Harnessing the wind

To reduce the inherent risks of oil dependence and develop new, clean technologies, Mexico has embarked on a new energy path based on the use of renewable energy sources. This new path began with Mexico's adoption of the Kyoto Protocol and was subsequently ratified with the Energy Reform of 2008. Under the Energy Reform, Mexico intends to diversify its energy supply, which is based on fossil fuels, into a renewable energy system.

Due to Mexico's geographical and physical conditions, and incentives granted by the respective government agencies, the country makes for a highly attractive investment for foreign companies. In virtue of this, Mexico has been positioned as one the world's top ten exporters of renewable energy, as well as one of the leading countries in terms of prospective renewable energy resources. Besides having an excellent geographical location and abundant natural resources, Mexico has great potential for manufacturing industry equipment given its low costs and highly-skilled workforce. Renewables include the primary energy equivalents of hydro, geothermal, solar, wind, tide and wave. They also include energy derived from solid bio-fuels, bio-gasoline, biodiesels and others.

Pursuant to the Prospective 2010-2025 regarding the electricity sector, the national electricity consumption in 2011 was 222,400 gigawatts (GW) per hour. The gross electricity generation – during the months of January–June 2011– reached 126,660 GW per hour. Mexico's installed capacity amounts to 2,365 megawatts (MW) or 4% of the national electric system). The ministry of energy's (SENER) Special Program for the Use of Renewable Energy (Programme) states, as a primary goal, an increase of 3.6% in additional capability of renewable energies.

Many studies have been made in order to determine Mexico's renewable energies potential. These have reached the following conclusions:

• for small-scale hydropower resources, the estimated potential is 3,250MW
• for solar power, more than 70% of Mexico's surface receives a heatstroke of 5KWh/m2 per day
• for geothermal energy, the estimated potential amounts to 1,395MW, while in bioenergy such potential rises to 2,635 and 3,771 petajoules per year
• for wind energy, the estimated potential amounts to 40,000MW

Mexico has great potential for the development of this industry because it offers a great opportunity for investment and development projects. It is also an excellent platform for creating jobs through manufacturing components required for driving the industry. Special attention has to be paid to geothermal and wind energy potential sources.

Mexico's great potential is due in large part to the generous incentives the Mexican government has given to renewable energy projects. The country's geographical conditions are optimal for the development of the aforementioned projects. Likewise, the new energy policy (Energy Sector Plan 2007 – 2012) implemented by President Calderón in 2007, has as its purpose the transition from electricity generation by non-renewable energies to mechanisms of clean energies.

In geothermal energy production Mexico is a world leader, while in wind energy the existence of vast areas suitable for harnessing wind power makes it one of the most attractive zones for investors in the generation of electricity. Some examples of these areas are as follows:

• Isthmus of Tehuantepec, located in Oaxaca where the vast majority of operating wind farms (508 MW) are located
• La Rumorosa, State of Baja California, has estimated wind potential of more than 5 GW
• Northern coast on the Gulf of Mexico, the Bay of Campeche, States of Tamaulipas and Veracruz
• Yucatán Peninsula, where considerable wind potential was identified at 50 and 80 meters.
• Northern and central regions of Mexico in the states of Nuevo León, Coahuila, Chihuahua and Sonora, with lower capacity factors in the range of 20% to 30%

Mexico’s Renewable Energies Potential

Legal framework

The principle of Kelsen's pyramid sets out the basic rule as the base, and the secondary rules as the higher levels, of the pyramid. Following this principle in the context of renewable energy and electricity laws, the basic rule consists of the provisions contained in article 27 of the Political Constitution of the United Mexican States (Constitution) and the secondary by the specific rules that will govern power generation activities in Mexico. Applying Kelsen's pyramid to the classification of the renewable energy and electricity legal framework, the secondary level of the pyramid can be classified into three categories.

