Mexico’s Renewable Energy Industry

Mexico’s Renewable Energy Industry

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Mexico is on the road to sustainability

The world is in a clean energy mood

Many factors combined in the past few years to position clean energy production in the top priorities of many governments, companies and individuals. Global warming, natural and man-caused disasters, international environmental agreements, the economic recession, the auto industry crisis, the unstoppable growth of Asian economies, the rising cost of oil, a growing global awareness of resources and environmental preservation are some of the most important reasons behind the "going green" wave.

Individuals and institutions that "go green" make decisions considering what impact the outcome of those decisions will have on the climate, pollution, natural resources, animal habitats and other environmental factors. Besides recycling waste and consuming green products, they engage in sustainability actions to limit the use of natural resources, increase self-sufficiency and minimize contamination. Most of the sustainability actions of individuals and organizations have to do with energy consumption. The subject of energy is very vast.

Industry, transportation and electric power generation are by far the largest users of the world's energy resources.
Around the mid-1960's, humankind began to realize the potential of renewable energy sources in comparison to the traditional, more contaminating liquid and coal fuels.
In this article, we will review the global trends of renewable energy resources and how Mexico fits into the picture.

Global Total Energy

According to the U.S. Energy Information Administration (EIA), total world energy annual use is currently about 478 quadrillion British Thermal Units (1015 BTU). The global economic recession that began in 2007 and continued into 2009 has had a profound impact on world energy demand in the near term.

Total world marketed energy consumption contracted by 1.2 % in 2008 and by an estimated 2.2 % in 2009, as manufacturing and consumer demand for goods and services declined. EIA forecasts that world marketed energy consumption will increase by 49 % from 2007 to 2035, going from 495 quadrillion BTUs to 739 quadrillion BTUs, respectively, as depicted in Exhibit #1.
During the next 25 years, total energy demand in the non-OECD countries is expected to increase by 84 %, compared with an increase of only 14 % in the OECD countries.

China and India do not belong to the Organization for Economic Co-operation and Development, but Mexico does. Strong long-term, 4.4% average annual growth in Gross Domestic Product (GDP) in the emerging economies of non-OECD countries drives the fast-paced growth in energy demand. In contrast, OECD countries are expected to grow at an annual average rate of only 2.0% for the same period.

Exhibit #2 shows the world marketed total energy by fuel type. Notice that fossil fuels, which include liquid fuels, natural gas, and coal, are expected to continue supplying much of the energy used worldwide.

Although liquid fuels, which include petroleum and non-petroleum derived fuels (ethanol, biodiesel) remain the largest source of energy, the liquids share of world marketed energy consumption falls from 35 % in 2007 to 30 % in 2035. To a large extent, high world oil prices lead many energy users to switch away from liquid fuels when feasible. In this projection by EIA, the price per barrel of oil goes from $79 in 2010, to $108 in 2020 and $133 in 2035. And unless there are mid-term significant technological advances in the transportation industry, liquids will continue to provide much of the energy consumed.

In this regard, a substantial change in demand patterns in favor of electric powered and hybrid vehicles is hoped for in the auto industry, but this would not likely impact global demand for liquids in the next 25 years, though.
But coal holds its turf in global energy consumption. Coal actually increases its share from 26.7 % in 2007 to 28 % in 2035. How can this be if we are supposed to be moving away from contaminating energy sources? The answer is in China, where increasing demand for energy to fuel electricity generation and industrial production is expected to be met in large part by coal. Immense coal reserves in China and coal's relatively low energy conversion costs are to be blamed for a huge environmental setback in world energy consumption.

For example, installed coal-fired generating capacity in China more than doubles from 2007 to 2035, taking coal use in non- OECD Asia from 70 quadrillion BTU's to 140 quadrillion BTU's respectively, as coal use in China's industrial sector alone grows by 55 %. To put coal's 70 quadrillion BTUs increase in non-OECD Asia in perspective, consider that renewable energies worldwide grow "only" 59 quadrillion BTUs during the same period, going from 41 quadrillion BTUs in 2007 to 100 quadrillion BTUs in 2035. But don't be discouraged just yet.

World Electricity Generation

A study by EIA on the worldwide generation of electric power offers further insights about the long-term prospects of renewable energy sources.

Exhibit #3 shows that world net electricity generation increases by 87% in the projection, going from 18.8 trillion kilowatt-hours in 2007 to 25.0 trillion KWH in 2020 and 35.2 trillion KWH in 2035. The rapid increase in world energy prices from 2003 to 2008, combined with concerns about the environmental consequences of greenhouse gas emissions, has led to renewed interest in alternatives to fossil fuels— particularly, nuclear power and renewable resources.

As a result, long-term prospects continue to improve for generation from both nuclear and renewable energy sources— supported by government incentives and by higher fossil fuel prices. From 2007 to 2035, world renewable energy use is the fastest growing component for electricity generation, growing by an average of 3.0 % per year.

