Mexico’s experiences with Wind Energy Clean Energy, Good Governance and Electricity Regulation Cape Town, Cape Milner Hotel Thursday 20 th May, 2010 Francisco Xavier Salazar Diez de Sollano Chairman, Energy Regulatory Commission, Mexico 1

Background In order to promote the use of renewable energy, and specially its wind potential, Mexico has been taking a number of actions that allowed the country to experience the world’s fastest growth in wind capacity in Taking into account that it was not until the end of 2008 that Mexico had a specific law to promote renewable energy and that, up to date, no subsidy has been established, most of this growth is explained by: – Wind projects as part of the capacity expansion for public service (Ministry of Energy mandate implemented by CFE, the State owned utility); – Specific regulatory instruments issued by CRE, and – Coordination between the Ministry, CFE and CRE. 2

Using the grid as a bank In January 2006, CRE issued a second version of a contract model for the interconnection of intermittent type renewable energy sources (wind, solar radiation, small hydro, etc) from self-supply generation permit holders (above 0.5 MW); By introducing the idea of using the grid as a bank, this instrument has become a landmark in the development of renewable energy in Mexico; Regulated topics: – Transmission services – Energy exchange and trade. 3

Basic characteristics Energy is delivered to the grid whenever it is generated; Consumption doesn’t need to match generation; energy can be “accumulated” in the grid and delivered in a different period of time; Energy exchange takes place at the prevailing tariff rate in the interconnection and load points; At the end of the year, the permit holder can sell the remaining “accumulated” energy at 85% of the marginal cost of the system; Wheeling charges and other services provided by CFE are paid based on methodologies approved by the CRE; Capacity credit is granted based on the monthly average of power produced during the weekdays system peak period; Emergency energy for the Government Utility (CFE) is paid at 1.5 times the tariff rate. 4

A graph… Base IntermediatePeak Actual generation Electricity demand Energy surplus Generating capacity Energy deficit 5

Remarks It is important to say that prior to 2008, CRE didn’t have an specific mandate to promote the use of energy from renewable sources... The underlying logic was to issue an instrument that would level the field for these kind of technologies by recognizing the special characteristics of intermittent sources of renewable energy like wind. Therefore, it implied, up to a certain point, entering in a zone where regulation was meeting energy policy… Nevertheless, the instrument was a success because of its immediate acceptance by all the relevant actors: Ministry of Energy, CFE, financing entities and the permit holders. 6

A transmission open season Once regulation was in place there was another problem: how to solve a coordination problem between different permit holders and CFE to build transmission capacity. The most important wind potential is located in southern Mexico (Oaxaca), far away from the main consumption areas and with very limited transmission capacity. Building several transmission lines was uneconomic, so there was a need for someone to step in and coordinate CFE and permit holders through an open season type of process to determine the capacity of a new transmission line to be built, establish how this new capacity would be paid and allocate the new and existing transmission capacity among the different users. 7

Results As a result more than 2600 MW of transmission capacity were reserved in both the existing and new transmission lines: around 2000 MW were allocated with several permit holders while CFE retained the rest for its own projects. Some of these projects have already started operations (at present, almost 500 MW have been commissioned) and the rest are scheduled to start between this year and the next one. More transmission capacity will be needed in the future. Another open season conducted by CRE will probably be needed. 8

Remarks In a similar way to the contract model for the interconnection of intermittent type renewable energy sources, there was no specific legal provision whereby CRE should conduct a process like this… However, CRE considered it was related to its mandate of promoting the efficient development of the regulated activities. Also, it was another way to overcome barriers of entry to new technologies, something which is also within the typical job description of a regulator. The process was successful once again thanks to the support of Ministry of Energy, CFE and the permit holders… 9

New regulation Now with a clear mandate on the subject, last month CRE issued the following specific regulation to promote renewable sources of energy and efficient cogeneration: A new methodology to calculate wheeling charges for these technologies based on long run transmission marginal costs and a postage stamp criteria. An updated model of contract for the interconnection of these kind of projects that includes the benefits of the new transmission methodology. A net metering type of contract for low and mid tension consumers, opening up a 27 million users market that may now generate their own electricity in site and exchange electricity with the power sector. Bear in mind that subsidies are still not available… 10

The ideal model Based in our experience, we believe an ideal institutional framework to adequately develop renewable energy should include at least three elements: – Specific legal provisions (which include goals and mandates); – Specific institutions with clear roles: policy, planning, regulation and operation, and – Economic mechanisms to level the field (funds, subsidies, tariffs, taxes, etc.) At the same time, the framework should be designed taking into account resource availability as well as restrictions imposed by market structure and public funds. 11

The basic lesson… In 2008 the Mexican Congress passed a new legislation specifically devoted to promote renewable energy. Secondary legislation has been issued by the Ministry of Energy and CRE This new framework tries to take into account considerations like the ones previously mentioned but will probably be limited in the short run by budget restrictions. Nevertheless, as the Mexican experience shows, more than the specific legal framework, the commitment and creativity of policy makers and regulators will remain as the main driving force to continue promoting renewable energy…and shaping institutional framework… 12

Thanks! 13