Renewable energy and carbon capture in Mexico – Lexology

Renewable energy and carbon capture

Renewable energy consumption, policy and general regulation

Give details of the production and consumption of renewable energy in your country. What is the policy on renewable energy? Describe any obligations on the state and private parties for renewable energy production or use. Describe the main provisions of any scheme for registration of renewable energy production and use and for trade of related accounting units or credits.

According to the 2019–2033 National Electric System Development Programme (PRODESEN 2019–2033), in 2018 renewable energy production in Mexico accounted for approximately 16.7 per cent of the total generation output countrywide (equal to 53,019GWh). Hydropower is still the main renewable energy resource (based on the fact that the Mexican government classified, for the purposes of PRODESEN 2019–2033, big hydropower plants as clean/renewable energy assets despite their environmental impacts). That said, solar has had the most significant increase (by 523.2 per cent from 2017 to 2018) among clean energy technologies in Mexico.

The Power Industry Law (LIE), passed by the Mexican Congress in 2014, provides the fundamental legal framework for the power sector in Mexico. Furthermore, the LIE sets forth the key principles of clean energy-related obligations. Additionally, the Energy Transition Law, enacted in 2015, establishes that the share of clean energy assets in the production of energy shall be at least 35 per cent by 2024.

The LIE also defines ‘clean energy’ as those energy sources and electricity generation processes that allow emissions or waste, when applicable, not to exceed the thresholds set forth by the relevant regulations. As such, clean energy includes wind, solar, wave, tidal, geothermal, hydro (essentially, mini-hydro – that is, hydropower plants with an installed capacity that does not exceed 30MW), nuclear and waste-to-energy sources.

More importantly, the LIE and its regulations set forth an obligation for power suppliers, qualified users participating in the Mexican Wholesale Electricity Market (MEM), final users who receive energy under an isolated supply scheme and holders of grandfathered interconnection agreements whose load points do not consume their total energy from clean energy resources, so that such entities and users acquire a certain amount of clean energy certificates (CELs) on a yearly basis. The number of CELs that shall be acquired by these load serving entities, users and holders of grandfathered interconnection agreements is based on a percentage of the energy consumption of the load points associated with such persons and companies. The percentages determined by the Ministry of Energy (SENER) for purposes of complying with this obligation to acquire CELs are:

  • 2020: 7.4 per cent;
  • 2021: 10.9 per cent; and
  • 2022: 13.9 per cent.

The regulatory body responsible for the administration of these clean energy-related obligations is the Energy Regulatory Commission (CRE). CELs are awarded by the CRE to clean energy generators on a monthly basis pursuant to the energy generation information collected, mainly, from the National Centre for Energy Control (CENACE), the Mexican ISO. Overall, the CRE grants a CEL for each MWh injected into the Mexican grid. Furthermore, CELs are traded either at the yearly CELs market operated by CENACE (such CEL spot market is pending implementation by CENACE) or through bilateral contracts (including those contracts awarded as a result of the long-term auctions organised by CENACE). In the context of bilateral contracts, CELs are transferred by means of the execution of bilateral transactions. The CRE has implemented an Electronic System for the Management of CELs and Compliance of Clean Energy Obligations for the purposes of handling the granting, processing and transfer of CELs among clean generators, power suppliers, qualified users that participate in the wholesale electricity market, final users under an isolated supply scheme, holders of grandfathered interconnection agreements that have the obligation to acquire CELs and other entities or individuals who voluntarily want to purchase or sell CELs.

Except for the form of power hedging agreements in terms of the long-term auctions called by CENACE in 2015, 2016 and 2017 (whose target is the deployment of renewable energy projects as the energy sold thereby shall be produced exclusively from clean energy facilities), the current Mexican legal framework does not provide for other standard forms of contract in relation to the trading of CELs in the MEM.

The Amendment to the CEL Rules, the CENACE Order , the SENER Reliability Policy and the CRE (Transmission) Resolution have had a substantial impact on the legal certainty necessary for investment in the renewable energy sector. This will, inevitably, affect the country’s development in this area by creating a combative environment around energy transition and climate change.

Nevertheless, and in spite of any political ideologies, renewable energy is still expected to have a key role in the Mexican power sector in the medium and long term. Wind and solar energy assets are currently expected to cover around 48 per cent of the capacity to be installed within the next 15 years (approximately 33,929MW); however, this figure may change depending on how the current government’s public policies end up being implemented.

Wind energy

Describe, in general terms, any regulation of wind energy.

Wind energy does not have specific regulations. The LIE and the regulations arising from the law set forth the rules, terms and conditions applicable to energy activities, including clean and renewable energy-related activities, such as wind energy generation. With regard to permits, energy generation facilities (such as wind farms) with an installed capacity equal to or greater than 0.5MW require a generation permit from the CRE (the term of the generation permit is 30 years).