In the forecast, the renewable share of world electricity generation increases from 18 % in 2007 to 23 % in 2035. Coal-fired generation increases by an annual average of 2.3 % for the period, making coal the second fastest-growing source for electricity generation in the projection. Coal maintains its share of 42% in world electricity generation throughout the projection period.

But the outlook for coal could be altered substantially, however, by any future international or domestic legislation that would reduce or limit the growth of greenhouse gas emissions. It is expected that the international community will intensify its efforts to make non-OECD Asian countries limit the use of coal and expand the utilization of renewable sources. China is already taking initiatives that among other things will help them "save face" in the international community in spite of its gigantic increase in coal use. China has engaged in an electrifying pace of wind power development.

The case of Gansu Province breathtakingly illustrates how China's wind industry has hit its stride: as recently as 2006, the total installed capacity of wind power in Gansu Province was a negligible 110 Mega Watts; wind power development has proceeded at such a pace that since May, 2010 Gansu Province has been installing, the equivalent of an average of 40 MW per day! Gansu is just one of seven regions in China that are all developing wind power capacity of at least 10,000 MW. Collectively, they expect to reach 150,000 MW by 2020. At this pace, China will overtake the #2 (Germany) and the #1 (U.S.) current wind power producers by 2011 and 2012, respectively.
Worldwide energy generation from natural gas and nuclear power—which produce relatively low levels of greenhouse gas emissions (natural gas) or none (nuclear)— increase by 2.1% and 2.0% per year, respectively, as shown in the graph.
But, according to EIA, still, there is considerable uncertainty associated with nuclear power projections.
Issues that could slow the expansion of nuclear power in the future include plant safety, radioactive waste disposal, rising construction costs and investment risk, nuclear material proliferation concerns and a general public rejection for nuclear technology.

Exhibit #4 illustrates the composition of renewable energy sources in the generation of worldwide electric power. Much of the world increase in renewable electricity supply is fueled by hydropower and wind power. Of the 4.5 trillion KWH of increased renewable generation over the projection period (2007-2035), 2.4 trillion KWH, about 54%, is attributed to hydroelectric power and 1.2 trillion KWH, about 26%, to wind.

Except for those two sources, most renewable generation technologies are not yet economically competitive with fossil fuels over the projection period, except for a limited number of niche markets. Typically, government incentives or policies provide the primary support for construction of renewable generation facilities. Although they remain a small part of total renewable electricity generation, renewables other than hydroelectricity and wind— including solar, geothermal, biomass, waste, and tidal/ wave/oceanic energy—do increase at a rapid rate over the projection period, as shown in the graph.

Renewable energy sources have come a long way in the global energy game. In a 50-year projection we would very likely see them taking the main stage. Research & Development in renewables is increasing, and it won't be long before technological breakthroughs leap them above fossil fuels in the energy generation cost race.

Mexico's Renewable Energy Industry

Mexico's energy report card is mixed. Exhibit #5 shows the energy sources composition for generation of electricity. Natural gas is the main fuel in use feeding 49% of Mexico's power generation plants' output. Liquids and coal together account for 32.5% of power generation.

And collectively, nuclear, hydroelectric and other renewable sources generate the remaining 18.5%. Mexico's electric power generation is among the cleanest in the world, with only one third sourced from contaminating fuels (liquids and coal), while the global average is almost 50%. But on the other hand, Mexico is behind the global average for nuclear, hydroelectric and renewables. For example, Mexico renewables and hydroelectric use in power generation is 13.7%, well below the world's 18.6% average.

And in renewables alone, Mexico's 3.4% is also below the global current standard of 5.3%. Mexico's renewables' 3.4% participation in power generation, which is equivalent to about 2,000 MW, can be segmented as follows: 1.6% is geothermal, 0.86% is biomass, 0.65% is mini-hydroelectric, 0.30% is wind and only 0.03% is solar. Currently, the "modern renewables", wind and solar, account for just 0.33%, one third of one percent, or only 194 MW of the total electricity generated in Mexico.

The global standard for wind and solar is 3.7%.
The good news is that Mexico has a great potential for modern renewables and that the Mexican government launched a plan to promote their use.

Exhibit #6 illustrates Mexico's solar and wind power potential.
Notice that the northwestern region of the country is primed for solar energy development, with an average of 5 to 6 low peak sun hours, one of the highest in the world.

This is equivalent to about 6 KWH/day/square meter. The rest of the country, at between 4 and 5.5 low peak sun hours is also very high in the scale of solar potential use. The Mexican solar sector, however small, exists, primarily in the form of off-grid photovoltaics.

Roughly 60,000 to 80,000 solar systems operate across rural Mexico, after the government identified the technology as one of the most cost-effective ways to provide power to rural Mexicans without access to electricity. Mexico issued recent legislation to allow renewable energy self-generators to interconnect with the utility public monopoly Federal Electric Commission's (CFE) national grid, and pay on a net consumption basis. In addition, the new legislation provides fiscal incentives, such as 100% accelerated depreciation and import tax free equipment imports, for investing in renewable energy systems.

