Land Management (BLM) currently has 64 applications for the use of public lands in California for large‐scale solar projects with a combined capacity of 64 GW. The overwhelming majority of these projects would use concentrating solar thermal technologies with the balance being PV. Some 48 of these projects use parabolic trough, power tower and Dish‐Stirling technologies with an installed capacity of 48 GW.18 The installed per kW capital costs for utility‐scale solar thermal projects being permitted in California range from $1520/kW for Dish‐Stirling to $4,000/kW for trough which varies by wet/dry cooling and by energy storage and site development costs. The typical 250 MW solar thermal trough project being permitted in California will have capital costs of approximately $1 billion.

Arizona – In Arizona all responsibility for compliance with RPS requirements is borne by the regulated utilities and regulated by the Arizona Corporation Commission (ACC). BLM currently has 33 applications for the use of public lands in Arizona for large‐scale solar projects with a combined capacity of 20 GW. The overwhelming majority of these projects would use concentrating solar thermal technologies with the balance being PV. Some 29 of these projects use parabolic trough and power tower technologies with an installed capacity of 19 GW.19 Based upon a 2007 RFP, APS awarded Abengoa, the global Spanish solar company, a 30‐year Power Purchase Agreement to construct and operate a 280 MW trough power plant with 6 hours of thermal storage. The “Solana” project is being built near Gila Bend. The capital costs are $1.5 billion and electricity sales over the project term are expected to be at least $4 billion.

6 Private Investment/Tax Equity Financing There are fundamental differences in the financial support programs between Europe and the U.S. related to solar incentives to buy‐down the cost of solar generation. Unlike Europe, where feed‐in‐tariffs have been the drivers for the explosive growth of solar in German and Spain, U.S. government incentives for renewable energy largely consists of tax credits for renewable energy manufacturing and for renewable energy generation projects. Tax‐equity investments are largely driving the growth of the solar industry in the U.S.20 The basic financial model developed in the U.S. for renewable energy generation is based upon a combination of tax credits, upfront and performance‐based financial incentive payments and tax strategies which leverage net operating losses and accelerated depreciation. This model applies to Distributed Energy for the residential and commercial/industrial markets and to utility‐scale projects with Independent Power Producers.

6.1 European Feed‐in‐Tariff Financing Model

Feed‐in tariffs require the grid‐operator and primary electricity supplier to purchase electricity from renewable energy generators at fixed premium prices which are guaranteed over a long‐term

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performance period and are usually market or inflation adjusted. As such, any renewable generator can structure a project with certainty as to the revenues from power generated which makes conventional bank financing and private investments very attractive. In Germany, solar PV receives up to €.43/kWh ($.61/kWh) if on a home, or €.32/kWh ($.45/kWh) if on a ground‐mounted site.21

6.2 Investor Syndicates in Spain

During the peak of Spain’s feed‐in‐tariffs for PV from 2005 onward, several different business models were developed for private investment syndicates to take advantage of the 20‐year guaranteed payment of approximately $.56 kWh (inflation‐adjusted annually) for projects of 100kW or less with the tariff price dropping to $.32 kWh for larger projects. Most project developers/solar companies developed large PV projects and divided the large‐scale systems into 100 kW parcels, or companies, to qualify the project for the higher tariff. In this single society model, each parcel was set up as a subsidiary and was owned by several investors. A 2 MW PV plant would require 20 different investor/owner companies. A variation was a multi‐property model, one or more of the trackers is owned per investor as part of an overall owners' association. The expected investor return was 10% with a 10 year pay‐back. It was reported that one installation needed less than four months to attract investors for its 130 parcels of 100 kW each.22

6.3 Tax Equity Model for Solar

The key tools for tax equity financing of solar projects in the U.S. are third‐party ownership of the project which leverages receives tax credits, a long‐term performance‐based financial incentive from a state or a utility, net operating losses and accelerated depreciation distributions along with revenues from long‐term contracts with parties buying the electricity and the renewable Energy Credits generated. Tax Investors are targeting returns in the 9% or more range for an Internal Rate of Return for a 20‐year term for solar third‐party ownership projects in the commercial/industrial sectors. 23 More than 80% of the commercial/industrial solar installations in California are financed through a third‐party ownership model using a Solar Services Agreements (SSA) which is also referred to as a Power Purchase Agreement (PPA). The tax equity model for solar typically works as follows:

A commercial/industrial business wants the benefits from solar for its building but does not want to make the large upfront capital outlay for the system and/or may not be able to use all of the available tax credits.

The business enters into a long‐term SSA with the SSA company which has access to tax equity investment capital.

The SSA company comprised of tax equity investors will own, install, and operate the solar equipment on‐site at the business.

The SSA company pays for all capital costs for the solar equipment and bears all performance risk of the solar system.

The business agrees to pay the SSA company for the solar electricity generated on‐site over a 10 to 20‐year period at most often a fixed‐rate which is at or below the current electricity price. The business locks‐in a long‐term rate which is less than it would be paying the local utility over the term of the SSA.

All financial and tax incentives go to the owner of the solar system which is the SSA company.

The SSA company then receives a performance‐based incentive over time for the Renewable Energy Credits generated by the solar project from the local utility company which is used to

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help meet state requirements for its renewable energy generation.

The SSA receives all Federal and state tax credits which are distributed to the SSA company shareholders based upon ownership percentage. The tax equity investors also receive net operating losses for the SSA company which are driven by 5‐year Federal accelerated depreciation.

A variation to this model is third‐party leasing of the solar system to a property owner such the Solar City’s “SolarLease” program24 which is a 20‐year arrangement that allows homeowners to rent a solar photovoltaic system with no down payment and with fixed monthly fee starting at $55, reducing homeowners’ electricity costs. For larger utility‐scale projects, a partnership‐flip model modelled after the US wind industry is often used where the PPA company’s ownership is structured at 99% for the tax equity partners with this ownership “flipped” by being reduced after the benefits of the tax credits have been exhausted with substantial ownership then going to the project developer.

6.4 Tax Equity Solar Funds

In the US southwest, large solar system integrators and project developers are vertically integrating with large tax investors to establish tax equity funds dedicated to financing their project pipelines and to assure growth in an uncertain financial climate. In 2009 several Solar Equity Funds were established or recapitalized:

SolarCity: US Bank and SolarCity established a $100 million solar tax equity fund for PV projects in the residential, commercial/industrial, schools and government markets. SolarCity is a national solar provider for homeowners, businesses and government organizations and provides from one source solar power system design, financing, installation and monitoring services.

Renewable Ventures has capitalized 5 solar tax equity funds with the latest $200 million fund being established in August 2009. The new Solar Fund V is structured to include both debt from John Hancock and equity from Renewable Ventures and Wells Fargo. The fund will enable the construction and permanent financing of around 35 megawatts in the next year and the combination of debt and equity enables the fund to seek a broader range of federal government incentives, improving project economics for prospective customers such as municipalities, universities, electric utilities and companies. 25 In 2009 MMA Renewable Ventures was acquired by the Spanish company Fotowatio which is one of the largest solar power companies in the world and an Independent Renewable Power Producer with 130 megawatts of solar projects in operation in the United States and Europe. Fotowatio has more than 1,000 megawatts in development across the United States, Spain and Italy using both PV and CSP technologies. A global company, Fotowatio is owned by GE Energy Financial Services, Landon Group, and Qualitas Venture Capital.26

6.5 Institutional Investors

Banks have traditionally used the tax equity markets to fund solar projects by buying the Federal and state tax credits from project owners. Major banks in the solar tax equity market include AIG, Lehman Brothers, Wachovia, JP Morgan, Morgan Stanley, Union Bank, Wells Fargo, Electric Finance Group, Prudential Capital Group, and General Electric Capital. Other large institutional investors include pension funds, insurance companies and endowments.

6.6 Project Finance for Large‐Scale Solar Projects

“Project finance” is the primary financial structure used globally by Independent Power Producers and investors to enable the financing of large‐scale renewable projects.27 Tax equity funds and Solar Services Agreements for Distributed Energy is a form of project finance. Project finance is project‐specific asset financing which usually involves a combination of equity and debt with investor returns and debt

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repayment only coming from project revenues which are secured by a long‐term contract with a creditworthy electricity utility. In the U.S., project finance has focused on utilizing existing state and Federal incentives in the form of tax credits and accelerated depreciation to reduce the overall cost of a solar energy system to the end user. As such, project financing can be viewed as strategic investments by tax‐motivated investors to take advantage of the available government subsidies for solar installations.28 The ultimate goal in IPP projects is to arrange a borrowing for a project which will be beneficial for the private investor and at the same time be completely non‐recourse to the other activities of the parent company and in no way affecting their credit standing or balance sheet. Indeed, project financing is sometimes called off‐balance‐sheet financing.29

6.7 Project Finance and Foreign Direct Investment

The following international solar companies are using project finance for large‐scale utility solar projects in the Southwest U.S.:

From Spain – Abengoa, Acciona, Iberdrola

From Israel – BrightSource/Luz, Solel

From Germany – Solar Millennium

Australia – Ausra

6.8 Public Equity

Globally public equity “dwarfed” other types of investment in solar energy as described in a 2008 study by the National Renewable Energy Laboratory titled “A Historical Analysis of Investment in Solar Energy Technologies (2000‐2007)”. In 2007, public equity accounted for almost two‐thirds of global non‐governmental investment in solar energy, and private equity surpassed venture capital investments in solar energy for the first time. Public markets investment in solar energy companies as corporate equity stakes are sold on the open market. Companies also raise debt as part of their public offerings and usually in the form of convertible bonds which are included in the total offering size because they have the potential to convert into shares of the company at a later date. At the time of the public offering, however, they are not considered to be equity because, as bonds, they have the expectation of corporate repayment. 30

7 International Development Financing

7.1 North American Development Bank

In 1993 the North American Free Trade Agreement created the North American Development Bank (NADB) to facilitate financing for the development, execution and operation of environmental infrastructure projects located in the U.S.‐México border region and certified by the Border Environment Cooperation Commission (BECC).31 Under its charter, NADB is authorized to make loans to both public and private sector borrowers, operating within the United States and México. NADB projects must meet 3 eligibility criteria:

Project must be located within 100 kilometers (62 miles) north of the international border in boundary in the four U.S. states of Texas, New México, Arizona and California and within 300 kilometers (about 186 miles) south of the border in the six Mexican states of Tamaulipas, Nuevo Leon, Coahuila, Chihuahua, Sonora, and Baja California.

Project must remedy an environmental and/or human health problem. Eligible environmental sectors include priority sectors such as water supply, water conservation, wastewater treatment and municipal solid waste.

Project must be certified by the Border Environmental Cooperation Commission (BECC).

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NADB extended the eligibility for projects through new “Expanded Mandate Sectors which includes renewable energy projects. Large‐scale solar projects on the U.S./México border can be secured by long‐term Power Purchase Agreements with utility companies which make very attractive investments for NADB. No large‐scale solar projects have been certified by BECC or funded by NADB however, the potential of NADB funding for a 50MW solar thermal power project in southern New México was identified in a 2005 feasibility study for the State of New México:

NADB may represent the lowest‐cost source of debt for a new large‐scale solar project in southwest New México. NADB, which funds infrastructure projects within 100 kilometers of the US‐México border, represents an interesting prospective funding source. Although terms vary considerably depending upon the project’s credit risk, under the most favorable circumstance, NADB might be able to offer 25 year debt at a 6 percent interest rate. It should be noted that NADB cannot accept exposure of more than 50 percent of the total capital costs, which will limit project debt share to 50 percent unless other debt sources are tapped. 32

7.2 International Finance Corporation

The International Finance Corporation (IFC) promotes sustainable private sector investment in developing countries as a way to reduce poverty and improve people's lives. IFC is a member of the World Bank Group and is headquartered in Washington, DC. It shares the primary objective of all World Bank Group institutions: to improve the quality of the lives of people in its developing member countries. Established in 1956, IFC has 182 member countries which provide its authorized share capital of $2.4 billion and is the largest multilateral source of loan and equity financing for private sector projects in the developing world. It promotes sustainable private sector development primarily by:

Financing private sector projects and companies located in the developing world

Helping private companies in the developing world mobilize financing in international financial markets

Providing advice and technical assistance to businesses and governments

International finance Corporation33 is the largest multilateral source of loans and equity finance for private enterprises in emerging markets

IFC is supporting the entire value chain in solar power to promote rapid scaling‐up and cost reductions in the global solar sector. Recently IFC’s made its first investment in solar photovoltaics manufacturing in China, which now supplies roughly 25 percent of the global market.34

$100 Million Loan to Suntech: In July 2009, IFC approved a convertible loan of up to $100 million to support Suntech for capital expenditure and debt refinancing. Suntech Power Holdings Co., Ltd, headquartered in Wuxi, Jiangsu Province, China is a global leader in photovoltaic solar cells and modules. Suntech designs, develops, manufactures, and markets various PV cells and modules to provide electric power for residential, commercial, industrial, and public utility applications worldwide. Suntech’s key markets worldwide include Germany, Spain, the United States, China, Japan, Italy and South Korea. IFC’s convertible loan will act as an anchor for the Company to finance its capital expenditure program and lengthen the duration of its debt. The proposed IFC financing is also expected to enable Suntech to attract further long‐term capital providers.35

$75 million loan to SunPower Corporation: The US‐owned SunPower Corporation generated $1.45 billion in revenues in 2008 and is waiting for final approval of a $75 million IFC loan for a second solar cell fabrication facility in the Philippines. The project will result in the completion of twelve solar cell manufacturing lines with an aggregate nameplate capacity of 466 MW.36

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8 Carbon Finance Carbon finance and the selling of greenhouse gas emission reductions are likely to become major drivers in the mix of financial tools to support the solar generation demand side of the solar industry. As a party to the Kyoto Protocols, México has benefited from carbon financing of renewable projects but no solar at this time. There are many expectations that the current U.S. Congress will voluntarily adopt “cap‐and‐trade” legislation to regulate greenhouse emissions which would provide further stimulate the U.S. solar market.

