Market framework

Government electricity participants

Who are the principal government participants in the electricity sector? What roles do they perform in relation to renewable energy?

Until 2013, the generation, transmission, distribution and marketing of electric power for public utility service purposes in Mexico was exclusively reserved for the federal government, through the Federal Electricity Commission (CFE), a state-owned company of the federal government operating as a vertically integrated monopoly. Private participation was allowed only in the generation and transmission of power not intended to provide public utility services, under six types of permits. However, the Mexican energy sector is now subject to a completely new legal framework, enacted in 2014, following a historic constitutional reform passed and enacted in December 2013, that opened up almost all areas of the oil, gas and power industries to private participation and competition, with no foreign investment restrictions (the Energy Reform).

Over the past 20 years, the federal government fostered the participation of private companies in the electricity sector, particularly in power generation, through its independent power production programme (private independent power producers have a generation capacity of more than 14,000MW, a considerable portion of the growing demand) and self-use power generation projects, as those were essentially the only two schemes that allowed private participation; however, as a result of the Energy Reform, the electric power industry (previously vertically integrated and under the Constitution mostly reserved for CFE) is no longer considered ‘strategic’, and accordingly, all parties are free to participate except in those activities that have been expressly reserved to the state under the new article 27 of the Constitution (namely, nuclear power, power transmission and distribution as a utility service, and the dispatch and operation of Mexico’s National Electric System to be controlled by an independent system operator). CFE is no longer considered a public instrument of the federal government and has been transformed into a ‘state productive enterprise’, a new form of state-owned commercially oriented company, managed by a board of directors and subject to corporate governance principles.

Moreover, for the electric power sector, the Energy Reform created a completely new industry model based on a competitive wholesale electricity market (WEM) operated by the new independent system operator (ISO), while keeping the state’s control and ownership of the National Grid and its exclusivity with respect to power transmission and distribution activities, but with the express possibility of entering into contracts with private parties assisting the Mexican state in the development of such activities (including public-private partnership (PPP0 arrangements). The Energy Reform opened the market to merchant power plants that sell their power in bulk, where the ISO dispatches the system on the basis of cost efficiencies, providing market participants with non-discriminatory access to the grid, which is expected to affect the cost of power to the end user, thereby reducing the price differentials that the industrial and residential sectors currently have with respect to other economies.

The Energy Regulatory Commission (CRE) became the regulator of the midstream and downstream oil and gas industry, and all areas of the electricity industry, which turned the CRE into a powerful and vital part of the Mexican government.

Commercially speaking, the Mexican electricity sector is still divided into two main areas: the electric power public utility service, and the activities in which private participation is allowed. The generation, transmission, distribution and sale of power for public utility service purposes, previously reserved to the federal government through the CFE, is still controlled by CFE. However, as one of the most important and first changes resulting from the Energy Reform, the operational control of the National Electric System (SEN, which encompasses the generation, transmission and distribution facilities used in the provision of electric power public utility services) was assumed by the ISO, namely, the National Centre for Energy Control (CENACE), a governmental instrumentality created as a spin-off of CFE, in charge of operating the SEN and dispatching all the power output generated by the CFE and private generators interconnected with this system, provide open access to all market participants, and operate the WEM.

Private electricity participants

Who are the principal private participants in the electricity sector? What roles do they serve in relation to renewable energy?

Private participation in the Mexican electricity industry is mainly concentrated in those activities where private participation was already allowed prior to the Energy Reform, particularly independent power production (IPP) (private generation facilities aimed at supplying all their capacity and power output to the CFE) and self-supply generation (private generation facilities aimed at supplying power for self-supply purposes to the holder of the relevant self-supply power generation permit and its shareholders). However, as a result of the long-term auctions launched by CENACE during the previous presidential administration, some private renewable projects have been developed under the sole generation scheme.

