Wind Energy in Mexico: Development and Execution Best Practices. Agustin Valdivia, James V. Bubb

Transcription

1 Wind Energy in Mexico: Development and Execution Best Practices Agustin Valdivia, James V. Bubb Development of wind projects in Mexico presents several challenges and opportunities that are unique to the Mexican marketplace. High PPA tariffs and a growing energy market attract developers to the Mexican wind market. However, seizing these opportunities requires developers to understand the needs of stakeholders such as Off-takers, CRE (Energy Regulatory Commission), and CFE (State Owned Utility). Some of the critical development challenges include: identifying viable Points of Interconnection, securing PPA's, working with limited small scale wind data, and managing the substation engineering design, review, and approval process. During the construction phase, some of the important challenges include: major equipment importation, EPC planning and reporting, and site safety, security and theft. Lastly, it is important to appreciate the positive influence of the Spanish workforce during Wind Turbine Generator (WTG) installation and the support from CFE during substation testing and start-up. Mexico Market and Opportunities Mexico's wind resource map, shown in Figure 1, illustrates the areas for potential wind energy projects: Oaxaca (class 5 to 7), Tamaulipas (class 3 to 6, & 7 at coast), Baja California (class 4 to 7), and Nuevo Leon & Central Mexico (class 3). Oaxaca takes advantage of high pressure from the Gulf of Mexico, low pressure at the Pacific Ocean, and a gap in the mountain range that results in strong and steady winds. Tamaulipas is next best wind resource region, with more availability for Transmission Lines, but presents higher security risk associated with drug trafficking in the region. Baja California Nuevo Leon Central Mexico Tamaulipas Oaxaca Figure 1 - Mexico Wind Resource Map; source: SENER The overall grid installed capacity in Mexico is approximately 53,000 MW, where wind energy accounts for 1,560 MW (approximately 3% of overall grid capacity); see Figure 2. This value includes 250 MW November 2013 Page 1 of 6

2 from four projects under construction in As a point of reference, ERCOT covering the majority of the Texas grid, has an overall installed capacity of 70,000 MW and a wind installed capacity of 10,000 MW (approximately 14%). The state of Oaxaca leads Mexico's installed wind capacity with 90%, as one would expect from the high wind power density shown in Figure 1. In terms of WTG manufacturers, Gamesa and Acciona have led sales with 65% of the installed capacity in Mexico. The rest of the installed WTG are Vestas, Clipper, and GE. Figure 2 - Mexico Wind Energy Installed Capacity; source: AMDEE There are two types of wind energy off-takers in Mexico: CFE and Private Parties under a self-supply agreement. CFE had public tenders in 2009 for three long term wind energy Power Purchase Agreements (PPA's) to Independent Power Producers (IPP's), resulting in two 100 MW and one 300MW wind projects completed in No more public tenders from CFE have been issued to this point. Self-supply agreements are the most viable scheme for development of wind energy projects in Mexico because they allow private parties to sell power amongst themselves, as long as a self-supply generation permit is granted by C.R.E. (Regulatory Energy Commission). To comply with the self-supply generation permit, a consortium must be formed between an IPP and one or multiple off-taker's that are interested in signing a long term PPA. Off-takers are often motivated to sign PPA's with an IPP because electricity tariffs contracted with CFE are high. CFE has approximately 37 different tariffs, ranging from low to high voltage and among different regions of Mexico. Most tariffs are divided into peak time, intermediate peak, and off-peak periods. A summary of CFE averaged tariffs and commonly proposed tariffs by wind energy developers for PPA's are shown on Table 1. Wind energy PPA tariffs for public lighting and low voltage commercial retail are very attractive, but it may difficult to find large off-takers at these tariffs. Medium voltage commercial retail and industrial tariffs are less attractive than low voltage tariffs, but have larger potential off-takers and are high enough to make wind energy projects economically viable. As a reference, Figure 3 shows a comparison between common wind energy PPA tariffs in Mexico and the US. Note that wind PPA tariffs in Mexico are comparable to the combination of common wind PPA tariffs and the PTC subsidy contribution in the US. The CFE demand charge can also reduced or eliminated for off-takers in renewable energy self-supply agreements. The demand charge is small compared to the cost per MWh, but it can account November 2013 Page 2 of 6