8.1 Carbon Funds

“Carbon Funds” are an investment vehicle that seeks either to repay investors in carbon credits, or to use income from selling such credits to generate or enhance investment returns. Such funds can buy credits or invest in carbon‐offset projects such as solar energy generation and claim ownership of the emission reductions generated by these projects.

8.2 Kyoto Protocol

The 2005 Kyoto Protocol established the market for carbon funds by creating a financial mechanism to reduce greenhouse gas (GHG) emissions which are attributed to causing global warming. The Kyoto Protocol is an international treaty that established a “cap and trade” system which imposes national caps on the emissions for 37 industrialized countries and the European community for reducing greenhouse gas (GHG) emissions. These reductions amount to an average of five per cent against 1990 levels over the five‐year period 2008‐2012.37 The United States is not a party to this agreement but México is and as such has access to carbon finance. On average, this cap requires countries to reduce their emissions 5.2% below their 1990 baseline over the 2008 to 2012 period. Carbon markets have grown rapidly and have reached over $100 billion dollars of annual transactional value and have created a new mechanism to assist in financing renewable energy generation projects while delivering billions of tons of reductions in carbon emissions.38

8.3 World Bank Carbon Finance Unit

Initiatives at the World Bank Carbon Finance Unit's (CFU) 39are part of the larger global effort to combat climate change, and go hand in hand with the World Bank and its Environment Department's mission to reduce poverty and improve living standards in the developing world. The CFU uses money contributed by governments and companies in OECD (Organization for Economic Co‐operation and Development) countries to purchase project‐based greenhouse gas emission reductions in developing countries and countries with economies in transition. The emission reductions are purchased through one of the CFU's carbon funds on behalf of the contributor, and within the framework of the Kyoto Protocol's Clean Development Mechanism (CDM) or Joint Implementation (JI). Unlike other World Bank development products, the CFU does not lend or grant resources to projects, but rather contracts to purchase emission reductions similar to a commercial transaction, paying for them annually or periodically once they have been verified by a third party auditor. Carbon finance is the selling of emission reductions to increase the bankability of projects by adding an additional revenue stream in hard currency which reduces the risks of commercial lending or grant finance. As such, carbon finance provides a means of leveraging new private and public investment into projects that reduce greenhouse gas emissions, thereby mitigating climate change while contributing to sustainable development.

8.4 Clean Development Mechanism

In addition to the market‐based emissions trading, the Kyoto Protocol also established the Clean Development Mechanism (CDM) which allows emission‐reduction projects in developing countries to earn certified emission reduction (CER) credits with each equivalent to one ton of CO2. These CERs can be traded, sold and used by industrialized countries to a meet a part of their emission reduction targets under the Kyoto Protocol. The mechanism stimulates sustainable development and emission reductions,

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while giving industrialized countries some flexibility in how they meet their emission reduction limitation targets. The projects must qualify through a rigorous and public registration and issuance process designed to ensure real, measurable and verifiable emission reductions that are additional to what would have occurred without the project.40 There are currently 1842 CDM projects registered with an expected 2.9 billion tons of carbon offsets until the end of 2012.41

8.5 CDM Projects in México

Through September 2009, there have been 118 approved CDM projects in México consisting mainly of projects involved in greenhouse gas mitigation and methane recovery at landfills, confined animal operations such as dairies and pig farms dairy, and wastewater ponds. There are no solar CDM projects in México at this time but there were 7 wind projects in Oaxaca approved for CDM registration since 2006 consisting of 970 MW of combined installed capacity. The structure of these wind projects offer business models for how Mexican companies can form alliances with global solar project developers and use carbon funds for project financing42:

2 wind projects comprising 364 MW were funded by Spain and developed by the Spanish giant Gamesa Energia S.A. which has installed more than 16,000 MW of its wind turbines in 20 countries and over 4 continents.

A 249 MW wind project was also funded by Spain through CEMEX International Finance Company (CIFCO) and also by the United Kingdom of Great Britain and Northern Ireland through CO2 Global Solutions International S.A. and Gazprom Marketing and Trading Limited.

The Spanish Carbon Fund (SCF) funded an 83 MW wind project which was managed through the International Bank for Reconstruction and Development (IBRD) as Trustee.

3 other wind projects comprising 274 MW were developed by 2 Mexican companies under the “Self‐Consumption scheme” included in the Public Electric Service Act or Ley del Servicio Público de Energía Eléctrica. The project developers and operators, Eoliatec del Istmo S.A.P.I. DE C.V. and Fuerza Eolica del Istmo S.A de C.V, would provide the generated power to its consuming partners.

8.6 World Bank’s Clean Technology Fund

The Clean Technology Fund (CTF) seeks to promote scaled‐up financing for demonstration, deployment and transfer of low carbon programs and projects with a significant potential for long‐term Greenhouse Gas (GHGs) emissions. The CFT promotes the realization of environmental and social co‐benefits thus demonstrating the potential of low‐carbon technologies to contribute to sustainable development and the achievement of the Millennium Development Goals (MDBs). The Clean Technology Fund includes program in the Power Sector to promote renewable energy technologies to reduce carbon intensity.43

8.6.1 Clean Technology Fund’s Investment Plan for México

In 2009 the World Bank announced that México, Egypt and Turkey are the first three countries to tap the new $5.2 billion Clean Technology Fund managed by the Bank‐ $250 million for Turkey, $300 million for Egypt and $500 million for México. The three countries will combine the soft loans from the Fund with loans from other sources in order to implement low carbon projects in the sectors of renewable energy and transportation.44 Clean Technology Fund Investment Plan for México45 is a “business plan” agreed among, and owned, by the Government of México for the International Bank for Reconstruction and Development (IBRD), the Inter‐American Development Bank (IADB) and the International Finance Corporation (IFC) to provide support for the low‐carbon objectives contained in México's 2007‐2012 national development plan, its national climate change strategy and special climate change program. This IP builds on the three development banks' experience, gained through their long‐standing and comprehensive environmental programs in México.

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8.7 Post‐2012 Carbon Credit Fund

Negotiations have commenced on continuing the Kyoto Protocol from the “first commitment period” (2008‐2012) into the “second commitment period” (post‐2012). Negotiations will take place on the post‐2012 commitment period in Copenhagen in December 2009 which is expected to produce a mandate that will include a comprehensive negotiating agenda and timetable for a single, effective global agreement that builds on the strengths of the Kyoto Protocol and takes it further.46 In 2007, 5 leading European Banks established a EUR 150 million “Post‐2012 Carbon Credit Fund”, which is the first of its kind, will exclusively purchase and trade “carbon credits” generated after the Kyoto Protocol expires in 2012. The aim is to support the market value of environmentally worthwhile projects amid uncertainty over the actual form that the carbon credit trading regime will take after 2012.47 Contributor banks include KfW Bankengruppe, Caisse des Dépôt, European Investment Bank, Instituto de Crédito Oficial and Nordic Investment Bank48

9 Foreign Direct Investment Global companies making “Foreign Direct Investments” (FDI) in the U.S. and in México49 are the “financial enablers” which offer the greatest potential for investments the solar sector. FDI is inward direct investment into an organization, equipment, plants, and facilities in a country at a level that is considered significant to exercise managerial control. Direct foreign investment enterprises comprise those entities that are identified as:

Subsidiaries where investor owns more than 50 per cent

Associates where investor owns 50 per cent or less and

Branches which are wholly or jointly owned unincorporated enterprises either directly or indirectly owned by the investor.50

9.1 Major Gains in 2009 Foreign Direct Investment in US Renewable Energy Sector

FDI projects in the renewable energy sector in the US have seen a 3‐fold increase in 2009 with investors encouraged by new regulation in the sector brought in by the Obama administration, which guarantees federal‐level tax credits for renewable energy investors until 2013. According to figures from fDi Intelligence, the sector has seen a 336% jump in the first four months of 2009 compared with the same period in 200851.

9.2 Chinese Foreign Direct Investment in U.S. Manufacturing

Suntech Power Holdings Co., Ltd., of China is the world's largest crystalline silicon photovoltaic (PV) module manufacturer by volume. In May 2009 Suntech announced plans to establish a long‐term presence in the U.S. and is considering several states for the optimal, cost‐effective location for a production and distribution center.52 The favourable business climate along with extensive incentives available nationally and at the state level appears to be the decision to locate in the U.S. rather than México. In a Suntech Press Release, Shi Zhengrong, Suntech's CEO, "We believe in the outstanding long‐term prospects of the solar energy market in the United States . . . a number of favourable developments have led us to this decision, including the dramatic growth in utility demand for large‐scale wholesale solar projects, the increasing number of states with incentive programs for customer‐owned systems and the federal government's recent stimulus package."53

* * *

1 http://www.seia.org/galleries/pdf/Jan_09_Solar_Manufacturing_OnePager.pdf 2 http://www.ausra.com/news/releases/080630.html

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3 “China Racing Ahead of U.S. in the Drive to Go Solar”, New York Times, August 24, 2009 4 “Solel Awarded $2.6 Million Grant From Spanish Government for Solar Manufacturing Facility”, Solel Solar Systems, Ltd, Press Release September 23, 2009 5 http://www.executivetravelmagazine.com/page/Europe's+appeal+for+foreign+direct+investment 6 http://www.exim.gov/products/policies/environment/index.cfm 7 http://www.energy.gov/recovery/48C.htm 8 http://www.canadainternational.gc.ca/sell2usgov‐vendreaugouvusa/assets/pdfs/sell2usgov/BAAInterimRule_eng.pdf 9 “China Racing Ahead of U.S. in Drive to Go Solar”, China Environmental News, August 25, 2009

10 http://www.dsireusa.org/

11 Arizona Administrative Code R14‐2‐1807 “Manufacturing Partial Credit”

12 “2010 Renewable Energy Standards and Tariff Implementation Plan”, Tucson Electric Power, July 1, 2009 13 http://www.oregon.gov/ENERGY/CONS/BUS/docs/Renew.doc 14 http://www.timesfirst.com/trade‐news/203536/Oregon‐Looks‐to‐Clean‐Tech‐for‐Revival.html 15 “Economic Impacts of the Tax Credit Expiration, Final report,” Navigant Consulting, February 13, 2008,

http://www.seia.org/galleries/default‐file/Navigant_Tax_Credit_Impact.pdf 16 http://www.gosolarcalifornia.org/csi/index.html

17 http://www.energy.ca.gov/siting/solar/index.html 18 http://www.blm.gov/pgdata/etc/medialib/blm/ca/pdf/pa/energy/solar.Par.45875.File.dat/ Renew_Energy_2_09_solar.pdf 19 http://www.blm.gov/pgdata/etc/medialib/blm/ca/pdf/pa/energy/solar.Par.45875.File.dat/ Renew_Energy_2_09_solar.pdf 20 “Solar firms lament loss of ‘tax‐equity’ buyers”, San Francisco Business Times, October 6, 2009 21 http://www.renewableenergyworld.com/rea/news/article/2009/09/feed‐in‐tariffs‐go‐global‐policy‐in‐practice 22 “Survey Shows Spanish Market for Large‐Scale PV Set to Grow”, Photon International, October 2005 23 “Financing Non‐Residential Photovoltaic Projects: Options and Implications”, Mark Bolinger, Lawrence Berkeley National Laboratory, Environmental Energy Technologies Division, January 2009 24 http://www.solarcity.com/ 25 http://www.renewableventures.com/ 26 http://www.renewableventures.com/news/20090803‐pressrelease‐solarfundv.html 27 “Financing Solar Thermal Power Plants”, National Renewable Energy Laboratory, NREL/CP‐550‐25901, April 1999 28 “A Historical Analysis of Investment in Solar Energy Technologies (2000‐2007)”, National Renewable Energy Laboratory, Technical Report, NREL/TP‐6A2‐43602,December 2008 29 “Financing Solar Thermal Power Plants”, National Renewable Energy Laboratory, NREL/CP‐550‐25901, April 1999 30 http://www.nrel.gov/docs/fy09osti/43602.pdf 31 http://www.nadb.org/programs/descriptions/loan_guaranty.html 32 “New México Concentrating Solar Plant Feasibility Study, Draft Final Report”, February 9, 2005, Prepared for New México Energy, Minerals and Natural Resources Department, Black & Veatch 33 http://www.ifc.org/ifcext/gms.nsf/Content/EEM_Renewable_Energy

