Exploring the Potential for Renewable Energy Cooperatives in Mexico the Role of Business Models in the Energy Transition

Exploring the potential for renewable energy cooperatives in Mexico The role of business models in the energy transition J.D.J. Carrasco Montejano

Exploring the potential for renewable energy cooperatives in Mexico The role of business models in the energy transition

J.D.J. Carrasco Montejano

To obtain the degree of Master of Science in Sustainable Energy Technology at the Delft University of Technology, to be defended publicly on Tuesday November, 24 2020.

Student number: 4800117 Thesis committee: Dr. T. Hoppe, TU Delft (TPM) supervisor Dr. Ir. J. Quist, TU Delft (TPM) supervisor Dr. L. Kamp, TU Delft (TPM) committee

Cover image: SENER, Mexico.

An electronic version of this thesis is available at http://repository.tudelft.nl/.

Acknowledgements

This report presents the results of a research that also marks the conclusion of my master’s studies in Sustainable Energy Technologies at the Delft University of Technology.

I moved to study in the Netherlands with great motivation to take an active role in the energy transition. As I learned about the different challenges to integrating renewable energy technolo gies, such as solar PV and wind, one challenge was especially difficult for me to understand: social opposition. Developing mega projects seemed like the logical way to meet the energy transition goals; however, I soon started to see the impact on the host communities’ livelihood, which created new forms of inequalities. Looking at alternatives, I came across the renewable energy cooperative business model and its potential to accelerate the energy transition while supporting economic and social development. I was not alone in this realization; over the past years, many communities in the Netherlands and other countries worldwide decided to take ac tion and started their own energy cooperatives. Sadly, it was not the case for my home country, Mexico. Understanding the reasons and the possibility to contribute to change this reality served as the motivation for this research.

I am profoundly grateful to my first supervisor, professor Thomas Hoppe, who welcomed my research proposal and, with his extensive experience in the topic, guided and supported me along the process. I also want to thank professors Jaco Quist and Linda Kamp for introducing me to the study of transitions, for their feedback, and for pushing me to improve the research quality. Furthermore, I appreciate the support of the interviewees, who kindly shared their knowl edge, experience, and insights to make this research possible.

Doing research and my master’s education, in general, proved to be a great challenge. I am fortunate to be surrounded by amazing people that encouraged and challenged me during the past two years. Extended thanks to my friends from SET and Energy for Refugees; working with you surely enriched my Delft experience. Alejandro, Anurag, David, Eric, Ricardo, my fam ily away from home, thank you for the long discussions, celebrations, and support during difficult times. Vasile, the best is yet to come; thanks for all the coffees and for looking after my mental health.

All this would not be possible without my family. Thank you for trusting and supporting me always. Alejandro, thanks for showing me the path to sustainability; you have been a true role model. Diego, thanks for helping with all my crazy ideas and projects. Lastly, mom and dad, I cannot thank you enough. You are my motivation to continue aspiring to do more and do better. All my achievements are shared with you.

J.D.J. Carrasco Montejano Delft, November 2020

iii

Executive summary

Problem statement Mexico is currently transitioning to a lowcarbon electricity production that has a specific goal of producing at least 50% of their electricity from clean energy sources by 2050. Following the liberalization of its electricity sector in late 2013, private actors joined the Mexican government’s efforts to increase the share of renewable energy; however, the mechanisms placed to attract investment continue to favor the incumbents and the model of largescale, privately owned, and internationally financed projects. These projects produced new forms of spatial and social inequalities, which led to criticism and conflicts from civil society and indigenous groups at the local level.

Research approach and methodology Theories on sociotechnical transitions study the shifts within large sociotechnical systems and recognize technological innovation’s role for the required transition. However, technological in novation alone is not sufficient to achieve the required changes. It depends on other elements within the sociotechnological system, such as user practices, markets, business models, pol icy, infrastructure, and cultural meanings. The role of business models remains underexplored; therefore, this research intends to contribute to the emerging literature linking sociotechnical transitions and business model theory. Using the framework proposed by Wainstein and Bum pus (2016), this research aims to understand the role of business models as part of the socio technical regime and as a device to commercialize technological innovation.

Over the last decade, new business models, like the ones implemented by renewable energy cooperatives (REScoops), are proving to be a driving force to transition to lowcarbon energy generation. A REScoop is a business model where citizens jointly own and participate in re newable energy or energy efficiency projects. This business model follows the International Cooperative Alliance’s principles, which allow for the local community’s involvement in the de velopment, installation, and operation of low carbon energy installations, which may positively impact the projects’ acceptance. Furthermore, the emergence of REScoops advances princi ples as energy democracy, selfgeneration, and green energy consumption that assist in reduc ing GHG and energy poverty. Despite the observed benefits, countries with apparent proper conditions, like Mexico, have not succeeded in implementing this business model. Therefore this research aims to understand the limiting factors by conducting a case study to answer the following main research question:

What are the challenges and opportunities for the potential use and adoption of the renew able energy cooperative business model in the context of the Mexican energy transition?

The main research question is decomposed into six subquestions that help understand the renewable energy cooperative business model and the implications for creating renewable en ergy cooperatives in Mexico. Qualitative data is collected and guided by the research questions and the framework combination presented by Wainstein and Bumpus (2016). Secondary data is collected from indepth desk research and is complemented with primary data resulting from the elaboration and analysis of nine expert interviews.

v vi Executive summary

Main findings Implementing the conceptual framework combining business models with sociotechnical tran sition theory from a multilevel perspective has proven to be useful in understanding specific dynamics and business models’ roles within the Mexican energy transition. While the Electric Industry Law of 2014 liberalized the Mexican electricity sector and created the required conditions for REScoops to participate, the secondary laws and the regime’s pressures impose a series of entry barriers for REScoops to compete in the electricity market at a large scale. However, the REScoop business model can be implemented to advance clean electricity generation at the distributed level. Even when the effects on the energy matrix would be minor, the REScoop business model provides benefits beyond the environmental benefits and could be a key element to advancing concepts such as energy sovereignty and reducing energy poverty in the country.

This research introduced four potential business models that could be developed under the current circumstances and regulatory conditions. These business models shall be carefully ex amined and adapted to the host communities’ specific needs and resources. The collective generation business model, in particular, can play an important role in promoting RES’s de velopment since the users can directly see the benefits on their electricity bill; furthermore, it represents an alternative for SMEs to access cheaper and cleaner electricity. Given the impor tance of SMEs in the Mexican economy, reducing electricity costs would bring additional benefits to the communities.

The emergence of pilot projects is fundamental to break the barrier of the lack of information and access to funding. Mexico has a great social capital and experience with the cooperative organization; however, it would need external partners’ technical support to kick start these projects. As the first pilot projects prove successful, it would be essential to follow learning, networking, and visioning paths to move into the regime.

Recommendations Policy Recommendations Policymakers are advised to revise the design of energy auctions to enable citizens’ active partic ipation. The regulation for distributed generation could be revised to facilitate communityowned projects by increasing the maximum capacity limit, include virtual net metering, and clarify the procedure to benefit from the quota obligations. Furthermore, cooperatives’ regulation shall recognize and promote energy cooperatives and remove restrictions to access funding from cooperative banks.

Recommendations for local governments, cooperatives, and public and private organizations The different actors are advised to establish programs to promote and support the development of REScoops, including capacity building, technical and administrative assistance, and financial support. Furthermore, these actors can take a topdown approach and start new cooperatives or participate as codevelopers or customers for the REScoops. To be effective, these projects shall also consider interventions for energy efficiency.

Further research Further research can be directed at understanding how the identified barriers and drivers affect business models’ design for largescale RES projects. As part of these efforts, it is advised to research how the modification of the longterm auctions and the regulation on distributed generation could favor citizen participation. Furthermore, this research calls for a multicountry analysis to identify common barriers and drivers among developing economies. Contents

Acknowledgements iii Executive summary v List of Figures ix List of Tables xi List of Acronyms xiii 1 Introduction 1 1.1 Research gaps and contributions ...... 3 1.2 Research questions ...... 4 1.3 Report structure and reading guide ...... 4 2 Theoretical framework 5 2.1 Frameworks on sociotechnical transitions ...... 6 2.2 Business models ...... 7 2.2.1 Business model definition ...... 7 2.2.2 Business model framework ...... 7 2.3 Framework integration ...... 11 3 Methodology 13 3.1 Research approach ...... 14 3.1.1 Reserch strategy ...... 14 3.1.2 Data collection and treatment ...... 15 3.2 Research methodology...... 16 4 Renewable energy cooperatives 19 4.1 Introduction to renewable energy cooperatives ...... 20 4.2 Common practices from European renewable energy cooperatives...... 23 4.2.1 Value proposition ...... 23 4.2.2 Customer segments ...... 24 4.2.3 Customer relationships...... 25 4.2.4 Distribution channels ...... 26 4.2.5 Key activities ...... 26 4.2.6 Key resources ...... 27 4.2.7 Key partnerships ...... 29 4.2.8 Cost structure...... 31 4.2.9 Revenue streams...... 33 5 Sociotechnical analysis of the Mexican electricity sector 35 5.1 The landscape ...... 36 5.1.1 Major changes in the political regime ...... 36 5.1.2 Climate change concerns and the pressure to reduce greenhouse gas em misions ...... 37 5.1.3 The incumbent role of natural gas ...... 37 5.2 The regime ...... 39 5.2.1 Infrastructure of the National Electric System ...... 39 5.2.2 Electricity users and demand ...... 41

vii viii Contents

5.2.3 The regulatory framework for the energy transition ...... 41 5.2.4 The Mexican Electricity Market ...... 46 5.3 Niche developments ...... 51 5.3.1 Development of lowcarbon technologies and social acceptance ...... 51 5.3.2 Distributed Generation ...... 56 5.3.3 Renewable energy cooperatives in Mexico ...... 58 6 Business models analysis: The incumbent business model 61 6.1 The incumbent business model ...... 62 6.1.1 Value proposition ...... 63 6.1.2 Customer segments ...... 63 6.1.3 Customer relationships...... 63 6.1.4 Distribution channels ...... 64 6.1.5 Key activities ...... 64 6.1.6 Key resources ...... 65 6.1.7 Key partnerships ...... 65 6.1.8 Cost structure...... 66 6.1.9 Revenue streams...... 66 7 Business model analysis: The REScoop business model 67 7.1 Barriers and drivers for the development of REScoops in Mexico ...... 68 7.1.1 Policy and regulation barriers ...... 68 7.1.2 Financial barriers ...... 71 7.1.3 Cultural barriers...... 71 7.1.4 Drivers ...... 71 7.1.5 Effects of barriers and drivers for the development of REScoops in Mexico 73 7.2 Business model design for Mexican renewable energy cooperatives ...... 77 7.2.1 Total sale ...... 79 7.2.2 Leasing/PPA ...... 80 7.2.3 Selfconsumption ...... 81 7.2.4 Collective generation ...... 82 7.2.5 Value proposition ...... 83 7.2.6 Customer segments ...... 83 7.2.7 Customer relationships...... 85 7.2.8 Customer channels...... 86 7.2.9 Key activities ...... 86 7.2.10 Key resources ...... 86 7.2.11 Key partnerships ...... 88 7.2.12 Cost structure...... 90 7.2.13 Revenue streams...... 90 7.3 Comparison of business models...... 92 8 Conclusions, reflections, and recommendations 95 8.1 Conclusions...... 96 8.2 Reflections ...... 101 8.3 Recommendations ...... 104 8.4 Further research ...... 106 Reference List 107 A Questionnaire for expert interviews 119 List of Figures

2.1 a) Multiple levels as nested hierarchy, and b) dynamic multilevel perspective, adapted from Geels (2002, 2018) ...... 6 2.2 Osterwalder business model framework, adapted from Osterwalder and Pigneur (2010) and Wainstein and Bumpus (2016) ...... 8 2.3 Business model canvas, reprinted from Osterwalder and Pigneur (2010) ..... 10 2.4 Business model in the multilevel perspective, adapted from Wainstein and Bum pus (2016) ...... 12

3.1 Research Flow Diagram ...... 18

4.1 Municipal support mechanisms for REScoops, own illustration adapted from Meis ter et al. (2020) and Warbroek and Hoppe (2017) ...... 31 4.2 Cost components for RES power plants, own illustration adapted from Visser and Held (2014) and RESCoop 202020 (2014) ...... 32 4.3 Global LCOEs from utilityscale RES, 20102019. Reprinted from IRENA (2020) 32 4.4 Main support schemes on the promotion of renewables, Own illustration adapted from Banja et al. (2017) ...... 33

5.1 Sociotechnical evolution of the electricity sector in Mexico, reprinted from Jano Ito and CrawfordBrown (2016) ...... 36 5.2 Sociotechnical evolution of the electricity sector (20132018). Own illustration using references cited in Section 5.2...... 38 5.3 Share of installed capacity by generator in Mexico. Own illustration with data retrieved from SENER (2002, 2012, 2019c). Note: the capacity of CFE for 2002 and 2012 includes the capacity assigned to LyFC ...... 40 5.4 Responsibilities of government actors under the LIE, own illustration with data from SEGOB (2014) ...... 44 5.5 CFE’s corporate structure, Own illustration adapted from from CFE (2017) ... 45 5.6 Structure of the Mexican electricity market, own illustration adapted from (CRE, 2020a) ...... 47 5.7 Clean Energy Certificates requirement (20182022), own illustration adapted from CENACE (2020a) ...... 49 5.8 RES capacity additions by company as result of the longterm auctions (2015 2017), own illustration with data retrieved from Banco Nacional de Obras y Ser vicios Públicos, S.N.C. (2020); SENER (2020b)...... 50 5.9 Global horizontal irradiation Mexico, reprinted from Solargis (2019)...... 53 5.10 Historical evolution of solar PV technology in Mexico (20072019), own illustration with data retrieved from SENER (2018c, 2020c)...... 53 5.11 Wind resource of Mexico and Central America, reprinted from NREL (2017). .. 55 5.12 Historical evolution of wind technology in Mexico (20072019), own illustration with data retrieved from SENER (2018c, 2020c)...... 55 5.13 Distributed generation capacity and number of interconnection contracts in Mex ico (20072019), own illustration with data retrieved from CRE (2020) ...... 56 5.14 Interconnection contract selection for distributed generation, own illustration with data retrieved from CRE (2020) ...... 57

ix x List of Figures

6.1 Business model for CFE SSB, own illustration with data retrieved from the different sources mentioned in this chapter ...... 62

7.1 Potential business models for Mexican REScoops, own illustration with data re trieved from the different sources introduced in this chapter ...... 78 7.2 Graphical representation for the total sale business model based on the business model canvas, data retrieved from the different sources introduced in this chapter 79 7.3 Graphical representation for the leasing/PPA business model based on the busi ness model canvas, data retrieved from the different sources introduced in this chapter ...... 80 7.4 Graphical representation for the selfconsumption business model based on the business model canvas, data retrieved from the different sources introduced in this chapter ...... 81 7.5 Graphical representation for the collective generation business model, based on the business model canvas; data retrieved from the different sources introduced in this chapter ...... 82 7.6 Comparison of the business models, own illustration with data retrieved from ref erences in chapter 6 ...... 92

A.1 Draft of the potential business model canvas for the development of REScoops in Mexico ...... 121 List of Tables

1.1 Research structure and reading guide ...... 4

5.1 Legal framework for the energy transition, data retrieved from SENER (2020a) . 42

6.1 Main indicators of electricity users in Mexico for the year 2018, elaborated with information from (SENER, 2020b) ...... 63

7.1 Average cost for installation, operation and maintenance of Solar PV in Mexico in 2020, data retrieved from (GIZ, 2020) ...... 90

A.1 Participants in the expert interviews ...... 119

List of Acronyms

AMDEE Mexican Association of Wind Energy AMIF Association for the Photovoltaic Industry ANES National Mexican Association for Solar Energy ASOLMEX Mexican Association of Solar Energy BM Business Model CCE Electricity coverage contracts CCS Carbon capture and storage CEL Clean Energy Certificates CENACE National Energy Control Center CFE Federal Electricity Commission CONACyT National Council on Science and Technology CONUEE National Commission for Efficient Use of Energy CRE Energy Regulatory Commission CSC Collective selfconsumption DGRV German Cooperative and Raiffeisen Confederation DOF Diario Oficial de la Federacion (National Gazette) ENTEASE National Strategy for the Energy Transition and Sustainable Use of Energy EPC Engineering, procurement and construction FIDE Revolvingloan trust Fund to Save Electricity FiP Feedin Premium FIRCO Shared Risk Fiduciary Fund FiT Feedin Tariff GHG Greenhouse Gases GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit GmbH INAES National Institute of Social Economy IPCC Intergovernmental Panel on Climate Change IPP Independent Power Production IRENA International Renewable Energy Agency IRENA International Renewable Energy Agency LAERFTE Law for the Use of Renewable Energy and Financing of Energy Transition LASE Law for Sustainable Use of Energy LGCC General Law of Climate Change LGCC General Law of Climate Change LIE Electric Industry Law LTE Energy Transition Law LTE Energy Transition Law LyFC Luz y Fuerza del Centro MEM Mexican wholesale market MEM Wholesale Electricity Market MLP MultiLevel Perspective NDC Nationally Determined Contributions NREL National Renewable Energy Laboratory

xiii xiv List of Acronyms

O&M Operation and Maintenance PETE Special Program for the Energy Transition PIE Independent Power Producers PML Local Marginal Price PMLh Hourly Local Marginal Price PPA Power Purchase Agreements PRODESEN Program for the Development of the National Electricity System PRONASE National Program for the Sustainable Use of Energy PRONASOL National Solidarity Program RES Renewable Energy Sources REScoop Renewable energy cooperative SEN National Electric System SEN National Electric System SENER Secretary of Energy SIN National Interconnected System SME Micro, Small and Medium Enterprises SNM Strategic Niche Management SSB Basic Service Supplier SSC CFE Qualified Service Supplier 1 Introduction

“We are the first generation that can put an end to poverty and we are the last generation that can put an end to climate change, so we [must] address climate change.” – UN SecretaryGeneral Ban Kimoon

Ban Kimoon raised attention to two of the world’s pressing challenges: on the one hand, meeting the greenhouse gas (GHG) reduction goals aimed at limiting global warming to 1.5 °C (United Nations, 2016); on the other hand, putting an end to poverty by enabling socioeconomic development. These two challenges are nonconflicting and should be addressed simultane ously. Energy access is necessary to fulfill basic human needs, stimulate economic growth, and fuel human development (Gaye et al., 2007). However, the way we currently produce and consume energy is responsible for around 78% of the GHG emissions (Pachauri et al., 2014). The solution partially rests on the transition to more sustainable energy systems, which presents an unprecedented opportunity to meet both longterm economic and climate goals (Cantarero, 2020).

The power sector is one of the major sources of GHG emissions. In 2018 alone, it was re sponsible for the emission of 33.1 gigatonnes of carbon dioxide; coalfired power generation accounted for 30% of all energyrelated carbon dioxide emissions (IEA, 2019). In this context, the transition from fossil fuels to Renewable Energy Sources (RES) for electric power generation becomes a vital factor for the uncoupling of electric power generation and GHG emissions.

Theories on sociotechnical transitions study the shifts within large sociotechnical systems (Geels, 2002) and recognize the role of technological innovation for the required transition. How ever, technological innovation alone is not sufficient to achieve the required changes (Bidmon and Knab, 2014), as it depends on other elements within the sociotechnological system, such as user practices, markets, business models, policy, infrastructure, and cultural meanings (Bid mon and Knab, 2014; Geels, 2018).

The MultiLevel Perspective on sociotechnical transitions (MLP) framework proposed by Geels (2002) has proved to be useful to understand the dynamics in sociotechnical transitions and the changes and tensions at different societal levels. However, the role of business mod els in the energy transition remains underexplored (Boons and LüdekeFreund, 2013; Wes seling et al., 2020). Tapping into this gap, this research intents to contribute to the emerging literature linking sociotechnical transitions and business model theory (Wainstein and Bumpus (2016),Bidmon and Knab (2014), Elmustapha and Hoppe (2020),Huijben and Verbong (2013)).

1 2 Introduction

Wainstein and Bumpus (2016) presented a framework that merges the multilevel perspec tive with the business model framework considering the roles of business models within socio technical transitions, which proved to be useful to analyze the low carbon power system tran sition. They presented illustrative examples comparing the incumbent regime actor’s business model to the business models of new niche actors such as the prosumers, thirdparty forprofit companies, and grassroot developments (e.g., energy cooperatives and social businesses). Similar efforts were presented by Elmustapha and Hoppe (2020), however, using a combination of business model and Strategic Niche Management (SNM) framework (developed by Schot et al. (1994)) to present a case study comparing business models for solar energy niches in a developing economy context. Both studies agree that grassroots initiatives, like renewable en ergy cooperatives (REScoops), could constitute key players and suggest further exploring their potential role in the energy transition and the limitations these business models could face in de veloping countries. Following their suggestions, this research provides a case study to analyze the potential of the renewable energy cooperative business model in the context of the Mexican energy transition.

Mexico is undergoing a big transformation process following the liberalization of its electricity sector in 2013, also known as the Mexican energy reform. This reform seeks to attract private investment to modernize the national electric system, diversify the generation matrix, and in crease the competition in the market to reduce electricity prices (SEGOB, 2013). A key aspect of the energy reform was enacting secondary laws to increase the share of re newable energy technologies in the energy matrix to 35% by 2024 and 50% by 2050 (SENER, 2020a). Despite the potential and benefits of distributed generation and the regulation allowing for its development (SENER, 2018a), the mechanisms placed to attract investment continue to favor the incumbents and the model of largescale, privately owned, and internationally financed projects. These projects produced new forms of spatial and social inequalities (AvilaCalero, 2017), which led to criticism and conflicts from civil society and indigenous groups at the local level (Tornel, 2020). MejíaMontero et al. (2020) argue that the criticism is rooted in the lack of proper and informed consultations, the failure to involve the local community in the design and development of the projects, the failure to account for the communal land tenure, and foremost the unequal distribution of the benefits.

In particular, indigenous communities have opposed the development of wind projects in the Isthmus of Tehuantepec in Oaxaca, Mexico. This resulted in new spaces of dialogue and the creation of the Yansa Ixtepec Community Interest Company. Motivated by perceived social, economic, and environmental benefits, the community of Ixtepec intended to replicate the Eu ropean REScoop business model in Mexico. The Yansa Ixtepec Community Interest Company was presented as an alternative to incumbent companies. In 2012, it attempted to compete in an open tender promoted by the Mexican government to develop more wind capacity in the region. However, the regulation at the time did not allow for its realization (AvilaCalero, 2017; Hoffmann, 2012).

The report of DGRV (2018) revealed that, despite the liberalization of the electricity sector and the strong cooperative movement in Mexico, no energyproduction REScoops operate in Mexico. Understanding the barriers and drivers for their creation can help design business models better adapted to the local socioeconomic and regulatory conditions, increasing the chances of success. Furthermore, citizens’ involvement in electricity generation from RES could have a significant economic impact, and the potential to accelerate the energy transition. 1.1. Research gaps and contributions 3

1.1. Research gaps and contributions The multilevel perspective on sociotechnical transitions (MLP) framework proposed by Geels (2002) has proved to be useful to understand the changes and tensions at different societal lev els. However, the role of business models in the energy transition, although is getting increased attention in the literature, remains underexplored (Boons and LüdekeFreund, 2013).

Wainstein and Bumpus (2016) presented a framework that merges the multilevel perspec tive with the business model framework taking into consideration the roles of business models within sociotechnical transitions, same that proved to be useful to analyze the low carbon power system transition, where they presented illustrative examples comparing the business model of the incumbent regime actor to the business models of new niche actors such as the prosumers, thirdparty forprofit companies and grassroot developments (e.g., energy cooperatives and so cial businesses). Similar efforts were presented by Elmustapha and Hoppe (2020); however, using a combination of business model and SNM framework to present a case study comparing business models for solar energy niches in a developing economy context. Both studies agree that grassroots initiatives, like renewable energy cooperatives, could constitute key players and suggest further exploring their potential role in the energy transition and the limitations that these business models could face in developing countries. Following their suggestions, this research provides a case study to analyze the potential of the renewable energy cooperative business model in the context of the Mexican energy transition.

In the context of the selected case study, recent research has explored the technical (Bush nell et al., 2019) and social (AvilaCalero, 2017; GarcíaOchoa and Graizbord, 2016; Hoffmann, 2012; Ochoa and Graizbord, 2016; Tornel, 2020) challenges posed by the large scale develop ment of renewable energy technology in Mexico, that despite the liberation of the energy sector and the opening of the market for new actors and business models, and the potential for dis tributed generation (SENER, 2018a), most of the new capacity installed continues the pattern of largescale, centralized systems that also centralizes the benefits in a few players (AvilaCalero, 2017).

Hoffmann (2012), and AvilaCalero (2017) documented the motivations and early efforts to adopt the European energy cooperative business model in Mexico as an alternative to achieve a just energy transition. This business model is an attractive alternative to the incumbent cen tralized system since renewable energy cooperatives, flourishing in countries like Germany, Denmark, and the Netherlands prove to bring significant economic, social and environmental benefits to communities implementing them (Warbroek and Hoppe, 2017), increase acceptance of renewable energy technologies, and at the same time support national governments achieve their Nationally Determined Contributions (NDC) goals of production of electricity from clean en ergy sources. The report of DGRV (2018) looked into the regulatory conditions for distributed generation in Mexico; it recommended further exploring the cooperative model for the generation of electricity as it could have a significant economic impact and accelerate the energy transition. However, there is no mention in the literature of the segments where REScoops can participate or the business models that could be implemented or the possible benefits.

In response to these research gaps, this research intends to contribute to the emerging lit erature linking sociotechnical transitions and business model theory (Wainstein and Bumpus (2016), Bidmon and Knab (2014), Elmustapha and Hoppe (2020)). Using the framework pro posed by Wainstein and Bumpus (2016) enriched with concepts from the sustainable business model literature, this research aims to understand the role of business models, both as part of the sociotechnical regime and as a device to commercialize technological innovation, and through a case study, identify the challenges and opportunities that business models of new niche actors such as REScoops encounter in developing economies like the case of Mexico. 4 Introduction

1.2. Research questions This research aims to fill the knowledge gap discussed in section 1.1 by answering the main research question:

What are the challenges and opportunities for the potential use and adoption of the renew able energy cooperative business model in the context of the Mexican energy transition?

To answer the main research question it will be fragmented into six subquestions. These subquestions intend to use the framework introduced in chapter 2 to characterize the Mexican energy transition and understand the potential role of the renewable energy cooperative busi ness model to accelerate this transition. The subquestions are listed below:

1. What are the common practices in the business models developed by European REScoops? 2. What does the sociotechnical system of the Mexican power sector look like? 3. What is the business model of the incumbent power utility company? 4. What are the barriers and drivers to implementing the REScoop business model in Mexico? 5. What is the potential architecture of the REScoop business model under the current Mex ican regulations? 6. How does the REScoop business model compare to the incumbent business model?

1.3. Report structure and reading guide This report is divided into 8 chapters, comprising the research definition, analysis, and conclu sions. Chapter 1 introduces the problem, the knowledge gaps, and the research questions. Chapter 2 introduces the frameworks of sociotechnical transitions and business models and how they are combined to compose the framework that guides this research. Chapter 3 elab orates on the research approach and the selected methodology for data collection and treat ment. Chapter 4 defines the renewable energy cooperatives and explores common practices on business models developed by European renewable energy cooperatives. Chapter 5 anal yses the landscape, regime, and niche developments guiding the Mexican energy transition. Chapter 6 studies the incumbent electricity retailer’s business model as part of the socio tech nical regime. Chapter 7 provides an analysis of the different barriers and drivers for the devel opment of REScoops in Mexico and proposes potential business model designs for Mexican REScoops, which are compared against the incumbent business model analyzed in chapter 6. Chapter 8 closes the report by answering the research questions, reflecting on the framework and methodology, and offering recommendations for the different actors. Table 1.1, presents a graphical representation of the research structure and serves as a reading guide.

Table 1.1. Research structure and reading guide 2 Theoretical framework

“There is one forecast of which you can already be sure: someday renewable energy will be the only way for people to satisfy their energy needs. Because of the physical, ecological and (therefore) social limits to nuclear and fossil energy use, ultimately no body will be able to circumvent renewable energy as the solution, even if it turns out to be everybody’s last remaining choice. The question keeping everyone in suspense, however, is whether we shall succeed in making this radical change of energy platforms happen early enough to spare the world irreversible ecological mutilation and political and economic catastrophe.” – Hermann Scheer

A transition towards lowcarbon electricity, heat, mobility, agrofood, and other systems is re quired to mitigate the effects of climate change (Geels, 2018). Theories on sociotechnical tran sitions study the shifts within large sociotechnical systems (Elmustapha and Hoppe, 2020), and recognize the role of technological innovation for the required transition. However, technological innovation alone is not sufficient to achieve the required changes (Bidmon and Knab, 2014), as it depends on other elements within the sociotechnological system, such as user practices, mar kets, business models, policy, infrastructure, and cultural meanings (Bidmon and Knab, 2014; Geels, 2018).

This chapter presents the framework to be used in this research. Section 2.1 describes the importance of the frameworks on sociotechnical transitions with an emphasis on the multilevel perspective on technological transitions; section 2.2 defines business models and introduces the nineblock business model decomposition of Osterwalder and Pigneur (2010). Finally, sec tion 2.3 describes how frameworks on sociotechnical transitions and business models can be integrated to analyze the potential role of business models to accelerate the energy transition.

5 6 Theoretical framework

2.1. Frameworks on sociotechnical transitions Theoretical frameworks on sustainable transitions aim to understand, explain, and model the dy namics of largescale societal change (Elmustapha and Hoppe, 2020; Bidmon and Knab, 2014). One of those frameworks is the multilevel perspective on technological transitions (MLP) pro posed by Geels (2002). Geels argues that the changes occur through the dynamic and non linear interaction between three analytical levels: niches, the sociotechnical regime, and the sociotechnical landscape. The relationship between the levels follows a nested hierarchy (or multilevel perspective) where niches are embedded within regimes and regimes within land scapes, as presented in figure 2.1 a).

Figure 2.1. a) Multiple levels as nested hierarchy, and b) dynamic multilevel perspective, adapted from Geels (2002, 2018)

At the microlevel, the niches represent protected spaces for experimentation where radical innovations can develop; the protected spaces provide room to develop learning processes and space to buildup the required social networks (Geels, 2002).

At the meso level, the sociotechnical regime is defined as the locus of established practices and associated rules that enable and constrain activities within communities and stabilize the existing systems (Geels, 2011, 2002). The stability is dynamic as innovation can still occur in a more incremental nature (e.g., by improving or adjusting technology) instead of the radical innovation developed at the niche level (Geels, 2002; Bidmon and Knab, 2014). Geels (2018) distinguishes six dimensions in the sociotechnical regime: technology, user practices and ap plication domains, industry, policy, culture, and technoscientific knowledge as represented in figure 2.1 b). The dimensions are linked and coevolve; however, following their internal dynam ics, tensions can develop and lead to periods of weak linkages. For analyzing the electricity regime Verbong and Geels (2007) identified three interlinked dimensions:

i) Network of actors and social groups; this involves actors such as the utilities, residential and industrial users, and ministries within the government.

ii) Formal, normative and cognitive rules; the formal (e.g., laws, standard, and regula tions), normative (e.g., behavioral norms and role relationships), and cognitive (e.g., guid ing principles and problem agendas) guide the activities of the actors.

iii) Material and technical elements, describe the required elements for the provision of the electricity service such as the power plants and the transmission and distribution grid. 2.2. Business models 7

The sociotechnical landscape, located at the macro level, is defined as a set of technology external and heterogeneous factors (e.g., fuel prices, economic growth, cultural and normative values, environmental problems) and structural trends that change slowly and autonomously Geels (2002).

The MLP framework argues that transitions occur with the interactions between the three levels, as shown in figure 2.1 b). radical innovations can break out of the niche level and into the sociotechnical regime following the development of internal factors (e.g., price/ performance improvements, scale and learning economies, complementary technologies and infrastructure, positive cultural influences, and support from actors), and external ”windows of opportunity.” these windows can be created when shifts in the landscape put pressure on the regime leading to its destabilization, or by internal tensions within the regime. When the new sociotechnical regime is established, it can build up tension to change the landscape (Geels, 2018, 2011, 2002).

The MLP framework has been particularly useful to help understand energy transition dy namics (Wainstein and Bumpus, 2016). Niche innovations, like clean energy technologies and energysaving practices, find it difficult to break through and challenge the incumbent energy regime (characterized by specific regulations, infrastructure, user practices, and maintenance networks aligned to the existing technology) (Geels, 2002). In this line, Wainstein and Bumpus (2016) and Boons and LüdekeFreund (2013) argue that these technological innovations alone are insufficient to change the current production and consumption system. Thus, require new business models to effectively commercialize and drive their objective value to compete with the incumbent.

2.2. Business models 2.2.1. Business model definition There is no generally accepted definition of the term ”business model” (BM) within the academic literature (Wainstein and Bumpus, 2016). CasadesusMasanell and Ricart (2010) describes the BM as “the logic of the firm, the way it operates, and how it creates value for its stakeholders”. Scholars agree that BMs transcend the firm’s boundaries as value is created in a network of partners and not the firm alone (Huijben and Verbong, 2013; Bidmon and Knab, 2014). Bidmon and Knab (2014) also define the BM as a market device to commercialize innovative technology (like renewables) that is subject to innovation.

