Increasing Mexico s clean energy generation and reducing its electricity subsidy through Distributed Generation and a Solar Bonus CCAP Climate Finance Forum 2016 Bonn, Germany Luis Muñozcano Deputy General Director of Clean Energies Energy Secretariat lmunozcano@energia.gob.mx
MEXICO S RESIDENTIAL SOLAR BONUS Background (1) Mexico is a developing country highly vulnerable to climate change. GHG emissions are 1.4% of the global total. Per-capita emissions are 5.9 tco 2 eq including all sectors. Mitigation Policies Constitution establishes that national development shall be sustainable. The Climate Change General Law (2012) aims to foster adaptation, regulate GHG emissions, and promote transition towards a low carbon economy. National Climate Change Strategy, Climate Change Special Program, and other policy instruments have similar objectives. The 2013 Energy Reform, produced legislation for clean energy obligations (CEL) and low carbon footprint for the electricity sector Resulting legislation -the Electricity Industry Law and the Energy Transition Law- aims to fulfill these mandates. Sector Context Energy Reform allows private sector participation in electricity generation, opening the door to a wider portfolio of technologies, particularly renewables.
MEXICO S RESIDENTIAL SOLAR BONUS Background (2) Clean Energy Policy Framework Compulsory clean energy goals are in place, pursuing 25% clean energy by 2018, 30% by 2021 and 35% by 2024. Yearly electricity program (PRODESEN 2015-2029) sets the stage for moving from the actual 20% clean energy share (mainly hydro and nuclear) to complying with the clean energy goals. Solar and wind today are 2.1% of the total gross generation. Small generation contracts, (mainly solar) amounted to 9,016 by 2014. It is expected to grow up to 286,000 by 2022, particularly in the residential high consumption and small business sectors
Background Electricity Subsidies 25% of electricity is consumed in the Residential sector, which is subsidized in 95% of the cases. Subsidy level varies per tariff group, but averages 63% of the production costs. The subsidy costs the State 86,000 Million MXN per year (~5 Billion USD)
Barriers to Mitigation in the Electricity Sector As the country s financing organizations have limited experience in financing renewables, small and mid size companies are struggling to get enough funding for renewable projects. Grid has limited capacity in high potential renewable zones. Interconnecting infrastructure is expensive. Some pending regulatory decisions are preventing bi-lateral contracts. Residential electricity subsidy prevents significant deployment of distributed generation. Grid operator still not confident of handling higher renewable penetration. Capacity building on this issue is in early stages. Solar Solar DG
Program Description Provide subsidized domestic electricity consumers with a solar bonus to pay for a solar PV rooftop. PV equipment will have enough capacity to take homes out of the subsidy in net terms. First Phase proposes a start in two cities with the highest subsidized tariff and high solar insolation: La Paz, and Guaymas. Project will eliminate a highly regressive residential electricity subsidy, add new opportunities for GHG mitigation by increasing renewable penetration, among other benefits. The program could include several energy efficiency measures to optimize investments in solar rooftops and improve residential energy performance. GUAYMAS, SONORA LA PAZ, B.C.S
Requirements for Implementation (1) Policy changes. Treasury Secretariat (Hacienda) is in the process of channeling fiscal funds to support the electricity subsidy. Previously, the subsidy was fully covered by CFE alone by the accounting practice of transferring taxes and other fiscal obligations to the subsidy. In 2016, the fiscal budget included 30,000 million MXP ($1.7 Billion US) to CFE for partially covering the residential and agricultural electricity subsidy. Propose financial mechanisms for full scale deployment will rely on gradually and partially transferring fiscal funds from the subsidy to the solar bonus. A bridge loan is required to jump start the process. Deployment in two cities will help for concept testing. International funds will be needed to fully provide the required solar bonus.
Requirements for Implementation (2) Technical support will be needed to assess grid performance under the intended penetration schedule in the two-cities program. Solar rooftops in the two-cities programs will be gradually deployed during a six-year period. SENER will lead the program while Hacienda will oversee the financing mechanism. Other partners will include CFE (Power Distributor), FIDE (EE Fund), state governments, CRE (Regulatory Agency), CENACE (System Operator), and local organizations and providers. CFE is the former state monopoly for electricity. FIDE is a publicprivate organization for promoting energy efficiency. CRE is the energy regulatory authority. CENACE is the national grid operator and authority
Expected outcomes First phase (Two Cities) Program outcomes: 131 MW of solar PV rooftops will be deployed in 53,000 homes covering half of the residences of La Paz and Guaymas. 218 million USD in subsidies will be avoided over a period of 15 years. 72,000 tco 2 e per year emissions will be avoided. A total amount, in the order of, 125.7 million USD will be invested and, at least, 380 direct jobs will be created in both cities. Full Program potential outcomes: Install solar roofs on 70% of Mexico s homes over 15 years, enabling residences to generate their own electricity without any subsidy; Free over 4 billion USD per year to be used for pressing and under-funded social programs; Mitigate 20.5 MtCO2eq/y helping Mexico to comply with its INDC. Install 21 million rooftops with a total capacity of 26 GW in a 15 year time frame. Open a new business avenue worth 0.17% of GDP with new value chains and creating at least 200,000 direct jobs.
Project Financing A 125.1 million USD fund is required from international support to supply the solar bonus to 53,000 homes included in the Two-Cities Project. Once approved by Hacienda, the avoided electricity subsidy during 10 to 15 years will be the source for loan repayment Residents will contract a commercial loan to pay 90.55 million USD. Other sources will provide concessional funds for studies and other associated expenses
Conclusions Two-Cities Project is the first phase of a national project aimed to eventually eliminate the electricity subsidy. Project processes and outcomes are scalable and replicable and can easily incorporate lessons learned from the Two-Cities Project. Sustainability will be well served as the project can decisively contribute to Mexico s climate change mitigation goals Support is needed to jump start the Two-Cities Project and to demonstrate concept feasibility. Probability that full scale project follows suit will be higher. 1,189 GWh by 2022
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