34 “FY09 is Year of Renewables for IFC, With Renewable Projects Dominating Power Sector”, International Finance Corporation

Press Release, 07‐22‐09 35 “Project Number 27874‐ Summary”, http://www.ifc.org/ 36 “Project Number 27807‐ Summary”, http://www.ifc.org/ 37 https://unfccc.int/kyoto_protocol/items/2830.php 38 http://www.parc.com/event/723/emissions‐trading‐and‐carbon‐finance.html 39 http://go.worldbank.org/9IGUMTMED0 40 http://cdm.unfccc.int/index.html 41 http://cdm.unfccc.int/Statistics/index.html 42 http://cdm.unfccc.int/index.html 43 http://go.worldbank.org/SG8NYY3DK0 44 “Turkey, Egypt and México Eye Low Carbon Future”, World Bank, Press Release May 29, 2009 45 http://www.iadb.org/intal/intalcdi/PE/2009/03479.pdf 46 http://www.cana.net.au/kyoto/template.php?id=5 47 http://www.euractiv.com/en/climate‐change/european‐fund‐support‐post‐2012‐climate‐projects/ article‐172007 48 http://www.kfw‐foerderbank.de/DE_Home/Klimaschutzfonds/PDF_Dokumente_Klimaschutzfonds/ Post_2012_Carbon_Credit_Fund_brochure_Nov08.pdf

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49 See “Section 4” for a listing recent FDI investments into México’s solar industry 50 http://stats.oecd.org/glossary/detail.asp?ID=621 51 “Huge leap for US alternative energy FDI”, Foreign Direct Investment Magazine, August 18,2009 52 “Suntech to Manufacture Products in the U.S.”, Suntech Power Holdings Co., Ltd., Press Release, May 11, 2009 53 http://www.renewableenergyfocus.com/view/1900/suntech‐plans‐pv‐module‐manufacturing‐in‐the‐usa/

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Section 6 Policy Recommendations

This section provides several policy recommendations for consideration as tools to accelerate the development of an export solar industry in México. To a great extent the solar sector plays a part of a larger, fast‐changing global “carbon market” in which the dominate drivers will be greenhouse gas (GHG) reductions and reduced “carbon footprints”. Many steps can be taken to further build the capacity of México’s emerging solar sector to compete in a dynamic global and national marketplace while also meeting goals to reduce greenhouse gas emissions.

1 Sector Development

1.1 Enhance Competitiveness of the SME “Gazelles" in the New Carbon Market

The changing “low‐carbon” economy will affect all sectors and segments of TechBA’s portfolio of companies.

Assist TechBA portfolio companies understand the impact and opportunities of new mandates for GHG reductions; Provide technical support on how companies can take proactive steps to become more energy efficient, to incorporate more renewable energy technologies and to reduce the carbon footprint of companies.

1.2 Form New Linkages to the European Solar Industry

Germany is the world’s leader in the design, engineering and installation of renewable energy systems, components and products. As such there are some 15,000 companies in Germany involved in the solar manufacturing industry. Most of these German companies are SMEs with little export experience and are key candidates for partnerships with Mexican SMEs.

German Solar Industry 20081

Installation and supply Companies

Manufacturing companies of cells, modules, collectors storage units and other

components

PV Industry 100 10,000

Solar Thermal Industry 100 5,000

Total 200 15,000

Establish TechBA‐Germany to accelerate linkages between German and Mexican SMEs for design, engineering, manufacturing and distribution partnerships; Following the lead of large‐scale Foreign Direct Investments, exploit opportunities for German SMEs to establish Mexican manufacturing and distribution relationships for export of solar products and components to North and South Americas.

1.3 Export Renewable Electricity to U.S.

Recent studies and assessments by the California Energy Commission and California Public Utilities refer to the potential of wind and geothermal from México to supply California as part of its Renewable Portfolio Standards. There is a noticeable absence of any reference to the solar thermal potential of Baja which is greater than wind in terms of renewable resources.

Commission a short‐term study to define the solar thermal potential of Northern México for the export trade of renewable electricity to the U.S. with particular focus upon California and

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Arizona. The study could include: quantifying solar resources; identifying optimal areas for solar plants and realistic solar thermal generation capacities; identifying transmission and regulatory constraints; interviewing Independent Power Producers and solar thermal technology companies to assess opportunities and barriers; etc.

Establish a governmental affairs initiative to track issues related to: the export of renewable energy from México to the U.S.; cross‐border transmission capacity development; Inform U.S. stakeholders on the role that México’s renewables can play in cross‐border electricity trade and inform entities such as the California Energy Commission, the California Public Utilities, the California Independent System Operators, and the Arizona Corporation Commission.

Initiate efforts to identify and designate the best solar zones for utility‐scale solar power plants and begin land assembly, permitting and infrastructure planning and development so that the best sites will be pre‐permitted and available for dedicated solar energy generation parks; utilize the mapping and analytic data on Baja California being developed as part of the Western Renewable Energy Zones project of the Western Governors Association.

1.4 Targeted Analysis

The following studies would be instrumental in leveraging near‐term opportunities for Mexican solar companies:

Develop turn‐key cost estimates for representative utility‐scale and Distributed generation solar thermal electric projects located in Northern México which maximize the use of domestic engineering, construction companies, supply chain and operations.

Prepare a comparative assessment of project siting, permitting, construction and operational costs between a representative 250 MW parabolic trough project in Southern California and an identical installation in Northern México.

Compare the energy and financial performance of large‐solar thermal electric scenarios for self‐generation power projects by a large industrial customer and compare to a representative wind project now dominating México’s self‐generation market; Compare advantages and disadvantages related to transmission, proximity of generation to point‐of‐use, capacity factors, the load profile and value of solar thermal with energy storage for intermediate and peak versus intermittency of wind, the value of solar offering heat and power for industrial processes; etc.

Assess “low‐carbon” industrial development opportunities through economic, energy and carbon analysis of promising opportunities such as: moving future energy demand for industrial development to areas with high potential for wind and solar which can reduce transmission investments and GHG emissions; and establishing renewable electric/thermal micro‐grids for low‐carbon industrial development.

Assess the value of U.S.‐type “tax credit” financial incentives for Distributed and self‐generation renewable energy development or for “low‐carbon” energy generation; Review the role that “tax equity financing” could play in leveraging investment in México’s renewable energy industry.

1.5 Developing Export Markets

Expand exports of manufactured solar goods by Mexican companies to U.S. by assisting with product‐ and component‐level certification requirements in the U.S. as required for installation codes and for projects funded by Federal and state incentives; Products include solar hot water systems, PV modules, balance‐of‐systems components, solar lighting, etc.

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o The explosive growth in national and international renewable energy programs has lead

to the development of standards in product and system design, performance measurement, system durability and installation practices.

o To accelerate the export of national solar components, products and systems, companies need assistance with certifications of their products for U.S. markets. Such assistance is needed for companies new to the export market and for experienced exporters bringing a new product class to the market.

Encourage Mexican independent test laboratories to include testing and certifications on relevant protocols and standards for solar components for export markets to provide industry with technical support during product design and to accelerate approval time requirements.

Develop a specialized solar export trade assistance program that is knowledgeable of U.S. industrial standards and product certifications with particular expertise in qualifying products for Federal and state incentive programs.

Conduct government‐to‐government and business‐to‐business trade missions to Germany and Spain in order to: educate European counterparts of the opportunities of “Asian cost structure” for market expansion to North American markets; recruit large, medium and small‐sized solar‐component companies to México and leverage Foreign Direct Investments in manufacturing; and build business relationships by and between the SMEs of the countries.

2 Alternative Energies and Sustainable Technologies Many of the market drivers for solar also apply to other well established renewable energy sectors in México. The global wind industry will continue to expand with much of the industry focus on larger and larger turbines for off‐shore wind farms. There will be new opportunities to design, develop and manufacture “Distributed wind” turbines, towers, blades and balance‐of‐plant equipment for units in the 100 kW to 1.5 MW range for “self‐generation projects” and in the 500 W to 100 kW range for residential, small commercial and off‐grid applications. México’s wind resources are excellent and are distributed throughout the country in Baja California, Veracruz and Oaxaca. México’s is the world’s 3rd largest geothermal producer and has “massive amounts” of reservoir temperatures in the 60–180°C range, with a mean of 111°C.2 These massive amounts of recoverable energy and the associated temperatures are there are opportunities to further develop the potential of lower‐ temperature geothermal resources and turbines such as Organic Rankine Cycle (ORC) and Kalina Cycle turbines which can also be used for renewable application to generate electricity from medium‐temperature solar thermal, from biomass and from industrial waste heat.

Develop sector initiatives in wind, geothermal and biomass to assist México’s SMEs expand into the numerous market niches of these growing national and global markets.

Leverage interest by European ORC and Kalina Cycle turbine manufacturers in México’s geothermal, medium‐temperature solar and industrial heat markets.

3 Leverage Recent Climate Change Agreements

3.1 US‐México Bilateral Framework on Clean Energy and Climate Change

In April 2009, México's President Felipe Calderón and U.S. President Barrack Obama agreed to collaborate in a new association to promote renewable energy and low‐ carbon generation through the "US‐México Bilateral Framework on Clean Energy and Climate Change". This Bilateral Framework

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establishes a mechanism for political and technical cooperation and information exchange, and to facilitate common efforts to develop clean energy economies. It will also complement and reinforce existing work between the two countries. The objectives of the collaboration are3:

To promote the development of renewable energy, energy efficiency and green jobs, market mechanisms, forestry and land use, green jobs, low‐carbon energy technology development and capacity building.

To strengthen the reliability of cross border electricity grids.

To expand extensive bilateral collaboration on clean energy technologies

To facilitate renewable power generation by addressing transmission and distribution obstacles between the two countries;

To foster Energy Service Company market development

To highlight existing and proposed areas for cooperation on clean energy and energy efficiency under the North American Energy Working Group

3.2 “Low‐Carbon North America”

In August 2009, México, Canada and the United States signed a “Declaration on Climate Change and Clean Energy” which included the following objectives:

Develop comparable approaches to measuring, reporting, and verifying greenhouse gas emissions reductions

Cooperate in implementing facility‐level greenhouse gas reporting throughout the region

Share climate‐friendly and low‐carbon technologies

Take a regional approach to carbon capture and storage

3.3 Copenhagen and Post‐2012

Negotiations have commenced on continuing the Kyoto Protocol from the “first commitment period” (2008‐2012) into the “second commitment period” (post‐2012). Further negotiations will take place in Copenhagen in December 2009 which is expected to produce a mandate for a comprehensive negotiating agenda and timetable for a single, effective global agreement that builds on the strengths of the Kyoto Protocol and takes it further.4 If successful, the Copenhagen meeting of 192 member countries of the UN Framework Convention on Climate Change (UNFCCC) will send a clear signal to business and industry, governments and citizens around the world. It is expected that together the commitments made and mechanisms agreed upon will signal that the future will be driven by a low‐carbon economy and that significant advantages go to those that invest in clean energy solutions.5

3.4 Leveraging Climate Change Agreements

Opportunities exist fro TechBA to leverage recent agreements between the U.S. and México to facilitate collaborative climate changes initiatives involving cross‐border trade of renewable energy, the acceleration of strategic partnerships between U.S. and Mexican SMEs in solar sector development, technology transfer, demonstration and deployment of solar R&D between university and industry research institutions, etc.

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Leverage the new U.S./México Bilateral Framework as basis for the development of renewable power plants and the export of renewable electricity to U.S. border states by resolving transmission issues and building new transmission capacity; Justify renewable energy development in context with specific objectives of the Bilateral Framework which includes strengthening the reliability and flow of cross border electricity grids, facilitating the ability of neighboring border states to work together to strengthen energy trade, and facilitating renewable power generation including by addressing transmission and distribution obstacles between our countries.

Track the agreements and mandates resulting from the Copenhagen meetings and keep TechBA’s portfolio of companies informed with competitive intelligence on opportunities, carbon reduction and “greening” strategies, financial incentives, life cycle carbon analysis, etc.

