600 West Broadway Suite 2600 San Diego, CA 92101-3372 619.236.1414 www.luce.com Mexican Renewable Energy for the US Market: Opportunities and Challenges by John B. McNeece III, Esq. 619-699-2443 jmcneece@luce.com Lic. Laura M. Nava (619) 235-3559 lnava@luce.com Luce, Forward, Hamilton & Scripps, LLP for the US-Mexico Bar Association s 2010 Annual Meeting and Continuing Legal Education Conference Mexico, D.F. November 3-5, 2010 2010 Luce, Forward, Hamilton & Scripps, LLP. All rights reserved.
TABLE OF CONTENTS Page Part I Part II Opportunities: Renewable Energy Projects in Mexico that will Generate Electricity for the US Market...2 A. Why Cross-Border Renewable Energy?...2 1. Mexico Has Critical Renewable Energy Resources...2 2. Mexico Has Access to New Transmission Infrastructure in the US...2 3. Faster Implementation of Projects in Mexico...2 4. Renewable Energy Is a Major Focus for the Mexican Government...3 5. Foreign Investment in Renewable Energy...3 6. US-Mexico Cooperation in Renewable Energy...3 B. Regulatory Factors Fostering Cross-Border Renewable Energy California Clean Energy and Climate Change Legislation....4 1. The California Renewables Portfolio Standard ( RPS )...4 2. California Global Warming Solutions Act of 2006 (AB 32)...5 Challenges for Development of Cross-Border Renewable Energy Projects...6 A. Transmission and Interconnection...6 1. Transmission within the US...6 2. Transmission across the Border...6 3. Interconnection to the Grid...6 4. Mexican Transmission Issues...7 B. Tax Issues...7 1. The US Investment Tax Credit...8 2. Recovery Act Section 1603 Grants in Lieu of ITC...8 3. Available US Tax Benefits...9 4. Available Mexican Tax Benefits...9 C. Recovery Act Buy American Provisions...9 1. Why are the Buy America Provisions Relevant?...9 2. An Exception to Buy America for NAFTA Compliant Products...9 D. Financing...10 1. Overview...10 2. Negotiated and Standardized PPAs...10 3. Feed-In Tariffs...10 4. The Proposed Renewable Auction Mechanism....10 i
Part III Potential Benefits for Cross-Border Projects under the Kyoto Protocol s Clean Development Mechanism...11 A. Kyoto Protocol...11 1. Introduction...11 2. The Flexible Mechanisms to meet GHG Reduction Obligations...11 3. The Clean Development Mechanism (CDM)...11 B. Mexico and the Clean Development Mechanism...12 1. Mexico is Entitled to Take Advantage of the CDM...12 2. An Under-Utilized Mechanism?...12 3. Opportunities for Increased Use of the CDM in Mexico...13 4. Alternatives to the CDM...13 ii
Mexican Renewable Energy for the US Market: Opportunities and Challenges Northern Mexico, adjacent to the US-Mexico Border, offers great opportunities for renewable energy projects built to provide electricity to the US. Such projects would not only benefit the US, but would benefit Mexico, with employment, taxes, and an infrastructure base that could then be extended to provide power to the Mexican grid. Yet there are also significant challenges to developing renewable energy in Mexico focused on the US market The opportunities grow out of the renewable resources in Mexico adjacent to the US border. This paper will focus on Baja California, Mexico, which represents a prime location for the establishment of several types of renewable energy projects, including wind farms and solar and geothermal projects. Baja California offers ideal topography, climate and geological formations for various forms of renewable energy, and its proximity to the United States makes this region especially attractive for renewable energy projects. The challenges derive from the fact that renewable energy is currently more expensive than energy generated from hydrocarbons, and is dependent on government support. For the long term, renewable energy is essential. For the short term, it is less expensive to obtain power from gas-fired power plants than from renewable energy sources. To fill the gap, the US government has provided significant incentives through the income tax laws, grants in lieu of tax benefits and loan guarantees to encourage development of renewable energy. However, these benefits do not extend to projects located outside the US. Unless Mexico can convince the US to extend those benefits to projects in Mexico that provide renewable energy to the US, or find a way to match the benefits, Mexican projects may be unable to compete with US projects regarding sale of renewable energy within the US. To overcome these challenges, Mexico will need to work with the US to develop a more integrated approach to renewable energy planning, including the availability of US government incentives for projects that provide energy for the US market. This is a politically charged topic at a time of economic distress in the US, where unemployment