2.2.2. Business model framework Similar to the fragmented definition of business models, several business model frameworks have been developed. Richardson (2005) analyzed existing frameworks and components and proposed a simplified business model framework around the concept of value, the same that is broken down into three major components:

i) Value proposition, describes the value (in the service or product) offered by the firm(Wainstein and Bumpus, 2016), to whom this value is offered, and how the firm can offer superior value compared to the competitors (Richardson, 2005).

ii) Value creation, explains how value is developed and delivered by the firm (Wainstein and Bumpus, 2016). It describes the firm’s organization and architecture and specifies its sources of competitive advantage(Richardson, 2005).

iii) Value capture, describes the financial systems to be employed to turn value into eco nomic profit (Wainstein and Bumpus, 2016). This component includes both the revenue 8 Theoretical framework

and economic models. The first describes the revenue streams or how the firm receives money; the second deals with the costs, margins, and the financial aspects of the firm (Richardson, 2005).

The framework developed by Osterwalder and Pigneur (2010) has been extensively tested in practice and applied in the renewable energy domain(Richter, 2013). In this framework, Oster walder and Pigneur (2010) argue that BMs can be better described through nine building blocks that show the logic of how the company will create value. The ninebuilding blocks are repre sented in figure 2.2, which also shows how the value proposition, value capture, value creation, and the downstream and upstream processes are encompassed and connected.

Figure 2.2. Osterwalder business model framework, adapted from Osterwalder and Pigneur (2010) and Wainstein and Bumpus (2016)

Firms are constantly pressured to respond to sustainability concerns (e.g., climate change, economic crisis, material resource scarcity) (Joyce and Paquin, 2016; Bocken and Geradts, 2019) and are being challenged to innovate their business models in order to remain compet itive; and thus require the development of new value propositions, value creation, and value capture mechanisms (Velter et al., 2020). The business models’ changes can be envisioned to decrease the social and environmental impacts and achieve sustainable development, which seeks a continuous balance between the social, economic, and ecological value (Boons and LüdekeFreund, 2013).

Boons and LüdekeFreund (2013) proposed a set of normative requirements that need to be met to market sustainable innovations; these rules can be used to enrich the definition and scope of the nineblock framework elements introduced by Osterwalder and Pigneur (2010) and presented below: 2.2. Business models 9

Value proposition The value proposition describes the value that a firm can offer to its customers and its value compared to its competitors (Richardson, 2005; Wainstein and Bumpus, 2016).

Customer segments The customer segments building block defines the different groups (or segments) of people or organizations the firm intends to capture and serve. The different segments are defined based on characteristics such as common needs, behaviors, or other attributes. Once a group or segment is selected, other business model canvas blocks, like the customer relationships and distribution channels, can be designed around the targeted customer’s specific needs.

Customer relationships This building block describes the kind of relationships that a firm establishes with the different customer segments. A firm can establish more than one category, including personal assistance, selfservice, implementation of communities, and cocreation (Osterwalder and Pigneur, 2010).

Distribution channels This building block describes the means used by a firm to reach its customers to deliver the pro posed value. Osterwalder and Pigneur (2010) distinguishes between direct and indirect chan nels (that mainly rely on partners). However, all go through different phases, this is 1. create awareness of the product or service being offered; 2. evaluate the position of the firm on deliv ering the value proposed; 3. help customers acquire the offered value; 4. delivery of the value to the customers, and 5. the postpurchase service or how to keep the customers engaged.

Key activities In the words of Osterwalder and Pigneur (2010), this building block describes the most important things a company must do to make the business model work. Together with the key resources and partnerships in the upstream side of the value creation, this building block describes the required activities to create the value offered in the value proposition.

Key resources The key resources are the assets required by the firm to deliver the proposed value. According to Osterwalder and Pigneur (2010), these resources can be physical (e.g., manufacturing facilities, buildings, machines), financial, intellectual, or human. Resources and can be owned or leased by the firm to other companies or partners.

Key partnerships This building block describes a network of partners and suppliers along the value chain required to make the business model work. The alliances and partnerships allow firms to optimize their work, reduce risk, ensure a reliable supply flow, and develop new business.

Cost structure The cost structure building block and the revenue stream constitute the value capture section of the business model canvas. In particular, this block lists all the costs incurred to deliver the proposed value to the customers. Osterwalder and Pigneur (2010) distinguish between two classes of BM cost structures; the first is costdriven, where firms try to reduce the cost as possible, integrating a low cost as a main feature of the value proposition. The second class is valuedriven, where cost structures are less concerned with the cost and focus on the added value or the experience. 10 Theoretical framework

Revenue streams Finally, the revenue stream building block represents how cash is generated by the firm, both from its customers and other streams. Osterwalder and Pigneur (2010) identify several mech anisms to generate revenue ranging from onetime asset sales (e.g., physical products) to re curring revenues in models like usage or subscription fees, lending, licensing, leasing, among others.

The different blocks of the business model framework decomposition can be arranged on a graphical representation introduced by Osterwalder and Pigneur (2010) as the business model canvas (figure 2.3). Similarly to the representation of figure 2.2, the value proposition occupies a central position; blocks located at the upstream and downstream of the value creation and value capture are divided into clusters.

Figure 2.3. Business model canvas, reprinted from Osterwalder and Pigneur (2010) 2.3. Framework integration 11

2.3. Framework integration In understanding the role of business models in sociotechnical transitions, Bidmon and Knab (2014, 2018) identify three different functions for business models:

i) Business models as part of the sociotechnical regime. The regime’s dynamic stability orig inates from the shared rules and practices between closely intertwined regime actors (e.g., generation companies, distributors, users, government authorities, banks) that are contin uously reproduced and reinforced (Geels, 2011). In this line, Bidmon and Knab (2018) argue that existing business models embed in the dominant “business model logic” (i.e., the established way that organizations work) and become “industry recipes” (i.e., the es tablished and accepted perception of how organizations within the same industry work). As such, they are part of the regime and reinforce its stability by reproducing the regime’s rules and structures, connecting the regime actors and related industries and their recipes, and by aligning to the established way that the system works and is shared by all regime actors (the “dominant regime logic”). Furthermore, existing business models as industry recipes, constitute a strong selection and retention mechanism for innovation and form additional barriers to societal transitions and perpetuate lockin (i.e., “a persistent state that creates systemic market and policy barriers to alternatives” (Unruh, 2000)). Thus, incumbents and other regime actors (e.g., consumers, public authorities, and financing institutions) will likely oppose a change in fear of new business models attempting to ap propriate their current source of value capture.

ii) Business model as a device to commercialize technological innovation. Bidmon and Knab (2018, 2014) propose that the main function of a BM within the sociotechnical system is as a device or market vehicle to commercialize innovative technology developed at the niche level. They suggest that the BM can be placed at an intermediate level between the niche and the regime. Business models facilitate the stabilization of the novel technology by contributing to three processes that are required for a technology to breakthrough into the regime, this is, i) articulation of expectations and visions required to attract attention and funding, ii) improve performance through learning processes, and iii) the building of social networks. Bidmon and Knab (2018) also argue that either new or existing business models can occupy the role of a market device. The commercialization of innovative tech nology coupled to an existing business model (aligned to the dominant regime logic) might be easier as they can benefit from freeriding in the regime’s infrastructure. The regime actors can easily relate and identify opportunities for value creation and capture. However, it is debatable whether this can lead to radical changes in the sociotechnical system.

iii) Business models as nontechnological niche innovation. Finally, Bidmon and Knab (2014, 2018) argue that business models, being subject to innovation, can be established as a form of nontechnical niche innovation that is influenced and could be triggered by devel opments in the landscape and regime level (e.g., new regulations or customer demand). Since these business model innovations already fulfill the three processes required to break into the regime (i.e., articulation of expectations and visions, learning processes, and social network building), they can emerge with a higher level of stability than techno logical niches. Which, in turn, will allow them to lay the foundation to become “industry recipes” in a new regime leading to a bigger shift within transitions.

By merging the multilevel perspective framework with the business model framework and the roles of business models within sociotechnical transitions, it is possible to represent graphically (as shown in figure 2.4) the relationships between the business models used to bring technical innovations into the regime, and the business models used by the incumbent firms that try to oppose change and perpetuate their technological lockin. 12 Theoretical framework

Figure 2.4. Business model in the multilevel perspective, adapted from Wainstein and Bumpus (2016)

Within the electricity system, Richter (2013) recognizes the competing business models as depicted in figure 2.4, and identifies two generic business models: • Utilityside business models, represent the typical (incumbent) largescale, centralized power plants. Their value proposition relies on the bulk generation of electricity fed into the grid and delivered to its users through the conventional electricity value chain (i.e., generation, transmission, distribution, retail, and consumption). The customer interface is in a business to business with no direct contact with the enduser.

• Customerside business models are mainly represented by distributed generation (i.e., small scale systems close to the point of consumption). These systems occupy a different position in the electricity value chain, with a higher level of interaction at the distribution side (e.g., the endusers) (Wainstein and Bumpus, 2016; Richter, 2013). Richter (2013) recognized the latter as an emerging niche, where most BM innovation is developing.

The framework combination presented in this section has already been proved to be useful to analyze the low carbon power system transition; in their research, Wainstein and Bumpus (2016) present illustrative examples where they compare the business model of the incumbent regime actor to the business models of new niche actors such as the prosumers, thirdparty forprofit companies and grassroot developments (e.g., energy cooperatives and social businesses). Similar efforts were presented by Elmustapha and Hoppe (2020); however, using a combination of the business model and SNM frameworks in the context of a developing economy. 3 Methodology

“Not everything that can be counted counts, and not everything that counts can be counted.” – William Bruce Cameron

Chapter 3 explains the methodology that was implemented for this research. Section 3.1 presents the research approach, strategy, and how data was collected and treated. Finally, section 3.2 provides a detailed description of the methodology to answer the research questions posed in section 1.2.

13 14 Methodology

3.1. Research approach This research aims to identify the challenges and opportunities for the potential use and adoption of the renewable energy cooperative business model within the context of the Mexican energy transition. In doing so, this research applies a deductive qualitative approach. Compared to an inductive approach, a deductive approach tends to let the concepts lead to the definition of the relevant data that needs to be collected (Yin, 2015). For this research, the data that needs to be collected is established from the beginning with the definition of the research questions and the selection of a framework. This section introduces the research strategy and the methods for qualitative data collection and treatment.

3.1.1. Reserch strategy The research strategy is defined as a plan on how to answer the research questions (Saunders et al., 2016), for which the author selected a case study. A case study allows the researcher to investigate a contemporary phenomenon in depth and within a reallife context, especially when the boundaries between phenomenon and context may not be clearly evident (Yin, 2018). Furthermore, an indepth inquiry can be designed to understand what is happening, its reason, the effects of the situation, and implications for action (Saunders et al., 2016). For this research, the phenomenon of study is the emergence or lack thereof of participatory business models to advance the adoption of lowcarbon technology within the Mexican energy transition context.

Case study selection With a population of around 130 million and abundant natural resources, Mexico is the second largest economy in Latin America and among the 15 largest economies in the world (The World Bank, 2020). This position does not come without a cost to the environment since Mexico ranked 12th in the global GHG emissions in 2018(IEA, 2020). Therefore, justifying the selection as a representative case for this study. Furthermore, Mexico proves to be an interesting case. It is pursuing two parallel processes: the transition to a lowcarbon electricity generation and the restructuration of its electricity sector. The first one has the end goal to generate 50% of its electricity by 2050; the second one was originated after the Mexican government passed the energy reform in 2013, putting an end to the public monopoly and opening the doors for private participation in electricity generation and retail. Despite its efforts, Mexico needs business mod els that promote citizens’ active participation in the energy transition to increase clean energy generation and energy efficiency. The selection of Mexico can serve as an example for other developing economies with similar geopolitical and socioeconomic dimensions.

