During the last couple of months the Mexican power sector has been impacted by regulatory changes and bills of amendments that may disrupt the way power companies operate and plan their investments since the enactment of the energy reform. At present there is uncertainty with new investments given the change in the energy policy of the government with respect to renewable energy, restrictions on legacy offtake agreements and other measures impacting competition in the power sector. However, there is still opportunity within the power sector, and therefore many companies are analyzing the feasibility of entering distributed and isolated generation, given both are exempted activities that do not require generation permits from the Energy Regulatory Commission ("CRE", Comisión Reguladora de Energía) and the applicable interconnection regulations are less strict than for other projects connected with the national grid.
Pursuant to the Electricity Industry Law (Ley de la Industria Eléctrica), exempt generators are not allowed to participate directly in the Mexican wholesale power market, however, they may sell their products through qualified suppliers, provided the power plants do not share their metering system with a load center of a basic supplier.
Distributed generation is the type of power generation that is carried out through a power plant of less than 0.5MW, interconnected with a distribution circuit highly concentrated with load centers. The isolated generation consists in the generation or import of power for the satisfaction of one's "own needs", without transmitting such energy through the national grid. The term "own needs" includes companies belonging to the same economic group.
Despite the regulatory changes, the exempt activities grew during 2019 by more than 40% (1) and the growth is still expected to continue. For instance, the Mexico City government is implementing the "Ciudad Solar" (Solar City) program which intends to install distributed generation infrastructure in 300 buildings of Mexico City, among other projects based on renewable energy (2). Nuevo Leon and Jalisco are the two other states in which distributed generation has substantially grown, in the industrial and domestic sector respectively.
Given the growing relevance of this line of business, Miguel Ángel Mancera, currently a member of the Senate and the former governor of Mexico City, has submitted a bill of amendment proposing to increase the threshold of distributed generation from 0.5 MW to 1 MW.
Considering the extraordinary circumstances the world is going through it is still uncertain how the distributed and isolated generation markets would evolve. However, the projects are being developed and some entities as the Inter-American Development Bank, the World Bank and Mexican development banks have stated their support of these initiatives and could agree to finance these types of projects.
Originally published by Mayer Brown, October 2020
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