Nevertheless, private participation has grown significantly in all areas of the electricity industry, now that the WEM has initiated operations, allowing private companies to participate in new areas such as power marketing and even public utility services. The new industry design of the sector, as contemplated in the Electricity Industry Law (LIE), includes:

  • private and government-owned generators;
  • CENACE, as the independent operator of the SEN and the WEM;
  • government-owned transporters and distributors, in charge of providing public utility transmission and distribution services through the national transmission grid and the general distribution grids, all to be spun off from CFE;
  • private entities participating in transmission and distribution activities as contractors to the government-owned transporters and distributors, under PPP or joint venture schemes;
  • private and government-owned marketers, who may participate in the WEM and represent generators and qualified offtakers;
  • private and government-owned suppliers, which are marketers that hold a permit authorising them to provide power supply services (classified as basic supply service, qualified supply service or last resource supply service);
  • qualified offtakers, which are large offtakers (above 1MW) entitled to acquire energy directly from the WEM, or from a marketer or a supplier; and
  • non-qualified offtakers receiving basic supply services from an authorised supplier.
Definition of ‘renewable energy’

Is there any legal definition of what constitutes ‘renewable energy’ or ‘clean power’ (or their equivalents) in your jurisdiction?

The LIE defines ‘clean energies’ as the energy sources and electricity generation processes whose emissions or waste, if any, do not exceed the thresholds established in the guiding regulations, including electric energy generated from:

  • wind;
  • solar radiation, in all its forms;
  • ocean energy in its various forms: tidal, ocean thermal, wave and ocean currents and salt concentration gradient;
  • geothermal reservoirs;
  • bioenergy sources, as determined by the Law for the Promotion and Development of Bioenergy;
  • methane and other gases associated with waste disposal sites, livestock farms and waste-water treatment plants, among others;
  • hydrogen through combustion or used in fuel cells, as long as they meet the minimum efficiency established by the CRE and with the emissions criteria based on the life-cycle analysis established by the Ministry of the Environment and Natural Resources (SEMARNAT);
  • hydroelectric plants;
  • nuclear power;
  • agricultural waste and municipal solid waste, when such processing does not generate dioxins and furans or other issues that may affect health or the environment and meets the Mexican official standards issued by SEMARNAT;
  • efficient cogeneration plants and sugar mills that meet the efficiency criteria issued by the CRE and the emissions standards established by SEMARNAT;
  • thermal power plants with carbon dioxide capture processes and geological storage having an efficiency that is equal or superior in terms of kWh-generated per ton of carbon dioxide equivalent emitted into the atmosphere than the minimum efficiency set by the CRE and emissions criteria established by SEMARNAT;
  • technologies considered as low-carbon technologies in accordance with international standards; and
  • other technologies as determined by the Ministry of Energy (SENER) and SEMARNAT, based on the parameters and standards for energy and water efficiency, emissions and waste generation, direct, indirect or life-cycle analysis.

In turn, the Energy Transmission Law (LTE) defines ‘renewable energies’ as those whose source is based on natural phenomena or materials suitable to be transformed into energy usable by the human being, which are naturally regenerated, and therefore are available continuously or periodically, and do not release polluting emissions when generated, including:

  • wind;
  • solar radiation, in all its forms;
  • the movement of water in its natural course or at artificial dams already existing, with a generation capacity up to 30MW or a density power, defined as the ratio between generation capacity and the area of the dam, in excess of 10 watts/m²;
  • ocean energy in its various forms: tidal, ocean thermal, wave and ocean currents and salt concentration gradient;
  • geothermal reservoirs; and
  • bioenergy sources, as determined by the Law for the Promotion and Development of Bioenergy.
Framework

What is the legal and regulatory framework applicable to developing, financing, operating and selling power and ‘environmental attributes’ from renewable energy projects?

Initially, no new statutes were enacted as a result of the Energy Reform to regulate specifically renewable energy sources; however, in December 2015, the new LTE was enacted (and the previous Law for the Use of Renewable Energies and the Financing of the Energy Transition was repealed). This new statute is aimed at promoting the diversification of the energy sources used to generate electricity through the use of renewable energies.

