WRI’s six-part blog series, Mobilizing Clean Energy Finance, highlights individual developing countries’ experiences in scaling up investments in clean energy and explores the role climate finance plays in addressing investment barriers. The cases draw on WRI’s recent report, Mobilizing Climate Investment.
Mexico has experienced a consistent increase in wind power generation capacity over the course of the past 10 years. In 2002, regulatory and financial barriers, scarce data, and limited industry expertise kept wind generation to less than 1 percent of total installed generation capacity. Through a combination of government-led programs supported by international partners and private sector investment, the country had installed 1240 MW of wind generation capacity by 2012.
The Mexico case study offers lessons for other developing countries looking to scale up renewable energy. Three in particular stand out, including:
Research and development (R&D) programs and pilot projects led by the government showed the great potential for wind generation in Mexico and built confidence among project developers.
Leveraging international and domestic financial support for pilot projects paved the way for subsequent investments by private sector developers and increased the number of wind projects.
Regulatory reform promoted private sector engagement and scaled up installed wind capacity in Mexico.
R&D Programs and Pilot Projects
Assessing the generation potential for wind was the foundation for implementing pilot projects in Mexico. The Mexican Electrical Research Institute started the study of renewable energy potential in the early 1980s and calculated a potential for wind generation of 40 GW. This important, publicly-funded R&D program built confidence within the government for pilot projects. In 1994, the Federal Electricity Commission (CFE) completed La Venta I (2 MW), the first grid-connected wind farm in Mexico.
The CFE then sought bids to select a project developer for La Venta II, the first large-scale (83 MW) wind farm in Mexico. La Venta II’s financial structure included revenues from carbon credits, building Mexico’s experience with the Clean Development Mechanism. Both pilot projects helped to demonstrate opportunities for wind generation and build technical expertise for the implementation and design of the financial structure of renewable projects.
Leveraging Financial Support for Pilot Projects
International and domestic public financial support for demonstration projects helped to scale up wind developments in Mexico. La Venta III (103MW), the first wind farm developed by an Independent Power Producer (IPP), received a tariff support of 1.1 cents per kWh for the first five years of operation. The government and the World Bank funded this tariff support with more than $25 million in a concessional loan from the Global Environment Facility (GEF). This paved the way for more financially viable projects. In 2008, four additional 100MW wind farms were developed by IPPs that did not require tariff support.
In another example of public funding for pilot projects, the Clean Technology Fund (CTF) financed renewable energy projects in the self-supply market in 2009, including two wind farms that totaled over 300 MW of installed capacity. By 2012, this financial support mobilized private investment for projects in the self-supply market that added over 100 MW of wind generation capacity. Later in 2011, the CTF helped the Mexican national development bank (NAFIN) create a renewable energy financing facility with $70 million, which was also fundamental to scale up investment in renewable projects in the self-supply market.
Regulatory Reform to Promote Private Sector Engagement
The regulatory reform of 2008 created a niche market for renewables and secured power purchase rates and revenues for renewable energy developers. The law required the Ministry of Environment (SENER) to set generation targets for renewable energy and CFE to determine along with SENER and the Ministry of Finance the electricity rates from renewable energy generation. Generation targets were set at 35 percent from renewables by 2024.
The policy reform in Mexico has sent the right signals to the market, bringing a steady increase in installed generation capacity.
Mexico has made sustained progress in promoting wind energy. Between 2006 and 2012, Mexico had 17 private sector wind projects either in operation or under construction, including 12 under the self-supply modality and five IPP projects. Public and private efforts have helped to develop not only wind power but also other renewable energy technologies in Mexico. The development of renewables is particularly relevant right now, with the 3rd Mexican International Renewable Energy Conference held last week on May 28-29. This conference gathered market and government representatives to discuss ways to move the renewable energy industry forward, demonstrating stakeholders’ interest in unlocking these resources.
However, the development of wind energy in Mexico is not without its challenges. Some of Mexico’s richest wind resources occur in a state that is home to indigenous communities who have raised concerns about the environmental and social impacts of wind development, and about access to information on the proposed developments.
Moving forward, the government should draw on its experience and continue innovating to meet its 35 percent renewable energy generation target by 2024. It should do so in ways that internalize environmental and social risks at the onset of project development. This could be done by observing best practice for consultation with affected communities and for environmental and social safeguards.
Find out how other developing nations are boosting investments in clean energy through our ongoing blog series, Mobilizing Clean Energy Finance.