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While the government has published in the PRODESEN a list of generation and • supporting grid infrastructure projects to be built from 2015 to 2029 (see section

1.4 of this document for the details of this composition), the actual projects that

will be built are likely to differ greatly from that list, for various reasons including:

–  –  –

o Second, with respect to renewable energy projects included in the PRODESEN, the current list is likely to be underestimating future new installed generation while indicating long-term projects that may never be built. For example, PRODESEN does not currently include projections for distributed generation, which is expected to be significant, especially from solar and efficient cogeneration technologies. The current list of renewables includes mostly projects that were grandfathered under the previous framework with incentives that were well understood by the financiers and are under development or ready to start development.

The PRODESEN also includes several projects estimated to begin construction way into the future. These include several projects from CFE or other sources not yet known. Some of these projects include large hydro and new nuclear generation that were projected before the energy reform. With the restructuring of CFE, some of these long-term projects may receive modifications or be cancelled. The future of these large projects creates further uncertainty for competing RE projects and related investment.

The uncertainty around the effectiveness of CELs in the short term is negatively influencing the number of RE projects included in the PRODESEN. Until the measurable effectiveness of the CELs program and its impact on prices is shown, it is difficult to accurately estimate the pace of investment and RE deployment in the future. The lack of information of future distributed generation and the uncertainty of the very long-term projects in PRODESEN are clouding the clean energy scenarios and required new investment.. USAID could continue to build local capacity in Mexico to improve its planning processes and provide models used by the industry for better forecasting of renewable energies to include distributed generation scenarios to meet clean energy goals while taking into consideration technical limitations and providing solutions.

USAID could also provide added support to review and implement new public policies and regulation, including a review of the CELs program and support the GOM around the creation of priority or competitive renewable energy zones, which will have a strong impact in the development of RE projects in various regions of the country.

With respect to the promotion of RE technologies or the future auctions for new • generation, there is currently no distinction between different clean technologies, except that the energy reform included a specific law for geothermal energy. If a priority for the Government of Mexico, there is an opportunity to work with various 26 stakeholders to establish programs and mechanisms to accelerate some technologies or business models in the market. One example could be solar leasing and community solar programs, and modifications to the CELs program to promote certain priority technologies in priority areas.

Special financing and technical support mechanisms may be needed to move • clean energy generation, energy efficiency programs, energy storage infrastructure, and smart grid projects at the state and municipality level. There is an opportunity to assess working with various stakeholders to develop programs and support mechanisms and instruments that could bring innovative solutions.

The idea would be to find solutions that could be replicated. There are a number of champions in the clean energy space at the state and municipal level where these mechanisms could be piloted.

There is a lack of financing mechanisms to assist small size RE generation • project developers to achieve low rate financing. While large projects can benefit from economies of scale and stronger interest from financiers, small projects are likely to be considered more risky with higher levelized cost of energy (LCOE) and therefore be less attractive to the large financial institutions. To assist the development of these growing sector, donor programs could provide collaborative assistance with government and commercial banks to implement programs that pool various projects as a single financing opportunity, thus spreading project risk (like the variability of the renewable energy resources) in various locations. Innovative financing instruments complemented with technical assistance could be offered to rapidly increase renewable energy deployment.

With the elimination of the Open Season, transmission lines specific for • renewable energy projects can now be included, after meeting certain conditions, in the PRODESEN. The lines that get approval for construction from SENER will have the opportunity to be built with private sector investment and co-ownership with CFE. Public private partnership models in this sector don’t currently exist, and present an opportunity for collaboration to develop the business models, programs and mechanisms based on best practices that could attract private sector investment and be successful in selling renewable energy capacity.

Mexico by law offers open access to the electricity network. RE transmission infrastructure that don’t get approval for inclusion in the PRODESEN can still be built by the private developers, as part of the RE project, making these projects more expensive and difficult to finance. Assisting these projects with financing solutions could also be an opportunity for donor programs.

Mexico is an early adopter of some renewable technologies for generation, • storage, and grid management. With the opening of the electricity sector to private investment and the creation of the wholesale power market, Mexico is poised to see a large influx of some technologies that may have a limited track record in terms of commercial deployment in the field. As a result, some of these technologies may require expert knowledge for the assessment of their technical and economic viability. Technical assistance programs attached to financing facilities would help lenders make investment decisions and greatly reduce 27 investment risk and lower the cost of capital of new technologies in Mexico in these specific cases. Program Theme As mentioned above, there are numerous opportunities to collaborate with many stakeholders including other donors, domestic and multilateral development banks, commercial banks, and the private sector. There are also opportunities to collaborate with other US projects already in development that are working to find innovative solutions to the financing challenges in this sector. Among others, there are opportunities for assisting in the creation of programs, innovative financial mechanisms, and technical support facilities across the whole spectrum of clean energy in Mexico.