Notwithstanding the latter, certain rules and manuals provide for specific rules with respect to wind energy, for example:

  • the Interconnection Manual establishes certain technical information requirements for purposes of the studies that CENACE must perform in order to determine the feasibility of the interconnection of the corresponding wind energy generation facility to the Mexican National Transmission Grid;
  • the Grid Code sets forth the general terms and conditions in connection with the physical operation by CENACE of the Mexican electricity system (including dispatch instructions to all generation assets) and, thus, incorporates certain parameters in relation to primary frequency control and other actions, ancillary services or reserves that CENACE needs to adequately control wind farms interconnected to the Mexican grid; and
  • the Short-Term Energy Market Manual contains special requirements for the submission of energy sale offers in the Day-Ahead and Real-Time Markets for wind energy assets (as intermittent dispatchable resources – as opposed to fossil fuel power plants).

Moreover, from a tax standpoint, investments in the purchase of machinery and equipment for energy production from renewable resources (eg, wind turbines) are subject to a 100 per cent income tax deduction. Furthermore, the Income Tax Law also provides for certain tax benefits in relation to the payment of dividends by renewable generators (such as wind energy generators) through the CUFIN Verde instrument. Additionally, equipment and facilities to be installed for the purposes of wind energy generation assets may be subject to certain benefits in regard to import duties as per the applicable Mexican laws (eg, the Import and Export Taxes Law) and free trade agreements signed by the Mexican government. Owing to an ongoing anti-dumping investigation, the import into Mexico of wind towers from China is subject to a provisional anti-dumping duty of 143 per cent (or 41.22 per cent in some cases). However, if the wind towers are imported as turbines (the complete equipment – ie, tower, nacelle, rotor and blades), no anti-dumping duties should apply.

Solar energy

Describe, in general terms, any regulation of solar energy.

Solar energy does not have specific regulations. Solar generation assets with an installed capacity equal to or greater than 0.5MW require a generation permit from the CRE (the term of the generation permit is 30 years).

Nevertheless, there are specific rules applicable to solar energy in Mexican regulations, mainly:

  • the Interconnection Manual in the context of the technical information that is necessary for CENACE to perform the relevant interconnection studies for solar power plants;
  • the Grid Code, which establishes certain technical requirements for solar power plants in relation to the physical operation by CENACE of the Mexican electric system (including primary frequency response and other actions, ancillary services or reserves required by CENACE to control and dispatch solar photovoltaic (PV) systems interconnected to the grid); and
  • as an intermittent dispatchable resource, solar energy projects are subject to requirements for submittal of energy sale offers in the short-term energy market that differ from conventional power plants’ offers.

Distributed generation, including solar PV distributed generation, has a different set of rules to utility-scale projects, particularly, the ‘Interconnection Manual for facilities with an installed capacity below 0.5 MW’ and the ‘General administrative provisions, forms of contract, price calculation methodologies and general technical specifications, applicable to distributed and clean distributed generation power plants’.

The long-term auctions called by CENACE in 2015, 2016 and 2017 were a key policy instrument – from an energy market structure standpoint – to develop utility-scale solar energy projects across Mexico. Fixed prices and long-term contracts awarded through this mechanism ensure financing (through equity, debt or both) for solar energy generators. The last long-term auction held by CENACE in 2017 resulted in a record-setting price for solar energy of US$17.7 per MWh. Having said that, the current federal government first suspended then cancelled the 2018 and 2019 long-term auctions and is not expected to call for new long-term auctions.

Although solar PV projects based on (1) bilateral power hedging agreements between generators and qualified suppliers and (2) spot market prices have been developed, financed, built and commissioned, recent government action in the form of the CENACE Order and, more importantly, the SENER Reliability Policy, have put at risk the deployment of new solar PV assets in Mexico. Furthermore, while the short-term energy market currently follows a merit order (economic) dispatch methodology that facilitates the financial dispatch of (merchant) solar energy assets (solar energy projects’ production and variable costs are minimal), it is likely that the government will pursue regulatory changes in order to change the economic dispatch principle for the benefit of conventional power plants (such as those owned by the Federal Electricity Commission).

Finally, from a tax standpoint, investments in the purchase of machinery and equipment for energy production from renewable resources (eg, solar panels, trackers and inverters) are subject to a 100 per cent income tax deduction. Likewise, the CUFIN Verde instrument (pertaining to wind energy) also applies to solar energy projects in the context of dividend payments in relation to the applicable tax income in Mexico. The Electricity Sectorial Programme issued by the Ministry of Economy grants certain benefits to solar power companies (ie, those companies directly involved in the production of energy) for purposes of exemptions or reductions of import duties (eg, with respect to the import of solar panels and other equipment associated with solar energy projects such as inverters). On the other hand, import of solar panels for commercial purposes could be subject to a 15 per cent import duty. Solar panels are also subject to certain benefits in regard to import duties under free trade agreements signed by the Mexican government.

Hydropower, geothermal, wave and tidal energy

Describe, in general terms, any regulation of hydropower, geothermal, wave or tidal energy.

