pv magazine: In terms of Mexico's solar market, what are the most important features of the electricity market reform announced yesterday?
Adam James: The main feature of energy reform is opening the market for solar generators to sell power directly to large consumers in the utility-scale segment. Prior to energy reform, there were only a few options on how you could develop solar projects and all of those were in the context of the CFE monopoly on the market.
It was not a competitive market, and so the opportunities for solar development were very limited. Only four utility-scale solar projects got built. Two were built by CFE directly, and two were built under the Small Power Producer Model; one of which was in Baja California under very unique electricity pricing circumstances, and the other one on the mainland which ran into a lot of problems. Nothing about the old model indicated that solar development was poised to take off, whereas under energy reform, there is a lot of market potential.
pv magazine: So will electricity market reform enable growth in the utility segment, and if so, how?
Adam James: Solar developers can now build projects and sell power to large off-takers, or into the open market, which is new for Mexico. And, in addition to that new development, we do expect that there will be a build-out of some of the legacy projects that received permits prior to the energy reform over the next 18 months.
pv magazine: In terms of the auction process, I know that the solar industry requested 20-year contracts. Will the 15-year contracts be sufficient to drive market growth?
Adam James: Yes, I think that although the length of the contracts is less than developers would want, it probably meets the minimum threshold for getting funding in terms of debt financing. A 15-year contract isn't unusual. So the problem is not about the length of the contract at this point, it's about the price of this contract.
The key question is at what price will solar developers be able to receive under the auction model, with solar competing directly against wind, co-gen and biomass? The price of these contacts is likely to be low, and the boost that solar receives with the added revenue from clean energy certificates is likely to be minimal.
pv magazine: So how will these auctions work? Will there be separate auctions for solar, or for all renewable energy sources?
Adam James: That's not exactly clear yet. The way that it's phrased is that long-term auctions will take place to be off-takers meet their clean energy certificate requirements by procuring resources that meet the criteria, such as co-gen, wind, biomass and solar.
pv magazine: What do you expect for deployment of solar through the auctions? Do you think that developers will have similar struggles as they have had with solicitations in other Latin American nations?
Adam James: The problem we are going to see in the Mexico auctions is more similar to the Brazil energy auction than the Brazil reserve auctions.
In the Brazilian reserve auction, there were solar projects that received tenders, and the problem was getting financed and built.
In the Brazil energy auction, and I think this will be similar to Mexico, is that the tenders were open to multiple technologies, including wind and solar. What happened is that multiple GW of solar bid into the energy auction, but then none of it cleared.
So if solar projects clear in the Mexican auction, i think that they will get built. The question right now is: will they clear the auction to being with?
pv magazine: Any other comments on electricity market reform?
Adam James: The other interesting aspect is that SENER initially had proposed that the threshold for qualified users, and those that would buy power on the wholesale market, would be three megawatts, stepping down to one megawatt over three years. In the final rules, only consumers with 5 MW of demand or above can participate in the market, and there is no step-down. That means that there is a smaller market of participants that solar developers can sell to.
pv magazine: So how are your expectations different for the Mexican solar market than they were a few days ago?
Adam James: Nothing has changed from what we expected. The final regulations are very, very close to the draft regulations. So there weren't any big surprises here.
The big questions of whether the world is better for solar development before of after the reform is, in my opinion, difficult to answer.
Under the old model, there were some technology-specific advantages to solar that have now disappeared. Reform has leveled the playing field via these auctions, and there isn't any specific advantage for solar at all. On the other hand, there is a massive new market that solar can sell into, and the technology is getting more competitive all the time.
My bottom line on energy reform is that it could have been a lot better for solar than it wound up being, but it's not negative for solar either. It's consistent with our expectations for the reform process, and it hasn't changed our forecast.
We still expect about 7.5 GW to be deployed in Mexico out to 2020, which is considerably higher than what SENER is predicting. About 78% of that market out to 2020 will be in the utility-scale segment, growing at an 84% compounded annual growth rate. The industrial market is ranked first with an 87% growth rate. Note that those are the two markets most impacted by the energy reform, growing twice as fast as the commercial segment.
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