Timespan The case study focuses on the Mexican electricity sector and understanding the role of business models in the transition to lowcarbon electricity production. The analysis of this sector focuses on the period between 2013 and 2020. 2013 is selected to start the analysis following the lib eralization of the electricity sector. This analysis intends to understand the dynamics between the different regime dimensions and the developments at the landscape and niche levels that create windows of opportunity for business models such as REScoops.

Geographical boundary This research focuses on two different geographical boundaries to answer the research ques tions. The first research question looks into the European countries to identify common practices on REScoop business models and the regulation and policy that has enabled such develop ments. The main focus is, however, on Mexico as the case of study. The analysis is carried at a national level. 3.1. Research approach 15

3.1.2. Data collection and treatment Data collection for qualitative research is nonstandardized and might involve using more than one data collection technique, which is then known as “multimethod qualitative research” (Saun ders et al., 2016). This research combines desk research and semistructured interviews, as presented below:

Desk research Desk research relies on collecting secondary data. This is defined as data that was collected initially for some other purpose Saunders et al. (2016), and includes both raw data and published documents that can be quantitative (numeric) or qualitative (nonnumeric) in nature. Secondary data include peerreviewed papers, books, policy documents, white papers, technical reports, and websites. The initial desk research was conducted with the guidance of the research ques tions. However, several iterations were required to validate primary data.

Saunders et al. (2016) recognize advantages and disadvantages to this method. A central advantage of this research method is the facility to access information from different countries, which enabled the author to collect and compare common practices among European REScoops and gather historical data for the case study. Disadvantages of this methodology can surge since the data was initially collected for other purposes, and the author had no control over how certain data was presented or aggregated. This created challenges that were particularly notable for analyzing quantitative data produced by the Mexican government.

Semistructured interviews Primary data (i.e., data directly collected by the author) was collected through expert interviews. A research interview is defined by Saunders et al. (2016) as “a purposeful conversation be tween two or more people, requiring the interviewer to establish rapport and ask concise and unambiguous questions, to which the interviewee is willing to respond, and to listen attentively”. The purpose of the expert interviews is twofold: firstly, to identify and validate potential REScoop business models in line with the Mexican regulations and user practices in the cooperative move ment context; secondly, to identify barriers and drivers that this business model could face for its introduction in the country.

The interviews’ design followed a semistructured format or otherwise referred to as quali tative research interviews (Saunders et al., 2016). The format’s nature permitted the author to form additional questions to get an indepth understanding of the topic based on the participant’s areas of expertise. Before the interview, the participants received a list of questions to guide the conversation. The questions were divided into two sections: the first section focuses on dis cussing the elements of the business model framework introduced in section 2.2.2. The author provided a draft of the potential business model elements that resulted from analyzing the com mon practices of European REScoops and the Mexican electricity regime. The questionnaire was designed to validate the initial assumptions and identify additional elements of the business models. The second section focuses on understanding the perceived drivers and barriers for developing the REScoop business model and the participant’s suggestions on how to overcome such barriers.

In total, nine interviews were conducted in the period from July to September 2020. The interviewees include experts recognized as key partners for developing REScoops in Mexico (e.g., public organizations, Solar PV developers, financial institutions, cooperative agencies). The interviewees were selected based on an online search and by referral from other intervie wees (snowballing) aiming to capture a spread of actors in the Mexican energy and cooperative sectors. The interviews were conducted by phone call or teleconference due to the travel and 16 Methodology face to face meeting restrictions imposed at the moment of writing this research. The interviews (lasting from 4560 minutes) were mainly conducted in the Spanish language and recorded on a password protected device. The participants’ list and the questionnaire used to guide the ex pert interviews are presented in Appendix A. The information retrieved from the interviews was coded into themes focusing on drivers, barriers, and the different business model canvas ele ments. This process was facilitated using specialized software, ATLAS.ti (version 8.4.4, 2019, ATLAS.ti Scientific Software Development GmbH).

Data triangulation A recognized strength of the case study methodology is the opportunity to use different sources of evidence. Data triangulation is a recommended practice as it offers validity, credibility, and authenticity through the convergence of findings, sources, or methods (Yin, 2015, 2018; Saun ders et al., 2016). The findings of the interviews were validated against secondary data on a second iteration of the desk research.

Research ethics The case study relied on semistructured interviews as a primary source of information. Before the interview, the interviewees were provided with a copy of the questionnaire and asked for permission to record the conversation and use their names and affiliation in this report. Fur thermore, the interviewees were requested to review, comment, and clarify any of the selected quotes reflected in this research. Following to concerns expressed by the interviewees, the transcripts of the interviews are omitted from this report.

3.2. Research methodology The main research question is defined as:

What are the challenges and opportunities for the potential use and adoption of the renew able energy cooperative business model in the context of the Mexican energy transition?

This section describes the methodology implemented by the author to answer the research questions introduced in section 1.2. This is followed by figure 3.1, which presents the research flow diagram and illustrates how the information collected from the different questions helps an swer the main research question and how the information is organized in the different chapters.

1. What are common practices in the business models developed by European REScoops? Outer to the case study, this question is set to provide a background on the definition of a renewable energy cooperative, its benefits, and its potential impact on accelerating the energy transition at a global scale. Through desk research, qualitative data is used to identify the common practices of European renewable energy cooperatives, based on the business model framework presented in section 2.3. The desk research was based pri marily on the results of the RESCOOP.EU project lead by most of the founding members of the federation of groups and cooperatives of citizens for renewable energy in Europe (REScoop.EU). Complementary data was collected using peerreviewed papers, websites of different REScoops, policy documents, and technical reports.

2. What does the sociotechnical system of the Mexican power sector look like? This question aims to describe the sociotechnical system of the Mexican power sector. While applying the MLP framework (section 2.3), a desk research is conducted to describe the landscape events that have influenced the ongoing transition to a lowcarbon electricity sector and characterize the current electricity regime and the niche developments. Qual itative and quantitative data is collected mainly from technical reports, policy documents, 3.2. Research methodology 17

and online databases made public by the Mexican government. This data is complemented by peerreviewed papers and technical reports of national and international organizations such as the GIZ in collaboration with national RES federations (e.g., ASOLMEX, ANES, AMDEE) and development banks.

3. What is the business model of the incumbent power utility company? To understand the role of business models as “part of the sociotechnical regime”, this question explores the incumbent retail electricity company’s business model, CFE Sumin istrador de Servicios Basicos (CFE SSB). Based on the nineblock business model decom position framework, the desk research looked into technical and financial reports issued by the Mexican government, complemented by information from the companies website to identify its value proposition, value creation, and value capture. This step takes relevance since it allows identifying the main actors of the electricity regime that might put resistance to new niche developments.

4. What are the barriers and drivers to implementing the REScoop business model in Mexico? Central to this research is to explore the technical, regulatory, and cultural barriers and drivers to the creation and diffusion of renewable energy cooperatives in Mexico. To answer this question, the author followed an iterative process that consisted of a desk research and semistructured interviews. Firstly, the desk research looked into policy and regulation documents from the Mexican government and its different institutions and technical reports published by national and international organizations. Secondly, semi structured interviews allowed the author to understand the impact of the desk research’s initial findings and provided additional elements. These new elements were validated against secondary data in a second iteration of the desk research.

5. What is the potential architecture of the REScoop business model under the current Mexican regulations? To understand the role of business models as “a device to commercialize technological innovation”, this question explores potential business models for developing renewable energy cooperatives in Mexico. To answer this question, the author integrates the knowl edge acquired by answering the previous subquestions, the same that was complemented by a desk research and expert interviews. The author followed a threestep process: first, based on the business model framework and the information collected from the common practices from European REScoops and the analysis of the Mexican electricity regime, the author identified potential business models for the development of Mexican REScoops. In a second step, semistructured interviews were used to request different experts to validate and discuss the author’s initial assumptions and provide additional elements that were not considered by the author. The third and final step consisted of validating the data collected from the interviews following a data triangulation method.

6. How does the REScoop business model compare to the incumbent business model? This question aims to illustrate the REScoop business model’s competitive advantage to promote local development and advance RES’s adoption. This question compares the business model of the incumbent firm against potential business models for renewable energy cooperatives in Mexico. This analysis draws from the findings on subquestions 4 to 5 and analyses the differences in the value proposition, value creation, and value cap ture of the firms. 18 Methodology

Figure 3.1. Research Flow Diagram 4 Renewable energy cooperatives

“There is no power for change greater than a community discovering what it cares about.” – Margaret J. Wheatley

This chapter introduces renewable energy cooperatives (REScoops). Section 4.1 provides a definition of the renewable energy cooperatives and a brief description of their benefits, origins, and potential to accelerate the transition to lowcarbon energy production. Section 4.2, answers the first subquestion by exploring the common practices of European REScoops. The analy sis of common practices is guided by the nineblock business model decomposition framework presented by Osterwalder and Pigneur (2010) and introduced in section 2.2.

19 20 Renewable energy cooperatives

4.1. Introduction to renewable energy cooperatives Section 2.3 introduced new customerside business models identified in the research of Wain stein and Bumpus (2016), this being prosumers, thirdparty forprofit companies, and grassroots developments. Community energy projects are one example of the grassroots developments (Seyfang et al., 2014). Community energy initiatives are commonly organized in what is re ferred to as “renewable energy cooperatives” (REScoops); however, the legal term differs by country (Hoppe et al., 2019; Coenen et al., 2017). A cooperative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointlyowned and democraticallycontrolled enterprise (International Co operative Alliance, 2020).

REScoops engage in a wide range of activities such as locallyowned renewable energy generation, energy efficiency, promotion of energy consumption reduction and rational use of energy, and collective behavior change programs that claim to bring additional benefits to top down policy initiatives (Seyfang et al., 2014; RESCOOP.EU, 2020a). The European federation for renewable energy cooperatives (REScoop.EU) defines a REScoop as a business model where citizens jointly own and participate in renewable energy or energy efficiency projects (RESCOOP.EU, 2020b). The cooperative model distinguishes from the traditional profitdriven models since the maximization of return on capital may not be a key objective (Bauwens et al., 2016). The cooperative model is based on seven principles laid down by the International Co operative Alliance (2020):

1. Voluntary and Open Membership 2. Democratic Member Control 3. Economic participation through direct ownership 4. Autonomy and independence 5. Education, training and information 6. Cooperation among cooperatives 7. Concern for community

Warbroek and Hoppe (2017) further analyzed the economic, environmental, and social ben efits of community energy projects. Examples of economic benefits are a lower energy bill, local economic regeneration, and job creation; environmental benefits include carbon reduction and energy savings; social benefits can be translated into social and civic gratification and commu nity cohesion.

The principles calling for open and voluntary participation, democratic governance, and au tonomy and independence allow for the otherwise impossible involvement of the local commu nity in the development, installation, and operation of low carbon energy installations, which may positively impact the acceptance of such projects (Warbroek and Hoppe, 2017). This is also sup ported by the research of Bauwens and DevineWright (2018) that concluded that members of a renewable energy cooperative have significantly more positive attitudes towards renewable energy than nonmembers.

