Renewable Energy in Mexico (Part I)

Renewable Energy in Mexico (Part I)

Baker & McKenzie

I. Renewable Energy as an alternative for the preservation of the environment.

Energy demand will continue increasing worldwide as a result of population growth, generalized use of technological products and greater economic development. Historically, fossil fuels 1 have lead energy generation schemes. However, environmental concerns in general as well as greenhouse gases emissions 2 in particular, currently create incentives towards development of clean energy and an efficient energy use.

When environmental harm directly caused by our consumption of energy is taken into account, perspectives for the future are troubling and even alarming. Even though for a long time environmental harm was denied or minimized, due to reasons directly associated with energy generation through fossil fuels, currently the planet's warming is recognized from a scientific and political perspective.

The greenhouse gas effect is considered one of the main causes of atmospheric contamination and global warming. We now understand that the use of typical sources of energy (carbon, oil or gas) may suffer a lower appreciation due to the effects occurring within the short, medium or long term. Environmental problems, even though ignored or unseen for a long time must be analyzed in the context of international policies for sustainable development. Globally, a concern for the immediate consequences originated from the conventional use of energy produced by fossil fuels is related to the degradation of the environment. In the last decades, this concern has ceased to be a local problem and has become to a matter subject of attention at the international level.

Renewable energy represents an alternative answer to the prevailing energy demand. The possibility of producing energy with minimum environmental impacts, through resources generated daily by nature, makes renewable energy an appealing alternative for the planet. The oil crisis of the seventies and the environmental worries provoked by natural threats such as the increase in the ozone layer hole, the greenhouse effect or nuclear waste have made considering renewable energies as a fuel supply source a viable option.

Renewables are vastly available and highly diverse. When talking about renewables, we find: (i) solar energy, which is generated through the use of photovoltaic solar cells or solar energy collectors; (ii) eolic energy, using the wind as main resource to produce energy; (iii) biomass, employing organic material formed by biological process or by products derived therefrom; (iv) geothermal energy, originating in the heating power of natural chemical reactions occurring in the Earth's interior and (v) hydraulic power stations, that by using kinetic force of water for the generation of power, have evolved technologically in recent years.

Renewables have enormous potential to provide energy on a sustainable basis, with zero or nearly no pollutant or greenhouse gas emissions. However, since a regular or constant energy supply cannot be entirely foreseen and given that generation costs are higher than those derived from the use of traditional fossil technologies, renewables have been restrained in their diffusion. As a result of this, regulatory schemes of several nations usually provide a preferential treatment to renewables to encourage their development.

From a merely economical standpoint, renewable energies are in a serious disadvantage with traditional fossil-based energy generation methods. Many of them lack of certainty about their generating capacity (for instance, the availability or magnitude of wind and/or solar light). Most renewable technologies require great spaces and high maintenance costs, which lead to the production of energy that is more expensive.

II. Legal Framework

Each of the renewable energy sources requires an adequate environment that favors its development. Mexico's current legal framework allows power generation projects using renewables under self-supply, small production, independent production and export schemes. The Law for the Public Service of Electrical Energy ("Ley del Servicio Público de Energia Eléctrica") does not constrain power generation to a specific technology. In spite that environmental costs are not expressly considered in pricing in the Mexican electrical market, there are a few provisions under Mexican law, promoting the use of renewable energy.

The General Law of Ecological Balance and Environmental Protection (Ley General del Equilibrio Ecológico y la Protección al Ambiente") requires Federal, State and local authorities to develop, within their respective jurisdiction, sound policies that include economic, financial, tax and market schemes that must identify as high-priority those activities related to "the research and implementation of energy-saving mechanisms and use of reduced contamination energy sources". 3 This law urges the granting of tax incentives in favor of those who "conduct technology research leading to a reduction of pollutants". 4 Based on this, we may conclude that such provisions encompass the development of technology that reduces pollutant air emissions and implements alternative sources of clean power generation. Nonetheless, at this point such legislation has not derived in subsequent regulations nor in the enactment of any provision that identifies specific incentives for the use of renewables.

III. Interconnection Agreements and Transmission

Service Contracts.

At present time, the electrical public service in Mexico is only provided by the Mexican Federal Electricity Commission (“Comisión Federal de Electricidad” or “CFE") and by the Central Light and Power Company (“Compañía de Luz y Fuerza del Centro” or “LFC”). As part of the internal guidelines issued by these two state owned entities, certain specific agreements for the interconnection and transmission services granting preferential conditions to renewable power sources, have been introduced. In addition, the electrical industry in Mexico has implemented some regulatory schemes with the purpose of balancing the competitive conditions for all technologies of production, allowing them to compete under similar conditions, while considering implicitly or explicitly those costs actually incurred.

Some of these regulation instruments are the interconnection agreements and transmission service contracts published in the Federal Official Gazette on September 7, 2001, whereby, albeit no favorable subsidies are included, they do consider renewable sources own particularities’ and promote their development. These contract forms apply to any licensee of eolic, solar and hydroelectric energy sources with an installed capacity greater than 0.5 megawatts. With these mechanisms, the CFE and LFC are committed with the licensee to: (a) receive all the power at the moment of generation, (b) return the unused energy upon request of the licensee; (c) pay in favor of licensee 1.5 times the applicable public service tariff in the event of an emergency, (d) provide licensee with supplementary energy 5 at the current dispatch tariff cost when delivering to the grid, (e) take into account the Plant Capacity Rate 6 in the supplementary services cost; and (f) allocate the priority order for electricity supply in its consumption centers.

Likewise, in contrast to the legal treatment for traditional energy sources (non- renewable), whereby no alternatives are available to compensate power shortage with excess power, the model form of interconnection agreement for renewables provides a power compensation mechanism on a monthly basis. In other words, such mechanism enables the use of surplus energy produced during a given month to compensate power shortages occurred in the subsequent months, based upon yearly balances.

Furthermore, transmission agreements govern the conditions under which CFE and/or LFC will provide power transmission services to licensees. Such agreements allow renewable energy producers to multiply transmission service charges by the Plant Capacity Rate, which implies that such producers will only pay around 30% and 50% of those charges applied to complimentary and transmission services, as well as to enable renewable producers to swap with the power carrier (CFE and/or LFC) the power generated among different hours of the day.

1 Fossil fuels are those that were formed on Earth hundreds of thousands of years ago from decaying plants and animals. Among the more common fossil fuels are oil, coal and natural gas.

2 Gases including Carbon Dioxide (CO²), Methane (CH4), Nitrogen Dioxide (N²O), Hydrofluorocarbons (HFC), Perflurocarbons (PFC) and Sulfur Hexafluoride (SF6)

3 Ley General del Equilibrio Ecológico y la Protección al Ambiente- General Law of Ecological Balance and Environmental Protection, section III, article 22 Bis. Mexican Federal Official Gazette. January 28,1988 (Mex.).

4 Id, section III, article 166.

5 Additional power energy originated from other source different than its own supply source, same which is delivered at a given consumption center by means of an ordinary electricity supply agreement.

6 Rate that indicates the capacity actually used in the power generation units and is calculated as the result of dividing the real average power capacity during a given period of time and its total effective power capacity.

By Baker & McKenzie

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