Currently, the following statutes constitute the main regulatory framework applicable to the development, financing, operation and sale of power and clean energy certificates (CELs):

  • Federal Constitution;
  • LIE and its Regulations;
  • LTE;
  • the Climate Change Law;
  • the Geothermal Energy Law and its Regulations;
  • Wholesale Electricity Market Rules and related manuals;
  • Guidelines for the issuance and acquisition of CELs;
  • the Law of Coordinated Regulatory Bodies for Energy Matters; and
  • general administrative provisions, methodologies and other resolutions issued by the CRE (which include, among others, guidelines to determine the rules for the operation of the CELs Management System, as well as the penalties applicable to those entities that fail to secure the required CELs).

SENER determined that the CELs’ obligation applicable for 2019 will be 5.8 per cent for those entities identified as obligated entities (e.g. large consumers participating in the WEM, suppliers, and certain generators). The aforementioned obligation will increase to 7.4 per cent in 2020, 10.9 per cent in 2021 and 13.9 per cent in 2022 to comply with an aggressive mandate contemplated under the LTE to generate 35 per cent of Mexico’s power from clean sources by 2024.

Stripping attributes

Can environmental attributes be stripped and sold separately?

Yes, CELs may be sold separately from energy and capacity.

CELs are issued by the CRE to new clean energy generators (including all renewable energies), which are entitled to obtain one CEL for each megawatt-hour of electricity that they generate. Special rules apply to allocate CELs to those clean energy facilities that use fossil fuel within their processes. Those CELs may be sold to large power consumers and suppliers under bilateral contracts, through auctions organised by CENACE, and eventually, through the Clean Energy Certificates Market to be organised by CENACE at least once a year, in the context of the WEM.

Government incentives

Does the government offer incentives to promote the development of renewable energy projects? In addition, has the government established policies that also promote renewable energy?

The main mechanism that the Mexican government has chosen to promote clean energies is the requirement imposed on qualified offtakers participating in the WEM that all load-serving entities must acquire CELs representing a certain percentage of their electricity consumption. SENER is the authority in charge of determining the percentage of clean energy that qualified offtakers and other load-serving entities may purchase in the form of CELs (the CELs obligation applicable for 2019 will be 5.8 per cent), which means that these obligated entities shall acquire CELs for at least 5.8 per cent of their total electricity consumption for 2019.

Moreover, the auctions that CENACE has so far carried out have all been directed to clean-energy generators exclusively, as an additional mechanism to both promote the development of clean energy projects and create the conditions to allow the generation from clean energy and the ensuing issuance of CELs, in amounts sufficient to permit qualified offtakers and load-serving entities to comply with their clean energy obligations. Based on the results of the last three auctions called by CENACE, 65 new power plants will be developed within the following three years (40 PV plants and 25 wind farms), which represents an investment of approximately US$8.6 billion. Likewise, the Mexican government intends to carry out a bidding process for the award of geothermal concessions.

With respect to tax incentives for renewable energy projects, the Mexican tax laws contemplate:

  • the possibility of applying an accelerated depreciation of the assets used in the generation of electric power based on renewable energy sources;
  • exceptions to the thin-capitalisation rules that restrict the ability to deduct, for tax purposes, certain interest payments; and
  • the importation of solar panels at reduced or zero per cent import duty rates.

Are renewable energy policies and incentives generally established at the national level, or are they established by states or other political subdivisions?

Policies and incentives are generally established at the national level.

Purchasing mechanisms

What mechanisms are available to facilitate the purchase of renewable power by private companies?

The mechanisms that facilitate the purchase of renewable power by private parties include:

  • auctions organised by CENACE, and just recently by private entities where qualified offtakers and private load-serving entities may join as purchasers of either capacity, energy or CELs;
  • the ability of large qualified offtakers to enter into bilateral contracts with generators and marketers to acquire capacity, energy and CELs;
  • the promotion of distributed generation projects through the implementation of favourable regulation, and investments to identify the most suitable financing scheme to promote these projects; and
  • the ability of private parties to produce renewable energy for their own consumption and sell their excess power through the WEM.
Legislative proposals

Describe any notable pending or anticipated legislative proposals regarding renewable energy in your jurisdiction.