is at levels not seen since the Great Depression. Yet the US needs to reduce its reliance on imported petroleum and natural gas, and to confront the environmental issues that derive from a carbon-based economy. A deeper relationship with Mexico, rising to the level of a partnership, could be a key element of a plan to meet these objectives. An alternative (or additional) possibility for Mexico to meet the competition of US tax incentives if such incentives cannot be extended to Mexican projects is for Mexico to foster increased development and sale of carbon credits, whether through the Kyoto Protocol s Clean Development Mechanism or otherwise. This paper will provide an overview of both the opportunities and the challenges to development of Mexican renewable energy projects focused on sales to the US market 1
Part I Opportunities: Renewable Energy Projects in Mexico that will Generate Electricity for the US Market A. Why Cross-Border Renewable Energy? 1. Mexico Has Critical Renewable Energy Resources. Baja California, in particular, has a number of important renewable energy resources. The Mega-Region consisting of northern Baja California and the counties of San Diego and Imperial counties in California has the potential for more than 12,000 MW of renewable electricity generation, as follows: Solar Energy 6,550 megawatts (Source: California Renewable Energy Transmission Initiative (RETI) Phase 2A Draft Resource Report) Wind Energy 3,495 megawatts including Baja California (Sources: RETI Phase 2A Draft Resource Report) Geothermal Energy 2,000 megawatts (Source: Imperial Irrigation District Summit Blue Report 2008) Importantly, the wind in the vicinity of the town of La Rumorosa, B.C., Mexico approximately 60 miles east of San Diego and 15 miles south of the U.S.-Mexico border is viewed as one of the best wind energy resources in North America. Unlike other wind resources, peak generation in this area is from mid-afternoon to early evening, when demand for electricity is most high. While the figures above for solar and geothermal focus on the US side of the border, primarily in the Imperial Valley, those same resources are available on the Mexican side of the border, since the Imperial Valley and the Mexicali Valley are different names for the same area, on either side of the border. 2. Mexico Has Access to New Transmission Infrastructure in the US. Focusing on Baja California, San Diego Gas & Electric has recently obtained all regulatory approvals for a transmission project, the Sunrise Powerlink, which links San Diego and the Imperial Valley, ending at the Imperial Valley Substation, close to the Mexican Border. Construction of the 117-mile, 500-kilovolt Sunrise Powerlink transmission line is scheduled for this Fall, with an in-service date in 2012. With this transmission capacity in place, it will be possible to deliver renewable energy from south of the border to the population centers of Southern California, once that energy is delivered across the border. 3. Faster Implementation of Projects in Mexico. Compliance with land use, environmental and permitting requirements in Mexico can move more quickly than in the US, depending on the support of the Mexican federal and state governments. 2
A January 2008 California State Auditor report on solar energy reported that the average time for obtaining approvals to build a large non-solar power plant (since the State had last approved a large solar power plant in 1990) and the corresponding transmission lines, and to interconnect to the power grid, totaled about 39 months. This figure of 39 months will certainly decline as the various regulatory bodies gain more experience and streamline their administrative procedures, and more transmission capacity is put in place. But the process is still complicated, and also presents the risk of lawsuits challenging administrative decisions. Mexican land use, environmental and permitting requirements are similar to those in the US, but the process can move more quickly in Mexico, with government support, and there is less chance for delaying litigation. Note that Mexico has an increasingly strong environmental movement and will respond strongly to poorly conceived projects 4. Renewable Energy Is a Major Focus for the Mexican Government. Mexico has a renewable energy law (November 28, 2008) and implementing regulations (September 2, 2009) that will help to focus and coordinate Mexico s efforts to foster renewable energy. 5. Foreign Investment in Renewable Energy. The Mexican government, through its promotional arm ProMéxico, sees renewable energy as a key area for attracting foreign investment. Foreign investment continues to be a major driver for the Mexican economy. 