This could include among a large variety of opportunities, generation projects from new technologies, transmission infrastructure for renewable energy, energy efficiency programs, energy storage, new business models, smart grid deployment, micro grids, and commercialization of new technologies.

The creation of specific programs and innovative financing mechanisms are beyond the scope of this assessment. If USAID is interested in pursuing any or some of these opportunities, a detailed assessment, working with various stakeholders is recommended. Other Stakeholder Activity Other donors seem very interested and some are already doing specific work and analysis of opportunities in this sector. The United Kingdom government is working with the Latin America Regional Climate Initiative (LARCI), SENER and Hacienda to identify financing mechanisms to accelerate renewable energy. The first task was to have the industry complete a survey to understand the risks and barriers within the industry. 49 The survey results will then be used to guide next steps for the donors in overcoming financing barriers. Other donors working in Mexico in this space include the German international cooperation agency GIZ, which is assisting the Government of Mexico through various agencies and programs to reduce barriers for finance of sustainable projects.

Regional and multilateral development banks have always played a key role in directly financing or co-financing early projects where commercial banks are not yet comfortable because of the lack of knowledge or the perception of high risk. In the clean energy space, these institutions have funded various studies and have been more active searching for larger opportunities. To fully develop their capabilities, some of these institutions may want to partner with other technical organizations, both local and international, to further develop appropriate instruments and programs for clean energy investment.

Private capital investment represents a very large pool of available funding for clean energy projects in generation, transmission, distribution and commercialization in 49 Mercedes Garcia Fariña. 2015. “Acelerando Las Inversiones En Energías Renovables En México”. 4–28.

28 Mexico. Other clean energy opportunities will be in energy storage and technical solutions for the integration of variable renewable energies. USAID could potentially collaborate with some of these stakeholders in building the technical capabilities to reduce investment risk and with the implementation of best practices to improve the investment profile of these projects.

2.1.4 Smart Incentives, Competitive Procurement, and Climate Planning The options presented here for a USAID program focused on large-scale renewable energy development have coalesced around the renewable energy planning through grid integration, renewable energy priority zones, and renewable energy finance. At the time of this writing, Mexico is deeply involved in promulgating the energy reform though the energy transition law has not been finalized. Therefore, program options to support smart incentives in Mexico, the competitive procurement process, or climate planning are not clear. Flexibility in the next phase of USAID’s work may be wise, because clear needs and gaps may emerge over the coming years. Below is a summary of the state of each of these building blocks (Smart Incentives, Competitive Procurement, and Climate Planning). Smart Incentives Smart Incentives are one of the USAID identified building blocks for enabling largescale renewable energy development. As a result of the energy reform in Mexico, there is currently only one renewable energy incentive, Clean Energy Certificates. Issued by the CFE, CELs are tradable certificates that wholesale market industry participants will be obligated to obtain 50 and are used to demonstrate compliance with consumption requirements of clean energy. The CRE will be responsible for awarding CELs to generators for each MW of clean energy they produce, and every year SENER will establish higher thresholds for including clean energy into the mix. 51 While the certificates broadly refer to clean energy, which some experts argue does not

do enough to target or incentivize renewables, they also provide an additional incentive:

the installation of distributed generation from clean energy sources. CELs issued for clean distributed generation will be increased for a clean generator based on the total power losses in the country’s electrical power system. 52 Published market rules for CELs by CRE and/or CENACE are forthcoming and were previously forecasted for June 2015. They will establish the manner in which parties will negotiate CELs through the wholesale power market. The published rules will also establish the procedures for CEL auctions in which other wholesale actors and utilities may participate. 53 50 Yayoi Sekine. 2015. “Mexico Unveils Power Market Rules, Clean Energy Target”. Bloomberg New Energy Finance.

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

52 Michael S. Hindus, Eric Save, and John B. McNeece III. 2014. “Mexico’s Guidelines for Clean Energy Certificates Will Support Renewable Energy Development”. Pillsbury.

53 “Mexico Announces Guidelines for Issuance of Clean Energy Certificates.” 2014. Nexant.

29 Competitive Procurement Competitive procurement is a USAID-identified building block to enable renewable energy. The idea is that through competitive procurement, renewable energy prices will be driven down through transparent and competitive procurement processes. In Mexico, the auction process is the competitive way in which new generation is procured. Mexico will soon publish market rules on the process for taking bids and auctioning off CELs.

Under current guidelines, long-term auctions for power, clean energy and/or clean energy certificates will be effective for 15 years. 54 They will allow market participants and suppliers serving residential and small business users (users who, alone, are not able to participate in the wholesale market) to enter into financial contracts for CELs. 55 Market operations are slated to begin October 2016. 56 At the time of this writing, many details of the auction process after the energy reform are still being worked out. While multiple opportunities for strategic USAID programing in this area are likely to emerge, at this time it is unclear what might be opportunities in the summer of 2016. The USAID funded Mexico Low Emissions Development MLED program is involved in the roll out of the auction process and is advising the GOM in this process.

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