March 24, 2022
Enabling traceability will be key to Mexico’s clean energy transition
By Alberto Campos, Senior Energy Manager
One of the most critical challenges facing society today is the decarbonization of the planet–that is, to move from fossil fuels to cleaner energy sources. While natural gas currently serves as a mainstay of the clean energy transition, it is imperative to shift to renewable energies to reduce greenhouse gas emissions (GHG).
Studies indicate that current global actions will be insufficient to limit global warming to well below 2 degrees Celsius–and preferably to 1.5 degrees Celsius– below pre-industrial levels, as laid out in the Paris Agreement. It is therefore necessary to immediately increase and accelerate global efforts to stave off the worst impacts of climate change.
To continue subsidizing fossil fuels is misguided in the face of increasing climate impacts, which include severe water and food shortages, extreme heat events, devastating cyclones and hurricanes, and serious health problems caused by polluting emissions.
The good news is that the private sector has stepped up to the challenge, setting bold targets for renewable energy consumption or achieving GHG emissions reductions to lower their carbon footprints. In this way, many companies can play an integral role in meeting global climate goals while decarbonizing their entire supply chains.
But to achieve these ambitious emissions reduction targets, it will be critical for the industry to implement a traceability or verification mechanism to ensure that decarbonization goals are actually being met.
In Mexico, there are currently several mechanisms to help meet these objectives, including Clean Energy Certificates (CELs), which were implemented as a compliance mechanism for large energy users to align with requirements laid out by the Ministry of Energy.
Derived from the Energy Reform of 2013, CELs account for the energy that is both generated and consumed, enabling energy users to utilize this mechanism to provide traceability to their consumption
CELs represent an additional revenue stream for clean energy generators, as large consumers must buy and liquidate these certificates to prove that the energy they are using is generated from clean energy sources.
While there are certainly benefits to utilizing CELS, several drawbacks exist as well:
- The traceability provided by CELs considers fossil energy sources such as efficient cogeneration or nuclear, yet most companies do not include these technologies in their renewable energy portfolios. This ultimately serves to diminish the value and competitiveness of CELs when compared to other compensation mechanisms that consider only renewable energy technologies.
- In response to the implementation of CELs, Mexico’s Energy Regulatory Commission (CRE) designed a voluntary cancellation mechanism, which can only be utilized if authorized by CRE. Unfortunately, this results in decreased competitiveness in the market.
- CEL pricing is high—they are currently at $7 per certificate, making them significantly more costly that other mechanisms.
CELs may expire this year, as no requirements have yet been released for 2023 and 2024.
Edison Energy recently drafted a list of federal CEL requirements to reach Mexico’s 2030 clean energy goals (see chart below), using the available information from the federal government’s program for the development of the National Electric System (PRODESEN) 2021-2035.
*Requirements established by Mexico’s Ministry of Energy
International Renewable Energy Certificates (I-RECs) are a second traceability mechanism currently utilized in Mexico. I-RECs work by counting the environmental attributes associated with clean energy generation.
I-RECs offer several advantages:
- They consider only renewable energy technologies.
- They are recognized internationally, which means that environmental attributes generated in Brazil, for example, are of equal value to those issued in China or India. This makes I-RECs an effective tool to help guarantee the origin of energy and improve sustainability indexes.
- I-RECs recognize energy generation from renewable technologies as a separate product than consumed energy. This allows end users who buy electricity from the grid to acquire the number of I-RECs equal to the amount of energy consumed. This enables them to declare that the purchased electricity is generated from clean energy.
- I-REC prices can range from $1 to $2 per certificate, making them a competitive mechanism for meeting emission reduction targets, particularly Scope 2.
To ensure that I-REC market participants align with best practices and sound governance principles, the I-REC Standard Foundation–a non-profit organization that governs the operations of I-RECs–has developed a series of rules, regulations, and best practices known as the I-REC Code.
Legacy contracts are a third mechanism utilized in Mexico. These contracts allow offtakers to demonstrate that the energy they are consuming comes from renewable energy power plants. However, these contracts are slated to be phased out within the coming years.
Providing traceability to the energy consumed in load centers will help large energy buyers meet sustainability objectives and develop more environmentally friendly products. This will be key to meeting Mexico’s climate targets and accelerating the clean energy transition.
The Edison Energy team continues to work with large corporate, industrial, and institutional clients to help them achieve their decarbonization goals, designing and implementing strategies that best meet their needs. To find out more, please reach out to alberto.campos@edisonenergy.com or www.edisonenergy.com.
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