'Worst policy decision' leaves Mexican clean energy in limbo

Veteran wind power commentator Brian Gaylord labelled Mexico's decision to cancel its latest clean energy tender “probably the worst decision taken by a policymaker” in his 14 years as an analyst.

But five days after the already-suspended process was culled completely, the Wood Mackenzie analyst and the rest of the clean energy sector are no nearer to finding out what happens next.

The Mexican government has been widely criticised for putting at risk one of the most competitive and promising wind and solar markets in the world.

Investors and companies such as Iberdrola, Enel, Engie, Acciona Energía, Actis, Voltalia, EDF Renewables, Canadian Solar, Jinko Solar and Envision have flocked to Mexico’s renewable energy sector since tenders started in 2016.

After three rounds, over 5GW of new capacity – mostly solar and wind – had been contracted at some of the world’s lowest prices and over $8bn in new investment had been pledged, with more to come as the country ploughed on to meet is 35% clean energy supply target by 2024.

But on 31 January, Mexico’s power regulator Cenace cancelled the country’s fourth energy tender, which was reaching its final stages to contract a minimum of 5% of national power demand from 2021.

Claiming the right to unilaterally act and citing the conclusion of a work-in-progress national investment plan, energy secretary Rocio Nahle said the tender would not happen.

It was a slap in the face for 28 companies, including the giant firms listed above, that had laid down guarantees and bid bonds to participate in the tender, and that had invested in the country in recent years, helping it double wind capacity from under 3GW in 2014 to around 5GW by the end of 2018.

It also raised fears of a return to dirtier forms of generation to fill the gap.

Discontent immediately surfaced on social media. “We’re going back in time to 1970s,” said one Twitter post. “While the world moves towards cleaner energy, Mexico goes back to polluting,” said another.

The Mexican Wind Power Association (AMDEE) and the largest companies lined up for the tender have also stayed silent, and so far have not replied to requests for comment from Recharge.

The reaction was very different in early December 2018, when the tender was suspended a few weeks before it was due to be concluded. The suspension allegedly aimed to give incoming officials time to take stock of the situation and the new government to appraise the objectives of the tender – an explanation most analysts found reasonable.

But scrapping the process altogether didn’t go down well at all, and commentators believe Mexico is poised between two very different paths.

It might just be waiting to restart tendering and continue on its path as the second biggest Latin American renewable energy market.

Or it could be in the brink of a decline and a massive judicial dispute, as companies will probably go to court to recoup the millions they invested in bid bonds, licensing, land tenure and project development, which the government insists it need not pay back.

“Cancelling a renewable auction is fine provided there is transparency in it,” said Luiz Barroso, CEO of Rio de Janeiro-based consultancy firm PSR, who advised the Mexican government ahead of its key 2015 energy reforms, and who also headed Brazil's energy planning authority EPE when it cancelled a similar tender in 2016.

The Brazilian decision brought strong criticism, and Barroso admitted timing is all-important.

“Brazil cancelled its auction just too close to its realisation, which was a mistake,” he said.

But as Brazil emerged from one of the deepest recessions in its history, tenders were restarted almost unchanged, which led to huge price drops and over 3GW of wind and solar contracted in 2017 and 2018.

In Mexico, a lack of transparency still abounds. In fact, recent figures indicate that power demand is still growing and projected at around 3% a year, signalling that new capacity needs to be added immediately.

“The decision to cancel the tender seems to be political, because its takes at least two months to conclude proper feasibility and costs studies,” said Wood Mackenzie's Gaylord.

The annulment comes against the backdrop of lack of information about the country’s renewable energy policies, the cancellation of oil and gas tenders, and the construction of important power lines, plus the scrapping of an international airport project in November which was also heavily criticised.

To make matters worse, the new administration led by centre-left president Andrés Manuel Lopéz Obrador (known as AMLO), is a fierce critic of his predecessor’s energy reforms, which opened up the power industry to foreign and private investment and paved the way to the tenders as one of fastest ways to meet the renewable energy targets.

During the presidential campaign, AMLO and his aides, spoke of rolling back part of the reform, mostly the part which affected the oil and gas industry. At the same time they made vague announcements that they would seek the cleanest and cheapest power possible.

This was read as an indication of the continuation of renewable energy policies. After all, nothing was cleaner and cheaper than wind and solar with Mexico's record-breaking solar irradiation in the north and wind swept Isthmus of Tehuantepec.

By AMLO’s rationale, he will have to go back to contracting renewables which, at under $20/MWh, is the cheapest way to supply power. Hydro is at least double the price, while thermoelectric power plants, even if they burn abundant gas imported from the US, are polluting. Nuclear takes a long time to be planned and built and will not fill in the urgent supply gap.

“We are still on hold to know more about the government’s plans and motivations, and there is no indication about the expansion of the grid, and how the renewable energy target will be met,” Ramón Fiestas, president of Latin America Committee at the Global Wind Energy Council (GWEC), told Recharge.