3.5 Focus on Financing Carbon SMEs

The world is moving nearer to consensus on climate change actions, governmental mandates and massive international “low‐carbon” development programs. It will be the private sector which will implement the new climate change mandates. Current climate change financing mechanisms are almost universally‐focused on multi‐year, project‐based financing which is administratively burdensome and rarely pay in a timely manner. SMEs will be playing an expanded role in implementing climate change initiatives through intra‐company GHG reductions and through the provision of goods and services which will assist other companies achieve emission reductions. The development needs of such SMEs merits increased attention by business development intermediaries to support this emerging class of “carbon market entrepreneurs

Accelerate the expansion of the SMEs in order to enhance their potential to lead national and global climate change initiatives with targeted assistance.

Conduct a financing needs assessment of México’s clean tech SMEs in order to understand the barriers to public and private investment capital; identify access to capital and cost of capital needs; identify types of investments and financing required to accelerate business development in the emerging and diverse carbon market; etc.

4 Leverage New R&D Relationships

Establish a solar test platform in México in cooperation with U.S. and European solar labs in order to test, evaluate and develop operating experience with all forms of promising solar technologies.

Form industry partnerships with German, Spanish and U.S. solar technology providers to demonstrate their equipment in México as a platform to launch deployment and market entry; Recruit demonstrations of the most promising solar technologies such as Distributed concentrating solar, cooling, and desalination.

Expand existing, and form new, research partnerships between Mexican institutions and Sandia National Laboratory, the National Renewable Energy Laboratory, German’s DLR and Spain’s Platforma de Solar Almería.

Increase participation of Mexican research institutions and SMEs in European solar R&D initiatives such as: the European Union’s Seventh Framework Programme which strongly encourages participation of non‐European partners; the European Commission’s Mediterranean

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and Concentrating Solar Desalination Project (MED‐CSD); and continue México’s work with the International Energy Agency in initiatives such as Concentrating PV, PV‐thermal, solar thermal cooling, solar industrial heat, etc.

Establish new initiatives with border research institutions such as:

o Global Institute of Sustainability, Arizona State University: ASU is a leader in the PV industry with core capabilities in solar PV testing, advanced PV materials and devices, building‐integrated PV, power electronics and power systems, etc.

o Arizona Research Institute for Solar Energy, University of Arizona: AzRISE is conducting

applied research in energy storage, smart‐grids, PV, optics and concentrators, solar housing, etc.

o Institute for Energy and the Environment, New Mexico State University: The IEE is

conducting much work that would be of interest to México such as: the use of solar energy to power desalination which operates the Brackish Groundwater National Desalination Research Facility located in the Tularosa Basin, in Alamogordo, NM; a recent demonstration of a 105 kW (30 Ton) commercial solar cooling project; and provides technical support to the U.S. Department of Energy PV inverters and standards.

5 Increase Awareness of Solar Thermal Capabilities with High‐Profile Demonstrations

In addition to R&D, there are numerous opportunities for high profile D&D (demonstration and deployment) of commercially‐available technology which can replace fossil fuel‐based electricity and industrial combustion processes. A common need for all sectors of renewable energy is to increase awareness of the role that existing and emerging renewable technologies can play in enhancing the competitiveness of SMEs through reduced energy costs and GHG emissions. Investments in high profile demonstration projects pay‐off in increased awareness of the role that renewable energies and sustainable technologies can play among policy‐makers, government officials, carbon project developers, “self‐generators”, architects and engineers, industry leaders, the investment community and SMEs. Such demonstrations have great potential to accelerate industry acceptance by showing technical and economic performance. Recommended demonstrations include:

Solar Cooling o Large industrial solar cooling “big‐box” demonstration with roof‐mounted, medium‐

temperature parabolic trough collector driving a double effect absorption chiller o Small commercial demonstrations with flat‐plate collector with an absorption chiller and

with evacuated tube collectors to drive a single‐effect adsorption chiller

Industrial Process Water o Large‐scale bottle washing with solar hot water o Low‐ and medium‐temperature for chemical processes

Industrial Process Heat o Pre‐heating natural gas boilers o Agricultural drying o Applications using different heat exchangers and temperatures

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Distributed Solar Thermal Electricity o Industrial “self‐generation” project using medium‐temperature parabolic trough

collectors and an organic Rankine Cycle power block to generate electricity and usable heat from the waste heat

Energy Storage o Incorporate low‐cost thermal storage solutions to low‐ and medium‐temperature

applications by adding 1‐6 hours of useful heat

* * * 1 http://en.solarwirtschaft.de/home/photovoltaic‐market/german‐market.html 2 Iglesias, E.R. and Torres, R.J. (2003) “Low‐ to medium‐temperature geothermal reserves in Mexico: a first assessment”, Geothermics, Volume 32, Issues 4‐6, August‐December 2003, Pages 711‐719, Selected Papers from the European Geothermal Conference 2003 3 “Obama, Calderon agree on US‐México framework on clean energy”, International Business Times, April 16, 2009 4 http://www.cana.net.au/kyoto/template.php?id=5 5 http://www.wri.org/stories/2009/11/foundation‐low‐carbon‐future‐essential‐elements‐copenhagen‐agreement

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Section 7 Company Screening Process and Company Profiles

TechBA used the following methodology to develop a final screen of 24 Mexican companies as candidates for the “Solar Energy Sector” business acceleration program:

A database was developed which identified 485 Mexican companies which focused on solar energy;

These companies were statistically analyzed by region and sub‐sector

Company information and websites were reviewed and a “Filter 1” screen of companies was made;

A “Filter 2”‐level screen was then made with staff conducting phone interviews of “Filter 1” companies to confirm and gather additional information such as:

o Annual revenue o Number of employees o Main products/services o Main clients o Competitors o Competitive advantage

A “Filter 3”‐level screen was conducted with a second round of phone interviews with the company CEO or with senior decision‐making staff. These interviews were used to analyze the capacities of the company and the company’s interest in exporting;

Based upon company interest and export potential, the initial list of site visits to 10 companies was expanded to 24. Face‐to‐face interviews were then conducted with these companies by TechBA staff and the solar sector consultant during November 2009.

The following tables provide details on the companies interviewed during site visits.

Value Chain Map of TechBA Solar Companies

14. Generadores 14. Generadores MexicanosMexicanos

18. 18. MerryMerry TechTechI t i lI t i l

50

>250

3. CAPTASOL3. CAPTASOL 4. Comercializadora 4. Comercializadora General SolarGeneral Solar

Mexicanos Mexicanos InternacionalInternacional

40

Mill

ions

MX

P)

1. 1. AlescoAlesco Energía y AguaEnergía y Agua

13. ERDM 13. ERDM

20

30

2008

Sal

es (M

2 C2 Calentadoresalentadores 9. 9. NewenNewen Energías AlternasEnergías Alternas

10. 10. EnergisolEnergisol

20. SEI 20. SEI AutomationAutomation

10

20 2. C2. Calentadores alentadores Solares de Solares de

MéxicoMéxico

6. Ecosistemas 6. Ecosistemas

7. Ecoturismo 7. Ecoturismo y Nuevas y Nuevas

Tecnologías Tecnologías

gg

12. 12. ERdCERdC

15. Global 15. Global SolareSolare

16. Grupo 16. Grupo DesmexDesmex

17. 17. MexiónMexión

19. 19. RespaSolarRespaSolar

21. 21. SunwaySunway de Méxicode México

22. 22. ThermosolThermosol

5. 5. CryplantCryplant EnergiasEnergias RenovablesRenovables8. EFISOL 8. EFISOL

11. 11. EnerthiEnerthi

7-2Confidential Business InformationConfidential Business Information

Company DetailsCompany DetailsCompany 1. 1. AlescoAlesco Energía y AguaEnergía y Agua 2. Calentadores Solares de 2. Calentadores Solares de

México, SA de CVMéxico, SA de CV

City México DF ZapopanCity México DF Zapopan

State México DF Jalisco

Sales 2008 (MXP) $40,000,000 $5,750,000

Sales 2009 (P) (MXP) $20,000,000 $10,800,000Sales 2009 (P) (MXP) $20,000,000 $10,800,000

Employees 25 10

Value Chain Solar System Operation & Management

Solar System Components

Primary Sector Power Project Engineering Assembly

Secondary Sector Project Development of Large Self-Generation Projects

Components Manufacturing

T h l T V i S l H t W t S tTechnology Type Various Solar Hot Water Systems


Company 3. CAPTASOL (3. CAPTASOL (SolexSolex)) 4. Comercializadora General 4. Comercializadora General Solar (Módulo Solar)Solar (Módulo Solar)Solar (Módulo Solar)Solar (Módulo Solar)

City Celaya Cuernavaca

State Guanajuato Morelos

Sales 2008 (MXP) $9 000 000 $50 000 000Sales 2008 (MXP) $9,000,000 $50,000,000

Sales 2009 (P) (MXP) $20,000,000 $100,000,000

Employees 50 100

Value Chain Proprietary Equipment Proprietary EquipmentValue Chain Proprietary Equipment Proprietary Equipment

Primary Sector Solar System Manufacturingand Distribution

Solar System Manufacturing and Distribution

Secondary Sector System Integration System Integration

Technology Type Solar Hot Water Systems Solar Hot Water Systems


Company 5. 5. CryplantCryplant EnergiasEnergiasRenovablesRenovables

6. Ecosistemas 6. Ecosistemas

City Cuernavaca México DF

State Morelos México DF

Sales 2008 (MXP) $5,000,000 $8,000,000

Sales 2009 (P) (MXP) $8,000,000 $28,000,000

Employees 5 40

Value Chain Solar System Integration Proprietary Equipment

P i S t I t ll ti / C t ti C t M f t iPrimary Sector Installation / Construction Component Manufacturing

Secondary Sector Maintenance Installation

Technology Type Various Photovoltaic (PV)Technology Type Various Photovoltaic (PV)


Company 7. Ecoturismo y Nuevas 7. Ecoturismo y Nuevas TecnologíasTecnologías

8. EFISOL / 8. EFISOL / InteluxInteluxTecnologías Tecnologías

City Zaragoza Monterrey

State Edo. De México Nuevo Leon

Sales 2008 (MXP) $2 070 000 $2 300 000Sales 2008 (MXP) $2,070,000 $2,300,000

Sales 2009 (P) (MXP) $2,700,000 $20,250,000

Employees 10 10

Value Chain Solar System Operation & Equipmenty pManagement

q p

Primary Sector System Integration and Engineering

Component Manufacturing

Secondary SectorSecondary Sector

Technology Type Various Other


Company 9. 9. NewenNewen Energías AlternasEnergías Alternas 10. 10. EnergisolEnergisol

City Mexicali México DF

State Baja California México DF

Sales 2008 (MXP) $20,700,000 $23,000,000

S l 2009 (P) (MXP) $27 000 000 $33 750 000Sales 2009 (P) (MXP) $27,000,000 $33,750,000

Employees 15 18

Value Chain Solar System Integration Solar System Integration

Primary Sector Installation / Construction Import and Distribution of SolarPrimary Sector Installation / Construction Import and Distribution of Solar Thermal Equipment

Secondary Sector Component Manufacturing

Technology Type Photovoltaic (PV) Solar Hot Water Systems


Company 11. 11. EnerthiEnerthi MéxicoMéxico 12. 12. ERdCERdC Energía Renovable Energía Renovable del Centrodel Centrode Ce t ode Ce t o

City Miguel El Marques

State Hidalgo Queretaro

Sales 2008 (MXP) $0 $10,000,000

Sales 2009 (P) (MXP) $67,500,000 $20,000,000

Employees 12 15

Value Chain Project Development of LargeRenewable Projects

Solar Cell ManufacturingRenewable Projects

Primary Sector System Integration / CarbonFinance

Installation / Construction

Secondary Sector Installation / Construction Components Manufacturing

Technology Type Various Various


Company 13. ERDM Solar13. ERDM Solar 14. Generadores Mexicanos 14. Generadores Mexicanos ((GenermexGenermex))

City San Andres Tuxtla Monterrey

State Veracruz Nuevo Leon

Sales 2008 (MXP) $34,500,000 $287,500,000

Sales 2009 (P) (MXP) $67,500,000 $405,000,000

Employees 35 300

Value Chain Solar Panel Manufacturing Solar System Components

P i S t S l S t M f t i C t M f t iPrimary Sector Solar System Manufacturing Components Manufacturing

Secondary Sector Rural Electrification System Integrator

Technology Type Photovoltaic (PV) - Generators for Utilty-Scale SolarTechnology Type Photovoltaic (PV) -Polycrystaline (poly-Si, mc-Si) and Monocrystaline (c-Si)

Generators for Utilty-Scale Solar Power Blocks


Company 15. Global 15. Global SolareSolare 16. Grupo 16. Grupo DesmexDesmex

City Guadalajara Leon

State Jalisco Guanajuato

Sales 2008 (MXP) $9,200,000 $17,250,000

Sales 2009 (P) (MXP) $13,500,000 $135,000,000

Employees 8 15

Value Chain Solar System Integration Solar System Integration

Primary Sector Installation / Construction Installation / Construction

Secondary Sector Consulting & Other Services Consulting & Other Services

Technology Type Solar Hot Water Photovoltaic (PV)


Company 17. 17. MexiónMexión 18. 18. MerryMerry TechTech Internacional, Internacional, S.A. de C.V. S.A. de C.V.

