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37% wind; 23% efficient cogeneration; 17% hydro; 12% nuclear; 6% solar and bio energy, and 5% geothermal. 25 The new generation projects estimated by technology were formulated by SENER using available data for projects that have been finished but are not yet in operation, projects that are under construction, approved projects, and estimated projects that are under consideration. In reality, the final composition of new projects by 2029 is expected to vary widely from these estimates. 26 For example, future renewable energy projects will depend largely on the effectiveness of the Clean Energy Certificate market that won’t start until 2018. New nuclear capacity is likely to face several obstacles as well.

The government’s broad definition of clean energy—certain renewables, but also cogeneration, other low-carbon emissions technologies, future new clean technologies, and existing large hydropower, and nuclear 27—may prove somewhat controversial, especially in light of the new clean energy certificates, or CELs, that are replacing the country’s two previous types of renewable incentives: the energy bank and the fixed, low-cost wheeling rates (or “postage stamp” rate). 28 Subsidized wheeling rates were mainly designed for the wind industry as they helped lower the cost of transmission and distribution, so generators were not forced to absorb the interconnection costs of clean energy deployment. 29 The energy bank was established in 2001 as another way to support the wind industry and decouple energy supply and demand. It allowed selfPrograma de Desarrollo Del Sistema Electrico Nacional 2015 to 2029 PRODESEN.” 25 “Programa de Desarrollo Del Sistema Electrico Nacional 2015 to 2029 PRODESEN.” 26 As determined through discussions with SENER.

27 *Note: Hydropower and nuclear power are still run through state monopolies. John B. McNeece III. 2015.

“Renewable Energy in Mexico Under the Energy Reform”. presented at the Imperial Valley Economic Development Corporation Eighth Annual Renewable Energy Summit, March 12.

28 Yayoi Sekine. 2015. “Mexico Unveils Power Market Rules, Clean Energy Target”. Bloomberg New Energy Finance.

29 “Mexico’s Energy Revolution Series: A Liberalized Electricity Sector.” 2015. White Paper. Manatt Jones Global Strategies.

10 suppliers to essentially “deposit” excess generation into the bank and “recover” it when their production could not meet their demand. 30 In the last decade, these incentives and measures arguably promoted renewable energy and cogeneration. Today, they no longer exist in the same form or will be phased out. CELs will emerge as the only renewable energy incentive. 31 CELs are tradable certificates that wholesale market industry participants will be obligated to obtain. However, draft guidelines under the new law that set forth the framework and criteria for granting CELs, buying and selling them, and a procedure for establishing the mandate to obtain them are yet to be finalized. 32 There is a push to level the playing field by relying on market mechanisms to promote development of the least expensive clean energy sources. 33 1.3.4 Organizational Changes with the Energy Reform The electricity law has brought major changes in the roles and responsibilities of

SENER, CENACE, CRE, and CFE. Some of the changes are described below:

SENER is Mexico’s energy ministry and will determine consumption levels in • order for an entity to be considered a “qualified consumer.” The Ministry will also carry out mechanisms for the diversification of energy sources, security, and the promotion of the use of clean energy. The Ministry is responsible for the final approval of the transmission and expansion plans and has the responsibility for market monitoring activities the first year of operation of the wholesale market.

CENACE is a separate and independent government entity and the main • operator of the wholesale market. The organization will set the spot price for electricity and be responsible for ensuring that demand for electricity is met at the lowest possible cost. 34 CENACE is responsible for preparing the transmission expansion plans.

CRE will issue permits for participation in the wholesale market as a buyer or • seller of electricity. They will also be responsible for setting tariffs of transmission, distribution, and basic retail services, issuing forms of interconnection contracts, setting general conditions for participants in the wholesale market, and managing CELs. 35 CRE is responsible for evaluating the transmission and distribution expansion plans provided by CENACE and the distribution companies. This 30 Stacey Davis, Mark Houdashelt, and Ned Helme. 2012. “Case Study: Mexico’s Renewable Energy Program”.

Center for Clean Air Policy.

31 Yayoi Sekine. 2015. “Mexico Unveils Power Market Rules, Clean Energy Target.” Bloomberg New Energy Finance.

32 Yayoi Sekine. 2015. “Mexico Unveils Power Market Rules, Clean Energy Target.” Bloomberg New Energy Finance.

33 “Mexico’s Energy Revolution Series: A Liberalized Electricity Sector.” 2015. White Paper. Manatt Jones Global Strategies.

34 Raquel Bierzwinsky. 2014. “Mexico Is Set to Open Its Power Sector - CFE, CENACE, Wholesale Generators, inside-the-Fence, Transmission, Retail, Electricity.” Chadbourne, Project Finance Newswire, June.

35 Jorge Alvarez, Fabián Valencia. 2015. “Made in Mexico: Energy Reform and Manufacturing Growth”. Working Paper. International Monetary Fund.

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CFE will continue to supply an electrical service at regulated rates to residential • users and small and medium-sized commercial and industrial users, also called “basic users.” CFE is responsible for the physical management of the electric network and with other future distributors, must submit to CRE and SENER, its distribution network expansion plans 36.

1.4 Methodology The following steps were taken to identify gaps and opportunities to support Mexico in a

transition to a lower emission electricity sector through renewable energy development:

Literature review looking at recent documents (~2012 to current work) to • understand the written research and recommendations to start the assessment.

