1 T r a n s m i tt i n g R e n e w a b l e E n e r g y t o t h e G r i d : The Case of Mexico 2014/3 85061 A KNOWLEDGE NOTE SERIES FOR THE ENERGY PRACTICE THE BOTTOM LINE Transmitting Renewable Energy to the Grid: Mexico’s La Ventosa region has ample wind resources but is The Case of Mexico remote. The national electric utility would not build the lines needed to transmit La Ventosa’s Why is this case interesting? What was the challenge? electricity to the grid without Mexico has world-class wind resources, but they are Neither the public grid nor private developers could assurances that developers located far from the national grid move forward without commitments from the other would follow through on their generating plans. But Mexico’s 2010 National Energy Strategy aims to promote sustain- Most of the projects in La Ventosa will be owned and operated by the developers could not obtain ability and simultaneously increase energy access by increasing private sector under a Mexican legal concept known as self-supply, needed financing in the absence the share of renewable resources used to generate energy. The whereby the government permits private energy projects to supply of a guaranteed transmission wind farms of La Ventosa, a windy area in the southeastern state of large industrial consumers at privately negotiated prices on the network. To break the deadlock, Oaxaca, are a key part of that strategy, which aims to raise the share grounds that they do not constitute a public service. However, the country conceived a of renewables in generation to 35 percent by 2024, up from 23.7 per- La Ventosa is located far from demand centers, and the existing planning process that yields a cent in 2008. In that year, Mexico’s installed renewable capacity of high-voltage network is not equipped to capture and distribute the shared transmission network 85 MW consisted of hydropower (92 percent), geothermal power wind energy generated in the region—thus the need to expand the funded jointly by developers. (7.5 percent), and wind power (0.5 percent). La Ventosa is one of existing public transmission network to allow these private projects Mexico’s prime wind sites with an estimated wind power potential of to operate. between 5,000 MW and 6,000 MW. Ongoing projects in the area are Mexico follows a so-called deep connection policy, according expected to generate a combined 1,967 MW. to which generators are responsible for all transmission expansion The Mexican government provides energy through its vertically costs. CFE owns and operates the entire transmission network in integrated electric utility, the Comisión Federal de Electricidad (CFE), the country and currently has no legal responsibility to expand it but it has also been increasing its support for the development of on behalf of generators that are not providing a public service. This renewable energy projects by promoting the participation of private created a regulatory void in which neither renewable generators Marcelino Madrigal entities, which have been allowed to generate power since 1992. nor the CFE could move forward unless the other party guaranteed (mmadrigal@worldbank In addition, the government is developing practical and sustainable its commitment. Generators were not able to secure financing in .org) is a senior energy approaches to connect La Ventosa’s remotely located wind power the absence of a commitment from CFE that sufficient transmission specialist in the World generation to the transmission and distribution grid. infrastructure will be developed to accommodate the electricity they With Bank’s Energy Practice. generate. But CFE required generators to commit to produce power Rhonda Lenai Jordan before it would expand the transmission network. (rjordan@worldbank.org) is an energy specialist in the same practice. 2 T r a n s m i tt i n g R e n e w a b l e E n e r g y t o t h e G r i d : T h e C a s e o f M e x i c o Figure 1. The “open season” process for transmission planning in Mexico RE generator’s letter of Intent CFE determines shared “This created a regulatory RE generator’s transmission extension letter of Intent and reinforcement void in which neither needs and costs renewable generators RE generator’s Communication of firm Changes nor the CFE could move letter of Intent transmission cost forward unless the other party guaranteed its RE generators submit No letter of commitment commitment.” and 5% payment Yes END CFE includes network CFE reviews Bidding for expansion in official RE generators RE generators construction of any changes submit 25% Yes No changes submit 100% of Yes budget and overall to transmission investment planning down payment the costs lines commitments No No Note: CFE = Comisión Federal de Electricidad, the Mexican electric utility; RE = renewable energy. Source: Prepared by the World Bank with data from the CFE and CRE. What was the solution? • Identify the transmission investment needs of all the wind power projects in La Ventosa. During an initial submission The “open season” system facilitates coordination period, interested renewable energy generators in the region between the public grid and private developers express their interest in reaching a formal transmission service agreement with the utility. Generators present preliminary To achieve the country’s target for renewable energy generation, proposals in which they specify their location, size, expected date sites in La Ventosa would have to be developed, despite the of commencement of operations, and other relevant technical regulatory void. To make this happen, Mexico devised what it called information. an “open season transmission planning process” that is invoked as often as needed by the Ministry of Energy and managed by the • Determine the least-cost transmission expansion strategy national energy regulator (Comisión Reguladora de Energía). The to serve the generators that expressed interest