Geothermal energy is regulated by means of the Geothermal Energy Law, which sets forth the basic terms and conditions for the recognition, exploration and exploitation activities of geothermal resources to produce energy or for other purposes (eg, cooling and heating). The three main governmental approvals that are established in the Geothermal Energy Law are:

  • recognition registration granted by SENER so that preliminary works to identify potential geothermal resources are carried out (the term of these recognition registrations is eight months);
  • exploration permits granted by SENER to analyse the geological, geophysical and geochemical elements of the geothermal area that is being explored, as well as other works to ascertain the existence of the geothermal resource (the term of these exploration permits is three years, which can be extended for three additional years); and
  • exploitation concessions granted by SENER in order to authorise the performance of any works associated with the construction, extraction, commissioning, production and transformation of the relevant geothermal resource (these concessions are subject to a 30-year term, which may be extended).

Regardless of the specific provisions contained in the Geothermal Energy Law, geothermal assets that produce energy are also subject to the provisions of the LIE and, thus, require a generation permit from the CRE if the installed capacity is equal to or greater than 0.5MW.

Hydropower, wave and tidal energy generation assets with an installed capacity equal to or over 0.5MW also require a generation permit from the CRE, provided further that, water concessions and authorizations from the National Water Commission are required for using national waters to produce energy.

In addition to the foregoing, it is important to note that Mexican energy regulations establish some specific rules, terms and conditions for geothermal plants (as a firm non-dispatchable resource), as well as for hydropower, wave and tidal energy assets in the context of interconnection-related information and operation and dispatch by CENACE. For example, with respect to (big) hydropower facilities, CENACE must assess the requirements for energy and ancillary services of the Mexican electric system seven days in advance for purposes of the issuance of (financial) dispatch instructions for the corresponding operation day.

The general tax incentives described for other renewable energy technologies (ie, CUFIN Verde and customs benefits for the power industry) may also be applicable to geothermal, hydropower, wave and tidal energy generation projects.

Finally, it is worth mentioning that geothermal and hydropower projects are subject to certain real estate-related obligations under the LIE (as a result of requiring a specific location) for purposes of acquiring land rights in order to construct and operate those types of generation facilities, including the delivery of notices, need for appraisals, use of standard forms of real estate contract and court validations.

Waste-to-energy

Describe, in general terms, any regulation of production of energy based on waste.

Waste-to-energy projects are deemed clean energy resources under applicable Mexican laws and regulations. All energy generation facilities (such as waste-to-energy power plants) with an installed capacity equal to or greater than 0.5MW require a generation permit from the CRE (valid for 30 years). Likewise, urban solid waste management is regulated under municipal and state laws and may be subject to local concessions and authorisations.

In addition to certain rules that apply to waste-to-energy projects in relation to interconnection studies (waste-to-energy power plants are considered conventional power plants for such purposes), it is important to highlight that waste-to-energy power plants are subject to different dispatch rules (similar to base-load power plants) as opposed to intermittent renewable energy facilities such as solar and wind. Furthermore, the technical configuration of waste-to-energy facilities implies that they must submit sale energy offers in the short-term energy market with different requirements than wind or solar energy facilities, provided that the premise of merit (economic) dispatch orders (ie, based on production and variable costs) is still the same.

The general tax and customs incentives described for other renewable energy technologies may also be applicable to waste-to-energy projects.

Biofuels and biomass

Describe, in general terms, any regulation of biofuel for transport uses and any regulation of biomass for generation of heat and power.

In general terms, electricity generation from biomass is subject to:

  • a generation permit;
  • specific rules regarding interconnection studies and dispatch instructions; and
  • tax and customs incentives.

On the other hand, it is important to highlight that production, storage, transportation and commercialisation of biofuels is regulated pursuant to the Law for Promotion and Development of Biofuels. In accordance with this law, the above-mentioned biofuel-related activities require a permit granted by SENER or the Ministry of Agriculture and Rural Development, as applicable.

Carbon capture and storage

Describe, in general terms, any policy on and regulation of carbon capture and storage.

There is currently no specific regulation or policy governing carbon capture and storage in Mexico.

However, on 6 November 2018, the federal government enacted the Guidelines to prevent and control methane gas emissions in the hydrocarbons sector. The Guidelines provide the obligation to assess, identify, measure and abate methane emissions. The techniques allowed in the Guidelines to abate methane emissions are varied, encompassing sequestering, redirecting to other processes, combusting and flaring. All companies and facilities involved in the hydrocarbons sector where methane gas may be present (ie, oil and gas exploration, production, storage, transport, distribution and processing) are obliged to comply with the Guidelines. All existing and new projects (all projects that have obtained a permit or an agreement with the National Hydrocarbons Commission) must conduct a diagnosis of their facilities and establish a methane emissions reduction goal, while new projects should not exceed the volume of methane estimated in the design of the project. Compliance with the obligations provided in the Guidelines, and reporting thereto, was expected by November 2019; however, this term was extended for an additional 19 months upon the lack of Authorised Third Parties required to sign off on the reports and diagnosis of the facilities.

Law stated date

Correct on

Give the date on which the above content is accurate.

4 August 2020. 

Source: https://www.lexology.com/library/detail.aspx?g=1c789477-44b8-41c7-8b4a-3093c00b9309

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