Topics included:

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The NREL team, with two USAID team members, met with key stakeholders over • ten days in Mexico City. During the visit, the team met with the GOM, private stakeholders, and other donor country partners. All meeting attendees are listed in Appendix II.

During the visit, the team identified common themes that were discussed during • the meetings. In turn, potential program themes were identified as possible priorities for further program consideration.

Potential priority program areas were further detailed with technical input from • content experts Potential topics for in-depth research were determined relative to the prioritized • program areas. Some topics were only lightly touched on or not covered because they were not highlighted in the TDY or literature.

36 “Mexico’s Energy Revolution Series: A Liberalized Electricity Sector.” 12



This section explores possible program ideas and distinct activities for accelerating large-scale renewable energy in Mexico. Scaling up renewable energy in Mexico will enable continued economic development while reducing GHG emissions. The ideas set forth here are those that emerged through a literature review that included the context of the current energy reform, prior experiences and knowledge NREL gained through years of collaboration with the GOM and other partners, and themes that emerged during the two week in-country renewable energy assessment in May 2015.

2.1 Building Blocks for Scaling Up Renewable Energy The USAID GCC recently introduced guidance for USAID renewable energy program design recognizing that countries with large amounts of renewable energy deployment (thousands of megawatts (MW)) achieved these results through several core pillars, or building blocks, that enable renewable energy. These building blocks align with areas where USAID can add value through their programs in countries where achieving largescale renewable energy is a priority pathway for GHG emissions reduction.

The six building blocks identified by GCC are:

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A description of each of these building blocks can be found in the source document included in Appendix III. Figure 2 below illustrates the building block concept.

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NREL’s Renewable Energy Assessment in Mexico showed that all of the building blocks are important emerging themes in Mexico, especially in the context of the energy reform. Some represent clear areas of opportunity around which new USAID program activities could be designed. In particular, Grid Integration, Locational Concentration, and Financing Support are all areas where addressable barriers were identified.

The incentive scheme and procurement pathway for renewable energy in Mexico were both dramatically reshaped with the recent electricity reform, however a significant amount of uncertainty remains around implementation of both renewable energy procurement and the only remaining incentive (Clean Energy Certificates). This uncertainty will likely last for at least three years or until the CEL market is fully operational.

While there is a near-term opportunity to assist the GOM as they carry-out the reform in these areas, many other donors are helping GOM implement these elements of the reform. Based on this reality, USAID/Mexico may have less immediate impact in this space in 2016 as new program activities are implemented.. One exception may be in the area of incentives for distributed generation which is not addressed by CEL and for which a business model or incentive scheme could be developed 37.

While climate planning (the last building block) in Mexico is certainly a driver of renewable energy in the country (per the PECC, General Climate Change Law, and recent INDC), the space for high value USAID activities is likely in areas such as carbon markets, MRV, registries, and inventories, which will be addressed in the future Climate Economic Analysis for Development, Investment, and Resilience (CEADIR) assessment.

37 This topic will be further explored in a separate deliverable to USAID Mexico from NREL, which will address distributed generation opportunities and assess the LARCI proposal.

14 2.1.1 Planning for a RE future: Grid Integration Mexico has ambitious clean energy goals. For Mexico to have more renewable energy, the country must optimize the integration of variable renewable energy. The impact of Mexico’s clean energy goals will depend partially on Mexico’s technical capacity in this area.

Interconnection, variability, and planning were consistently cited challenges during interview meetings. One leader of the solar industry society, the Mexican Association of Photovoltaic Solar Energy (ASOLMEX), stated that perceptions about the variability of solar energy was one of the greatest challenges facing the technology. In addition, the CRE, which is responsible for reviewing long-term grid expansion plans, expressed interest in understanding how to overcome intermittency when incorporating renewable energy into such plans. The Instituto Mexicano para la Competitividad (IMCO) also saw several planning barriers to renewable energy development. It was also mentioned industry uncertainty with regards to how many more megawatts of solar the distribution or transmission system can reliably incorporate. Developing projects and seeking financing without certainty regarding the timing of necessary network upgrades (at the interconnection point or for critical transmission lines) is a challenge.

The literature review further supported these interview insights. Much of the analysis of the electricity reform in Mexico highlights the importance of the new, independent grid operator, CENACE, which is mandated to do expansion planning for the transmission system and to treat all generator types equally. Both Manatt Jones Global Strategies and Bloomberg New Energy Finance have pointed toward a gap in knowledge and human capital at CENACE regarding different aspects of grid operation 38.

An objective of any electric grid operating system, including Mexico’s, is to provide reliable service. Variability is an inherent component of power system operations, due to changes in demand, generator outages, failure to accurately follow dispatch signals, or variations in the underlying resource, as occurs with wind and solar. Some of this variability is reasonably predictable and some is not. Variability is addressed through planned energy scheduling and, for unpredicted variability, ancillary services (e.g., utilizing partially loaded, fast-response generation (such as hydro or gas generators)).

Solar and wind energy contribute to this variability, but in most systems their addition does not fundamentally change how the system is operated—the same suite of tools can be used to manage the added variability. Solar and wind generation that is below 5% or 10% of total generation are unlikely to affect the types and magnitude of reserves. At higher penetrations (e.g., 30% of all generation), wind and solar variability can affect the magnitude and timing (response time, duration, seasonality) of spinning and non-spinning reserves. At very high levels (e.g., above 50% of all generation), considerations will be needed to assess whether new types of reserve products and 38 “Mexico’s Energy Revolution Series: A Liberalized Electricity Sector.”

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