Demand analysis of emerging PV markets: Mexico of Central and Southern America
April 15, 2020 PV InfoLink
Mexico has an estimated population of 127 million. Its economic growth has slowed and even posted 0% growth in recent years, with its annual GDP growth rate staying flat at 2.13% over 2017 to 2018. Moreover, ongoing tensions with the United States and the external debt problem make for a gloomy outlook on the Mexican economy. Fitch Ratings has assigned Mexico a BBB rating, almost equivalent to a junk-bond designation.
Certain geographical features contribute to diverse climates in Mexico, where highlands and hills are a common sight. The landlocked northwest is characterized by a continental climate; plains in coastal regions and the southeast have a tropical climate. Dry and rainy seasons in Mexico occur at precisely opposite periods. The dry season lasts from October to April, whereas the rainy season from May to September. Nearly 80% of annual precipitation is received during the rainy season in Mexico.
Sunlight abounds in Mexico. It has a daily solar radiation of around 5 kWh/m2.
Renewable energy development
In recent years, Mexico has been working hard at developing renewable energy. The Mexican government introduced the Energy Transition Law (la Estrategia de Transición para Promover el Uso de Tecnologías y Combustibles más Limpios) in 2015, whereby it pledges to achieve 35% share of clean energy in the nation’s electricity generation mix by 2024 and increase that percentage to 50% by 2050.
Hydropower dominates the installed renewable energy capacity in Mexico, accounting for nearly 60% of the total. Wind power is Mexico’s the second largest renewable energy source, representing about 20% of the nation’s installed renewable energy capacity. Solar power holds just 10% of the capacity.
Solar policies and outcomes
Under the Energy Transition Law, Mexico has set a specific renewable energy generation target. One of its main strategies to achieve this target is facilitating the development of the domestic PV industry, largely by means of issuing solar auctions. Since 2016, the government has held three rounds of solar auctions, assigning around 4.9 GW of capacity.
Knowing that Mexico had plenty of capacity to auction but did not have a fully-developed supply chain to support the PV industry, foreign investors arrived in drones to grab a share of the market, prompting successful bid prices to decline increasingly faster and steeper. Round 1 auction, held in 2016, concluded with an average awarded price of USD 44.9/MWh. The tariff price then nosedived by around 55% to USD 20.53/MWh awarded in Round 3 auction held in 2017. PV projects awarded through the three auction rounds have been mostly commissioned before 2020. Round 4 was cancelled last February, although the government is entertaining a relaunch. However, there is no further information about this auction round.
With no further auctions in store and no official intentions expressed about whether to continue to support PV development, Mexican solar growth now depends on private power purchase agreements (PPAs).
Distributed generation systems in Mexico are operating under a net metering system. Systems smaller than 500 kW in size can generate electricity for self-consumption and sell electricity through feeding the excess power to the grid.
When the PV policy governing distributed generation was introduced, it was promoted half-heartedly. This, combined with high costs, prevented Mexican demand for distributed PV from taking place. It was not until the government issued auctions did the demand started to pick up. Those concerned with Mexico’s solar development is calling to lower the minimum size set for distributed system to 2 MW. If this change is adopted, Mexican demand for distributed PV will improve further.
As of Q2 2019, Mexico accumulated over 4 GW of installed PV capacity, most of which came from tendered and distributed projects. Since the fourth round of solar auction was cancelled, utility-scale PV will be implemented through PPAs However, how these projects will turn out remains to be seen.
In 2019, China shipped 3.5 GW of modules to Mexico. Most of the modules were probably used in tendered and distributed projects, as well as some PPA projects. This year, the cancellation of auctions for utility-scale projects and the shift to PPA market will slow development of solar energy in Mexico. The country will therefore import fewer modules.
Mexico has been promoting renewable energy development since it enacted the Energy Transition Law. The Mexican government had issued auctions to stimulate PV demand, and without a mature domestic supply chain, foreign developers are allowed to establish a foothold in the market. Projects from the three auction rounds held to date were mostly connected to the grid before 2020. However, the country has cancelled Round 4 auction, and whether it will be re-issued is unknown. It’s expected that large-scale projects will be allocated through PPAs, although how they will fare remains to be seen.
Mexican demand for distributed PV picked up following to the launch of auctions. The distributed PV capacity may grow further if the upper limit of a distributed system’s generation capacity is officially raised.
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