Mexico Encourages Renewables

Mexico Encourages Renewables

March 01, 2006

Mexico has taken the first step toward providing incentives to use renewable energy.

The Mexican House of Representatives (Cámara de Diputados) passed a “Law for the Use of Renewable Energy Sources” (Ley para el Aprovechamiento de Fuentes Renovables de Energía) in December, and the measure has now been sent to the Mexican Senate for its review and approval. Many believe that the law will be enacted this year.

Mexico has effectively committed, by ratifying the Kyoto protocol, to use more renewable energy as a source of electricity.

The installed generating capacity worldwide from renewables is 50,000 megawatts. Mexican installed capacity from renewables is just two and three megawatts. This leaves enormous room for growth. The Mexican Ministry of Energy estimates that there is potential to generate approximately 5,000 megawatts from wind power, 1,000 megawatts from biomass and 150 megawatts from biogas drawn from landfills.

The measure the House passed in December would favor seven kinds of renewables: wind, sunlight, water, the ocean, and biomass, biofuels or organic wastes.

The measure authorizes incentives to promote the use of such renewables, but it is vague and ambiguous about the type of incentives. This will be left largely to the Ministry of Energy — called SENER — to decide. The measure directs SENER to work with state and municipal governments. SENER is also supposed to coordinate with the Ministry of Economy on a package of incentives to encourage manufacturing of renewable energy equipment in Mexico.

Some of the incentives will be given only to Mexican utilities, like the Comisión Federal de Electricidad and Luz y Fuerza del Centro, and to Mexican-domiciled electricity generators (defined as Mexican individuals or entities organized under Mexican law and domiciled in Mexico).

It is not only the incentives that have been left vague, but the other details of the program to encourage renewables also remain to be worked out. The measure directs SENER to set goals for renewable energy usage and then list actions that will be taken to achieve the goals. SENER will manage a trust from which grants will be made (Fideicomiso para el aprovechamiento de fuentes renovables de energía). The House said that the funding for the trust would be drawn from a number of sources, but the total peso amount is unclear. The funds are supposed to come from federal appropriations, certain duties to be identified in the future, contributions from state governments and municipalities, voluntary contributions by individuals and companies, contributions by international organizations and proceeds from the sale of renewable energy certificates to individuals or entities in Mexico and abroad.

The amounts in the trust will be further divided into a number of subaccounts. These subaccounts are a “green fund,” an “emerging technologies fund,” a “rural electrification fund,” a “biofuels fund,” a “general renewable energy fund” and a “renewable energy technology research and development fund.”

The funds in the various subaccounts would be used to make grants to eligible projects.

For example, the green fund would be used to make grants to power projects that will supply their output exclusively to the national grid. The only projects that qualify potentially are those developed by Mexican utilities or Mexican-domiciled generators of electricity. SENER would have discretion about how large a grant to award a project, but in theory the grant is supposed to close the gap between the cost of the renewables projects and what a lower-cost power plant that uses fossil fuel would cost. “Self-supply projects,” also known as inside-the-fence projects, would be ineligible for grants from the green fund.

The other funds — apart from the green fund — would be used to make grants to a wide range of projects. Grants would be given to develop renewables technology, especially in isolated areas, supply renewable power to isolated and low-income communities, promote the commercialization of biofuels for use in gasoline and diesel fuel sold domestically by PEMEX, promote new technologies that use renewables in other sectors besides electricity generation, and promote the use of biofuels and solar energy (for example, for heating water).

Projects that receive grants would have to use at least 2% of the grant money to support community development in the areas where the projects are located.

The projects must also meet minimum national integration percentages and encourage local community participation.

The measure that passed the House is a good start for developers, even if many details remain to be worked out by the Senate.

Renewable energy is often intermittent in supply. The measure would commit the national grid to take all energy supplied from eligible renewables projects at prices to be determined under future guidelines set by law. The measure also lets the government show that Mexico is taking steps to implement its obligations under the Kyoto accord. This should help Mexico qualify for financial assistance from the multilateral lending agencies.