This will evidently increase the use of renewables by consumers and enterprises. Wal-Mart Mexico was one of the first takers and installed one of the largest solar panel arrays in Latin America on top of a store's roof.

Besides the solar energy domestic market, the attractiveness of the U.S. market has prompted manufacturers of solar energy equipment to establish operations in Mexico. This is the case of Kyocera's new Tijuana based solar photovoltaic modules 250,000 square feet manufacturing plant. It will have an annual production capacity of 150 MW, enough to equip 42,000 houses every year with 3.5 KW of power.

And Sanyo is expanding its solar modules Monterrey facility from 20 MW to 50 MW. The Mexican government is placing its biggest wager on the development of wind energy, though. The government's goal is to take the participation of wind power in electric energy generation from 0.33% to 4.34% before the end of 2012.

This means going from an installed capacity of 180 MW in 2008 to 2,500 KW in just four years! Mexico's territory has plenty of windy areas with optimal conditions for wind energy development including the north west, north-east and south-east corners of the country, as well as in the state of Jalisco in central Mexico and the isthmus region in the state of Oaxaca in the south, as shown inExhibit #6.
As a result of the government fiscal incentives, the interconnection flexibility to the national grid and the increased awareness in Mexico in favor of renewable energy, the objective for wind power generation might very well be met, as evidenced by the projects already under construction and others in the commitment pipeline.

These projects represent an aggregate wind power capacity of almost 2,000 MW; they are listed in the table in Exhibit #7. Over 300 companies are currently participating as manufacturers, generators and distributors of renewable energy in Mexico. The landscape of the industry is illustrated in Exhibit #8, and it is prone to get more generous in the years to come.

The Opportunities

Mexico's overall energy situation is critical. The two main players (PEMEX and CFE) are government monopolies plagued with strong labor unions and huge operating and legacy costs.
PEMEX is a technically broke "enterprise" condemned at best to its status quo.

By having all of its net income committed to the federal government and its workers, there is little left for exploration of reserves and investment in oil derivatives producing assets or other growth driven initiatives.
Mexico is the sixth producer of oil in the world, contributing about 4% of global output, yet it is the fifth net importer of refined petroleum products. PEMEX reserves are depleting fast and its production is plummeting. CFE is not in a much better situation than PEMEX.
Just consider that the cost of power for industry is US$0.12 per KWH, a far cry from being a competitive tariff when compared to the U.S.' $0.07 and France's and Korea's $0.06.

In this context, it is easy to understand the recent surge in wind power investments and the extremely favorable welcome of industry and consumers to the opening government initiatives for renewable energy. This is probably the most significant step in the energy field taken by Mexico since the nationalization of the oil industry 72 years ago.
Many in Mexico hope that this step will lead to further opening of the energy sector in Mexico.

The country's international competitiveness will not improve unless the currently gridlocked Congress passes an energy reform that allows foreign investment in production and energy conversion of traditional fuels.
In the meantime, it will be very interesting to witness how renewable energy sources continue to fuel business opportunities in Mexico. The manufacturing of solar, wind and hydro energies components and systems is an excellent niche. Most of these energy generating products are for the most part labor intensive, heavy and bulky, with relatively low manufacturing volume and high product mix, oftentimes they are custom made and sensitive to intellectual property issues.

All of these characteristics make them a great fit to be manufactured in Mexico.
One of the most notable examples is Vientek, a joint-venture of Mitsubishi and TPI Composites.
The firm operates two wind turbine blade manufacturing plants in Ciudad Juarez.
The 500,000 square feet plants employ over 1,000 people, and have a capacity to manufacture 1,000 wind blades per year that supply the U.S. market. Another business opportunity is the export of energy.

For example, the city of Los Angeles is already buying power from the Cerro Prieto geothermal plant in Mexicali, Baja California. U.S. concentrated solar power and wind power developers have long eyed the sunny and windy areas of Baja.
The new fiscal and operational incentives from Mexico and the growing environmental requirements and complex permitting processes in the U.S. southwestern states, set the stage for U.S. developers to build energy exporting wind farms and solar arrays south of the border.

The best opportunity that renewables offer in Mexico is the electric power domestic supply from an operator other than CFE. Such is the case of Electrica del Valle de Mexico, owned by France's EDF Energies Nouvelle, whose 70 MW wind farm at La Ventosa in Oaxaca will deliver electrical energy under a 15-year self supply agreement to Wal-Mart Mexico.

Similar arrangements are already in the works by Mexican large corporations who expect to get a more competitive electric power supply. Even though Mexico is a relatively late arrival in the use of alternative energy, the country is quickly catching up in taking advantage of the opportunities that cleaner and renewable forms of energy offer.
Sergio L. Ornelas has 30 years of experience in international trade and direct foreign investment. He has business degrees from Babson College, Southern Methodist U. and Harvard; he was head of the State of Chihuahua Industrial Promotion Agency in 1980-5 and General Director for Intermex Industrial Parks through 2000. He is MEXICONOW's editor.
He may be contacted at: