Energy Storage Report

Energy transition initiatives have continued to decelerate in Mexico, as the administration of President Andrés Manuel López Obrador (AMLO) favoured backing state-owned enterprises such as national oil firm Pemex and power utility CFE. The reversal in climate change initiatives has seen Mexico’s share in Latin American clean energy investments decline from 35% in 2017 to 7% in 2022 (Infrastructure Investor, 2023). Consequently, Mexico lags behind its peers, such as Brazil (1st position), Chile (4th), and Colombia (6th) in the Energy Transition Index. Decarbonisation targets have been scaled down, raising uncertainty about the country’s ability and intent to chart a path to Net Zero by 2050.

The Mexican government has pledged to generate 35% of its electricity from clean sources by 2024, with an additional 5% subject to international support. However, including natural gas as a clean energy source has diluted the significance of this development. Despite the lack of political support, supporting market dynamics and favourable geographical conditions have contributed to a 50% increase in the share of renewables in electricity generation in the last five years.

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The energy storage sector in Mexico continues to be unregulated, with no specific laws defining it or governing its use. Consequently, there is limited visibility on the incentives associated with battery storage projects, which has deterred private investment. It is generally regarded as a limited source of energy generation that must adhere to some requirements to inject power into the grid for a short duration.

While there are no specific incentives for energy storage, it is presumed that its classification as a source of energy generation would make it eligible for the same incentives offered to renewable energy. In this case, projects are presented with accelerated depreciation for tax purposes. Without a legal definition of energy storage and ambiguous market regulations, the development of the industry has been stunted. While there are isolated large battery installations in the country, the regulatory uncertainty and the perceived absence of a policy push have worked to deter any substantial investment in the sector, either domestic or foreign.

Regulatory changes since May 2020, skewed the power market in favour of the state-owned utility CFE (Comisión Federal de Electricidad) (Reuters, 2022). Most detrimental among all changes were the curtailed open access to private market participants and arbitrary methods of evaluating interconnection requests. The new policy also authorises new ancillary services for the grid’s stability and safety, in addition to existing services that already receive remuneration, such as reactive reserve, reactive power and grid re-energization. Energy storage will likely be commercialised as an ancillary service under the wholesale electricity market, with frequency response and regulation as the key focus.

The Mexican energy market’s practice of demand average formula instead of dynamic pricing based on real-time supply and demand, have deterred the development of the storage market (LinkedIn, 2023). Most storage companies base their business models on demand-saving methods that involve storing energy during low demand and discharging during peak demand to deliver savings. Such models’ financial feasibility is adversely impacted when the demand average is factored in.

The nationalisation of the considerable lithium deposits in the country in April 2022 added to the uncertainty within the private sector. The newly created state-run enterprise LitioMx lacks the technical skill or the capital to exploit the clay-based lithium deposits, estimated to amount to 1.7 million tons (Reuters, 2023). In February 2023, a Presidential Decree designating a 900 square-mile lithium mining zone in northern Sonora was notable as a first step towards granting exclusive exploration rights to LitioMx, further deepening the uncertainty among private investors.

Recent adverse legislative changes have made it harder to trade energy on the wholesale market, thus stymying the development of utility-scale energy storage. Consequently, the BTM C&I segment will likely drive growth for energy storage in Mexico in the short term. Mexico’s substantial base of industrial facilities presents a significant scope to deploy battery storage in industrial microgrids. Such deployment can enable industrial consumers to secure reliable power supply and optimise consumption curves, delivering 20-40% savings on electricity costs by avoiding peak hour tariffs. This is evident from the major battery installations in Mexico that the C&I segment has primarily commissioned. Recent examples are a 25MWh BESS system integrator Quartux and battery storage technology provider Sungrow installed in Cancun in August 2023 to provide peak shaving and backup power services to unnamed customers in the area (Energy Storage News, 2023). Revolve Renewable Power Corp operationalised a 3.2MWh battery storage unit at a hotel chain site in Cancun in May 2023 (Revolve, 2023). The Quartux installation is purported to be the largest C&I battery installation in Latin America.

Even with the limited market growth and political flux, there are new business models in consideration. One example is the energy storage-as-a-service business of Fotowatio Renewable Ventures (FRV), US-based energy analytics and software company Energy Toolbase and local developer Ecopulse. Consumers are not required to make upfront capital expenditures on installation. Instead, the project partners will be paid by sharing the electricity savings in a model similar to what Stem Inc. and Enel X have offered C&I customers access to energy savings via battery storage in the US and Canada. The first installation under this model will be a 480kW two-hour Li-ion BESS in the Mexican industrial region of Iztapalapa (Energy Storage News, 2022).

The possibility of developing the domestic energy storage supply chain offers an additional upside potential to the market. Despite the uncertainty introduced by nationalisation of lithium resources, broader global efforts to pivot away from a China-centric battery supply chain in favour of nearshoring is likely to benefit Mexico. Global battery manufacturing major CATL has been reported to be scouting for sites in Mexico to establish what can be Latin America’s first Li-ion cell battery gigafactory. The leading battery storage system integrator, Powin, had already shifted its assembly plant to Monterrey. In March 2023, Tesla announced its plans to open a battery gigafactory in Nuevo Leon state, with the total investment amount pegged at $15 billion over two years (Reuters, 2023).

Hybrid renewable energy plants, particularly solar-cum-storage installations, constitute another significant growth driver for energy storage in Mexico. State-owned utility CFE is constructing a 190MW battery storage unit co-located with a 1GW solar PV project, which is due for completion in 2028 (Energy Storage News, 2023). Wind energy projects have also started incorporating storage elements, as evidenced by the 50MW Eolica Coromuel wind farm, which has a 10MW BESS onsite, supplied by Wärtsilä, and was operationalised in October 2022 (Bussiness Wire, 2022).