An important regulation that is pending concerns the rules for the functional separation of activities in the energy sector, including the electricity and the oil and gas industries. These rules will regulate the way entities involved in the different segments of these two industries shall implement the functional separation of their various business segments in order to avoid improper practices affecting the efficient development of the market. The functional separation rules are important to contain the market power of the larger participants, CFE and Pemex and, at the same time, give newcomers clearer rules to properly structure their business strategies and operations. Likewise, the government is in the process of setting the rules that will apply to carry out storage activities.

Drivers of change

What are the biggest drivers of change in the renewable energy markets in your jurisdiction?

The main drivers of change in the Mexican renewable energy market have been the new legal framework that came into effect as a result of the Energy Reform, the long term auctions called by CENACE, the Mexican government’s commitment to promote the sustainable development of renewable energy projects in order to comply with the emission reduction and renewable power generation commitments and goals it has assumed, both at the international level and under its own domestic laws, and the increasing cost efficiency of renewable energy. Just lately, the prices offered by developers in the long-term auctions called by CENACE and the reductions in the development and construction costs of the projects have also been critical for the Mexican renewable energy market.

Disputes framework

Describe the legal framework applicable to disputes between renewable power market participants, related to pricing or otherwise.

The legal framework applicable to disputes between renewable power market participants mainly depends on the parties involved. If the relevant dispute arises between CENACE and the market participants (ie, producers, suppliers, users, transporters or distributors) or any market participant and transporters or distributors, the Market Rules and the Dispute Resolution Manual shall apply. However, if the dispute arises exclusively between market participants (other than transporters and distributors), such entities are entitled to freely agree on the applicable mechanism. For instance, they may decide to resolve disputes in terms of the aforementioned legal instruments or to use commercial or civil laws, or any other alternative dispute resolution mechanism.

On one hand, if the dispute arises between CENACE and the market participants, the claim shall be filed before CENACE. CENACE will have a term of 10 business days, once the claim has been admitted, to resolve the dispute. CENACE’s resolutions may be challenged before the CRE, which is the agency with the authority to issue a final resolution. On the other hand, if the dispute arises between market participants, and such participants agree, to resolve disputes in terms of the Dispute Resolution Manual (the Manual) and the Market rules, the process will be as follows:

  • neither CENACE nor the CRE shall be involved;
  • the involved parties shall first try to solve the dispute through a mediation process. The mediator will be appointed between the parties. The terms and conditions applicable to the mediation process are contemplated in the Manual;
  • if the parties do not reach an agreement through the mediation process, the dispute will be submitted to an experts’ panel. The CRE will prepare and maintain a list of acknowledged experts for this purpose;
  • neither the resolution obtained through the mediation nor the resolution issued by the experts is mandatory for the parties; and
  • if the dispute remains, the parties shall commence an arbitration process or the corresponding judicial process (depending on the nature of the dispute and terms agreed between the parties).

Owing to the fact that the WEM commenced operations early in 2016, up to this date, only some disputes between market participants and CENACE have been handled through the aforementioned mechanisms.

Utility-scale renewable projects

Project types and sizes

Describe the primary types and sizes of existing and planned utility-scale renewable energy projects in your jurisdiction.

Before the Energy Reform, utility-scale projects were specifically contemplated in the laws as small-scale and independent power producer projects. The small-scale projects shall not exceed, by law, an installed capacity of 30MW, and the PPAs signed under this scheme were negotiated directly between the producer and CFE using a pre-approved form. The IPP projects have no cap on their capacity but the PPA shall be awarded as a result of a public bid called by CFE. The PPA signed between the producer and CFE under the IPP scheme was also a form, but could be revised through the clarification meetings carried out as part of the bidding process.