Akasiadis et al. (2017) argue that the emergence of REScoops advances principles as en ergy democracy, selfgeneration, and consumption of green energy that assist in the reduction of GHG and energy poverty (i.e., the deprivation of energy services linked to satisfying basic human needs (Ochoa and Graizbord, 2016)). Their study is supported by research carried out by Hoicka and MacArthur (2018) and Wagemans et al. (2019); the former looked into the development of community energy projects by indigenous communities of Canada and New Zealand, and the latter focused on the province of Limburg in the Netherlands. However, both concluded that the energy cooperative model might help overcome problems such as uneven development, in 4.1. Introduction to renewable energy cooperatives 21 equality, and energy poverty. Furthermore, REScoop projects at the distributed generation level create additional benefits by lowering the required investment in transportation and distribution infrastructure (Warbroek and Hoppe, 2017).

The origins of the renewable energy cooperatives can be traced back to the 1900s in South Tyrol, Italy, with the initial purpose to electrify remote rural areas. Later in the 1970s, and fol lowing the oil crisis, Denmark was one of the pioneers in developing energy cooperatives. In Germany, initiatives like Elektrizitätswerke Schönau(EWS) were established in 1986, following the antinuclear movement of the late 1980s. Other energy cooperatives started expanding fol lowing the 1990s European Union’s reforms in the energy sector that created a liberalized energy market, for instance, Ecopower (1991) in Belgium and Baywind (1996) in the UK. However, it was until recent years that these initiatives started to proliferate in Western Europe (Lammers and Hoppe, 2018; Huybrechts et al., 2018a; Wierling et al., 2018).

The European federation for renewable energy cooperatives (RESCoop.eu), founded in 2013, reports over 1500 energy cooperatives within its organization, the same that is serving around one million members and providing jobs to around 5.4 million citizens (RESCOOP.EU, 2020d). REScoops are unequally scattered across Europe, with few initiatives in the South and Central Eastern Europe (Huybrechts et al., 2018a) but a fastgrowing presence in countries like Den mark, Germany, and the Netherlands.

As of 2002, Danish cooperatives owned 40% of the wind turbines installed in the country. Which helped bring the cost down and improve the technology’s acceptance, revealing the im portance of this movement to transition to lowcarbon energy generation. As a result, wind energy was responsible for 49% of the national electricity production by the end of 2017 (Wier ling et al., 2018).

Germany has a long tradition of energy cooperatives. However, most of the close to 1000 ac tive cooperatives were installed after 2010 following policy incentives and the decision to phase out nuclear power. The German cooperatives compare to the Danish as they engage in a more broad set of activities. These activities include trade and consulting services and electricity generation from solar PV technology (60%), onshore wind (20%), and in small percentages, biomass, hydro (Wierling et al., 2018).

The Netherlands has also seen an important development of REScoops. Over the last ten years, the number of initiatives grew from around 40 to 582 (Reijnders et al., 2020; Oteman et al., 2017; Schwencke, 2020). The REScoop movement is flourishing despite limited support from the national government that still favors the centralized, largescale installation of renew able technology to meet the targets of clean energy production (Oteman et al., 2017).

Bauwens and DevineWright (2018) attribute the geographical disparity on factors such as regulation, supporting mechanisms for renewable energy and spatial planning, the culture of local energy activism, and the attitudes toward the cooperative model. Emphasis is made for the latter factor as the research of Bauwens et al. (2016) conclude that those countries famil iar with the cooperative model are more aware of the benefits, thus facilitating their development.

REScoops have adopted different business models and are diverse in terms of their mission and objectives, strategies, organizational structure and governance, scale and type of activities, financing mix, and partnerships. The report on REScoop business models (Rijpens et al., 2013a) elaborated by the European federation for renewable energy cooperatives recollects and com pares European best practices on business models with the purpose to provide new REScoops with proven organizational schemes for their development. In this report, Rijpens et al. (2013a) 22 Renewable energy cooperatives identify six main business model typologies as described below:

i) Local group of citizens, refers to small groups of citizens that, through a bottomup ap proach, try to fulfill a need by developing smallscale local projects that are mainly financed by shares and loans, and functions with volunteers.

ii) Regionalnational REScoops, are either born from local initiatives that scaled up or by external actors seeking to meet needs or take opportunities (i.e., regional government). These initiatives often develop different projects and technologies and are regional in scope. The financial sources are diversified and function with volunteers and paid em ployees.

iii) Fully integrated REScoop are a result of long organizational trajectories and engage in activities of the whole value chain from generation to retail of electricity. These REScoops function with both employees and volunteers.

iv) Network of REScoops, function as developers or incubators providing capital for new REScoops by replicating proven and successful organizational schemes and taking ad vantage of economies of scale and their experience.

v) Multistakeholder governance model, organizes the different stakeholders for the provision and consumption of renewable energy through complex governance structures.

vi) Nonenergyfocused organization, include those initiatives whose purpose is not the re newable energy production or supply, but rather involve activities such as education and awarenessraising on issues like energy saving. 4.2. Common practices from European renewable energy cooperatives 23

4.2. Common practices from European renewable energy co operatives While the development of REScoops is not exclusive to the European continent, it is on this con tinent that the movement started and has flourished (Lammers and Hoppe, 2018; Huybrechts et al., 2018a). Which led to the accumulation of knowledge and experience that, in turn, sup ported the expansion and replication of the REScoop business model.

This section focuses on answering the first research question, looking into the common prac tices in the business models developed by European REScoops. The endeavor of identifying and sharing best practices among REScoops continues to gather attention from academia and public and private organizations. However, one of the primary efforts is the REScoops 202020 project led by most of the founding members of the federation of groups and cooperatives of citizens for renewable energy in Europe (REScoop.eu) and supported by the European Com mission (Rijpens et al., 2013a; RESCoop 202020, 2013a).

The aim of the REScoop 202020 project (running from 2012 to 2015) was to elaborate an inventory of existing REScoops in Europe and their business models, develop and test method ologies based on best practices and share the findings to help citizens start new REScoops. The information presented in this chapter draws from the REScoop 202020 project’s output, consisting of a series of reports, manuals, handbooks, and guides (Rijpens et al., 2013a). The analysis is complemented with recent peerreviewed papers, technical reports, and websites of the main REScoops. The information is presented following the business model framework introduced in section 2.3.

4.2.1. Value proposition As the core of the business model, the value proposition reflects the firm’s competitive advan tage. It describes the value that it offers to the customers and how it compares to the competitors (Richardson, 2005; Wainstein and Bumpus, 2016). The value proposition offered by REScoops is as diverse as the business models that can be adopted by the same. It is subject to the ac tivities developed by the cooperative and whether the customer is a member of the REScoop or not.

Nonmember customers REScoops involved in renewable energy production (representing the majority of the REScoops) might offer their electricity production on the wholesale market or sign bilateral agreements with electricity retail companies for the latter to purchase the electricity production (de Bakker et al., 2020). By partnering with cooperatives (either by investing in the cooperative or through the signature of a PPA), the retailers capture value as they reduce their exposition to the wholesale market, expand their production portfolio, strengthen their market position, and obtain increased support for RES projects among local residents (de Bakker et al., 2020). Furthermore, purchas ing locally produced green electricity can be perceived as a positive action, thus improving the image of the consumer (RESCoop 202020, 2014). On the other hand, REScoops involved in electricity supply might decide to service nonmember clients. The latter can be motivated by environmental or social concerns or financial or technical reasons such as the expectation of better service or more comfort (Hoppe et al., 2019). 24 Renewable energy cooperatives

Members The main focus of the REScoop is to benefit its members and their communities, the same that find in the cooperative movement an alternative to the incumbent way of producing and con suming electricity. The cooperative model sets itself aside from the profit maximization scheme (Bauwens et al., 2016) by adhering to a series of principles outlined by the International Coop erative Alliance (RESCOOP.EU, 2020c). The cooperative principles of open and voluntary participation, democratic governance, and autonomy and independence allow for the local community’s involvement in the development, installation, and operation of low carbon energy installations (Warbroek and Hoppe, 2017). By investing together, the cooperative members can reduce the cost and increase the value of RES (Hentschel et al., 2018) and improve the acceptance and attitude towards RES (Warbroek and Hoppe, 2017; Bauwens and DevineWright, 2018).

There are several reasons for citizens to start or join an energy cooperative. However, those decisions are mainly motivated by economic, social, and environmental benefits. Economic ben efits are translated into a lower electricity bill (due to a lower tariff and energy efficiency measures promoted by the cooperative), local economic regeneration, and job creation. The last two ben efits occur as REScoops are more likely to use local banks and hire local firms (Soeiro and Dias, 2020; Warbroek and Hoppe, 2017). Social benefits result from social and civic gratification and community cohesion, as well as a sense of pride associated with the membership of a social and sustainable organization (Boon and Dieperink, 2014). Finally, environmental benefits can occur from displacing GHG since the energy produced comes from renewable sources (Warbroek and Hoppe, 2017).

Further to the above benefits, and drawing from the definition of REScoop introduced in section 4.1, REScoops as a particular organization or business model, are in a relatively good position to stimulate energysaving practices among their members (Coenen et al., 2017). The different activities and approaches are further described in section 4.2.5.

4.2.2. Customer segments The customer segments refer to the different groups (people or organizations) that the firm in tends to serve and are defined based on common needs or behaviors (Osterwalder and Pigneur, 2010). Historical energy cooperatives were born in rural communities to cover their members’ need to access the electricity service. While some REScoops continue to produce and supply energy to their consumermembers and nonmember clients, most modern energy cooperatives do not provide the produced electricity to their members. However, the production is fed into the public grid in exchange for an economic compensation (Dilger et al., 2017; Herbes et al., 2017; International Labour Office, 2013). Depending on the activities of the REScoop, it is pos sible to identify two possible groups of customers or beneficiaries of the value offered by the cooperative. This is members, and the nonmember customers, as explained below:

Members REScoops target environmentally conscious customers (e.g., cooperative members from com munities of interest) and members from communities of place concerned about the local com munity and the role that energy plays in the local development (Bryant et al., 2018). Cooperative members can take various roles, as investors, as clients, and as managers deciding on the fu ture of the cooperative (Rijpens et al., 2013a). REScoops follow the cooperative values of open and voluntary membership. This favors the structure of the REScoop since it invites multiple actors to join the project, leading to multistakeholder governance that allows them to gather different skills and experiences, favoring the REScoops social capital (Rijpens et al., 2013a). 4.2. Common practices from European renewable energy cooperatives 25

Most REScoops are born following a bottomup or centrifugal approach. This is when a group of citizens decides to develop a RES project together; these projects typically start with a small number of actors that might scaleup to involve different partners. On the other hand, some projects start with a topdown or centripetal approach, where an external actor (e.g., munici pality, NGO, another REScoop, or a project developer) starts the projects and involves different actors (e.g., citizens, private companies, public actors) in the project development (Rijpens et al., 2013a).

Customer nonmember REScoops involved in energy supply to endusers might require those users to be members of the cooperative to use the service. However, some REScoops have expanded their electricity supply services to nonmembers motivated by the improved service or better prices offered by the REScoops.

Although new regulations favor the development of REScoops, many of them must create alliances with incumbent energy companies. These alliances, as researched by de Bakker et al. (2020), allow REScoops to sell the total (public production alliances) or the excess energy (pri vate production alliances) produced by the REScoop to be fed into the public grid for public consumption. Additional examples can be found in the research of Potdar (2019), which reflects the case of two Dutch cooperatives that partner with a local retailer, Greenchoice, to allow their cooperative members to acquire energy services at a preferred rate on top of the return on in vestment on their shares.

4.2.3. Customer relationships Osterwalder and Pigneur (2010) describe the customer relationship building block as the rela tionships that the firm establishes with its clients. Relationships aim to acquire and retain clients or provide after services to boost sales.