3 for 10% of the overall off-taker savings. For example, a national retail chain off-taker (30 MW) could have annual savings of approximately US$ 4 million from MWh rate and US$500,000 from demand charge 1. Table 1 - Summary of Average CFE Tariffs and Common Wind Energy PPA Tariffs; source: CFE # CFE Tariff Description Voltage CFE Ave. Tariff (US$/MWh) Mexico Wind PPA Ave. Tariff (US$/MWh) 1 LV $245 $208 Public Lighting 2 MV $206 $175 3 LV $135 $114 Commercial Retail 4 MV $106 $90 5 MV $106 $90 6 Industrial HV S $102 $87 7 HV T $97 $82 Note, assumes US$/MXN $12.50 The averaged tariffs were calculated using a weighted average over the different periods of the day. Figure 3 - Comparison of Common Wind PPA Tariffs in Mexico and USA The Mexican Energy Regulatory Commission (CRE) has implemented a few renewable energy incentives to stimulate private industry investment. The most relevant incentives are: 1. Accelerated Equipment Depreciation - 100% depreciation in first year of operation. Incentive implemented in Energy Bank - energy generated by renewable IPP's can be "virtually stored" or credited to the offtaker up to a year after generation. Incentive implemented in Assuming the following scenario: An off-taker that consumes 30 MW in a self-supply agreement with a wind farm of 90 MW, Net Capacity Factor (NCF) of 30%, average generation of 60 MW during the demand charge peak hour (8:00 to 9:00 pm), and a PPA of US$90 per MWh. November 2013 Page 3 of 6

4 3. Low, Fixed Rate Wheeling Costs by CFE - one fixed "stamp" rate for wheeling costs (approximately US$2.5 per MWh), regardless of distance between IPP and off-taker. Incentive implemented in Since the low wheeling tariff incentive in 2010, the average annual installed capacity has been approximately 300 MW. At the end of 2012, a total of 2,500 MW in wind IPP generation permits had been approved by CRE. A healthy wind energy project development pipeline exists, but we believe that an average annual growth of 300 MW is a reasonable expectation. Key Development Challenges In order to realize the numerous opportunities provided by the wind energy market in Mexico, developers must address several considerable challenges. For example, wind resource data limitations can add difficulty to the initial "portfolio" site prospecting approach. Although, adequate large scale wind data resources exist (mainly US publicly available data), few national meteorological stations are installed near potential wind sites. This makes small scale wind resource estimates more complicated (i.e., no nearby references available). Land acquisition can also be challenging for very remote wind sites. Some municipalities have loosely defined boundaries, requiring a larger development investment to help municipalities & land owners reach boundary agreements and regularize property rights to execute lease options. Similar to the wind data limitations, the initial "portfolio" prospecting approach for selection of potential points of interconnection is more challenging than comparable development efforts in the US. Little grid information is publicly available from CFE (i.e., grid maps, location of substations, etc.) due to national security concerns. Therefore, wind developers have to apply for "Pre-Feasibility Study" with CFE for each potential site and gage the costs of facility improvements on a case by case basis. This process requires a larger than usual investment in the initial "portfolio" prospecting approach, but the information gap may be reduced through close communication with CFE and support from local engineering firms. PPA Execution is the key development milestone to move a project from development to construction. There are two basic approaches in the Mexican market: engaging a few large off-takers or many small off-takers. Some of the large off-takers prefer to self-perform the development of wind projects, such as: CEMEX, SORIANA, GRUPO HERDEZ, and Walmart Mexico. While a few large off-takers, like Volkswagen and BIMBO, have partner with independent wind developers. The largest PPA potential appears to be with the small-scale off-takers, but it comes with the corresponding challenge of coordinating multiple companies to develop a utility size wind energy project. Key Engineering & Construction Challenges & Opportunities During the engineering and construction phases, one of the biggest owner concerns is management of the substation engineering design, review, and approval process. The engineering design of the point of interconnection substation is a two step process. First, the substation technical specifications are designed by the developer's engineering firm and reviewed & approved by CFE. Secondly, the EPC contractor performs the detailed engineering design and CFE reviews and approves it. The approval process requires multiple meetings with each of the technical disciplines from the EPC and CFE to review and agree on many substation design requirements not described in detail at the technical specifications. Unfortunately, many EPC s assume that there will be significant design changes, so they take a design while building approach that can result in significant delays and change order claims by the EPC. For that reason, it's critical that the Owner's Engineer and EPC contractor work closely and proactively to get all engineering design revisions finalized as early as possible. A few other often overlooked project challenges include: major equipment importation, EPC planning and reporting, and site security and theft. Importation tax for major equipment is approximately 15% and importation duties can run up to 1% of the WTG cost. The key challenge with importation is adequate planning, coordination, and agent support. The importation process needs to be well coordinated because it can take from a few days to a few weeks per batch of shipments. Considering that one WTG may include up to 20 independent loads, a 50 WTG site can require importation of 1,000 shipments. Therefore, a few weeks delay per batch of shipments can have a significant impact on the project November 2013 Page 4 of 6