The IPP projects developed were mostly associated to wind farms, while small-scale projects mostly relate to PV projects. As the small-scale projects needed to satisfy certain requirements to maintain such status (which include, among others, the need to carry out a minimum investment percentage), most of them have been either terminated or migrated to the new regime.

Development issues

What types of issues restrain the development of utility-scale renewable energy projects?

As a result of the deregulation of the energy market in Mexico, there are no special regulations applicable to utility-scale projects. For instance, long-term PPAs were replaced with hedging agreements, which are awarded through CENACE’s auction process. All interested producers and load-serving entities may participate in the auctions, as sellers and purchasers, respectively.

Hydropower

Primary types of project

Describe the primary types of hydropower projects that are prevalent.

Hydropower projects in Mexico have been mainly developed under a conventional scheme, which considers the construction of a dam that will be used to store water in a reservoir. The installed capacity for existing hydropower projects is mainly concentrated in the western and south-western regions of the country. The Mexican government, jointly with CFE, has been exploring the possibility of developing offshore hydropower projects in the Baja California peninsula by using the power of waves to generate electricity from seawater.

Based on the statistics provided by the government through the Renewables Energy Prospective 2018-2032, hydropower is the largest source of renewable energy in Mexico. By the end of 2017, there were 85 hydropower plants with an installed capacity of 12,642 MW. Most of the existing power plants (almost 70 per cent) are owned by CFE and used to satisfy the increasing demand of users in Mexico. While there are some plants owned by private entities through the self-supply scheme, such plants are used to supply private offtakers through PPAs agreed between them. The projects owned by CFE were mostly developed by third parties as a result of a bid awarded to them.

What legal considerations are relevant for hydroelectric generation in your jurisdiction?

The legal framework applicable to hydropower projects in Mexico is generally the same as such applicable for any other power project. However, owing to the fact that (i) national resources are exploited, (ii) works are constructed within national water bodies, and (iii) most of the projects are developed within the coastline or within real property subject to public domain, developers shall consider that some additional permits and authorisations will be required from the National Water Commission or from SEMARNAT. The authorities granting the aforementioned permits may take some time to complete their evaluation since, in some cases, it requires granting a governmental concession for the use of land. Therefore, permit planning and continuous communication with the authorities will be critical for developers. In addition, the Market Rules include some specific planning and dispatching provisions for hydroelectric power plants.

Distributed generation

Prevalence

Describe the prevalence of on-site, distributed generation projects.

The distributed generation concept is relatively new for the Mexican energy sector. The regulatory framework that existed for distributed generation projects prior to the Energy Reform was not very clear on the associated benefits, costs and requirements. Despite the aforementioned obstacles, there are some projects either developed or being developed under this scheme, and so the distributed generation in Mexico has increased significantly in recent years. By the end of 2018, there was an installed capacity of up to 282MW of distributed generation.

The existing distributed generation projects include both projects owned by third parties that sell energy to end users and projects that are owned, operated or maintained by end users. Most of the existing projects were developed to satisfy the demand of a group of industrial facilities within an industrial park, a group of residencies within a major residential development or to offices in buildings. While some of the existing projects are connected to the distribution system, owing to the technical difficulties that this represents, some of them are not connected to the grid. Most of those connected to the distribution system use net metering, since it was the only mechanism allowed before the enactment of the LIE.

Types

Describe the primary types of distributed generation projects that are common in your jurisdiction.

The source mostly used for distributed generation projects is solar (98 per cent). In addition, there are some limited projects using biogas and biomass. Prior to the Energy Reform, these types of projects were developed through a small-scale or self-supply scheme. However, the current legal framework allows third parties to develop different schemes to sell energy through distributed generation projects, such as leases and virtual plants, among others. In order to qualify as distributed generation, electricity shall be generated by a power plant that is not required to obtain a generation permit (capacity below 0.5MW) and is directly connected to a distribution network with high load concentration. Distributed generation projects may be owned and developed directly by users or by third parties, to the extent that the energy is produced and consumed in the facilities of the end users.

