Geothermal Sector Begins Heating Up in Mexico

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By Emily Pickrell

March 22 — Geothermal energy in Mexico could be one of the winners of a huge legal overhaul of its power sector in the past two years, as Mexican leaders push for the development of renewable energy in the country through increased international investment.

As recently passed laws now allow private generation plants to competitively supply power to Mexico's grid for the first time, the geothermal sector has received a special boost with its own Geothermal Energy Law.

While Mexico's staggering solar potential and its developed wind resources have received more attention, officials say the legal overhaul has opened up a potential renaissance for geothermal.

“Prior to the Geothermal Law, you only had one participant, the [state-owned] Federal Electricity Commission, and only four fields,” Leonardo Beltran, undersecretary for energy transition at the Energy Ministry, told Bloomberg BNA in an interview. “Since the laws were passed, we have already granted a concession to Grupo Dragon, the first participant in the market, and there are 15 permits for exploration in 10 states. That clearly indicates that we have a great resource, that the legal framework is conducive and that it is sufficiently clear and provides the ground rules for the private sector.”

What Is Geothermal?

Geothermal power plants generate energy using underground heated water or steam that has been trapped by impermeable rock, known as a geothermal reservoir.

To build a new geothermal plant, developers must first identity these rare underground pockets, measuring the temperature and flow of the resource. In a successful site, the water or steam can be accessed and transferred to the plant and the heat is used to generate power. The water is then circulated back again to repeat the process for the plant’s next cycle of power.

Mexico's new geothermal laws were part of a much broader energy sector overhaul in 2013 that opened up the possibility to invest in a range of renewable energy options. The new legislation, however, also took on what officials saw as additional barriers: the high risk involved with exploration and the unwieldy challenge of getting the needed permits, especially for water.

“Prior to the new law, there was a lot of legal uncertainty for people interested in developing [geothermal] projects, because they did not know which authority they had to go to to get all the necessary approvals,” Cesar Hernandez, undersecretary for electricity at the Energy Ministry, said in a recent interview with Bloomberg BNA. “It is a law that, in my opinion, gave the needed legal certainty, which had been one of the reasons for the lack of development.”

Private Auctions

These new laws established private auctions for geothermal fields and gave private investors the right to invest directly or to partner with the Federal Electricity Commission (CFE), Mexico's national power company. Creating a specific process was necessary because of the high costs of exploration, which involves drilling an exploratory well to ensure that the anticipated resources in a given field are as rich as anticipated.

Geothermal Power Plant

“We listened to private participants that develop fields in other parts of the world, and they said that the type of legislation we had originally proposed was not attractive to private investors because we don't have blocks [a parcel of land that transfers the exploration and production rights to a specific entity],” said Lourdes Melgar, undersecretary for hydrocarbons for the Energy Ministry and former undersecretary for electricity. “Someone could do all the investment and exploration of finding a field and start drilling it and then a competitor could come in and put their field next door.”

From a resources standpoint, Mexico is a natural fit for geothermal development. It is the fourth-largest global producer of geothermal energy, with installed capacity capable of generating close to 1,000 megawatts. And its potential is even greater: the Energy Ministry estimates that its volcanic terrain is capable of producing up to 15,000 megawatts.

Geothermal energy also is attractive because of its unique ability among renewable energy options to generate electricity at a constant rate, unlike wind or solar energy, which rely on weather or light conditions. As Mexico attempts to move toward its stated goal of 35 percent clean energy by 2024, additional geothermal energy would be a welcome addition, providing a constant base load power at night and under poor weather conditions.

“Once you have your geothermal field in place, it is a winning technology,” said Diana Sasse, a partner specializing in renewable energy with Goodrich Riquelme, a Mexican legal firm. “It is base load, so it allows renewable energy with clean energy certificates with base load. This is a huge advantage compared to wind or solar.”

‘The Volcanoes Are Big Enough.'

With the new laws in place, potential investors have been waiting to see how the country's first wholesale market, which began in January, and the new clean energy certificates, which will start being used in the beginning of 2018, will impact the prices for renewable power.

The high upfront costs, however—which include extensive surveying before an exploration site is even selected—mean that additional geothermal investment will likely be slower than for wind or solar. The long lead time required also means that for the country's first clean energy certificates auction in March, where private companies could sell renewable energy contracts, geothermal will largely be absent.

“To tell you the truth, we don't care about this first call for bids, because no one will be there in geothermal,” said Gerardo Hiriat, director general of Energias Alternas, a Mexican financial group specializing in geothermal projects and former general manager of geothermal projects for the CFE. “Our expectation is to be there in three years, and right now, we are doing the exploration, seeing if the volcanoes are big enough, if they are not too old and if the rock gives off geothermics.”