Firstly, specific laws consist of provisions of the Electricity Law, the Renewable Energies Law, Bioenergetics Promotion and Development Law, and their respective regulations. Secondly is auxiliary laws. These consist mainly of provisions of the remaining laws which, for some reason or circumstance, their application is necessary to the execution of renewable energy projects in Mexico. In this regard there is the Income Tax Law, General Ecological Balance and Environmental Protection Law and regulations, and the National Waters Law. Thirdly, regulatory instruments are those comprised of the administrative provisions issued by CRE and which are applicable to the Federal Electricity Commission (CFE) and its energy producers.

Mexican Constitution: the basic rule

Article 25 of the Constitution establishes the right and obligation of the Mexican government for the planning, conducting, coordinating and guiding national financial activity. Likewise, article 27 deals with the Mexican government's (Nation) obligations for the generation, conduction, transformation, distribution and supply of electric energy with the purpose of providing a public service through CFE. Regarding electricity, the government will not grant any concessions to individuals or private entities, and the Nation must have the faculties to use the necessary goods and natural resources for these purposes.

Further, article 28 mentions the electricity sector as one of the Nation's strategic areas. In this regard, the electricity industry managed by the Mexican State will not constitute monopolistic activities.

Specific laws

The Electricity Law regulates electricity supply in Mexico following schemes by which private individuals or legal entities can carry out activities related to power generation that are not dedicated to public service. Pursuant to article 3 of the Electricity Law, there are certain activities that will not be considered an electric energy public service. These include generation of electric energy: for self-supplying, cogeneration or small production; conducted by independent producers for its sale to the Federal Electricity Commission; for export, derived from cogeneration, independent production and small production; and, dedicated to emergencies derived of interruptions in the electric energy public service. It also includes electric energy imported by individuals or entities, dedicated solely for supplying their own purposes.

In other words, private participation is allowed – as long as individuals have the respective permit issued by CRE – for the following power production schemes: self-supply; cogeneration; small producers; exportation and importation; and independent power roducers.

Since November 28 2008, renewable energies in Mexico have a specific legal framework of its own. The purpose of the Renewable Energies Law is to regulate the use of renewable energy sources and clean technologies for electricity generation not dedicated to the provision of a public service. In order to achieve this, the Law contemplates two instruments.

First is the National Strategy for Energetic Transition and the Sustainable Use of Energy. This instrument looks forward to assure energetic efficiency and sustainability in order to encourage the use of clean technologies and renewable energy sources. Second is the Special Program for the utilization of Renewable Energies. This establishes public policies in renewable energy matters, determines the objectives in renewable energy policies and the relevant actions that will lead to them.

The Bioenergetics Promotion and Development Law regulates the promotion and development of bioenergetics with the purpose of contributing to energy diversification and sustainable development in the country and among others. It states the authority of SENER to grant and revoke permits related to production, storage, transport and distribution via pipelines, as well as bioenergetics commercialization.

Auxiliary laws

General Ecological Equilibrium and Environmental Protection Law and its regulations state that there is an obligation of those private individuals or legal entities interested in the construction of hydroelectric, geo-thermoelectric, wind and thermoelectric power plants to obtain from the Ministry of Environment and Natural Resources an authorisation on the environmental impact of such facilities.

The National Waters Law states the obligation to obtain from the National Water Commission an award with the purpose to exploit and use national waters for power generation. On the other hand, in the case of small scale hydro power plants, such an award shall not be required.

Regulatory instruments

These consist mainly of administrative provisions issued by CRE. These include: interconnection agreements; guidelines for the framework agreements entered into by the supplier and the renewable energies generator; general provisions to regulate the access of new power generation projects with renewable energies; framework contracts and agreements for renewable energy sources and for efficient cogeneration; framework agreements for the commitment of power sale for small producers to be entered into with CFE; methodology for determining the charges related to interconnection agreements; methodology for determining the short term total cost for the payment of electric energy by the grantees to CFE; and matrices of charges for transmission and sub transmission services.

These regulatory instruments intend to rule the chain of generation of electricity as well as its related activities. As an example of this, the figure below exemplifies the electricity chain ruled by CRE.