By becoming members of the REScoop, electricity supply clients access to specific rights. Members of the cooperative are involved in the governance structure, which allows them to par ticipate in decisionmaking (e.g., decide on the profit allocation, the name of the cooperative, the activities, and electricity pricesetting) (Rijpens et al., 2013b). In most cases, cooperative mem bers have one vote regardless of the number of shares in the REScoop. Voting occurs during the general assembly. The general assembly is also where a board of directors is elected to represent the cooperative members and manage the REScoop (Rijpens et al., 2013a).

REScoops differentiate from traditional electricity companies because the former try to in centivize and promote electricity consumption from clean energy sources and energysaving practices among its members. In contrast, traditional electricity companies benefit from their clients’ high consumption practices. Coenen et al. (2017) explored different strategies used by REScoops to establish relationships with the cooperative members and nonmember clients, and how those strategies have positive impacts, such as reductions in energy consumption. Among the studied REScoops, it is possible to identify strategies such as awarenessraising, education, and behavioral change campaigns, information sharing in digital platforms, and local ambassadors. 26 Renewable energy cooperatives

4.2.4. Distribution channels Distribution channels are described by Osterwalder and Pigneur (2010) as the means estab lished by the firms to reach their customers to deliver the proposed value. REScoops mainly use direct channels to reach their members and customers.

REScoops require to reach potential members (to invest and develop RES projects) even before forming the REScoop itself. In this regard, the research of Warbroek et al. (2019) reveals the importance of social capital (i.e., networks of social relationships that are governed by so cial norms, reciprocity, and trust) in successfully developing community energy projects. Social capital plays a role in mobilizing resources, information, and ideas between different groups. Warbroek et al. (2019), and Huybrechts et al. (2018b) also mentioned the importance of visibility to create legitimacy; to achieve this, REScops share success stories in both the formal (radio, newspapers) and social media (Twitter, Facebook, Youtube, among others) in addition to setting up a website.

REScoops can also use technological tools to communicate their customers’ energy con sumption and for billing purposes (Bryant et al., 2018). Examples of these technological tools are smartphone apps, online client accounts, electronic billing, smart metering devices, and home audits (Coenen et al., 2017).

4.2.5. Key activities This building block refers to the activities required to create value for the customers (Osterwalder and Pigneur, 2010). Different REScoop business models can be categorized based on the core activities along the electricity value chain as described below:

• Energy production is the most widely adopted activity among REScoops. These REScoops produce energy (electricity and/or heat) from one or various renewable energy sources. Solar PV is the most widely adopted technology, followed by onshore wind and, on a smaller scale, biomass, and hydro. The energy production activity requires the REScoop members to develop new installations for energy production. Thus, go through different phases (e.g., project development, financing, construction, and generation) that are often carried out by the cooperative or with the support of external partners, as introduced in section 4.2.7. The energy produced is then sold to an energy supplier or directly to its customers (Rijpens et al., 2013a; Dilger et al., 2017).

• Energy consumption. Some REScops (e.g., Som Energia, Ecopower, Enercoop) supply energy (electricity and/or heat) from renewable sources to their customers. The customers are typically cooperative members. However, some REScoops also supply energy to non members. The energy is produced by their own infrastructure, other renewable energy producers, or the wholesale market (same that can claim the origin through clean energy certificates). (Rijpens et al., 2013a; Yildiz, 2014; Hufen and Koppenjan, 2015; de Bakker et al., 2020).

• Energy services, engage in diverse activities such as consulting services, energy effi ciency, and distribution of clean energy. However, the latter is uncommon since public entities entirely own most distribution grids (Yildiz, 2014; Rijpens et al., 2013a; Hoppe et al., 2019). European REScoops have also incurred in offering other services providing riskcapital for new projects, as well as the collective purchase of solar panels for its members, education and training, energy storage, emobility, among others (Rijpens et al., 2013a; Herbes et al., 2017). 4.2. Common practices from European renewable energy cooperatives 27

As REScoops grow and professionalize, they can be involved in more than one activity, which allows for the strengthening of the organization and the diversification of the revenue streams, as further explained in section 4.2.9. However, the activities of the REScoops are not limited to the energy production and supply since they are wellpositioned to influence their members to adopt energysaving measures. Coenen et al. (2017) explored the different measures applied by REScoops across Europe to promote energy savings. Among the most used interventions, it is possible to find education campaigns, awarenessraising, and behavioral change. On a lower scale, they employ local ambassadors and information share through different traditional and social media. Other incentives rely on technology to keep customers informed of their energy use, such as smartphone apps, online client accounts, electronic billing, installation of smart metering, and home audits.

4.2.6. Key resources Osterwalder and Pigneur (2010) refer to the key resources as the assets required to deliver value to the customers. The resources can be physical (equipment, buildings, machines), financial, or human. For REScoops, the required resources depend on their activities. This section describes the key resources required by energy production REScoops, as the most common business model.

Physical resources The primary physical resource for REScoops that engage in energy production is a renewable energy power plant with access to the transmission or distribution grid (depending on the power plant’s capacity). The availability of renewable energy sources generally influences the selec tion of the technology; for instance, wind technology dominates among Danish cooperatives, biomassbased cooperatives are common in forestrich Austria, and countries like Germany, with diverse natural resources, often employ equally diverse technologies. However, as the cost of certain technologies decreases, such as solar PV, more and more cooperatives use this technology regardless of the availability of local renewable energy sources Wierling et al. (2018).

Financial Resources The economic resources for the different phases of a REScoop project can come from a diverse set of sources: • Self Financing is commonly used during the construction phase. In this scheme, capital is raised from existing or new members of the cooperative. Capital can be raised as debt, bonds, or equity. Return on investment is paid out as share interest at the end of the year when the cooperative members decide how to distribute the profits during the gen eral assembly. In turn, bondholders are paid an interest based on the value of the bonds (RESCoop 202020, 2014).

• Crowdfunding can be used during the development phase of the project. This emerging scheme uses an online platform to create an open call to the broader public to finance a project. These calls are usually timelimited and state the project’s purpose, the funding needs, and the expected benefits from financing the project. The financial contribution can take the shape of donations, sponsoring (advertising based), rewards (offering a product of lower value), preselling, lending, and securitiesbased investments (based on the is suance of shares or bonds). The sharesbased crowdfunding (a type of securitiesbased investment) is the preferred scheme for REScoops since investors become members of the cooperative with voting rights (RESCoop 202020, 2014). 28 Renewable energy cooperatives

• Bank loans are typically used during construction and O&M phases of the projects. Debt financing requires guarantees and the payment of interest (in Europe ranges from 4 to 5%). Ethical banks (i.e., banks whose mission is to foster cultural, ecological, and social projects) are an alternative to loans from traditional banks. Some ethical banks are orga nized as cooperative banks, where the cooperative banks’ members also become mem bers of the REScoop. While the financial support conditions operate in a similar fashion as the traditional banks, ethical banks have the advantage that there is a more power ful feeling of trust, involvement, and networking between the members, which facilitates the support from the financing institutions (RESCoop 202020, 2014). Moreover, the re search of Boontje (2013)reveals that Cooperative banks can play an active role as initiators of REScoops.

• Joint ventures (JV), mainly used to finance the construction of a project, are created from the partnership of two or more companies that combine part of their assets and are often created to share both the risk and expertise for a limited period of time. JVs are formal ized through a Joint Venture Agreement (JVA), where the parties specify the nature, term, and amount of their participation (RESCoop 202020, 2014). The Coopernicus Project is a REScoop in Portugal that was born as a joint venture between the local REScoop and experienced European REScoops (such as CWW Waterland and DE Windvogel from The Netherlands, Som Energia from Spain, and Beauvent from Belgium). Through a JVA the participating REScoops formalized their contribution and the conditions and the method ology for the local REScoop to buy back the shares (RESCoop 202020, 2014).

• Cooperative Funds generally support the development of new REScoops in the preplanning and operation and maintenance phases of the project. In this scheme, the supporting en tity invests in equity and joints the management to provide legal and economic advice. The returns on investment are generally low and midlong term (RESCoop 202020, 2014). Regional and local governments can provide additional financial support in the form of grants, loans (with interest rates below the market and more extended repayment periods), and tax exception or reductions. Fiscal incentives are often complementary to the other mechanisms explained in section 4.2.9 below and are managed at a subnational level(RESCoop 202020, 2013b). Hoppe et al. (2015) provide examples of how local governments have used this mech anism to support the creation of new REScoops.

Due to the high cost associated with the creation and operation of a REScoop, it is common to use more than one of the funding sources previously introduced. According to the research of Rijpens et al. (2013a), the members of the REScoop finance most of the projects through a selffinancing scheme, followed or complemented by loans, and by public and private subsidies. In the same line, the analysis of the German REScoops carried out by Yildiz (2014), and Klagge and Meister (2018) highlight the importance of cooperative banks as the source of more than 50% of the debt capital requested by the local REScoops. This is followed by subsidized loans from the stateowned German development bank, representing onethird of the loans.

Human resources Following the democratic principle of REScoops, decisions are taken during the general as sembly where all members have equal voting rights; however, for the day to day decisions, the general assembly elects a board of directors, the same that is appointed with the purpose to manage the REScoop Rijpens et al. (2013a). According to the research of Rijpens et al. (2013a), 88% of the interviewed REScoops function with no more than ten board members, and with a small number of employees, or even without them.

The human resources for most REScoops are composed of volunteers, the same that provide 4.2. Common practices from European renewable energy cooperatives 29 their skills, experiences, networks, free time, and creativity for the development of the REScoop. However, the research of Herbes et al. (2017) concludes that running entirely on volunteers can represent a constraint for further development and business model innovation for REScoop since required knowhow and specific competencies are often missed among existing volunteers.

4.2.7. Key partnerships Key partners are described by Osterwalder and Pigneur (2010) as the network of partners and suppliers along the value chain required to make the business model work. The partnership al lows firms to optimize their work, reduce risk, ensure a reliable flow of the required supplies, and develop new business. For REScoops, the partnerships materialize through different ways; in some cases, the partners become members of the REScoop and contribute with capital with their corresponding voting rights; others could create a consortium with various actors (like public, pri vate and cooperative involvement), and finally through the signature of contracts or agreements for a definite time and scope (e.g., for the maintenance of the infrastructure) (Rijpens et al., 2013a). Partnerships are required to carry out the following activities: • Financingmix, partners can contribute with capital, investments, or loans. • Production activities, to have access to installation sites for the RES projects. • Distribution activities, to have access to the grid. • Project development and construction. • Operation and maintenance of the installations. Partnerships occur at the different stages of the project and involve a diversity of actors, such as the cooperative members, private companies, other cooperatives, other REScoops, and the government at the different levels (Rijpens et al., 2013a). This section presents key partners for the development of REScoops involved in energy production activities.

Cooperative members Cooperative members are the backbone of any REScoop. Cooperative members can take di verse roles within the organization. Cooperative members become both owners and investors of the cooperative by acquiring shares, which gives them the right to participate in the decision making and expect a return on investment based on the cooperative’s positive results. For REScoops that also supply electricity, cooperative members can also become users or clients of the REScoop, which is beneficial for the cooperative. These users bring capital as sharehold ers and turnover as clients (Rijpens et al., 2013a). Furthermore, since REScoops are controlled by their members, the latter can also take part in the management of the REScoop, the same that is elected in a democratic process during the annual assembly. The cooperative members’ role and importance are further described in section 4.2.5 above.