At the same time, the government recently designated the exploration fields to which the CFE will have the first rights to develop. The list consists of five fields where it has already worked: The first four fields have developed power plants (Cerro Prieto and Tres Virgines in Baja California; Los Humeros in Puebla; and Los Azufres in Michoacan), and the fifth is an explored but undeveloped field in Jalisco, called Cerritos Colorados.

Interested producers may bid on any remaining fields for a three-year permit to explore blocks up to 150 square kilometers, followed by a 30-year concessions contract.

And to sweeten the pot for private investors, the Mexican government is offering an insurance program that reduces the risks and costs associated with the first stage of exploration. This program, which was developed in conjunction with the Inter-American Development Bank and Mexico's National Finance Bank, provides guarantees and insurance mechanisms to reduce the associated exploration risk, which is helpful in securing financing.

13 Permits for CFE

The Federal Electricity Commission also received 13 permits to explore new sites—either on its own or with private partners. It is this opportunity to partner with the CFE that has generated the most enthusiasm from would-be geothermal investors in Mexico, because the fields are already proven and the commission has obtained the needed permits—a complex process in Mexico.

“There is a strong lobby knocking on the door of the CFE and asking the CFE to partner with them,” Hiriat said. “Everyone is afraid of spending money and not finding enough resources, or running into too many social problems.”

Partnering with the CFE could involve its own risks for companies, however, according to Hiriat, as the Mexican company's estimate of the exploration costs it accrued (and will thus divide) prior to the partnership may make such deals much more costly than expected.

Grupo Dragon in Mexico, which has one geothermal plant under the previous power laws, received the first 30-year concession under the new laws for exploration last November. Under the contract, it is authorized to produce up to 52 megawatts in a project in San Pedro Lagunillas in Nayarit and drill up to 18 wells.

And while the new laws allow for the possibility of an orchestrated auction similar to those taking place in the oil and gas sector, government officials say future auctioned fields could continue to be awarded separately, similarly to the Grupo Dragon contract.

“The Geothermal Law states that we can issue a tender, similar to the Round 1 process in the hydrocarbon sector, but it is an option and not a mandate,” the Energy Ministry's Beltran said, noting that the U.S. does not go through an auction process to award geothermal rights. “Right now we are in the process of analyzing what else is happening around the world in geothermal.”

Water Remains Challenge

An additional challenge for new investors is that permits for the needed water will now be the responsibility of the National Water Commission, or Conagua, which has the responsibility of ensuring that all geothermal water will be recycled, one of the requirements established in the Geothermal Law. For investors, this means working with another agency in addition to the Energy Ministry. For Conagua, it also has meant developing the needed regulations to oversee how private users manage water use.

“It is one of the things we have to establish by law—the use of water as part of a whole new industrial procedure,” said Alejandro Medina Mora Nieto, assistant director for legal process at Conagua, noting that the new laws established that the geothermal water must be recycled, but did not expand on how this would be handled. “The important thing is that 100 percent of the water that you use in geothermal goes back,” he said.

Grupo Dragon, which has received the needed water permitting from Conagua, said it plans to re-inject up to 84 percent of the more than 40 million cubic meters of water it will use annually for the project.

The continued challenges of water have pushed some Mexican geothermal experts to call for developing technology that will eliminate the need for water. This new approach, known as enhanced geothermal systems, give generators much more flexibility on where plants could be placed and would double the potential geothermal resources in Mexico, according to Luis Gutierrez-Negrin, president of the Mexican Geothermal Association.

‘Lower the Risk.'

Other experts say more investment in technology as a whole is needed to make Mexico's geothermal resources more attractive.

“Geothermal has to lower the risks of drilling through the development of technology and lower the price of an installation for it to really catch on in Mexico,” Hiriat said, noting that investments by the U.S. Department of Energy could lead the way for the needed technology. “We have to learn from them how to make a cheaper well, how to clean the steam so that the maintenance does not cost so much, how to increase the reliability of a plant and how to increase the productivity of a well.”

Such limitations have led Bloomberg New Energy Finance to estimate that Mexico's geothermal's share of the electricity market will grow from its current 1.3 percent share to only about 2.3 percent by 2040, according to Lilian Alves, an analyst with Bloomberg New Energy Finance.

“The reason why [expected] participation is limited is because geothermal is a technology that does not have an experience curve,” Alves said. “We are expecting further price drops for wind and solar, which will continue to make them much more competitive against sources like geothermal.”

To contact the reporter on this story: Emily Pickrell in Mexico City at correspondents@bna.com

To contact the editor responsible for this story: Greg Henderson at ghenderson@bna.com

For More Information

View an audio slideshow describing Mexico's geothermal energy potential at http://hosting.soundslides.com/63pt3/.