City México DF Tijuana

State México DF Baja California

Sales 2008 (MXP) $7,245,000 $628,427,209

Sales 2009 (P) (MXP) $16,200,000 $653,407,754

Employees 15 417

Value Chain Project Development Solar System Components

P i S t S t I t t / C b P d t d C tPrimary Sector System Integrator / CarbonFinance

Product and ComponentManufacturing

Secondary Sector Installation, Construction and operation of Large Self-Generation RenewableGeneration RenewableProjects

Technology Type Various


Company 19. 19. RespaSolarRespaSolar 20. SEI 20. SEI AutomationAutomation S.A. de C.V.S.A. de C.V.

City Merida Guaycura

State Yucatan Baja California

Sales 2008 (MXP) $14,950,000 $28,750,000

S l 2009 (P) (MXP) $13 500 000 $27 000 000Sales 2009 (P) (MXP) $13,500,000 $27,000,000

Employees 18 30

Value Chain Solar System Integration Equipment

Primary Sector Retail Components ManufacturingPrimary Sector Retail Components Manufacturing

Secondary Sector Installation / Construction

Technology Type Various PV Manufacturing Equipmentgy yp g q p


Company 21. 21. SunwaySunway de Méxicode México 22. 22. ThermosolThermosol

City México DF Guadalajara

State México DF Jalisco

Sales 2008 (MXP) $8,625,000 $18,000,000

Sales 2009 (P) (MXP) $13,500,000 $24,000,000

Employees 4 13

Value Chain Proprietary Equipment Equipment

Primary Sector Solar System Manufacturingand Distribution

Import and Distribution of Solar Thermal Equipment

Secondary Sector System Integration

Technology Type Solar Hot Water Systems Solar Hot Water Systemsgy yp y y

7-13

* * *Confidential Business InformationConfidential Business Information

Appendix 1‐1

Appendix 1 Solar Technology Value Chain

Appendix 1‐2

1 Photovoltaic Value Chain

Appendix 1‐3

Appendix 1‐4

Appendix 1‐5

Appendix 1‐6

Appendix 1‐7

Appendix 1‐8

Appendix 1‐9

Appendix 1‐10

2 Concentrating Solar Thermal Value Chain

Appendix 1‐11

Appendix 1‐12

Appendix 1‐13

Appendix 1‐14

Appendix 1‐15

Appendix 1‐16

Appendix 1‐17

Appendix 1‐18

* * *

Appendix 2‐1

Appendix 2 Solar Policies and Incentives Overview

1 Study Overview

1.1 Purpose

The following study presents an overview of how policy can be used as a driver for promoting renewable energy development, investment and market penetration. The purpose of the study is to provide information that will help answer two fundamental questions. First, where do international business opportunities exist for small and medium‐size Mexican businesses SMEs. Secondly, what can Mexico learn from the policy strategies of global leaders in order to promote internal development and investment in renewable energy technology?

1.2 Scope and Methodology

The scope of this study includes two sections. The first presents an overview of the Policy including the rationale behind policy, relevant stakeholders, policy drivers and policy approaches. The second section analyzes the policy strategies of three countries and one state specifically highlighting policies that uniquely address photovoltaic (PV) solar energy, concentrated solar power (CSP) and biodiesel. The study began by taking a broad survey of various policy strategies across several different countries and regions—similarly highlighting policies that specifically addressed PV solar, CSP and biodiesel. Subsequently, the scope of the study was narrowed to focus on the following regions.

Germany: Due to its global leadership in renewable energy technologies

Spain: Due to its recent global leadership in PV and CSP technology and its cultural and language similarities with Mexico

US: Due to its diverse renewable energy opportunities, its proximity to Mexico and its significant business potential for Mexican companies.

California: Due to its renewable energy technology leadership, its proximity to Mexico and its significant business potential for Mexican companies.

2 Policy and Renewable Energy Technologies

2.1 Rationale for Policy Drivers

Even though Renewable Energy has experienced worldwide interest, impressive technological developments and some impressive market penetration successes, Renewable Energy has continued to penetrate the energy market Although there is general consensus that renewable energy technologies should make up a greater portion of the world’s overall energy production, actual market penetration has been difficult and slow. Both the legitimacy of market barriers and the limited strength of natural market drivers can result in

Appendix 2‐2

limited investment and implementation of renewable energy technologies. In order to alter this situation, public policy has proven to be one mechanism by which countries can promote and foster renewable energy growth. In fact, there are a variety of factors that help illustrate the need for policy as a driver of renewable energy. Due to market‐entry barriers, the current level of renewable energy implementation and production is less than what would be efficient at today’s market prices.

Many analysts believe that fossil fuel prices are not adequately adjusted to reflect the true resource scarcity of fossil fuels. If price levels were more commensurate with the long‐term scarcity of fossil fuels, renewable energies would become more competitive.

One inherent risk involved with fossil fuels is their notorious price fluctuations and volatility. As such renewable energies are a means of diversifying a countries energy portfolio this reducing risk and creating a greater level of security and energy independence.

Widespread use of fossil fuels has a damaging effect on both human health and the environment. Properly accounting for these costs and including them into the overall cost of fossil fuels helps demonstrate the relative cost effectiveness of renewable energies.

Renewable energy technology is still a young and growing industry. Consequently, countries that promote internal development and investment in renewable energy technology will likely experience economic and employment growth as this sector expands.

In rural areas, renewable energy technologies allow communities to leverage local natural (and labor) resources in order to generate energy.

2.2 Stakeholders1

Successfully chartering renewable energy policies involves the cooperation (or, at least, the consideration) of several groups of stakeholders. In general, national governments are the primary entities that create renewable energy initiatives and policies. In some cases (such as the United States) states and/or local governments also have considerable freedom to develop their own renewable energy policies as well. However, local governments are typically the ones that implement and enforce renewable energy policies that have been previously defined and established at a national level. Additionally, national governments may opt to participate in multinational renewable energy initiatives such as those established by the European Union. These agreements allow countries to make a united effort towards the promotion of renewable energy technology. In the commercial sector, energy supply and service companies are naturally significant stakeholders in matters concerning renewable energy policy. Historically, energy companies have approached renewable energy technology defensively; however, many are now adopting a much more favorable disposition. That said, governments need to ensure that the energy sector is a level playing field for established providers and market entrants to compete fairly. Further up the value chain, equipment suppliers and financial service entities are industry players that have commercial and financial interests in the renewable energies market. Ensuring that these players are considered in policy decisions is important.

Appendix 2‐3

Citizens are stakeholders that can become a source political support (or, conversely, opposition) in matters of renewable energy policy. Providing citizens with the opportunity to participate and support policy decisions will greatly increase political support. Non‐Government Organizations (NGOs) play a unique role in the promotion of renewable energy in comparison with other players in the stakeholder network. In fact, these organizations are often the main supporters of renewable energies. Due to their unique interests in renewable energy, they actively strive to minimize the challenges and obstacles involved with introducing renewable energy. Acting as early promoters and global advocates, NGOs continue to present renewable energy as a benign energy technology that can legitimately benefit society as a whole.

2.3 Policy Drivers2

Over the past several years, countries across the world have begun implementing various policies in order to promote renewable energies. Because of differences in political ideologies, government structure and resource capabilities there are a broad range of renewable energy policies being implemented. However, these categories can be categorized into half a dozen categories.

2.3.1 Mandated Market Policies

This is the most direct and forceful approach to promote the adoption of renewable energy technology. The purpose of these policies is to give the renewable energy industries a large enough foothold in the energy market, so that they can become well established and self‐sustaining. Mandated market policies take several different forms, but one of the most common types include Renewable Portfolio Standards (RPS), renewable energy targets requirements. These mandates require countries, states and/or energy producers to meet renewable energy quotas (percentages and/or specific quantities). Another common example of a mandated policy is a Feed‐in Tariff, which essentially establishes above market energy prices for an extended period of time (20‐25 years). This allows renewable energy producers (and their investors) to recover their invested capital. Lastly, policies such as competitive bidding concessions and tradable renewable energy certificates also are forms of mandated market policies.

2.3.2 Financial Incentives

Financial Incentives are another policy strategy for promoting renewable energies. The purpose of financial incentives is to decrease the costs of renewable energy and in turn increase their competitiveness relative to established non‐renewable energies. There are several different types of financial incentives including (but not limited to), capital grants, third‐party financing, investment tax credits, property tax credits, production tax credits, sales tax rebates and excise tax exemptions. Additionally, taxes on fossil fuels also help increase the competitiveness of renewable energy, while simultaneously internalizing some of the external costs involved with fossil fuels (environmental damage and energy security).

2.3.3 Public Investment

This policy involves giving preference to renewable energy in government procurement, infrastructure projects and the use of public benefit funds. These policies can also be combined with development programs.

Appendix 2‐4

2.3.4 Integration and Standards

Another fundamentally important category of policies are the policies that further the establishment of industry standards, permits, building codes and environmental guidelines. This is especially important because most renewable energy technologies are relatively new technologies.

2.3.5 Awareness and Education

Another important driver of renewable energy is public and industry information. Thus policies that disseminate information, generate awareness, provide educational resources and facilitate capacity expansion make up a distinct policy category.

2.3.6 Research and Development

Because renewable energy technology is generally newer technology it depends heavily on research and development funding. Policy that provides direct funding or incentives for research and development make up the final policy category.

3 Policy Approaches3 Over the past several years, there are a handful of general policy approaches that have been observed. These general approaches will be highlighted below:

In general, all countries have renewable energy policies at some level. Countries that do not have polices that specifically address renewable energy often include renewable energy technology in policies relating to rural energy, electricity sector expansion, etc. However, based on experience, countries with scattered, non‐aligned and non‐coherent renewable energy programs have not proven successful in promoting renewable energy—even with international cooperation.

Another common approach that has been adopted by several countries including Egypt, Pakistan and Uganda is to embed several policy measures into a single renewable energy project. For example, countries have focused on generating awareness, building capacity and promoting research and development around a single renewable energy development project. Often these projects are publicly funded, although private partnerships are becoming increasingly common. In general, these projects are seen as a promising first step towards a large, fully‐scoped renewable energy policy program.

In the past, industrialized nations have adopted commonly adopted a technology development perspective where the country develops policy drivers that support research and development, generate awareness, disseminate information and build capacity. These policy drivers in turn promote research and development in renewable energy technologies with the expectation that developers would bring the technology to appropriate markets for commercialization. However, this has proved largely unsuccessful and has highlighted the significant barriers involved with commercialization.

In order to address these commercialization barriers countries have generally adopted two different approaches.

Appendix 2‐5

The first strategy aims to improve the competitiveness of renewable energy technologies relative to fossil fuels. This is achieved by using a variety of financial incentives, which reduce the costs of renewable energy. Taxes are also sometimes placed on fossil fuels in order to better adjust for environmental damages and energy security costs. This approach has proven most successful in countries where market barriers have already been significantly reduced.

The second strategy is a more forceful approach and focuses on market transformation. As such, policies help provide renewable energy technologies with both access to energy markets as well as support in order to ensure that the renewable energy achieves a significant market share. Specific policy strategies include mandated market policies such as price guarantees, feed‐in tariffs, public bidding, renewable energy certificates and quotas in Renewable Portfolio Standards (RPS).

In general, the strategies that have achieved the most success are those that utilize a demand‐pull approach for driving renewable energy development and investment. Interestingly, adopting a demand‐pull approach both increases market share while simultaneously laying the foundation for long‐term competitiveness. In fact, this generally initiates private investment in research and development, which allows the renewable energy to reach economies of scale.