6. US-Mexico Cooperation in Renewable Energy. The US and Mexico established a Bilateral Framework on Clean Energy and Climate Change (announced by the White House April 16, 2009) that provides a basis for cross-border cooperation on renewable energy projects. The US continues to voice support for such cooperation. In joint remarks by President Obama and President Calderon at the White House on May 19, 2010, President Obama stated: To create clean energy jobs and industries of the future, we re building on a partnership we launched last year with new initiatives to promote regional renewable energy markets, green buildings and smart grid technology. These initiatives will also help us implement the commitments we made at Copenhagen, especially as we work toward the climate conference in Cancun later this year. (emphasis added). 3
B. Regulatory Factors Fostering Cross-Border Renewable Energy California Clean Energy and Climate Change Legislation. 1. The California Renewables Portfolio Standard ( RPS ). Under California law, the RPS applies to retail sellers of electricity (defined as investor-owned utilities ( IOUs ), non-utility electric service providers, and community choice aggregators, which are primarily local governments). Under the law, those retail sellers are obligated to increase renewable energy as a percentage of their retail sales to 20% by 2010. California state law also requires publicly owned utilities to implement the standard but gives them flexibility in developing specific targets and timelines. In November 2008, Governor Schwarzenegger raised California s renewable energy goals to 33% by 2020 by Executive Order. The 33% requirement by 2020 was further validated by means of its inclusion in the Scoping Plan for AB 32 (California Global Warming Solutions Act of 2006), discussed below. In July 2009, the California Public Utility Commission ( CPUC ) reported that the three investor-owned utilities in California were supplying approximately 13% of their aggregated total sales from eligible renewable resources as of 2008, far below the 20 percent required by 2010. The CPUC further reported that the 15 largest publicly-owned utilities anticipated 12.4% of RPS-eligible renewable retail sales by 2011, but this progress is still far short of the renewable target. The California utilities would like to meet their RPS standard in part through renewable energy credits or RECs which are unbundled from the energy related to the RECs. The CPUC has shown willingness to permit the use of transferable RECs ( TRECs ) to meet RPS standards, but on a limited basis. In a March 11. 2010 decision, which has since been stayed, the large investor-owned utilities could use TRECs on a temporary basis (through December 11, 2011) to meet 25% of their annual RPS requirement. This 25% cap placed a significant restriction on the use of TRECs for the large IOUs. Further any renewable power that was generated outside of the California and first connected with the grid outside of California would not be viewed as bundled energy (energy and RPS-eligible attributes), but would be viewed as RECs subject to the 25% cap. This created a benefit for in-state renewable energy. The critical point for Mexico is that renewable energy generated in Mexico and delivered into California with its first point of contact to the grid in California, then such Mexican renewable energy is viewed as California in-state energy, and is not subject to the cap on TRECs. This makes such energy more valuable than other out of state renewable 4
energy. The CPUC will likely make a final decision on the US of TRECs at its meeting in December 2010. 2. California Global Warming Solutions Act of 2006 (AB 32). AB 32 [e]stablishes [a] first-in-the-world comprehensive program of regulatory and market mechanisms to achieve real, quantifiable, costeffective reductions of GHGs [greenhouse gases], according to the California Air Resources Board (ARB), which has a key role in implementing AB 32. The legislatively mandated Scoping Plan for AB32, prepared by the ARB with input from other government agencies and numerous stakeholders, sets forth a series of plan elements to achieve the maximum technologically feasible and cost-effective reductions in GHG emissions by 2020. This includes elements relevant to cross-border renewable energy, i.e. achieving a statewide renewables energy mix of 33% by 2020, and developing a California cap-and-trade program that links with other Western Climate Initiative partner programs to create a regional market system. The Scoping Plan also includes international elements. Among other things, according to the Plan, California may participate in collaborative relationships with developing countries or regions for achieving early climate