1. Juan Mata Energy Week, Washington, D.C., 8 March 2006
SECRETARÍA
DE ENERGÍA
Mexico Large-Scale Renewable Energy Development Project (Ministry of Energy / World Bank / Global Environmental Facility)
Juan Mata Energy Week, Washington, D.C., 8 March 2006

2. Elaborado a partir de la Prospectiva del Sector Eléctrico 2004-2013
Background
Power sector: A growing dependence on natural gas...
350
“Libre”
300
250
Gas natural
200
TWh /año
150
Combustóleo y diesel
100
Carbón 50
Nuclear
Geotermia
Hidráulica
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
Elaborado a partir de la Prospectiva del Sector Eléctrico

3. Background ...and a growing volatility
Precio del gas natural en pozo en EUA 7 6 5
(US$/MMft³) 4 3 2 1
1990
1995
2000
2005
Fuente: Energy Information Administration

4. The policy and political context
The current policy framework establishes State control of electricity transmission and distribution.
Since 1992 private sector has limited participation in power generation in two schemes: Self-supply and Independent Power Production (IPP)
The current electricity law presents barriers for RE development:
The National Utility, CFE, needs to follow a least-cost principle for acquiring energy from third parties
A number of benefits of renewables (social, economical, and environmental) are not valued

5. Policies and regulations
The current strategy
Projects
GEF/WB Large-Scale Renewable Energy Development Project
GEF/UNDP wind power project
CFE projects
Accelerated depreciation
New contract template for self-supply projects
Bill for a new renewable energy law
Other methodologies and policy instruments   
Policies and regulations    

6. 1. GEF/UNDP Wind power project
Action Plan for Removing Barriers to the Full-Scale Implementation of Wind Power (US$11M)
Technical center for wind power in South Mexico
Installation of anemometers
Incentives for pilot small-scale grid-connected projects

7. 2. CFE projects
La Venta II turn-key wind project under construction in the Isthmus of Tehuantepec
More geothermal plants planned (220 MW included in the expansion plan of CFE )

8. 3. Accelerated depreciation
The current income tax law already offers accelerated depreciation (100% on year 1) to all investments in renewable energy equipment

9. 4. New contract template for self-supply
Given the current policy context of Mexico, self-supply remote projects offer good possibilities for renewable energy development (projects with a combined capacity of at least 1300 MW have already requested permits)
A new interconnection contract template for RE has just been published (30 January 2006)
The contract offers energy banking, favorable wheeling charges and capacity recognition (to reduce demand charges) to self-supply projects with intermittent generation from renewable sources

10. 5. Renewable Energy Law
A new Law for renewable energy was approved by the Lower Chamber of Congress in April 2005
The Energy Ministry has provided technical advice
It is compatible with the current electricity law
The Law includes a specific Fund to provide incentives for Grid-Connected RE, following a strategy similar to that of the LSREDP
In addition it confers new attributions to the regulatory body

11. 6. Other methodologies and policy instruments
With the support of multilateral and bilateral cooperation (GEF, GTZ, REEEP, USAID), the government is developing:
A methodology to assess the economic value of risk reduction offered by RE
A methodology to assess the contribution of intermittent sources to grid capacity
Instruments to enable small-scale self-supply (PV)
Dispatch and planning models to incorporate wind power into the electricity sector
A long-term prospective study of RE (to be published soon)

12. 7. GEF/WB Project
Large-Scale Renewable Energy Development Project: US$25+45M grant aimed at providing temporary, performance-based incentives for grid-scale wind energy
The State utility (CFE) will pay its avoided costs, and an additional, predefined, limited time, incentive will be given through a “green fund”
Incentive allocation based on a competitive auction mechanism
In 2006 bidding for Phase I (100MW)

13. Main Objective
Stimulate and accelerate the commercialisation of renewable energy applications and markets in Mexico, particularly at the grid-connected level, in order to reduce greenhouse gas (GHG) and other emissions while responding to increasing energy demand and energy diversification imperatives necessary for sustainable economic growth

14. Strategy
By offering a subsidy, the project seeks to compensate the current gap between the costs of renewable energy, and the price that the utility can pay
Costs
Subsidy
Payment by the utility (CFE)

15. This in turn will enable the industry to grow and to reduce its costs
Cost reductions
(due to the learning curve and economies of scale at both global and national levels)
Costs
Subsidy
Payment by the utility (CFE)

16. In addition, the project seeks to recognise the value of renewable energy, namely:
Its contribution to the capacity of the electric system
Its environmental and health benefits, at a local, national and global level
The greater stability of its future costs
The benefits of diversification
Its benefits on regional development and job creation
Costs
Subsidy
Payment by the utility (CFE)
Recognition of value

17. The rationale of convergence:
Cost reductions
The simultaneous effect of cost reductions and value recognition will reduce the current gap…
Costs
Subsidy
Payment by the utility (CFE)
Recognition of value

18. The rationale of convergence:
Cost reductions
The simultaneous effect of cost reductions and value recognition will reduce the current gap…
Costs
Subsidy
Recognition of value
Payment by the utility (CFE)

19. The rationale of convergence:
Cost reductions
…until the need for the subsidy eventually disappears
Costs
Subsidy
Recognition of value
Payment by the utility (CFE)

20. Activities
Implementation of a financial mechanism (“Green Fund”) that will provide additional incentives and hence assure the feasibility of renewable electricity projects
A progressive recognition of the real value of renewable energy

21. 1. Green Fund
A performance-based incentive offered per energy unit produced, rather than a capital subsidy
A competitive process (IPP tender)
Each winning project will receive a fixed incentive during a 5 year period
The incentive will diminish gradually in the subsequent tenders

22. 2. Recognition of Value of Renewable Energy Sources
Climate change mitigation (CDM)
Accelerated depreciation
Recognition of the capacity contribution of intermittent renewable energy technologies
Recognition of the implicit value of price stability (portfolio diversification / free hedging)   

23. Project phases Phase I: US$25M Phase II: US$45M
US$20M for the Green Fund (incentives for a single wind project: La Venta III)
US$5M for technical assistance activities
Phase II: US$45M
Green Fund (other renewable energy sources might be included)

24. Phase I: La Venta III
The La Venta III wind farm is included in the 2006 budget
CFE (the Mexican state-owned utility) will pay its avoided costs, and the PPA will establish a fixed per-kWh payment (adjustable only with inflation or exchange rate)
The Green Fund will provide the additional incentive
Tender in 2006, operation in 2008

25. Thank you! ¡Muchas gracias!