The three members of the North American Free Trade Agreement (NAFTA) signed a deal last Friday, February 12, to cooperate on clean energy and address climate change. The goal of the memorandum of understanding is to integrate the energy systems of Canada, U.S., and Mexico and promote a clean energy agenda. Like many environmental agreements among nations, it will only prove effective if it supplements favorable domestic conditions. Here’s some information on electricity trade and renewable energy (RE) within NAFTA, and the prospects for more integration leading to cleaner energy.
According to the Energy Information Agency, in the ten years between 2003-2013, imports of electricity by the U.S. from Canada more than doubled, while exports declined by more than half. With Mexico, trade grew both ways, but exports from Mexico to the U.S. grew sixfold in this period and by 2013 were ten times greater than U.S. exports of electricity to Mexico. In 2013, exports + imports of electricity represented just over 2% of total consumption in the U.S., with Canada accounting for nearly 90% of this trade.
The electricity coming into the U.S. from Canada is already quite green: the two largest exporters are hydroelectric producers Hydro-Québec and Manitoba Hydro-Electric Board. The two countries have well connected grids and already have transmission projects in the works aimed at increasing bidirectional sales of wind power.
The transmission connections between the U.S. and Mexico are less developed. The Baja California grid, which is separate from the grid that connects the rest of Mexico, participates in the Western Electric Coordinating Council which includes the Western U.S. as well as Alberta and British Columbia. Mexico sells electricity through this grid mostly to San Diego. Other connections along the border allow local trade but are only partially integrated into either system (see map).
The electricity coming from Mexico could be greener and increased trade with the U.S. could help. Mexico’s renewable installed capacity is 25% of the total, and it accounts for less than 20% of total generation. The first cross border wind generation project is being built in Rumorosa, Baja California, to provide electricity exclusively to the city of San Diego. The first phase of the project is 155 MW with planned expansions to up to 1,200 MW.
But the most important factors for RE growth in Mexico, I believe, are local.
Cost. The cost of RE has been dropping, even in relation to lower prices for fossil-based generation, and that will be the biggest factor encouraging new RE in Mexico. The government also passed regulation in December 2015 to begin implementing clean energy certificates (CELs in Spanish) through which generators using “dirty” technology help subsidize the establishment of clean energy. Additionally, NAFINSA, a state-owned development bank, recently floated “green bonds” to provide US$ 500 million in financing to RE in Mexico. All of these factors should boost growth in RE.
Transmission. Location of RE sources relative to demand centers is always a challenge. The growth in solar in 2015 according to Mexico’s National Solar Energy Association (ANES) amounted to 39-49 MW distributed across 46-50 medium and small scale installations. Further growth, and larger-scale installations, may be limited by the absence of adequate transmission and interconnection. In the past, projects to install wind and solar power in Baja California have been stalled by the lack of interconnection to the larger national system and the difficulty this creates in regulating frequency. The expansion of the Rumorosa project may also be jeopardized by insufficient transmission and system congestion on both sides of the border. Under the new market rules it is unclear who is in charge of authorizing transmission upgrades and additions and how these would be financed, especially since transmission remains under exclusive control of CFE.
Market entry. Large consumers are showing interest in purchasing clean energy and are mandated by law to purchase 5% of the energy from clean sources by 2018. Walmart Mexico, for example, supplies most of its energy needs from wind sources, and Volkswagen is following a similar path. It is yet to be seen whether RE can participate successfully in the Wholesale Electricity Market that launched in January. Many firms purchased the bidding documents but CFE was the only participant in the first auction and will continue to be the dominant actor as the owner of more than 2/3 of the installed capacity (See earlier post http://www.energyfuturelatam.net/2016/02/05/tentative-start-of-mexicos-wholesale-electricity-market-insiders-advantage/). The evolution of the wholesale market in 2016 will determine whether there is room for RE in Mexico’s energy mix.
The focus of the energy reforms in Mexico, unfortunately, has been mostly on fossil fuels and cost reduction for industrial users. Despite announcements made and agreements signed by the Mexican government, the type of long-term policy design and planning needed to shift the country’s energy matrix away from fossil fuels is absent. RE, however, will continue to make inroads through smaller scale undertakings and in locations where structural conditions are favorable.1