4 Policy Analysis & Benchmark

4.1 Overview

4.1.1 Targets and Renewables Portfolio Standard

Region

Indicative Renewable Electricity

Target by 2010

Mandatory Renewable

Electricity Target by 2020

Germany 12.50% 18%

Spain 30.30% 20%

USA None None

California 20% 33%

4.1.2 Feed‐in Tariff Rates

Feed‐in Tariff Rates (eurocents/kWh) Germany Spain USA California

Solar PV 35‐49 18‐44 * ** Solar Thermal N/A 22‐27 * ** Biomass 8‐17 5‐16 * ** Geothermal 7‐15 7‐8 * ** Wind 4‐9 6‐7 * ** Hydro 4‐10 7+ * **

* The US has no Federal‐level feed‐in tariffs

Appendix 2‐6

** Variable feed‐in tariff based on time of day and contract dated.

4.2 Germany

As a global leader in renewable energy, Germany has arguably established the most effective blend of policies directed at promoting renewable energy technology. Germany’s chief renewable energy policy—the Renewable Energy Source Act (EEG)—essentially utilizes feed‐in tariffs in order to guarantee pricing and grid connection to renewable energy producers. The EEG supports several different renewable technologies including wind, water, solar, biomass, sewage gas combustion and geothermal energy. Because of Germany’s success in promoting renewable energy, feed‐in laws have been adopted in several European countries and proposed all across the world.

4.2.1 Feed‐in Tariffs

Under Germany’s Renewable Energy Source Act, feed‐in tariffs provide renewable energy providers (and their investors) with both guaranteed energy prices and grid connections. Without feed‐in tariffs, renewable energy projects are simply too high risk to be worth investing in. However, the combination of guaranteed grid‐connection and above‐market energy prices for 20‐years have allowed several renewable energy projects to secure investment financing. Additionally, in order to promote a rapid market response feed‐in rates decrease each year thus allowing projects that begin earlier to lock in higher rates.

4.2.2 Renewable Energy Targets

Additionally, Germany also has a variety of renewable energy targets. Some of these targets are voluntary while others are mandated by law. Mandatory targets set by the (EU) Directive on the Promotion of the use of energy from renewable sources

18% renewable share of final energy consumption by 2020

At least 10% renewable share of total transport fuel usage by 2020 Indicative Target set under the RES‐ Electricity European Directive from 2003

12.5% renewable share of gross electricity consumption by 2010

Germany’s 2008 Feed‐in Tariff Rates (Eurocents/kWh)

Photovoltaic solar 35.48 ‐ 48.98

Biomass energy 7.91 ‐ 16.83

Geothermal 7.16 – 15.00

Sewage gas 6.16 – 7.22

Offshore wind energy 8.92

Onshore wind energy 5.07 – 8.03

Water energy 3.54 – 9.67

Source: “Renewable Policy Report: Germany” EREC

Appendix 2‐7

National Renewable Energy Targets

25% to 30% renewable share of the electricity sector by 2020

14% renewable share in the heat sector by 2020

4.2.3 Tax and Credit Incentives for PV Solar

Germany also has some additional tax and credit incentives for investments in PV solar.

Investment costs for commercial systems (including planning and installation) can be depreciated over 20 years

In exceptional cases when a commercial system is installed near a manufacturing facility, 12.5‐27.5% of the investment cost can be claimed as a tax credit

Commercial Solar systems are VAT exempt (VAT is 19% in Germany)

The KfW Program “Solarstrom Ergeugen” is a credit incentive for private investors (100% of investment, max of 50,000 euros) which offers them financing for up to 10 years with 1‐2 years free of redemption or up to 20 years with up to 3 years at nominal interest rates between 4.15‐4.45% depending on duration.

The KfW “ERP‐Umwelt‐ und Energiesparprogramm” is a credit incentive for commercial investors (50% for Small and Medium Enterprises and 35% for other companies of investment is eligible) up to 500,000 euros of investment (in old federal states) and 1,000,000 euros (in new federal states) for a duration of 10 years with 2 years free of redemption (in old federal states) and 15 years with 5 years free of redemption (in new federal states) at nominal interest rates between 4‐7%.

“KFW Umweltprogramm” is a program for commercial investors that offers credit incentives for 75% of invested funds up to a maximum of 1,000,000 euros per installation, 96% net payment, durations of up to 20 years, 3 years free of redemption and nominal interest rates between 4‐7.72%.

There are also some regional investment grants for PV

4.2.4 Support for Renewable Energy Heating

In January 2009 the Renewable Energies Heat Act was enacted. The act makes the following provisions:

First, the act provides market incentives in the form of subsidies for solar thermal and small‐scale biomass heat generation. It is expected that the program will provide 500 million euro worth of support between 2009 and 2012 to support renewable energy in existing buildings.

Germany’s Renewable Energy Targets

Indicative Renewable Electricity Target by 2010 12.50%

Mandatory Renewable Electricity Target by 2020 18%


Appendix 2‐8

Second, the act mandates that new homes must fulfill a portion of their heating needs by utilizing renewable energies. Homeowners can use any type or combination of multiple renewable energy sources. The share of renewable energy portion must comply with the following standards:

o At least 15% for solar radiation

o At least 30% for biogas

o At least 50% for all other renewable energy technologies

4.2.5 Investment Subsidies

Resource Technology Support Level Start Year

Solar Thermal Solar Collectors < 40 m2

Investment Subsidies (Primary private households and SMEs)

Solar Thermal Solar Collectors > 40 m2

Repayment bonuses of up to 30% of investment cost

2007

Geothermal Max 1 Million euro per drilling; Max 550,000 euro per community heating system

2007

RES‐Community Heating systems

Max 550,000 euro per community heating system


4.2.6 Financial Subsidies

Resource Support Level Start Year

Solar Thermal Low‐interest loans with partial debt waiver (commercial and public sector applicants)

Solid Biomass Reduced interest KWF loans 2007


Appendix 2‐9

4.3 Spain

4.3.1 Tariffs and Market Premiums

Like Germany, Spain has also implemented a feed‐in policy strategy in order to promote renewable energy development. However unlike Germany, Spain has two separate feed‐in options for renewable energy producers. The first is a standard fixed feed‐in tariff for producers that supply energy through the transport or distribution grid. However, producers may alternatively choose to sell their energy on the wholesale electricity market at the current market price plus a feed‐in premium, which varies based on the state of the market. This allows renewable energy generators to receive above market prices up to a pre‐established limit. Feed‐in premiums are reevaluated every year and fixed feed‐in tariffs every four years; however, changes to feed‐in tariffs rates do not affect plants that are already in production. Available research data did not specify whether changes to feed‐in premiums would affect operating renewable energy plants.

Spain’s Feed‐in Tariff Rates

Feed in Tariff (eurocents/kWh)

Feed‐in Premium (eurocents/kWh)

Capacity (MW)

Life (y)

Feed in Tariff Reference feed‐in premium

Upper limit Lower limit

Solar PV

< 0.1 0‐25 44.0381

> 25 35.2305

0.1‐10 0‐25 41.7500

> 25 33.4000

> 10 0‐25 22.9764

> 25 18.3811

Solar Thermal 0‐25 26.9375 25.4000

34.398 25.404 > 25 21.5498 20.3200

Wind Onshore 0‐20 7.3228 2.9291 8.4944 7.1275

> 20 6.1200 0.0000

Geothermal, tide, ocean

0‐20 6.9800 3.8444

> 20 6.5100 3.0600

Hydro

< 10 0‐25 7.8000 2.5044

> 25 7.0200 1.3444

10‐50

0‐25 6.60 +1.20*[(50 ‐capacity)/40]

2.1044

8.000 6.1200 > 25

5.94+1.08*[(50‐capacity)/40]

1.3444

Biomass*

*Spain has over 19 different Biomass classifications and corresponding rate structures.

Source: “Renewable Policy Report: Spain” EREC

Appendix 2‐10

4.4 Renewable Energy Targets

Mandatory Targets set by the (EU) Directive on the Promotion of the use of energy from renewable sources

20% of final energy consumption by 2020

At least 10% of total transport fuel usage by 2020 Indicative Target set under the RES‐ Electricity European Directive from 2001

30.3% share of RE on gross electricity consumption by 2010 National Targets

12.1% share of RE in Primary Energy Consumption by 2010

4.5 Support for Renewable Energy Heating and Cooling

Like other countries in the EU, Spain has a series of policies and incentives that specifically promote the use of renewable energy for heating buildings. The most direct and forceful policy addressing renewable energy heating is the CTE (Codigo tecnico de la edification) policy, which mandates that all buildings must derive 30‐70% of their water heating energy from solar thermal energy. This mandate applies to all new and remodeled buildings. In order to support the CTE mandate, Spain also offers investment subsidies to all individuals, companies and organizations investing in solar thermal energy systems. The subsidy pays for 37% of the total costs of the project. Additionally, Spain has established a few different programs that help provide financing for renewable energy projects. One program aims at providing 100% financing for projects involving:

Solar thermal systems with capacity greater than or equal to 20kW

Co‐generation systems with capacity up to 20MW

Biomass thermal energy systems up to 3MW power capacity A second program provides loans to individuals and small and medium size enterprises (SMEs) for solar thermal projects. These loans can range from 10,000‐300,000 Euros and begin accruing interest after the completion of the project at an interest rate of 7%.

Spain’s Renewable Energy Targets

Indicative Renewable Electricity Target by 2010

30.3%

Mandatory Renewable Electricity Target by 2020

20%

Source: “Renewable Policy Report: Spain” EREC

Appendix 2‐11

4.6 United States of America

The landscape of US renewable energy policy is much more complex than many of the European policy strategies. Instead of a few Federal‐level policies, the U.S. policy landscape is marked by several Federal tax incentives. On the federal level, the U.S. primarily provides tax incentives, grants and loans that to support renewable energy. The following is a list of Federal financial incentives:

Policy Type of Incentive

Support

Renewable Energy Conservation Subsidy Exclusion

Personal Tax Exemption

Rebates from utilities for energy conservation measures (i.e. solar energy systems) are nontaxable (proposed)

Residential Renewable Energy Tax Credit

Personal Tax Credit

Tax credit equal to 30% of investment in renewable energy system up to $2000

Modified Accelerated Cost‐Recovery System plus Bonus

Corporate Depreciation Incentive

Renewable energy systems receive additional 50% bonus depreciation above standard depreciation

Renewable Energy Conservation Subsidy Exclusion

Corporate Tax Exemption

Rebates from utilities for energy conservation measures (i.e. solar energy systems) are nontaxable (proposed)

Business Energy Investment tax Credit (ITC)

Corporate Tax Credit

Tax credit equal to 10‐30% of investment in renewable energy systems

Qualifying Advanced Energy Manufacturing Investment Tax Credit

Corporate Tax Credit

Tax credit equal to 30% of investment toward an advanced renewable energy project in the renewable energy manufacturing sector ($2.3B)

Renewable electricity Production Tax Credit (PCT)

Production Tax Credit

Renewable energy production tax credit of 1.1‐2¢/kWh

Renewable Energy Production Incentive (REPI)

Production Incentive

Renewable energy production incentive payments of 2.1¢/kWh

Renewable Energy Grant Grant Grant equal to 10‐30% of investment in renewable energy systems

Rural Renewable Energy Grant

Grant Grant of up to 25% of total project cost for rural small business and agricultural producers

Tribal Energy Grant Grant Provides financial assistance, technical assistance and education to tribes for the development of renewable energy

Clean Renewable Energy Bonds (CREBs)

Loan Essentially an interest free loan. Interest is paid in the form of tax credits to the bondholder. ($2.4B)

Energy‐Efficient Mortgages

Loan Provides energy‐efficiency mortgages for energy improvements including investments in renewable energy systems

Qualified Energy Conservation Bonds (QECBs)

Loan Essentially an interest free loan. Interest is paid in the form of tax credits to the bondholder. ($3.2B)

Loan Guarantee Program Loan Provides Loan guarantees that support the commercial use of renewable energy technologies ($750M)

Appendix 2‐12

Additionally, there are a few Federal regulatory policies that exist as indicated in the table below.

Policy Type of Regulation

Details

Interconnection Standards for Small Generators

Interconnection Federal interconnections standards for small generators up to 20 MW

Energy Goals and Standards for Federal Construction

Construction Targets

Sets renewable energy targets for new and renovated federal buildings

At the state level there are a variety of different strategies that are being employed including Renewable Portfolio Standards (RPS), renewable energy specific targets, tax incentives, rebate programs, grant programs, loan programs, interconnection standards, net metering and public benefit funds. The following maps illustrate the current policy strategies of each state. Additional maps illustrating state policy frameworks are included in the Appendices section.

Source: www.dsireusa.org

Appendix 2‐13



Appendix 2‐14


4.7 California

4.7.1 Feed‐in Tariffs

In 2009, California established a new feed‐in tariff system allowing small renewable energy generators (<3MW) to sell energy at established, above‐market prices. Contract periods range from 10‐20 years with adjustable rates based on time of contract initiation and time of day. All types of renewable energy technologies are eligible to receive feed‐in tariffs; however, solar technologies are eligible for higher

rates.4

4.7.2 Renewable Portfolio Standards

In 2002 California established its first legislated Renewable Portfolio Standard; however, since then the state has increased its commitment to renewable energy by setting increasingly aggressive targets. Based on California’s current standards, the state must achieve a 20% renewable energy share by 2010

and a 33% share by 2020.5

4.7.3 Property Tax Incentives

Although most renewable energy systems increase a property’s market value, California has enacted a law in 1999 that excludes solar systems from being included in property tax assessments. Thus, an

investment in a solar system does not result in increased property taxes.6 Alternatively, a different program allows property owners to receive “property tax financing,” which allows them to receive government financing in order to fund renewable energy projects. In return, the money used to fund

the project is repaid through increased property taxes over a period of years.7

Appendix 2‐15

4.7.4 Solar Rebate Programs

In order to specifically promote solar energy production, California has developed several different rebate programs. A summary of the various programs is provided in the tables below.