Unless distributed generators intend to have a direct participation in the WEM (in which case they shall obtain a generation permit and waive their status of distributed generators), projects developed under this scheme do not require a generation permit from the CRE. Distributed generators are entitled to decide whether they wish to adopt a net metering or net billing consideration scheme.

Regulation

Have any legislative or regulatory efforts been undertaken to promote the development of microgrids? What are the most significant legal obstacles to the development of microgrids?

SENER and the CRE acknowledge the benefits that the development of microgrids will bring to small communities and rural areas in the country; however, detailed regulation on this matter is pending. Up to this date, the market rules contemplate a chapter setting general provisions for small systems (which include microgrids), but a manual on this matter is to be released by SENER within the following months.

Early this year, the CRE issued a regulation in order to set the rules for end users to sell energy to other end users. Although this regulation may be used for all schemes, it is expected to mainly promote the development of distributed generation projects, as it will allow a single entity to act on behalf of a number of end users to acquire the generated energy from a generator, and in turn, sell it to other end users (eg, industrial parks, residential areas).

Other considerations

What additional legal considerations are relevant for distributed generation?

The participation of distributed generators in the WEM will be subject to the reduction of the net demand of load serving entities, and therefore, to the obligations assumed by such entities. In this case, the consideration that distributed generators will be entitled to receive will depend on the status of the entity that acquires the relevant power as follows: if the energy is acquired by basic suppliers, such buyers shall pay a market value consideration determined by the CRE; on the other hand, if qualified suppliers acquire energy from distributed generators, the price of such transactions may be freely agreed among the parties thereto. The CRE has issued certain administrative provisions identifying the applicable models for CFE to acquire the excess energy generated by distributed generation projects, as well as the methodology to calculate the applicable consideration; however, as a result of CFE’s lobbying and a number of judicial strategies, there is a proposal to replace such models and rules in order to revise the scope of CFE’s obligations and the existing methodology.

Energy storage

Framework

What storage technologies are used and what legal framework is generally applicable to them?

To date, only batteries are used in Mexico to store energy. The existing storage equipment is mainly installed in rooftops. However, there are no significant projects.

Regarding the applicable legal framework, certain administrative resolutions have established a number of limited provisions regulating individual energy storage equipment and energy storage equipment associated to distributed generation facilities represented in the WEM by basic services suppliers. However, despite the existence of certain drafts of legal instruments to approve the products and services that industry participants undertaking energy storage activities will be entitled to offer to the WEM, nothing has been formally issued. Therefore, there is still uncertainty for the implementation of this type of projects.

Development

Are there any significant hurdles to the development of energy storage projects?

The market guidelines include limited provisions applicable to energy storage. In fact, such provisions are limited to references to ‘energy storage equipment’ and are silent with respect to other types of technologies, such as ice or molten salt energy storage, hydrogen storage, thermal energy storage, among others.

The Energy Transition Strategy to Promote the Use of Clean Technologies and Fuels provides, as part of the government’s strategies, the creation of a group of entities supporting the development of new storage technologies.

Foreign investment

Ownership restrictions

May foreign investors invest in renewable energy projects? Are there restrictions on foreign ownership relevant to renewable energy projects?

There are no foreign investment or ownership restrictions applicable to renewable energy projects.

Equipment restrictions

What restrictions are in place with respect to the import of foreign manufactured equipment?

Some of the equipment typically used in the production of renewable energy is subject to import duties and taxes, which may vary substantially depending on whether the equipment is manufactured or not in one of the many countries with whom Mexico has entered into free trade agreements. However, the Mexican government has established exemptions and specific programmes to allow the import of such equipment at reduced rates. For instance, the importation of solar panels is generally subject to a 15 per cent ad valorem duty. This duty has been highly debated over the past few years, and as a result of the lobbying efforts of renewable energy industry associations, the Mexican authorities have allowed solar power companies to become registered as beneficiaries of the Sector Promotion Programme, which allows them to import solar panels at a zero per cent duty.