action. In this regard the scoping plan specifically notes that Projects in the Mexican border region may also be of particular interest, considering the opportunity to realize considerable co-benefits on both sides of the border. AB32 is being challenged in the political sphere on the grounds that it would reduce jobs and is an unaffordable luxury in a time of economic distress. Opponents to AB32 placed a proposition on the California ballot for November 2, 2010 that would suspend AB 32 until California unemployment figures are reduced to levels that will not be reached in the foreseeable future. Governor Schwartzeneger and many leaders of the California business community have come out in opposition to the proposition, arguing that AB32 will help create large numbers of green jobs that are critical to the California economy. To date, the polls show that this proposition proposing the suspension of AB32 will likely fail. 5
Part II Challenges for Development of Cross-Border Renewable Energy Projects A. Transmission and Interconnection 1. Transmission within the US. The Sunrise Powerlink, discussed above, will assist greatly with US transmission issues for renewable energy generated in Baja California and delivered to the US in California. For other areas in the US, transmission within the US is a key constraint on whether cross-border generation of renewable energy for the US market will be feasible. 2. Transmission across the Border. A key issue for cross-border renewable energy project is the need to deliver energy across the border to the transmission grid in the US. The Sunrise Powerlink, for example, will be an important resource for renewable energy generated in Baja Calfornia, but the energy generated in Mexico must first cross the border to reach the Imperial Valley Substation, the end point for Sunrise Powerlink. The Imperial Valley Substation is close to the border, but the critical step is actually getting the power across the border. There are already two transmission lines now crossing the border from Baja Mexico into the US for private generation projects, i.e. for the Sempra Generation power plant and the Intergen power plant west of Mexicali. These two cases demonstrate that private cross-border transmission is viable. Nevertheless, the process for obtaining permission to build cross-border transmission in the form of Presidential Permit, which will involve review from numerous US government agencies and US environmental review, is a complex, time-consuming process. 3. Interconnection to the Grid. Interconnection of a renewable energy project to the transmission grid or the electricity distribution system in California requires substantial technical analysis (1) to determine what interconnection facilities will be required for the project, (2) to ensure that the grid or distribution system can handle the additional energy flow from the project, and (3) to ensure that the grid will not be adversely impacted by the interconnection, among other things. The relevant studies may require significant time and money, and will result, among other things, in an estimate of the charges to the interconnection customer for interconnection facilities and distribution upgrades, if any (costs for these purposes are non-reimbursable), and an estimate of charges to the interconnection customer for transmission network upgrades (costs for this purpose are reimbursable). 6
Interconnection to the transmission grid in California is subject to the interconnection procedures established by the California Independent System Operator ( CAISO ) under the regulatory supervision of the US Federal Energy Regulatory commission ( FERC ). Interconnection to the distribution system of a distribution provider (e.g. a utility that sells power to retail customers), is subject to the interconnection procedures under the distribution provider s Wholesale Distribution Access Tariff ( WDAT ), once again under the regulatory supervision of FERC. For interconnection with the transmission grid, CAISO s current interconnection procedures for large projects (greater than 20MW) and its proposed interconnection procedures for all projects (approved by the CAISO Board of Governors on September 9, 2010 for submission to FERC) provide that CAISO will evaluate all projects submitted during a queue window. This will provide more certainty to the interconnection process than was the case in the past. The WDAT interconnection procedures for the various California distribution providers will likely follow the same path that CAISO has created for interconnection procedures under the jurisdiction of CAISO. Nevertheless, interconnection will remain a critical step in developing a renewable energy project, whether in Mexico or the US, and the interconnection request will continue to require substantial time and effort. 