5 schedule. In addition, EPC project planning, scheduling tracking & reporting often needs to be supplemented by Owner to keep accurate track of project progress and realistic goals. It is key to reject poorly supported schedule delay claims from EPC contractor. Overall, front end planning, anticipation of large risks, and OE experience can greatly help to reduce project risks. Site safety, theft, and security are three more aspects that should be closely considered prior and during the construction phase. In MPR's experience, there is less emphasis on site safety in Mexico than the expected industry practice in the US. For example, projects often lack a drafted Lock Out Tag Out (LOTO) procedure. However, the Owner's Engineer can work with the EPC to implement a LOTO plan and Environmental, Social, and Safety Management Plan (ESMP) to increase site safety awareness and comply with US lenders requirements. Theft can go from tens of thousands to millions of US dollars, depending on project size and location. Theft is mainly focused on copper components, so WTG's using aluminum cables are a big benefit to reduce theft incidents that can grow into larger safety risks. Figure 4 shows the number of drug-related murders per Mexican state from January to November As apparent from the map, some states are significantly more complicated than others in terms of security. The map shows absolute numbers of drug related murders, but one should also consider the number of murders per 100,000 habitants. From that perspective, some of the apparently lower risk states shown here become more challenging. Areas with little population and drug traffic are also a concern. Figure 4 - Drug-related murders in Mexico, Jan. - Nov. 2012; source: The Economist Lastly, it is important to appreciate the strength of Spanish and Mexican cultural influences in the WTG installation practices and the support from CFE during substation testing and start-up. A large fraction of the WTG installation workforce in Mexico is experienced personnel from Spain. The Spanish wind energy experience has been effectively applied in a collaborative process with Mexican contractors to significantly reduce construction risks in the wind industry in Mexico. Figure 5 shows the collaborative effort of a Mexican and Spanish WTG installation group at a site in northern Mexico. In addition, CFE personnel is very interested in getting the substation in good operating condition from the start, because they inherit the Point of Interconnection substation/switchyard from the project owner. Therefore, CFE performs a very thorough testing process to avoid issues from contractor overlooks, which significantly reduces the risks of having equipment malfunctions/failures during Energization. November 2013 Page 5 of 6

6 Figure 5 - Mexican and Spanish Group Installing a WTG Rotor at Northern Mexico Site For More Information Contact: Agustin Valdivia avaldivia@mpr.com (713) MPR Associates, Inc 1221 McKinney St., Suite 3325 Houston, TX About MPR MPR Associates is an employee-owned specialty engineering and management services firm founded in 1964 and headquartered in Alexandria, VA. MPR provides solutions to clients in the energy, federal government, and health & life sciences industries. The company benefits its clients by delivering innovative, safe, reliable and cost-effective technical solutions across the entire project or product lifecycle. MPR has executed significant projects in 50 countries on six continents, bringing the same dedication to engineering excellence, innovation, and creativity to our clients' challenges. MPR's technology expertise, within the nuclear, coal, oil, gas, and power markets, has contributed to the development of more than 40,000 MW of new generating plants. We have developed solutions for our clients through due diligence of commercial transactions with a cumulative value of more than $30 billion. MPR also acts as Owner's Engineer, leading hundreds of projects from early development through commissioning and performance testing. Celebrating nearly 50 years of experience, MPR continues to break through difficult technology challenges, working across sectors and disciplines, to bring impactful solutions to the client. About the Authors Agustin Valdivia - is a consulting engineer at MPR Associates. He has supported wind energy clients in roles as owners engineer and project controls lead, and has supported clients with tasks including: contract management, engineering review, and due diligence support. Agustin recently performed the Owner's Engineer role for a wind energy project in northern Mexico, where he managed 2 EPC contractors (electrical and civil), performed contract management and supervised the owner's site team. James V. Bubb - is a consulting engineer at MPR Associates, currently responsible for MPR s renewable energy practice area and has extensive experience developing a range of renewable energy projects, including offshore wind. Jim is currently serving in the lead technical role for MPR s Independent Engineer assessment of the Cape Wind offshore project. November 2013 Page 6 of 6