Mexico’s electricity chain

Mexican governmental stimuli in renewable energies

At an international level stimuli are used to secure supply, for environmental improvement, for economic benefits for the population, to increase access to energy systems, and to encourage investments in energy efficiency and reduce investment costs. As such, stimuli for renewable energies can be divided in two main categories: tax stimulus, which comprises acceleration of depreciation, tax credits and tax deductions; and economic stimulus which comprises cash transfer for energy producers, loans/guarantees granted by the respective governments, and facilities for grid connection.

The Mexican government grants these stimuli primarily to those individuals or entities that use, exploit or develop renewable energy projects and related technologies, machinery and/or equipment.

Fund for energy transition and sustainable use of energy

Based on article 27 of the Renewable Energies Law and bound to the National Strategy for Energy Transition and Sustainable Use of Energy, the Fund for energy transition and sustainable use of energy (Fund) was created with 3 billion pesos ($250 million) of the federal government's budget of 2009. This Fund operates as a trust in which the financial resources can be granted to future investors by direct resolution or specific calls. The resources of the Fund will be used to promote energy transition, energy saving, clean technologies, and the exploitation of renewable energies.

Support mechanisms for renewable energy projects

These mechanisms are granted by Nacional Financiera (NAFIN), under which funding is in most cases provided by the following financing international organisations: Inter-American Development Bank; World Bank; German Development Bank KfW; and the International Finance Corporation.

An example of one of these support mechanisms is the Rural Electrification with Renewable Energies Sources Program (Project). The purpose of the Project is the provision of electric power through renewable energy sources, independently from the SEN to 50,000 houses (approximately 250,000 inhabitants) in the poorest communities of Mexico. The electric power can only be exploited for domestic use or for developing productive activities for the communities. The term for this project started in July 2009 and will be effective until July 2014.

This Project includes a donation from the Global Environmental Facility (GEF) and a loan from the World Bank, as well as contributions from the National Commission for the Development of Native People (CDI), the Global Energy Transition and Sustainable Use of Energy Fund, and state and municipal governments.

Applicants for the project have to fulfill the following prerequisites:

• have a population of between 100 and 2,500 inhabitants
• belong to the 100 municipalities with the lowest human development index
• be away from conventional distribution electricity networks by at least five kilometres;
• communities should not be considered in CFE's network expansion projects or in similar projects funded by federal and/or state agencies in the last five years
• show their interest in participating in the project and willingness to belong to it through a process of public consultation
• demonstrate the willingness of the state or municipality to which they belong to make the corresponding financial contribution
• the community must support the social and technical processes of installation of the systems for generating electric power from alternative sources and their maintenance
• projects should be authorised by the committees formed by the local and municipal government

Accelerated depreciation of fixed assets

This stimulus implies a 100% deduction incentive for taxpayers who invest in renewable energy equipments. Pursuant to article 40 of the Income Tax Law, equipment used for energy sources derived from the sun, wind, water and geothermal energies, as well as biomass fuel, are eligible for this type of stimulus.

It is worth noting that in order to obtain this right, the investor will need to maintain in operation the acquired machinery and equipment for a five year period. On the other hand, the depreciation must be conducted in the fiscal year in which such fixed assets are used by the energy producer.

Import Zero (Arancel Cero)

This stimulus exempts payment of the general import and/or export tax on certain items. These include antipollution equipment and its parts when companies comply with the guidelines issued by the Environmental and Natural Resources Federal Ministry (SEMARNAT) and the ministry of economy. It also includes machinery, equipment, instruments, materials, animals, plants and other articles for technological research and development.

Infrastructure National Fund

Infrastructure National Fund (FONADIN) is a financial instrument of the Mexican government with multiple functions. These include the promotion of the participation of the private sector in the development of infrastructure; venture capital funds for infrastructure projects; and channeling resources through different financial instruments such as offering various types of securities, guarantees, subordinated debt, and recoverable and non-recoverable cash grants.

FONADIN operates as a project assessment centre that will help establish investment priorities in four main areas: highways, roads and bridges; water, irrigation, drainage and sanitation; railroads, ports, airports, urban and interurban transport; and projects designed to preserve the environment and biodiversity, such as handling of solid waste and natural resources, and generation of renewable energy.