4. Mexican Transmission Issues. Apart from US transmission and interconnection issues, the Mexican energy company, the Comisión Federal de Electricidad ( CFE ) has expressed concern that power delivered from Mexico to the US, e.g. to the Imperial Valley Substation close to the Mexican border, will create issues with the Mexican grid. It appears that generators may need to make some accommodation with CFE on Mexican transmission issues in connection with authorization to export renewable energy from the US to Mexico. A good line of communication with CFE will be essential in order to work through these issues as early as possible in the development process. B. Tax Issues. There are significant US tax benefits for renewable energy projects located in the US, consisting of investment tax credits (ITC) and grants in lieu of the ITC. However, the key benefits are not available for projects located outside the US. This is the key constraint on development of renewable energy projects in Mexico for delivery of energy to the US. There are US and Mexican tax benefits that are available, but they are not as compelling as the US ITC and grants in lieu of ITC. 7
1. The US Investment Tax Credit. Currently, US law provides for a 30% investment tax credit ( ITC ) for certain energy property in the year that such energy property is put into service. For this purpose, energy property includes the equipment and other tangible property (so long as such property is subject to depreciation or amortization) related to a solar energy project if placed in service before January 1, 2017, related to a wind energy project if placed in service before January 1, 2013, and related to a geothermal project, if placed in service prior to January 1, 2014. The ITC is not available for assets used predominantly outside of the US. To date, used predominantly outside of the US has been interpreted based on the physical location of the property. However, in light of the absence of Treasury Regulations interpreting this phrase, this term is potentially subject to administrative interpretation from the US Treasury. The key issue will be to obtain an interpretation of US tax law that if the assets in Mexico constituting the renewable energy project are used to generate electricity which is then exported to the US under a Mexican export concession, those assets will not be treated as being used predominantly outside of the US. The Mexican government has taken an interest in this potential strategy for obtaining US ITC for projects physically located in Mexico under the stated circumstances. However, it is as yet unclear whether it will be possible to obtain such an interpretation. 2. Recovery Act Section 1603 Grants in Lieu of ITC. The US currently has a program in place under Section 1603 of the US American Recovery and Reinvestment Act of 2009 (the Recovery Act ) permitting cash grants from the US Treasury for renewable energy projects equal to 30% of the tax basis of the energy property in lieu of the 30% ITC. However, according to US Treasury interpretation, Section 1603 does not permit grants for projects physically located outside of the US. The Section 1603 grant program is now coming to an end to be eligible for the grant, a project must begin construction or incur 5% of project expenses by December 31, 2010 and according to political analysts this program will likely not be renewed. In a sense, this is beneficial for potential Mexico projects, since the cash grants for 30% of the tax basis of the energy property within a renewable energy project located in the US constitute a huge incentive to locate projects where they are eligible for the grants, i.e. in the US. 8
3. Available US Tax Benefits. The US does have certain tax benefits that will be available for US owned renewable energy assets located outside of the US. In particular, wind and solar renewable energy assets located outside of the US will be entitled to five-year straight line depreciation under the alternative depreciation system. This of course applies for payment of US taxes by a US taxpayer. 