Projects

General government authorisation

What government authorisations must investors or owners obtain prior to constructing or directly or indirectly transferring or acquiring a renewable energy project?

In order to commence construction works, developers shall obtain:

  • SENER’s authorisation of the project’s social impact assessment;
  • SEMARNAT’s environmental impact authorisation;
  • change of forest land use authorisation;
  • clearance from the National Institute of Anthropology and History;
  • clearance from the National Water Commission; and
  • local land use and construction licences.

In addition, it is advisable to obtain the interconnection studies from CENACE in order to be clear about the feasibility and cost to inter-connect the project to the National Electric System.

The authorisations required to transfer or acquire a renewable energy project will depend on the structure of the transaction and the value of the assets. For instance, the transaction may require clearance from the antitrust agency (COFECE), the Energy Regulatory Commission or authorisations from other agencies for the assignment of the existing permits or rights (if the transaction is focused on the acquisition of assets).

Offtake arrangements

What type of offtake arrangements are available and typically used for utility-scale renewables projects?

The available arrangements depend on the type of offtaker. Basic offtakers (those with a demand below 1MW) are only entitled to purchase energy from basic suppliers (by the end of 2018, in addition to CFE, three private entities hold a permit to act as basic supplier) based on a regulated rate determined by the CRE. Qualified offtakers (those with a demand equal or above 1MW) may either purchase electricity and products from a qualified supplier or directly participate in the WEM. If such off-takers decide to participate in the WEM they may participate in the day short-term market or purchase energy through medium or long-term hedging agreements, either awarded as a result of an auction process or directly negotiated.

Offtakers participating in the WEM are required to satisfy certain capital requirements and to post a number of guarantees supporting their activities as market participants. However, there is no sovereign or third-party credit support available to support the payment obligations.

Procurement of offtaker agreements

How are long-term power purchase agreements procured by the offtakers in your jurisdiction? Are they the subject of feed-in tariffs, the subject of multi-project competitive tenders, or are they typically developed through the submission of unsolicited tenders?

There are three options available to enter into long-term purchase agreements:

• A non-market participant qualified offtaker may agree with a qualified supplier to enter into a long-term agreement. Under this structure, the tariffs are agreed between the parties.• The qualified offtaker may become a market participant and either enter into a hedging agreement directly with a producer or a supplier, or participate in the long-term auctions launched by CENACE. If participating in the auction, such offtaker will be entering into a long-term hedging agreement with the clearing house, which will in turn have an executed hedging agreement with the producer. The tariffs will be determined by CENACE depending on the offers made by sellers.• Transitory provisions of the LIE provide that those offtakers receiving electric energy supply before the enactment of such LIE were entitled to maintain their condition as basic offtakers (despite the amount of their consumption). These ‘grandfathered offtakers’ may enter into PPAs with producers holding a grandfathered project.

Operational authorisation

What government authorisations are required to operate a renewable energy project and sell electricity from renewable energy projects?

The most critical government authorisations required to operate are, among others:

  • the authorisation from CENACE to interconnect the project to the SEN;
  • environmental impact authorisation;
  • the generation permit;
  • the registration as market participant before CENACE; and
  • the municipal operation licence.

Failure to obtain any of the above may result in the facility’s closure, suspension of activities or the imposition of fines. Note, however, that, depending on the type of technology, some additional critical permits may be required for operation.

In addition to the above, owing to the restrictions contemplated in the LIE to sell the energy generated in the producer’s power plants directly to end users (unless such end users have been registered as market participants and the transaction occurs within the WEM), a structure that considers adding a supplier to the equation shall be considered. This supplier shall obtain a supply permit from the CRE and shall become a market participant.

Decommissioning

Are there legal requirements for the decommissioning of renewable energy projects? Must these requirements be funded by a sinking fund or through other credit enhancements during the operational phase of a renewable energy project?

Except for the conditions imposed by SEMARANT in the environmental impact authorisation and those determined by CENACE, jointly with CFE, for the interconnection of the project to the SEN, there are no legal requirements for the decommissioning of renewable energy projects.