In general terms, FONADIN constitutes an instrument that is authorised to deliver the National Infrastructure Program 2007 – 2012, that provides the objectives, goals and actions that the federal government will promote in order to increase the coverage and quality of Mexico's infrastructure.

Environmental management of renewable energies

In the wake of the environmental impacts caused by the generation of electricity from fossil fuels, the new focus is on developing alternatives which cause minor environmental impacts. However the generation of all types of energy involves environmental effects which must be considered during the environmental impact evaluation, where it is necessary to consider all project stages. This includes the construction of the renewable energy source, the operation and maintenance of the source, and the dismantling process.

Article 5, section K of the regulation of the General Law for Ecological Balance and Environmental Protection in Matters of Environmental Impact (RLGEEPAIA) states rules for nuclear power plants, hydroelectric, coal power plants, geothermal energy, thermoelectric, conventional plants, and combined cycle or gas turbine plants, with the exception of the generation plants with a lower or equal capacity to 0.5 MW, which will be used for backup of homes, offices and residential areas. These must present an environmental impact assessment prior to the project's implementation to obtain an authorisation from SEMARNAT.

Different authorisations must be submitted to the Mexican authorities so that electric plants which use renewable energies can be constructed. These authorisations include the society´s constitution, feasibility of electricity generation, provision of additional services, environmental aspects, natural resources management, installation, and construction. A summary of the environmental authorisations applicable in Mexico for electricity generation projects through the use of renewable energies is showed in the table above.

Renewable energy generation must be evaluated within an environmental context, beginning with the environmental impact evaluation that must be performed through the submission of the Environmental Impact Assessment (MIA) to SEMARNAT, which is the responsible agency to protect, restore and conserve the natural ecosystems as well as for the environmental effects evaluation (positive and negative) resulting from an energetic project implementation. If the project were considered within the dispositions of section K of the RLGEEPAIA, all authorisations, with the exception of the surface water and construction of hydraulic infrastructure, must be submitted to SEMARNAT. The ones outside the mentioned legal disposition must be referred to the State Environmental Departments or Agencies where the project will be located. A title of water concession and an authorisation to execute hydraulic works must be submitted to the National Water Commission (CONAGUA).

In the specific case of an MIA, it is necessary to consider the identification, description, and evaluation of the environmental impacts, as well as the establishment of preventive and mitigating actions for each environmental impact identified. At least the following must be considered :

• Reservation or natural protected areas (ANP)
• Presence of species (terrestrial or aquatic) classified as endangered, threatened or subject to special protection according to the Official Mexican Standard NOM-059-SEMARNAT-2010
• Existence of low groundwater levels and wetlands
• Natural streams modification
• Presence of properties with population in the subject area
• Type of land use and conflicts of the property land
• Availability of access routes to the area
• Soil impacts as a consequence of deficient waste management

In the case of negative impacts in any of these aspects, it is mandatory to develop and implement mitigation measures such as waste management plans, installation of air emission controls, and wastewater management plans. Regarding the advantages, the main environmental benefits for the generation of renewable energies are focused in air emissions. Reductions of the following should be highlighted:

• Fossil fuel use
• Air emission, mainly carbon dioxide which is one of the main gases which causes global warming, as well as sulfur dioxide, and nitrogen oxide which are catalysts for acid rain
• Hazardous waste generation, and as a consequence, diminishing use of sites used for its final disposition

These benefits are directly proportional to the commitments that Mexico made as a consequence of its participation in the Kyoto Protocol, which foresees a reduction of the greenhouse gas effect that is mainly anthropogenic (man-made). The decrease in fossil fuels consumption and the development of renewable energies such as wind, geothermic, biomass, solar, hydraulic, and tidal energies will reduce gas emissions.

With the Kyoto Protocol now in force, Mexico must push ahead with economical modifications based on sustained and sustainable economic development regarding the environment. Therefore, renewable energies generation projects must be encouraged, proposing solutions for potential environmental impacts and applying clean development mechanisms as part of the construction and operation of new energy alternatives.