4.7.5 California Solar Initiative

(For solar PV systems, unless otherwise noted)

Incentive Type System Size Target Incentive

Expected Performance‐Based Buydown

<50kW

Residential & Commercial $2.50/W‐AC one time rebate or opt for PBI*

Government & Nonprofit $3.25/W‐AC one time rebate*

Performance‐Based Incentive (PBI)

>50kW

Taxable Entities $0.39/kWh for 5 years*

Government & Nonprofit $0.50/kWh for 5 years*

Low‐Income Multi‐Family Affordable Solar Housing Program

‐ Common Area Loads $3.30/W‐AC one time rebate*

‐ Systems that offset tenant loads $4.00/W‐AC one time rebate*

Low‐Income Single‐Family Affordable Solar Housing Program

1‐1.2kW Households <50% of Area median Income

Fully Subsidized System

‐ Households 50% ‐ 80% of area median Income

$4.75‐7.00/W‐AC

Pilot Solar Water Heating Program

‐ Residential/Small Commercial $1,500

‐ Larger Commercial Up to $75,000

* Initial rates; Rates decrease as system capacity increases.

Source: http://www.dsireusa.org/incentives/

CEC – New Solar Homes Partnership (For Solar PV Systems)

Incentive Type Target Incentive

Base Incentive Custom homes, select housing developments

$2.50/W*

Solar as a Standard Feature Incentive

Select housing developments $2.60/W*

Residential Areas of Affordable Housing Projects

Affordable Housing Projects $3.50/W*

Common Areas of Affordable Housing Projects

Common Areas of Affordable Housing Projects

$3.30/W*

Appendix 2‐16

Emerging Renewables Program*

Energy Technology System Capacity Incentive

Wind First 7.5 kW $2.50/W

7.5 – 30 kW $1.50/W

Fuel Cells <30 kW $3.00/W

* Additional Incentives for systems installed in Affordable Housing projects


Self‐Generation Incentive Program*

Energy Technology System Capacity Incentive

Wind Turbines 30kW ‐ 3MW $1.50/W

Fuel Cells 30kW ‐ 3MW $4.50/W

Advanced Energy Storage ‐ $2.00/W

*Program also includes provisions for non‐renewable energy sources


4.7.6 Interconnection and Net Metering

California’s “Rule 21” addresses the specific elements of interconnection including the operating and metering requirements for energy generating systems up to 10MW. Once the energy generating system is approved by the local utility, the generator is connected to the grid and can begin selling energy under a standard tariff schedule. Although the differences between feed‐in tariffs and net metering are largely theoretical, they are definitely distinct from a policy perspective. In 1996, California created a policy that mandates utilities to guarantee net metering for up to 1MW for renewable energy (solar and wind) systems.

4.7.7 Local Government and Utility Programs

In addition to the state‐level programs and incentives, California has a variety of incentives at the local government level as well. These programs include incentives such as:

Fee Waivers

Expedited Permitting

Leasing Incentives

Production Incentives Rebates

Loans

Grants

Financing

Appendix 2‐17

5 Recommended Resources

Thematic Background Papers (12)

International Conference for Renewable Energies, Bonn, Germany 2004 Available online at: http://www.renewables2004.de/en/cd/default.asp.

Policy Recommendations for Renewable Energies (Conference Outcome)

International Conference for Renewable Energies, Bonn, Germany 2004 Available online at: http://www.renewables2004.de/en/2004/outcome_recommendations.asp

Global Renewable Energy and Measures (online) Database

http://renewables.iea.org

Renewable Energy Country Attractiveness Index

Ernst & Young, August 2009 http://www.ey.com/Publication/vwLUAssets/Renewable_energy_country_attractiveness_indices_August_2009/$FILE/Renewable_energy_country_attractiveness_indices_August%202009.pdf

EU Renewable Policy Reviews (Including Germany & Spain)

EREC | European Renewable Energy Council http://www.erec.org/policy‐actions/national‐policies.html

Database of State Incentives for Renewables and Efficiency

http://www.dsireusa.org Stimulus Package http://www.energy.gov/additionaltaxbreaks.htm http://www.energy.ca.gov/2008publications/CEC‐100‐2008‐008/CEC‐100‐2008‐008‐CMF.PDF http://www.erec.org/fileadmin/erec_docs/Projcet_Documents/RES2020/GERMANY_RES_Policy_Review_09_Final.pdf http://www.erec.org/policy‐actions/national‐policies.html http://www.wind‐works.org/FeedLaws/USA/Feed‐in_Tariffs_and_Renewable_Energy_in_the_USA_‐_a_Policy_Update.pdf http://www.cmslegal.com/newsmedia/publications/publicationdetail/pages/default.aspx?PublicationGuid=5d8f51c6‐8c00‐4df5‐b579‐05cb29814fe6 http://eetd.lbl.gov/ea/ems/reports/lbnl‐154e‐revised.pdf http://www.boell.de/downloads/ecology/FIT_in_America_web.pdf http://www.energyblueprint.info/fileadmin/media/documents/national/2009/e_r__national_usa_lr‐Final.pdf http://www.boell.de/downloads/ecology/FIT_in_America_web.pdf http://eetd.lbl.gov/ea/ems/reports/lbnl‐154e‐revised.pdf

Appendix 2‐18

Attachment 1: Additional Tables and Figures

Ernst & Young Renewable Energy Country Attractiveness Index

See original source for index ranking methodology and analysis.

Rank Country All

Renewables Wind Index

Wind Onshore

Wind Offshore Solar

Biomass/Other Geothermal

Regulatory Infrastructure

1 US 70 71 75 59 73 64 67 68

2 Germany 66 67 66 71 65 64 60 64

3 China 66 69 73 59 54 56 60 69

4 India 62 63 70 42 61 56 43 60

5 Spain 60 61 66 46 66 53 35 63

6 Italy 59 59 64 46 64 55 65 64

7 UK 57 61 59 66 37 55 34 60

8 France 57 59 60 54 53 57 28 58

9 Canada 55 60 64 46 33 48 31 59

10 Portugal 54 56 61 43 51 45 33 58

11 Ireland 52 57 58 57 28 47 27 60

12 Greece 51 53 57 42 56 42 33 55

13 Australia 50 51 54 42 54 46 59 53

14 Sweden 50 52 52 51 35 55 34 52

15 Netherlands 46 49 50 49 37 40 21 42

16 Poland 46 49 53 39 34 41 22 46

17 Denmark 45 48 45 54 32 45 32 50

18 Belgium 45 50 48 55 28 35 26 47

19 Norway 45 48 49 45 24 44 30 49

20 Brazil 44 44 48 34 40 46 20 41

21 New Zealand 42 46 50 36 25 33 43 41

22 Japan 42 44 46 38 43 33 38 45

23 Turkey 42 43 46 36 40 36 42 44

24 Austria 34 31 41 0 43 47 35 48

25 Finland 33 33 32 35 20 47 22 33

Source: Renewable Energy County Attractiveness Index, Ernst & Young, August 2009 http://www.ey.com/Publication/vwLUAssets/Renewable_energy_country_attractiveness_indices_August_2009/$FILE/Renewable_energy_country_attractiveness_indices_August%202009.pdf

Appendix 2‐19

Appendix 2‐20

Source: www. dsireusa.org


Appendix 2‐21



Appendix 2‐22



Appendix 2‐23

* * * 1 "Renewable Energy Actors and Stakeholders." http://www.ren21.net/REPolicies/policy/actors.asp (accessed 10/7/09). 2 "Instruments of Renewable Energy Policies." http://www.ren21.net/REPolicies/policy/instruments.asp (accessed 10/7/09). 3 "Concepts of Renewable Energy Policies." http://www.ren21.net/REPolicies/policy/concepts.asp (accessed 10/7/09). 4 http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=CA167F&re=1&ee=0 5 Senate bill 107, Schwarzenegger 2008 Executive Order; http://www.energy.ca.gov/renewables/index.html 6 http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=CA25F&re=1&ee=0 7 http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=CA198F&re=1&ee=0

Appendix 3 Solar Sector Market Opportunities

Presentation

Solar Sector StudySolar Sector StudyOverview of Market OpportunitiesOverview of Market Opportunitiespppp

December 2009December 2009

1

Summary of export opportunities for U.S. solar marketSummary of export opportunities for U.S. solar market

1. Develop and export proprietary Mexican solar systems, equipment and products

2. Recruit European solar technology companies to manufacture solar products and systems in México for export and national marketsp

3. Provide the Supply Chain base for key “high‐value” components required for utility‐scale solar in California and Arizona

4. Export lower‐cost energy engineering services to support the design and development of solar projects in southwest U.S.

5 E t l l t i it t U S b M i I d d t P P d5. Export solar electricity to U.S. by Mexican Independent Power Producers

6. Develop and export to U.S. the expertise of Mexican system integrators with multi‐disciplined engineering and installation experience gained in “distributed” solar thermal applications such as space cooling and industrial process heat

7. Develop and export to the world the expertise of Mexican system integrators gained in international development projects for the design and installation of rural electrification and p p j goff‐grid projects using solar and other renewables

2

California and Arizona: Market Demand for SolarCalifornia and Arizona: Market Demand for Solar

– Target Market is California (CA), Arizona (AZ) and Southwest U.S.

– CA needs 24 GW of renewables to meet 33% renewable energy requirements in 2020

• This is almost half of México’s installed capacity in 2007

• Solar is expected to provide more than 50% of CA and AZ’s renewable generation

• Demand‐side calls for $60.3 billion of utility‐scale solar energy capacity needed by 2020

– CA will remain the global leader in utility‐scale solar thermal electric (388 MW of parabolic trough was installed in 1989)

• October 2009 ‐ 10 GW in near‐term solar power plants are now being permitting in CA withOctober 2009 10 GW in near term solar power plants are now being permitting in CA with $40.6 Billion in Project Costs

• Another 60 GW of utility‐scale solar projects are in the “pipeline” and have applied for permits to build on public lands in California, Arizona, Nevada and New Mexico

– CA and AZ have 70% of the U.S. PV market share and are new global PV “hot‐spot”

N CA i 200 000 l h t t t i t ll d b 2017– New CA program requires 200,000 new solar hot water systems installed by 2017

3

Size of CA and AZ solar market to 2020 Size of CA and AZ solar market to 2020 –– A diversified A diversified market worth ~USD 92 Billionmarket worth ~USD 92 Billion

Demand‐Side to Solar Market: Estimated Market Value of Needed Solar Capacity for Existing Programs and Policies to 2020 for California and Arizona

Installed Market Value of Solar $=USD

MW

sta edCosts $/MW

a et a ue o So aProjects Leveraged by

Incentives


CA RPS Utility‐PV 3,235 $7,000 $22,645,000,000

CACalifornia Solar Initiative ‐ Distributed PV 3 300 $7 800 $25 740 000 000CA PV 3,300 $7,800 $25,740,000,000




CA Total 15,103 ‐‐ $83,377,000,000



AZ Total 1,869 ‐‐ $9,261,003,088

CA+AZ Total Projected Demand‐Side Market 16,972 ‐‐ $92,638,003,088CA+AZ Total Projected Demand Side Market 16,972 $92,638,003,088

bl f l

4

RPS = Renewable Portfolio Requirements

1. Solar systems, equipment and products1. Solar systems, equipment and products

• Design, develop, manufacture and export proprietary solar products

– Solar Hot Water Systems

– Solar Street Lightsg

– PV Panels

– PV Manufacturing Equipment

– PV balance‐of‐system componentsy p

• Re‐design and manufacture solar‐powered DC equipment, appliances, and accessories to meet off‐grid requirements for costs, durability and basic features

– Appliances such as refrigerators and freezers

– Interior and exterior lighting systems

– Electronics and electrical equipment such as TVs, radios, battery chargers, PCs, ect o cs a d e ect ca equ p e t suc as s, ad os, batte y c a ge s, Cs,etc.

– Cooling equipment such as fans, air conditioners, and evaporative coolers

– Tools and equipment, etc.