4. Available Mexican Tax Benefits. Mexico also has certain tax programs that are beneficial for renewable energy projects. For a Mexican taxpayer, the cost of renewable energy fixed assets consisting of machinery and equipment, which can include all costs necessary to finance, import, transports install and make operable the machine and equipment, are entitled to first-year 100% depreciation in Mexico, so long as the machinery and equipment remain in operation for 5 years. For a US taxpayer setting up a renewable energy project in Mexico through a Mexican subsidiary, the special tax incentives associated with the IMMEX program (including what was formerly identified as the maquiladora program) will likely be available, depending on clearance from the Mexican tax authorities. C. Recovery Act Buy American Provisions 1. Why are the Buy America Provisions Relevant? The Mexican government has offered to support solar farms in Mexico using PV technology, if the PV solar panels are manufactured in Mexico. However, some manufacturers are reluctant to put PV manufacturing capability in Mexico for fear that they will not be able to sell their products to US solar farm developers who are using government funding. This is because of Buy American provisions in the 2009 Recovery Act. 2. An Exception to Buy America for NAFTA Compliant Products. One of the exceptions to the Buy American provisions of the Recovery Act is that such provisions must be applied in a manner consistent with United States obligations under International agreements. One of those international agreements is NAFTA, and if there is sufficient transformation of a product in Mexico, it will be deemed to be in compliance with NAFTA and will satisfy the Buy American requirements. Kyocera was able to obtain a ruling from the US authorities that its solar modules involved sufficient transformation in Mexico to be considered NAFTA compliant even though the silicon cells for the modules come from Japan. 9
D. Financing 1. Overview. Because of all of the uncertainties presented by the issues discussed above, it may be difficult for smaller companies without a large balance sheet to obtain financing for cross-border renewable energy projects, unless it has in place a firm power purchase agreement ( PPA ) with a utility. The creditworthiness of the utility then provides the basis for financing, assuming that completion risk for the project can be mitigated. 2. Negotiated and Standardized PPAs. The negotiation of a bilateral PPA is an issue that can take time and money. On the other hand, the large utilities are now using request for offer mechanisms with a renewable standard contract, i.e. a standardized PPA, that involve little negotiation. The downside to a request for offer mechanism for project sponsors is that this mechanism is fundamentally a bid process designed to push prices for renewable energy as low as possible. This is certainly beneficial for the utilities ratepayers, but challenging for project sponsors. 3. Feed-In Tariffs. Project sponsors prefer feed-in tariffs to a bid mechanism as a basis to obtain a PPA. A feed-in tariff involves a pre-set the amount that will be paid for renewable energy on a must-take basis. On October 11, 2009, Governor Schwarzenegger of California signed legislation that will require California utilities to buy electricity from solar panel generators of 1.5-3.0 MW in size, at set rates that would be above what the utilities would otherwise pay for wholesale power from conventional sources. 4. The Proposed Renewable Auction Mechanism. The CPUC is also contemplating a possible Renewable Auction Mechanism, or RAM, for transactions up to 20 MW. RAM would employ standardized PPAs and apply to the three largest investor-owned utilities in California up to a program total of 1,000 MW. Individual prices would be determined by each seller submitting a nonnegotiable bid, which could be up to 150% of the market price referent, representing the market price of electricity (which the CPUC has determined is best reflected by the long-term ownership, operating, and fixed-price fuel costs for a new 500 MW natural gas-fired combined cycle gas turbine). The buyers would then select purchases in the order of least-costly first. This is less attractive to developers than a feed-in tariff, because of the competitive pricing, but it still has the advantage of creating sets a must-take purchase mechanism. 10
A. Kyoto Protocol Part III Potential Benefits for Cross-Border Projects under the Kyoto Protocol s Clean Development Mechanism 1. Introduction. The Kyoto Protocol is a protocol to the United Nations Framework Convention on Climate Change ( UNFCCC ), which is aimed at stabilizing greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. UNFCCC, Art. 3. The Kyoto Protocol establishes legally binding commitments for the reduction of 6 gases (carbon dioxide, methane, nitrous oxide. sulfur hexafluoride, hydrofluorocarbons and perfluorocarbons, collectively identified as greenhouse gases or GHGs ) produced by so-called Annex I parties (the developed/ industrialized countries that are listed in Annex I to the UNFCCC). Mexico is a signatory to the Kyoto Protocol, while the US is not. 2. The Flexible Mechanisms to meet GHG Reduction Obligations. In order to attain its emission goals, the Kyoto Protocol includes flexible mechanisms whereby the Annex I countries can use alternative methods to meet the GHG reduction obligations. This includes the Clean Development Mechanism ( CDM ), described below, which is applicable to the non-annex I countries. In practice the non-annex I economies (primarily developing countries) have no GHG emission restrictions, but have financial incentives to develop GHG emission reduction projects, through the CDM process. 