Open seasons

Open seasons are the administrative procedures which allow expansion or modification of the transmission infrastructure of the SEN to be scheduled in a concerted manner, in order to reserve capacity on it. The public agencies responsible for the organisation, summoning and execution of open season projects are CFE and CRE.

The process to expand the SEN starts with the CRE's analysis of the appropriateness of holding an open season. This is provided the national energetic planning and prospective instruments foresee the existence of potential of renewable energy resources for power generation in a given geographical area in the country. For the publication of calling an open season it is also necessary for CRE to have the knowledge, by any means, of the insufficiency of CFE to provide the service of energy transmission to the relevant geographical area in the country, and of the existence of possible investors with the purpose of exploiting said potential. In the event that the analysis suggests it is appropriate to hold an open season, CRE will request from CFE the execution of a study of the required extensions, describing the works to be executed and the estimated costs involved.

Once this has happened, CRE will publish in the federal official gazette the summoning for the open season, which shall include the respective activities programme to be executed. Therefore, CRE shall inform participants of the rules for the allocation of additional transmission capacity.

The legal ordinances that regulate open seasons are the CRE Law; Renewable Energies Law and its regulations; Electricity Law; and CRE internal regulatory instruments.

Open season programme and order of activities

Publication of the call in the Federal Official Gazette Submission of applications of the parties interested in the open season Presentation of the Project and work plans of the open season to the interested parties Receipt of the questions of the interested parties Meeting in order to deliver clarifying answers Submission of the letters of intent to the Commission by the interested parties Analysis of the applications received and revision of the transmission network project and presentation of the results to the interested parties, including the cost of the infrastructure Second period of consideration of the applications and submission of the corresponding letter of intent Second round of analysis of the submitted applications and presentation of the results, including the estimated cost of the infrastructure Approbation of the capacity assignation method Meeting for the presentation of the results Notice to the concessionaire / licensee on the capacity assignation Signature of the letter of commitment and credit card deposit for 25% of the total cost of the reserved capacity Signature of the transmission agreement Elaboration of the final Project by the Federal Electricity Commission based on the analysis of the letters of commitment and the credit cards, in order to present it to the Energy Secretary and to include it in the Federal Government Expenditure Budget for 2013 tax year Approbation of the Project in the Federal Government Expenditure Budget for fiscal year 2013 Initiation of procedures by The Federal Electricity Commission for the call for tender by defining the total cost Submission of the credit cards for 100% of the total estimated investment Project awarding by CFE

2011 open seasons

On August 8 2011 the federal official gazette published a public call to private entities for the construction with CFE of open seasons regarding the construction of an electric network by means of wind projects developed in the states of Oaxaca, Puebla, Tamaulipas and Baja California. It also related to hydroelectric projects in the state of Puebla, under the modality of self-sufficiency.

In accordance with the call, open seasons will be subject to the programme and activities listed in the box out.

Finally, we should note that CRE had received expressions of interest from electric developers for more than 20 GW capacity in the above mentioned states. Of that total, CRE plans to award a total minimum of 3.8 GW, and a maximum of 5.6 GW.

Juan Carlos Serra
		Juan Carlos Serra has been Basham Ringe y Correa since 1996 in the corporate practice group. He is a partner of the energy and mining practice and a specialist in international business transactions and corporate law. His experience includes joint-ventures, mergers and acquisitions, reorganisations, and other investments. He has solid experience participating in national and international public bidding as well as extensive advice in energy and mining issues. Serra is a member of the Mexican Legal Bar (Barra Mexicana del Colegio de Abogados), Institue of Energy Law, Rocky Mountain Mineral Law Foundation, and International Bar Association. He is a graduate of the Law School at The National University of Mexico and has a Master´s Degree from Georgetown University (Fullbright Scholarship). He speaks Spanish and English. Basham Ringe y Correa Paseo de los Tamarindos No. 400-A, Piso 9 Col. Bosques de las Lomas, 05120, Mexico City. P: +52 55 52 61 04 91 F: +52 55 52 61 04 96 E: serra@basham.com.mx W: www.basham.com.mx

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