This Post was submitted by Climate Scorecard Mexico Country Manager Sara Zetune
Image Source: Illumexico
Distributed solar power generation for residential use has been, until now, a feasible option that only high electricity consumers choose. Even during a pandemic the distributed generation interconnection contracts submitted to the Energy Regulatory Commission (CRE) increased from 1,031.59 MW in 2019 to 1,196.52 MW the year after. This added 160 thousand households and small businesses to the matrix.
In contrast, 80% of Mexican households are somewhat subsidized to pay less than 72% of the real cost of electricity, making it unattractive and unfeasible to invest in photovoltaic arrays for cleaner energy consumption. In fact, the current administration expects to spend 70,000 million Mexican pesos in electricity subsidies (roughly 3,400 million dollars), and in the last decade this cost has summed up to 350,000 million Mexican pesos. At this cost, PV solar panels could be installed in all households. In this instance, government electric subsidies represent a major obstacle to democratizing on-site clean energy generation. It is ultimately a step back towards a just clean energy transition.
The Mexican Climate Initiative Solar Bond Program
The Mexican Climate Initiative (ICM) is a climate advocacy NGO that develops studies and analyzes specific public policies that contribute to the reduction of emissions that cause climate change. ICM developed the Solar Bond program as a mechanism to transfer part of the expenditure in electric subsidies towards the acquisition and installation of photovoltaic modules. The Solar Bond program is a clever way to incorporate low and middle income households (specifically subsidized electric consumers) into the market for solar PV installation, thus expanding the distributed solar power generation network and allowing the state-owned Federal Electricity Commission (CFE) to evolve from a non-profitable business model (supply of basic electricity at subsidized rates) to a profitable one—without increasing the charges to end users.
The innovative aspect is the win-win financing scheme. The funds for the solar PV modules installation would derive in a sixth part from the Solar Bond; this results in avoided subsidies for the State. The rest would be paid-off by the user through a leasing scheme to the electricity supply division of the Federal Electricity Commission (CFE – SSB) in a role of third-party lessor. A core component of this program is that the monthly payment by the user for the rental of the solar-powered roof will be between 15 to 20% below their current payment for electricity. The final user will receive the installation of a solar PV array of sufficient capacity to meet its current needs and generate additional volume to power the grid at a lower cost than CFE’s unsubsidized cost. This implies the elimination of the State’s annual expenditure on electricity subsidies corresponding to the houses where the program is implemented.
A Win-Win Scenario: Benefits for the Environment, Consumers, and State
According to a cost-effectiveness study made by the ICM in 2018, the Solar Bond program has the potential to achieve a mitigation of 22.8 million tons CO2eq per year. By the end of Phase 1, it is expected to attain a reduction of oil consumption of 4.7 million barrels per year from avoided fossil fuel electricity production.
Public resources will be redirected to maximize social benefit, creating a cleaner environment enabling 26 million Mexican pesos that the State could obtain in terms of net present value in a period of 25 years (ICM, 2018) and could create 37 thousand new jobs in the installation of solar panels in a period of 15 years (IMCO, 2018). Final users would not only be part of an inclusive clean energy transition, but will gain a reduction of 15-20% of their bimonthly payment contributing to the reduction of energy poverty in users who are in this situation, as well as higher awareness in Energy Efficiency
Currently the program is in the pilot stage funded by the UK Pact that lasts for 2 years covering 635 households. By the end of this stage, Phase 1 will be initialized under the following objectives:
- Reach: penetration of 4% of households per payment rate group, summing up a total of 1.4 million benefited users
- Final generation target: 1,690 MW (see graph 1)
- Greenhouse gas mitigation by the year 15 of implementation: 23 million tons CO2eq/year
- Technological considerations: installation of solar PV array on rooftops according to payment rate and available area, bidirectional metering, and in most cases energy efficiency measures for lightning, refrigerator, AC and others
- Number of PV panel installed: 25 thousand solar panels by the year 15
- Investment: 317 millon dollars
- Geographic scope: 14 states (Jalisco, Veracruz, Aguascalientes, CDMX, Mexico State, Nayarit, Chiapas, Guerrero, Yucatán, Nuevo León, Quintana Roo, Tabasco, Tamaulipas and Baja California)
- Time frame: 35 years
- Economic benefit for the State: Net Present Value of $20,650 million of Mexican pesos ($1,02 million) with an Internal Rate of Return (IRR) of 17%
Graph 1. Evolution of the installed capacity of distributed PV generation resulted by the Solar Bond program Phase 1 (ICM, 2018)
Solar Bond Aims for Real Social Benefits
The Solar Bond program aims to empower citizens and transform them from passive consumers of electricity to clean electricity generatorsm, as well as draw back the 11 million households currently in energy poverty indexes.
Mexico has historically turned to fossil fuels subsidies to reduce energy cost, and finance household electrification. However, according to the IEA, “the economic and environmental costs of fossil fuel subsidies far outweighs any of its perceived social benefits, which can be achieved by other more effective means”.  The Energy Director of ICM, Daniel Chacón, pointed out, “this financial instrument [Solar Bond] would allow reducing the subsidy for electricity rates, estimated at $ 120 billion Mexican pesos per year, and that in a period of 15 years the subsidy could be saved in its entirety to be used to meet education, health or safety needs, instead of being money burned in highly polluting and inefficient plants.”
*The ICM created the Solar Bond program with the support of the German Development Cooperation (GIZ), the Inter-American Development Bank (IDB), the World Bank and the British Embassy in Mexico.
Análisis de Costo Beneficio del Programa Bono Solar Fase 1
Analizan bono solar para eliminar subsidio eléctrico
Iniciativa Climática de México, 2018.