CLEAN ENERGIES POLICIES AND REGULATION IN MÉXICO

During the last ten years, clean energies in Mexico have been growing. Setting aside hydroelectricity, electricity generated from wind, solar and biomass, went from around 400 GWh in 2007, up to more than 13,000 GWh in 2016. Such a spectacular growth has been the result of regulation and policy developed during this time and described as follows.

Energy policy to promote clean energies[1] in the electricity sector in Mexico has been basically based on 4 legal instruments: The Renewables Act (2008); the Climate Change Act (2012); the Electricity Act (2014) and the Energy Transition Act (2015) that abrogated the first one.  Except for the Electricity Act, they all set legal binding penetration goals. The Renewables Act specified a maximum of 65% fossil fuels based electricity generation (not capacity) for 2024, 60% for 2035 and 50% for 2050.  The first of these goals was reinforced by the Climate Change Act by rephrasing it in the opposite way: At least 65% of clean energies by 2024. The Energy Transition Act confirmed the target for 2024 but, different from what was stated in the previous legislation, instead of detailing goals beyond 2024, it sets goals for previous years, setting a short-term path for clean energies: 25% by 2018, 30% by 2021 and 35% by 2024[2].  Also, along with the Electricity Act, they introduced a policy change setting the clean energy requirements on the consumption of electricity rather than on its supply[3].

But before the existence of the Renewables Act, and despite the absence of specific policy for clean energies, regulation issued by the Energy Regulatory Commission (CRE) made possible the first investments in the field. Naturally, once the specific legislation was passed by Congress, this regulation became rooted and supported by policy. Among this first generation of regulations, four regulatory instruments are noteworthy. One was meant for small scale, distributed generation type developments, while the other three were designed for large projects.

The first one was a 1:1 net metering scheme. It considered two cases: Small and medium scale renewable generation (below 1 and between 1 and 69 kV respectively). The scheme allowed for a roll-over or virtual accumulation[4] of energy that could be used within a period of up to 12 months. It was very attractive for relative large residential and commercial consumers that were previously paying rates high above costs[5].

Regarding the large scale regulatory instruments, the first one was the interconnection contract for renewable and efficient cogeneration plants. This contract had a feature popularly known as the “energy bank”. This worked as a massive scale net metering mechanism where an accounting balance was made between the value of the energy calculated with the corresponding hourly rates at the generation point and the consumption nodes. A 12 months roll-over accumulation was allowed, and any excess energy –if any– could be sold to CFE (the State-Owned Utility) at the end of this period at 15% discount of the local marginal cost.

The second instrument was a special postage stamp rate schedule for renewable and efficient cogeneration plants. The schedule was calculated based on long run marginal costs and considering the benefits of substituting expensive fuel oil marginal generation in the short run. The third and final instrument was the definition of minimum efficiency standards for cogeneration so it could receive the same regulatory benefits as renewables.

Although these regulations made possible around 3000 MW of new capacity that was operating by 2015, they were limited to large users that were in practice the only ones able to sign bilateral contracts with private generators under the so called self-supply arrangement[6].

With the constitutional reform on energy in December 2013 a new industrial organization was established. CFE was both vertically and horizontally separated and the market opened to full competition and private participation in generation, supply and ancillary services. An Independent System Operator was instituted. Transmission and distribution remained controlled by the State but open to participation of the private sector through public bids organized by Secretary of Energy.

The reform also aimed to accelerate the transition from a high to a low-carbon electricity sector by introducing clean energy obligations to be met by Clean Energy Certificates (CECs) acquired by the demand side of the market. The obligations are set as to meet the clean energy goals already mentioned. Essentially, one CEC is equivalent to one MWh of clean energy generated. CECs can be sold under bilateral contracts resulting either from private deals or public auctions, and also in an organized market for unbalances.

Auctions will produce most of the CECs, at least in the short run. This is because they are the only mechanism that Load Serving Entities can use to satisfy the demand of regulated users and they can also be joined by non-regulated users or their suppliers (under a clearing house scheme). So far, two auctions have taken place and they both were extremely successful, setting world records in terms of low prices.

A third auction is under way and it is expected will be as successful as the two previous ones. If that is the case, Mexico will be close to meeting the clean energy penetration goals set in the law and, therefore, a large part of its commitments under the Paris agreement.

[1] Clean energies, as defined in the Mexican law, include a wide range of technologies from large hydro, nuclear and efficient cogeneration up to traditional renewables.

[2] By the end of 2016, clean energy generation (as previously defined) accounted for around 21% of the total generation, of which the largest share came from hydro (around 70%).

[3] Under the Renewables Act framework, the ultimate responsible to meet the goals was CFE, the State-Owned Utility. If private generation was not enough then CFE would be instructed to develop, directly or indirectly through contracts with IPPs, the lacking capacity.

[4] Excess generation (not consumed in place) is sent to the grid receiving “credits” that are used within a year to reduce the purchase of electricity when in site generation is less than consumption.

[5] Current regulated rates for this type of users include a cross-subsidy to reduce the rates for small users.

[6] Before the energy reform in 2013, there was not a wholesale market for electricity and small to medium users were not able to buy electricity from private generators or suppliers.