Mexico Windpower: Introduction to the Mexican wind market

It is four years since Mexico opened up its energy market to private and foreign investment, and the government is still grappling with regulatory challenges. [NB. We published this piece in the Wind Watch section of our global edition on 1st May 2017]

Source: Wikimedia Commons.

Mexico’s President Enrique Pena Nieto said in 2014 that he would not impose limits on foreign renewable energy investors coming into the country. This promise should have heralded the start of rapid growth in Mexico’s wind sector. But, while we have seen growth, it is not fast enough to be called ‘rapid’. Why?

In 2016, developers completed wind farms totalling 454MW in Mexico, bringing the total installed wind capacity to 3.5GW, which represents just 5% of total power generation. That is not much, but we should not be too critical considering the effort that Mexico is putting to reform its energy system, and the difficulty of moving from a state-run to a private system. That started back in 2013.

In December 2013, the Mexican government launched its ‘Reforma energética’, which fully opened the power system to private and foreign investment, to gradually build a competitive marketplace for energy suppliers.

There were two main reasons behind the reform.

First, Mexico has historically relied on oil to satisfy its power needs, with an energy market strictly under state control since 1938. This kept industrial electricity prices about 77% higher than in the US. Restructuring the power industry and creating a competitive market to bring energy costs down was then the main goal that officials wanted to achieve.

Second, the Mexican government wanted to make its energy sector less dependent on oil, and the reform aimed to encourage the development of new generation capacity.

The result is that the renewable energy sector has been liberalised and, in 2016, the government carried out two major generation auctions, with a third planned this year. These efforts have brought down Mexico’s wholesale electricity prices by 33% over the last three years, providing a significant stimulus to the economy.

However, to sustain its plans, the government needs massive inflows of foreign capital. One of the hoped-for effects of the reform was to bring in overseas investors in order to fund the delivery of clean, competitively-priced electricity. That hasn’t happened yet.

Let's look at some research from the Global Wind Energy Council last April, put together with Mexico’s wind energy association.

GWEC figures show that investment in the wind sector has been disappointing so far. In its 2014 Global Wind Report, GWEC said there has been $5bn of investments in wind until that point, with $14bn of capital inflows expected by 2018.

The new statistics show that $14bn has not happened: the country attracted $1bn of investment in wind in 2015, and $900m in 2016, bringing the total to date to $6.9bn. And yet, the government still forecasts it will attract $23.6bn by 2020. Essentially, government expectations for overseas investment have continued to grow but real investments have instead been fallen well short.

These investments are needed to support the country’s ambitious renewable targets. It has plans to see 12GW of wind capacity installed by 2020 and up to 15GW by 2022. This means that Mexico plans to grow its wind capacity fourfold in less than three years and fivefold it in less than five.

Given the pace of wind investments so far, the targets look difficult to achieve in such a short period. But there are steps the country can take to attract more of those capital inflows.

For example, the legal and regulatory framework for energy investment is still taking shape. After 76 years under the old structure, this has understandably taken time, but a favourable system here is essential to support renewables. A plan to support investment in the transmission grid is also much-needed.

If it does that then growth should speed up. Mexico has natural resources, solid fundamentals and supportive government policies. We see no reason that it cannot attract the foreign capital needs, as long as the government follows up its radical reforms with some much-needed improvements. It has taken down the old system. Now it must refine the new one.