Transaction structures

Construction financing

What are the primary structures for financing the construction of renewable energy projects in your jurisdiction?

Renewable energy projects have access to a variety of financing schemes in Mexico. Depending on their size and characteristics, projects may be eligible to limited-recourse project finance schemes offered by multilateral agencies, export credit agencies and Mexican development banks, which often work in combination with domestic and foreign commercial banks. Corporate loans are also an alternative for smaller projects being developed by financially strong developers.

Likewise, private equity funds are also very active in the Mexican renewable energy market, offering developers access to equity and debt financing schemes.

Operational financing

What are the primary structures for financing operating renewable energy projects in your jurisdiction?

Bank loans and private equity funds are more customary options to finance operating renewable energy projects in Mexico. Recently, the federal government has announced its intention to implement a programme that would allow end users to have access to distributed generation by accessing loans that will be mainly guaranteed by the national development bank.

Just recently, to promote access to clean technologies for micro, small and medium scale companies, a Mexican development bank, along with the Ministry of Energy and a private association created a program to allow such entities to acquire and install solar PV systems interconnected under the distributed generation scheme.

Updates & Trends

Recent developments

Describe any market trends with respect to development, financing or operation in the renewables sector or other pertinent matters.Describe any notable pending or anticipated legislative proposals.

Market trends31 Describe any market trends with respect to development, financing or operation in the renewables sector or other pertinent matters.

As of 1 December 2018, a new administration leaded by President Andres Manuel Lopez Obrador, commenced the implementation of a number of changes in the energy industry, which are reorienting the Mexican government’s policies for the energy sector. Most of the changes approved so far, through either resolutions, decrees, or changes in the officers leading the independent regulatory agencies, show the new administration’s interest in reaching independence from energy imports and a more state-led approach for the development of energy resources.

With respect to the renewable energy sector, the fourth long-term auction scheduled for 2018 was ‘postponed on an indefinitely basis’, and no new auctions seem to be in the new administration’s agenda. As a result, some private industry players have announced their intention to launch a private auction process, which, despite being allowed under the existing legislation, may be a challenging task. Likewise, the bidding processes called for the development of transmission infrastructure, which is critical to add new capacity in certain areas where wind and solar resources are significant, were cancelled; thus, a material impact on the ability to install renewable projects in isolated areas may also affect the development of these type of projects.

Despite the situation described above, the industry participants are still obligated to satisfy a number of minimum requirements related to supply, power and clean energy obligations, which will be critical to anchor the installation of new projects. In addition, owing to the lack of transmission infrastructure, the energy regulator is trying to provide more clear rules for the development of isolated supply projects and for the sale of electricity from an end user to other end users.

Legislative proposals32 Describe any notable pending or anticipated legislative proposals.

New resolutions or legal instruments are expected mainly for distributed generation, storage, and potentially, on CELs (for clarification on the expected obligations).

First, the CRE has issued the draft of the resolutions approving the contract model for suppliers of basic services and the methodology to calculate the consideration applicable to collective distributed generation. This resolution intends to set the rules, terms and conditions that will apply when an ‘exempted producer’, who is supplying electricity to a group of ‘load points’.

On electricity storage, the CRE submitted the draft of a resolution approving the products and services that industry participants undertaking energy storage activities may offer to the WEM, as a way to provide certainty for the implementation of this type of projects. Under the proposed resolution, the CRE confirms that industry participants may undertake energy storage activities, which shall be subject to the requirements set forth under the applicable legal and regulatory framework for their interconnection and operation within the SEN.

Finally, the CRE has issued a resolution to calculate the aggregate amount of CELs available to satisfy the clean energy obligations imposed to the obligors, along with the methodology to calculate the price of the existing CELs. As a result of such calculation, the CRE may resolve to announce the need to apply the flexibility mechanism, which basically acknowledges the right of the obligors to delay 50 per cent of their obligations for a period of up to two years.