3. The Clean Development Mechanism (CDM) The Clean Development Mechanism (CDM), defined in Article 12 of the Kyoto Protocol, allows a country with an emission-reduction or emissionlimitation commitment under the Protocol, as listed in Annex B to the Protocol (an Annex B Party ), to implement an emission-reduction project in developing countries. Such projects can earn tradable certified emission reduction ("CER") credits, each equivalent to one ton of CO2, which can be counted towards meeting Kyoto targets. A CDM project must provide emission reductions that are in addition to what would otherwise have occurred. The projects must qualify through a rigorous and public registration and issuance process, under the auspices of the Executive Board of the CDM. Approval at the host country level is given by the Designated National Authority. The CDM program has grown very rapidly, since it is a fully articulated and rigorous mechanism for establishing tradable carbon offsets. 11
There are indications that the CDM program could become usable in the US, even though the US is not a not a signatory to the Kyoto Protocol. It may be acceptable as one of the authorized offset mechanisms under state or federal US clean energy and climate change legislation. B. Mexico and the Clean Development Mechanism 1. Mexico is Entitled to Take Advantage of the CDM. Mexico, as a signatory to the Kyoto Protocol and a non-annex I country, is entitled to establish projects under the Kyoto Protocol s Clean Development Mechanism (CDM). 2. An Under-Utilized Mechanism? The perspective of the Mexican government through the Ministry of the Environment and Natural Resources (Secretaría del Medio Ambiente y de Recursos Naturales, or SEMARNAT ) is that Mexico to date has not pursued the CDM process sufficiently. Through January, 2008, Mexico s designated National Authority for the CDM, the Intersecretarial Commission on Climate Change (Comisión Intersecretarial de Cambio Climático CICC, ) CICC had issued only 184 Letters of Approval for CDM projects based in Mexico. There are various reasons for the comparative lack of use of the CDM process in Mexico: Since the United States is not a party to the Kyoto Protocol, CER credits from the CDM are not usable, as such, in the United States. They would need to be used primarily in Europe. The CDM process is challenging, requiring application of approved methodologies to establish a baseline i.e., the GHG emissions that would have taken place in the absence of the CDM project. Further, the applicant must prove additionality, i.e., that the project is an addition to what would have taken place absent the CDM program. This can be a difficult call since many projects will have important benefits apart from the CDM program. The extended process for obtaining the CERs under the CDM process is drawn out and complex. It includes eight steps as follows: (1) design, structuring and finance of the proposed project; (2) national approval (by the Designated National Authority); (3) validation by a Designated Operational Entity (i.e., an entity authorized by the CDM to review and report upon CDM projects); (4) registration of the project with the CDM (supervised by the Executive Board of the CDM); (5) implementation of the project by the project sponsor; (6) monitoring of the project (by the Designated Operational Entity); (7) verification and certification of the project (done by the Designated Operational Entity) ; and (8) issuance of the CERs (carried out by the Executive Board). 12
3. Opportunities for Increased Use of the CDM in Mexico. Because of the apparent under-utilization of the CDM in Mexico, it would be worthwhile for Mexico to determine if it can foster greater use of the mechanism, whether by streamlining the process as much as possible, providing more guidance to potential users, or otherwise. 4. Alternatives to the CDM. Carbon credits, whether in the form of CEMs under the Clean Development Mechanism or other formats, will be increasingly valuable as the world focuses on climate change. With the significant renewable energy resources that Mexico has to offer, it should explore to what extent carbon credits can be created outside of the CDM in order to add value to renewable energy projects located in Mexico. 101339606.2 13