5

1. Solar Products 1. Solar Products –– Proprietary to Mexican SMEsProprietary to Mexican SMEs

FlatFlat Plate Collectors forPlate Collectors forFlatFlat--Plate Collectors for Plate Collectors for Solar Hot at Solar Hot at WalmartWalmart Solar Street LightingSolar Street Lighting

Evacuated Tube Collector for Solar Evacuated Tube Collector for Solar

6

Hot Water 70Hot Water 70––9090°°CC

1. Solar Products 1. Solar Products ‐‐ Types of DC productsTypes of DC products

70W Solar refrigerator/freezer70W Solar refrigerator/freezer

Fluorescent TFluorescent T--8 fixture 8 fixture with highwith high--efficiency DC efficiency DC ballast powered by roofballast powered by roof--

top PVtop PV

800W/18,000 Btu DC Air Conditioner800W/18,000 Btu DC Air Conditioner

60W 13.3” LED TV/DVD Player 60W 13.3” LED TV/DVD Player

42” “42” “VariVari--Fan” Fan” 12v or 24v DC12v or 24v DC

12” 212” 2--speed speed 12v DC fan12v DC fan

7

2. Leverage solar product manufacturing to México2. Leverage solar product manufacturing to México

• Leverage European solar technology and product providers to manufacture in México for export sales/distribution and for the emerging national solar sector

– Product Lines

• Medium‐temperature parabolic trough collectors

• Solar cooling equipment such as adsorption chillers and absorption chillers (single‐ff d d bl ff )effect and double‐effect)

• “Distributed” thermal power blocks such as Organic Rankine Cycle Turbines, Kalina Cycle Turbines, Stirling Engines, "small steam", etc.

• PV balance‐of‐system equipment such as inverters, charge controllers, trackers, y q p , g , ,mounting systems, etc.

• PV‐powered DC equipment for grid‐connected “low carbon” applications –

– Lighting for energy‐efficient commercial/industrial "green buildings“

– DC appliances equipment accessories and tools– DC appliances, equipment, accessories and tools

– Approaches

• Develop partnerships between Mexican and European SMEs

• Recruit Foreign Direct Investmentg

8

2. Solar Products 2. Solar Products ‐‐MediumMedium‐‐Temperature CollectorsTemperature Collectors

Solarlite (Germany)Solarlite (Germany)

Solitem (Germany)Solitem (Germany)

9Abengoa (Spain)Abengoa (Spain)

2. Solar Products 2. Solar Products -- MediumMedium‐‐Temperature CollectorsTemperature Collectors

SoleraSolera Sunpower (Germany)Sunpower (Germany)

PolyTrough (Australia)PolyTrough (Australia)

Ab (S i )Ab (S i )Abengoa (Spain)Abengoa (Spain)

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2. Solar Products 2. Solar Products ‐‐ “Distributed” Thermal Power Blocks for “Distributed” Thermal Power Blocks for

MediumMedium‐‐Temperature SolarTemperature Solar

Kalina Cycle Power PlantKalina Cycle Power Planth lh l °°Thermal Input ~100Thermal Input ~100°°CC

200 kW Turboden Organic Rankine Cycle Turbine200 kW Turboden Organic Rankine Cycle TurbineThermal Input ~100Thermal Input ~100‐‐310310°°CC

10kW 10kW sbpsbp EuroDish EuroDish with SOLO Stirling with SOLO Stirling E iE iEngineEngine

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2. Solar Products 2. Solar Products ‐‐ Small Solar Chillers from EuropeSmall Solar Chillers from Europe

10kW 10kW AbsorptionAbsorption CoolingCooling, , HeatingHeating and Hot and Hot WaterWater fromfrom

Climatewell (Climatewell (SwedenSweden) ) °°

8kW + 15kW 8kW + 15kW AdsorptionAdsorption ChillersChillersfromfrom SorTechSorTech AG (AG (GermanyGermany) )

Input at 55Input at 55‐‐9595°°CC


9kW 9kW AbsorptionAbsorption CoolingCoolingfromfrom SolarNext (SolarNext (GermanyGermany) )


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2. Solar Products 2. Solar Products ‐‐ PVPV‐‐Thermal SystemsThermal Systems

Net solarNet solar--toto--energy conversion efficiencies energy conversion efficiencies >50% with 2>50% with 2--4 kWh thermal generated for 4 kWh thermal generated for every 1 kW produced every 1 kW produced y py p

AbsoliconAbsolicon Solar Concentrator ABSolar Concentrator AB

HD Solar/HD Solar/HelioDynamicsHelioDynamicsPowerPower‐‐Spar/Spar/MenovaMenova

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HD Solar/HD Solar/HelioDynamicsHelioDynamicsPowerPower Spar/Spar/MenovaMenova

Announced Utility Scale Solar Projects in California and Arizona October 2009

3. Scale of Supply Chain Needed for Utility3. Scale of Supply Chain Needed for Utility‐‐Scale SolarScale Solar


Projects

Capital Costs per kW

Total MW Capital Investment


CSP Power Tower 14 $3 000 2 547 $7 641 000 000

NearNear--Term CA Term CA and AZ Projects and AZ Projects with Announced with Announced CSP Power Tower 14 $3,000 2,547 $7,641,000,000

CSP Dish‐Stirling 2 $2,000 1,600 $3,200,000,000


PV Thin‐Film 5 $5,000 1,153 $5,762,500,000

PV 1‐Axis Tracking Silicon 2 $7,000 440 $3,080,000,000

Totals 36 ‐‐ 10,453 $38,208,725,000

Power Purchase Power Purchase AgreementsAgreements

Totals 10,453 $38,208,725,000

Projected Volume of Parabolic Trough Mirrors, Receivers and Structural Supports

for Concentrating Solar Thermal Electric Projects in California, Arizona, Nevada

and New Mexico to 2015

MW Collector AreaNumber Mirrors

Number Receivers

Space Frame Metal

Supply Chain Supply Chain N d d fN d d f MW Collector Area Mirrors Receivers Metal

Trough 12,753 73,969,140 m² 30,607,920 3,101,603 539,915 mT

7,400 Hectares 12,406 km

Unit Basis per MW of Trough

5,800 m² Mirror surface area

Needed for Needed for Southwest U.S. Southwest U.S. Trough ProjectsTrough Projects

,

2,400 Mirrors ‐ number

243 Receivers ‐ number

4 m Receiver ‐ length

122 Spaces frames

42.3 Aluminum ‐metric Tons

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3. Major Components for Utility‐Scale Solar

Parabolic Trough Parabolic Trough --Structural SupportsStructural SupportsStructural SupportsStructural Supports

Solargenix/AccionaSolargenix/Acciona LUZ LUZ

Solar MillenniumSolar Millennium SENERSENER

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P TP TPower Tower Power Tower HeliostatsHeliostats

BrightsourceBrightsource

AbengoaAbengoa

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AbengoaAbengoa


Parabolic Trough Parabolic Trough ReceiversReceivers

Schott PTR 70 ReceiverSchott PTR 70 Receiver

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DishDish--Stirling Stirling -- ReflectorsReflectors

Stirling Energy Systems Stirling Energy Systems –– 750 MW Project, El Centro, California750 MW Project, El Centro, California

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30,000 x 25kW units30,000 x 25kW units


Parabolic Trough Parabolic Trough ––Steam Power BlocksSteam Power Blocks

Nevada Solar One 64 MW Parabolic Trough PlantNevada Solar One 64 MW Parabolic Trough PlantSolargenix/AccionaSolargenix/Acciona

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Parabolic Trough Parabolic Trough -- Power BlockPower Block

Solana 280 MW Parabolic Trough PlantSolana 280 MW Parabolic Trough PlantGila Bend, Arizona Gila Bend, Arizona AbengoaAbengoa

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4. U.S. solar project developers outsourcing energy 4. U.S. solar project developers outsourcing energy engineering services to Mexican companiesengineering services to Mexican companies

• Several Mexican full‐service energy engineering companies have extensive experience in project development, project engineering and transmission interconnections for large renewable “self‐generation”/carbon projects in México

• Many of these companies have worked with large Spanish system integrators (i.e. Acciona, Abengoa, Iberdrola) on wind projects in México; these are the same companies who are now developing many of the utility‐scale solar thermal p p g y yprojects in the U.S.

• There are great opportunities for U.S. solar project developers to achieve considerable cost savings by outsourcing engineering services to Mexican companies in the fields of mechanical, structural, electrical, power plant and civil engineering

• As the U.S. begins to adopt mandatory greenhouse gas emission reductions, opportunities also exist for Mexican SMEs to export expertise in “carbon” project development, in project qualification for “certified emission reductions” and indevelopment, in project qualification for certified emission reductions and in structuring and leveraging carbon finance

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5. Export of Solar Electricity to U.S.5. Export of Solar Electricity to U.S.

• CA anticipates renewable electricity imports from México

– Upgrades to transmission in Southern California expect wind, geothermal and

solar electricity from Baja California

– First large Power Purchase Agreement for sale of wind energy to CA utility has been completed (1250 MW at La Rumorosa)

• 5 GW of solar thermal potential in northern México5 GW of solar thermal potential in northern México

– More solar potential than wind

– No known solar Independent Power Producer (IPP) projects being planned

• Great opportunities for Mexican IPP to sell solar electricity to CA and AZGreat opportunities for Mexican IPP to sell solar electricity to CA and AZ utilities and to large industrial customers

– Short cross‐border interconnections to California utility sub‐stations

– Complex permitting and public land acquisition processes createsComplex permitting and public land acquisition processes creates uncertainties and delays

– Staging utility‐scale solar plants along northern border offers large German and Spanish system integrators low‐cost alternatives to CA and AZ

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5. Export of Solar Electricity to U.S.5. Export of Solar Electricity to U.S.

Southwest U.S. Southwest U.S. Transmission Transmission Lines and Key Lines and Key Load CentersLoad CentersLoad CentersLoad Centers

Solar ResourcesSolar ResourcesBaja CaliforniaBaja California

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6. Export technical know6. Export technical know‐‐how of System Integrators how of System Integrators experienced in solar thermal applicationsexperienced in solar thermal applications

• Low‐ and medium‐temperature solar thermal (< 250°C) energy has perhaps greater potential than PV and utility‐scale solar electricity to off‐set greenhouse gas emissions and to reduce energy costs

• Greatest gap in “Distributed” solar thermal value chain is shortage of experienced system integrators, project developers and multi‐disciplined energy engineers who can package turn‐key solar industrial process heat, solar cooling, solar desalination and small thermal electric projectsprojects

• Such commercial/industrial projects require extensive site‐specific engineering and integrated technical design at a level far beyond that required for PV or solar hot water. The key technical challenge is the integration of the solar collector field and the closed‐loop hydraulics of the heat transfer fluid (usually water) with a conversion process or equipment heat exchanger

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6. Export technical know6. Export technical know‐‐how of System Integrators how of System Integrators experienced in “Distributed’ solar thermal applicationsexperienced in “Distributed’ solar thermal applications

• This new field of system integrators requires competencies in a wide‐range of engineering disciplines such as electrical, mechanical, hydraulic/plumbing, industrial processes, environmental civil and structural as well as competencies in energy efficiency analysis andenvironmental, civil and structural as well as competencies in energy efficiency, analysis and management

• There are significant opportunities for energy project developers, energy services companies, engineers and turn‐key energy or industrial equipment installation companies to enter this space by scaling‐up existing capabilities

• Several Mexican solar companies have been involved with the use of flat‐plate and evacuated p ptube solar collectors for industrial applications such as pre‐heating natural gas fired boilers for process heat and for hot water for bottle washing; Some of these companies have also used solar collectors for low‐temperature solar cooling

• The lack of technical expertise in CA and AZ in solar thermal applications presents great opportunities for Mexican system integrators to enter this market with a subsidiary or in partnership with U.S. companies

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7. Export technical know7. Export technical know‐‐how of System Integrators how of System Integrators experienced in rural electrification and offexperienced in rural electrification and off‐‐grid projectsgrid projects

• Global “Off‐grid” Market:

– 1.6 Billion people world‐wide are without electricity

– 6.5 Million people in México live "off‐grid

38% f U S PV i t ll ti " ff id“– 38% of U.S. PV installations are "off‐grid“

– 7 GWp of new “off‐grid” global PV capacity predicted by 2020

• System integration for remote off‐grid requires unique multi‐disciplined projectSystem integration for remote off grid requires unique multi disciplined project development, design, installation and system training skills

• There is a growing number of Mexican system integrators working in international d l t j t i l i i t ll ti f PV l h t t ll i d bidevelopment projects involving installations of PV, solar hot water, small wind, biomass, micro‐hydro energy generators and equipment such as lighting, cooling, battery charging, etc.

• There are significant opportunities for México’s small and medium‐sized system integrators to leverage their national experience and expertise to become major players in the emerging global off‐grid market. Secondary opportunities also exist to develop and redesign existing renewable products for the unique requirements of remote off‐grid applications

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Solar Sector Study TechBA AZ FV Jan 2010

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