during the entire process, from start to finish, takes approximately six months submission period. After the submission deadline is reached, (figure 1). The objectives of process are to: project proposals are reviewed by CFE, which performs technical 3 T r a n s m i tt i n g R e n e w a b l e E n e r g y t o t h e G r i d : T h e C a s e o f M e x i c o studies to determine the lowest-cost transmission network What have we learned? needed to meet their collective requirements. Greater certainty and lower transmission costs • Define the cost-sharing ratio (or transmission rights price) for wind developers. Under Mexico’s deep-cost allocation policy, unlocked major investment in wind energy renewable energy developers are responsible for the costs The open season process was a major breakthrough that made “To achieve the country’s of the enabling facilities, system extensions, and network possible several agreements to build wind power generation projects target for renewable upgrades needed to handle their supply. Once the necessary in an area that previously had been closed to development because transmission network is defined, the price of the transmission of the lack of transmission infrastructure. The open season process energy generation, Mexico services agreement is determined by dividing the total cost by gave developers of renewable energy the certainty and predictability devised what it called an the generation capacity of the generators to be served by the they needed concerning the development of transmission infrastruc- ‘open season transmission network. Although all costs are borne by the renewable energy ture, while also reducing the investment costs of that infrastructure planning process.’” developers, this coordinated planning process can greatly reduce by ensuring development of an optimized and shared network. the investment needs of individual projects. The open season Moreover, the system is transparent for all participants. It highlights process is an anticipatory one that considers the full set of sites the ability of CFE to modernize its role as a facilitator and creative up front and creates an optimized transmission plan, as opposed problem solver, and encourages renewable energy developers to a reactive approach in which transmission lines are built for and energy consumers to collaborate and follow through on their each individual site in response to developer requests, which commitments for the benefit of all involved. leads to suboptimal, more-expensive solutions. To date, the open-season process has been performed twice in • Ensure the commitment of developers. As the open season the La Ventosa region, where 2,745 MW of wind power projects will moves forward, developers are required to gradually increase begin operation by 2014 (figures 2 and 3), enabling Mexico to meet its their financial commitment to bear transmission costs. goal of increasing the share of renewables in the nation’s energy mix. Generators initially submit letters of commitment with a payment of 5 percent of the total costs. CFE includes the network expansion plan in the official budget and utility expansion plan. Figure 2. Wind power capacity in operation in La Ventosa (MW) Generators subsequently make a 25 percent payment. If at any time during the process a developer backs out, CFE must 3,000 2,745 2,665 reevaluate the expansion plan and communicate changes and 2,500 associated costs with the remaining developers. If there are no 2,125 changes, developers pay 100 percent of their allocated cost and 2,000 the utility obtains bids to build the transmission infrastructure. 1,500 1,256 After the infrastructure has been developed, renewable generators pay a network usage charge determined using a 1,000 pricing methodology (the energy-based postage stamp method) 415 519 500 whereby all users pay the same rate based on the annual 86 85 2 megawatt-hours of consumption and generation, regardless of 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 peak usage. Further detail on transmission cost allocation and network pricing can be found in Madrigal and Stoft (2011). Note: All projects are committed or under construction. Source: CFE 2010. 4 T r a n s m i tt i n g R e n e w a b l e E n e r g y t o t h e G r i d : T h e C a s e o f M e x i c o Figure 3. Existing transmission network and new transmission References MAKE FURTHER needs in La Ventosa CONNECTIONS Madrigal, Marcelino, and Steven Stoft. 2011. “Transmission Expansion for Renewable Energy Scale-Up: Emerging Lessons and Live Wire 2014/1. “Transmitting Recommendations.” SEGEN Paper 26, World Bank, Washington, Renewable Energy to the Grid,” DC. June. by Marcelino Madrigal with CFE (Comisión Federal de Electricidad). 2010. “Programa de Obras Rhonda Lenai Jordan e Inversiones del Sector Eléctrico 2010–2024.” Mexico, D.F. http://www.semarnat.gob.mx/temas/..ot/pre_sector_electrico_ Live Wire 2014/2. “Transmitting 2010_2024.pdf. Renewable Energy to the Secretaría de Energía. 2010. “Estrategia Nacional de Energía ratificada Grid: The Case of Brazil,” by por el H. Congreso de la Unión.” Mexico, D.F. September 8. http:// Marcelino Madrigal with Rhonda www.energia.gob.mx/res/1646/EstrategiaNacsionaldeEnergia Lenai Jordan RatificadaporelHCongresodelaUnion.pdf. Live Wire 2014/4. “Transmitting The peer reviewers for this note were: Silvia Martinez Romero (senior Renewable Energy to the renewable energy specialist, ESMAP) and Waleed Saleh Alsuraih (senior Grid: The Case of Texas,” by energy specialist, MENA). The authors acknowledge contributions from Source: Secretería de Energía 2010. Marcelino Madrigal with Rhonda Francisco Barnes de Castro and personnel from the Comisión Reguladora de Lenai Jordan Energía, Mexico. This note is based on original work by Marcelino Madrigal and Steven Stoft. Further detail on transmission planning for the scale-up of renewable energy can be found in Madrigal and Stoft (2011).