Rising demand for electricity and a commitment to reduce reliance on hydrocarbons are driving strong growth in Mexico’s renewable energy sector, a push that could bring particular benefits in the solar power industry.

Mexico is now in the process of finalizing a list of bidders for the country’s third round of annual tenders for new supply projects, with technical bids to be submitted in September and the auction to be held in November. The first two rounds covered a combined 14.3 TWh of annualized production.

The tenders will bring Mexico closer to its goal of raising the share of renewables in the energy mix from around 20 percent currently to 35 percent by 2024 and 50 percent by 2050.

These targets should be sufficient to encourage the domestic renewables sector to expand capacity and take advantage of opportunities in the medium term, according to David Fatzinger, managing director for Latin America at InterGen, a power generation and development company.

“We believe there is sufficient activity in the market for Mexico to reach its 2024 target, and we are monitoring the progress of local providers in developing new renewable projects,” Fatzinger told OBG. “The main emphasis in the sector will be on solar and wind due to the country’s high potential to produce electricity from both.”

Powerful growth potential

Indeed, Mexico has potential to be the seventh-largest solar photovoltaic (PV) market in the world by 2021, according to the “Global Market Outlook for Solar Power 2017-2021” report from SolarPower Europe, an industry association.

The report, released at the end of May, said Mexico could have up to 14.1 GW of solar power installed by 2021, behind only larger players such as Australia, Germany, Japan, the U.S., India and China.

Mexico – alongside Chile – made the greatest advances in deploying and promoting solar energy last year, according to SolarPower Europe. It secured this spot by awarding 1 GW of solar power capacity in a power-purchase agreement for $40.50 per MWh. Related: U.S. Taps Strategic Petroleum Reserve After Hurricane Harvey

Progress is continuing on the ground, with more than a third of the combined 3.6 GW in PV projects approved last year already under development. Most of the 28 projects selected for development will come on-line in 2018 and 2019, according to Asolmex, Mexico’s solar energy association.

In mid-July the Ministry of Environment and Natural Resources, the federal environmental agency, approved 90 MW worth of additional PV capacity, spread across three projects in the northern state of Coahuila.

Coahuila is already the site of extensive PV development, with the Villanueva and Villanueva II projects being undertaken by Italian firm Enel. The two projects, which have a capacity of 427 MW and 327 MW, respectively, both came out of the first round of auctions in 2016.

Finding finance

While renewables are gaining wider acceptance as a mainstream energy source and investment vehicle, the banking sector has been slower to adapt.

Even though recently introduced investment mechanisms such as public-private partnerships and energy-focused real estate investment trusts (Fideicomisos de Inversión y Bienes Raíces, FIBRAs) are good methods to capture investments in new energy projects, banks continue to be reluctant to finance merchant-risk solar projects, according to Oscar Bernal, CEO of solar equipment supplier EOSOL. FIBRAs are listed investment instruments previously only available for the real estate sector but now approved for the energy industry.

“Banks are still inflexible, with limited payment periods. However, they do not often consider the profit margin of a solar project – up to 96 percent – once the farm is paid off, making it one of the most profitable long-term businesses in the world,” Bernal told OBG. “More projects will be financed by banks once they extend the time required for companies to pay back a loan.” Related: Are Libyan Oil Production Gains History?

According to Pedro Berriel, general manager of Power Electronics, a provider of renewable energy technology, this reluctance is holding back the development of small and medium-sized enterprises (SMEs) that are operating in the sector, both as providers and suppliers.

“There is a lack of incentives to provide access to credit for SMEs to grow,” he told OBG. “Since they do not risk making investments, they do not have the capacity to grow and are therefore not competitive.”

However, as renewable energy becomes more mainstream in the medium term, and the segment’s robust return on investment becomes better documented, financial institutions will likely be encouraged to provide the higher levels of credit needed to feed renewable energy expansion and strengthen links in the supply chain.

By Oxford Business Group

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