Other cooperatives Following the cooperative movement’s sixth principle, cooperation between cooperatives, ex isting cooperatives can play a crucial role in developing new cooperatives(RESCoop 2020 20, 2013a). Collaborations between cooperatives can take different forms, from financing to knowledge sharing and from individual cooperatives to federations. For instance, Huybrechts et al. (2018a) documented the different programs established by the European federation of re newable energy cooperatives to support the creation and growth of REScoops around Europe. These actions range from internal roles (e.g., collecting and sharing statistics and best practices, providing spaces for mutual exchange and collaboration between REScoops) to external roles (e.g., advocating for the REScoop model at the European level, building alliances with related parties and movements, and communicating and educating various audiences). 30 Renewable energy cooperatives

Private organizations One of the REScoop movement principles is the support of the local community and the strength ening of the local economy. REScoops can rely on private companies (e.g., energy providers, banks, grid operators, EPC companies) for the project financing, project development and con struction, operation, and maintenance of the installations. REScoops can be a source for job creation and can also set up new supply chains and opportunities to develop the local economy (RESCoop 202020, 2015; Rijpens et al., 2013a).

While some REScoops are born to offer an alternative to incumbent energy companies’ busi ness models, the research of de Bakker et al. (2020) reveals that a large number of the Dutch REScoops established alliances with the same energy companies in order to shape and scale their energy value chain. Partnership typologies include:

• Electricity resale. Is the most common partnership, where REScoops do not produce elec tricity, but rather purchase green electricity from energy companies to distribute among their members.

• Private production. The REScoop develops RES projects for private consumers; the en ergy company’s role is rather administrative as it deducts the production of the RES system from the customers’ electricity bill.

• Public production. The electricity produced by the REScoop is fed into the grid. The coop erative signs a PPA with the energy company where the parties agree on a price per kWh.

• Codevelopment and ownership. The energy company gets involved in the project devel opment and share the ownership of the production installation.

• Participation. The energy company fully owns and develops the RES project. The role of the REScoop is limited to organizing community support and economic participation.

These partnerships are beneficial to both parties; cooperatives can benefit from the energy companies’ knowledge, experience, and economic resources. Energy companies benefit from these alliances as the cooperatives’ involvement helps increase the local support for project development (de Bakker et al., 2020).

Subnational governments Subnational governments (regional, state, and municipal) play a critical role in providing insti tutional support for REScoops by filling the gaps of national policies and supporting instruments and contributing to the creation and development of RESCoops (Warbroek and Hoppe, 2017; Meister et al., 2020). In this regard, Meister et al. (2020) and Warbroek and Hoppe (2017) analyzed limiting factors encountered by RESCoops in Germany, Switzerland, and the Dutch regions of Overijseel and Fryslan, and how municipal governments (more accessible and better attuned to local needs than the national governments) have supported REScoops during the different phases of the project.

Developing a project involves activities such as planing, system design, and installation for which the developers should secure capital, suitable land (or roof space in case of solar), ob tain the required permits, and make decisions on the organization and business model structure (Meister et al., 2020). Figure 4.1 displays some of the mechanisms that municipal governments can use to help REScoops during the initial and following stages. Municipalities can provide financial support in the forms of grants, loans, or guarantees, and capital as members of the 4.2. Common practices from European renewable energy cooperatives 31 cooperatives. The latter scenario can also help accelerate permit procedures and promote lo cal acceptance during the projects’ production and electricity selling stages (Meister et al., 2020).

Figure 4.1. Municipal support mechanisms for REScoops, own illustration adapted from Meister et al. (2020) and War broek and Hoppe (2017)

Warbroek and Hoppe (2017) highlight the importance of municipalities offering capacity build ing by providing workshops (e.g., organizational development and project management) and connecting the REScoops with experts to facilitate and accelerate the development of the projects. Finally, Hoppe et al. (2015) analyzed how municipal governments can take the role of initiators, mediators, and network facilitator for new REScoop developments.

4.2.8. Cost structure The cost structure building block list all cost incurred on delivering the value to the customers (Osterwalder and Pigneur, 2010). The costs incurred by a REScoops highly depend on the size, technology, the activities developed by the cooperative, and the development stage of the REScoop (RESCoop 202020, 2014). REScoops can involve in one or more activities such as renewable energy production, supply, and distribution, as described in section 4.2.5. However, this section will focus on the costs associated with the dominant activity: the production of re newable energy.

Aside from the administrative cost incurred in forming and managing the REScoop (e.g., office, communication channels, salaries), REScoops are exposed to different costs depending on the development stage of the production facilities (Visser and Held, 2014). Figure 4.2 shows the different costs incurred at every stage of the project lifetime. Solar PV installations are generally low in maintenance requirements. However, technologies like wind and biomass would require REScoops to hire experts for the required maintenance activities. This increases the associated costs and shall be considered when selecting the RES generation technology. A good practice to reduce the risk and maintenance cost, as highlighted by RESCoop 202020 (2013a), is the signature of a service contract with an “uptime guarantee”; this compensates the REScoop in case the installations do not perform as expected. Many REScoops establish partnerships with local EPC companies for project development and construction or invest in purchasing existing RES installations. REScoops with experienced volunteers might perform the house’s project development phase and thus reduce the associ ated costs.

The selection of technology plays a vital role in the costs of developing RES projects. The Levelized Cost of Electricity (LCOE) refers to the cost of energy, and it accounts for the costs in curred during the lifetime of the installations (e.g., operation, maintenance, construction, taxes, 32 Renewable energy cooperatives

Figure 4.2. Cost components for RES power plants, own illustration adapted from Visser and Held (2014) and RESCoop 202020 (2014) insurance) divided by the expected total energy production (kWh) (Dinçer and AbuRayash, 2019). The LCOE for most RES technologies has decreased considerably during the last ten years as presented by IRENA (2020) in figure 4.3. Solar and wind technologies are showing the most significant reduction in energy production cost. For most RES (biomass excluded), the initial investment cost accounts for around 95% of the LCOE; the remaining 5% is used for operation and maintenance activities (RESCoop 202020, 2013b). The shares can change depending on the technology, size, and location of the installations; for instance, offshore wind technology has higher investment costs and greater energy production than the onshore coun terpart (RESCoop 202020, 2013b).

Figure 4.3. Global LCOEs from utilityscale RES, 20102019. Reprinted from IRENA (2020) 4.2. Common practices from European renewable energy cooperatives 33

REScoops have played a significant role in developing wind technology, which helped to bring the technology cost down and increase its acceptance (Wierling et al., 2018; Bauwens and DevineWright, 2018). However, nowadays, solar PV technology is the preferred technology for most REScoops. Solar PV resulted attractive because of its simplicity and modularity, scalability, low investment cost, short lead times, and low maintenance requirements (Rijpens et al., 2013a; Yildiz, 2014; Wierling et al., 2018; Herbes et al., 2017).

4.2.9. Revenue streams Revenue streams represent how cash is generated by the firm from their customers and other sources (Osterwalder and Pigneur, 2010). For REScoops, the revenue streams can be as di verse as the activities they engage in. Some REScoops engage in the production and sale of electricity, while others engage in business models that retail electricity generated by third party RES producers and energysaving projects. Combining different business models allows for the strengthening of the organization and the diversification of the revenue streams (RESCoop 20 2020, 2013a). However, the energy production and sale is by far the preferred business model among REScoops (Herbes et al., 2017; Yildiz, 2014; Dilger et al., 2017). In addition to the possi ble yearly “membership” fees imposed by some REScoops (RESCoop 202020, 2014), in some European countries, the sales of electricity are supplemented with different mechanisms imple mented at the national level to stimulate the use of renewable energy by leveling the playing field to make renewable energy projects economically feasible (Bauwens et al., 2016). REScoops produce electricity with renewable energy, thus can benefit from said mechanisms.

Mitchell et al. (2006) argue that risk reduction is essential for the mechanisms to be effective, as it can make a more extensive number of projects attractive by reducing capital cost. In the same line, Bauwens et al. (2016) identified whether support mechanisms are marketdependent or marketindependent play a role in risk reduction. The latter are considered more favorable for the development of REScoops than marketdependent ones.

Marketindependent mechanisms as the Feedin tariffs (FiT) offer high investment security as the cash flows can be predicted (fix remunerations independent of the electricity prices) and low transaction costs. On the other hand, marketdependent mechanisms like the feedin premiums (FiP) or quota obligations are subject to volatile electricity prices and can increase transaction costs (Bauwens et al., 2016). Figure 4.4 shows a representation of said mechanisms, the same that are explained below:

Figure 4.4. Main support schemes on the promotion of renewables, Own illustration adapted from Banja et al. (2017) 34 Renewable energy cooperatives

Feedin tariff The feedin tariff is government policy and a marketindependent mechanism that offers a risk free environment to RES producers, thus lowering the cost of capital and enabling private in vestment (CEER, 2016). With this mechanism, producers are guaranteed a price for the total of the energy produced for a determined time frame (usually 1520 years) (Greer, 2012). The FiT scheme is easy to implement and has been suitable for markets with a large number of households or local communitybased initiatives like REScoops (Commission, 2013).

Feedin premiums Feedin premiums are the evolved version of the FiT system, where participants are more ex posed to the market. In this mechanism, RE producers are forced to find a seller for their produc tion on the market and allow them to sell energy in different market places (energy exchange, bilateral contracts) (Commission, 2013).

With the FiP mechanism, RE producers get a premium on top of the market price. However, there are different architectures of the FiP mechanism, as the premium can be fixed or vari able, and for the later present caps and floors CEER (2016). A fixed premium can provide the producer with a certainty of public support as the premium is known as well as the contract du ration. However, the producer’s risk is increased as it depends on the evolution of power prices (CEER, 2016). A variable or floating premium is the most used FiP in Europe. This mechanism guarantees the long term revenue of the RE producer. However, the support amount cannot be predicted as it depends on the market price and is calculated as the difference between the ref erence price and the market price. The reference price is often set as the average price within a time period; in the Netherlands is every year, while in Germany, it is revised every month (CEER, 2016).

Green certificates or quota obligations The green certificate is a mechanism designed to support specific RES, as green energy produc ers will earn an income from selling the certificates to obligated parties in addition to the income from the sale of green energy. Obligated parties (typically suppliers or grid operators) create a demand for the certificates as they are mandated to buy and cancel a number of certificates equal to the quota (%) set of the given year multiplied by the quantity of electricity (expressed in MWh) that was supplied to their consumers (CEER, 2016). In most countries that adopted this mechanism, there is a penalty for noncompliance (Commission, 2013). This penalty is set higher than the market price for the certificates (CEER, 2016). However, if there is no minimum certificate price, the risk for investors is increased, thus increasing the cost of capital and, con sequently, the cost of developing renewables, which could limit the provision of renewables to largescale incumbents (Commission, 2013; Bauwens et al., 2016).

Support mechanisms like the feedin tariff played an essential role in developing REScoops (Wierling et al., 2018). For instance, Germany went from 100 energy cooperatives in 2005 to almost 1000 at the end of 2014. However, this development has been hampered in recent years due to changes in the regulation (2014) and sharp reductions in the feedin tariff, which forced German REScoops to innovate and look for alternative business models to remain profitable (Herbes et al., 2017; Klagge and Meister, 2018; Wierling et al., 2018). A similar situation can be found in countries like Spain, where RESCoops have developed regardless of the lack of support mechanisms (Inês et al., 2020). The first Spanish REScoop (Som Energia) was born in 2010, with a business model that engages in the production (developing smallscale RES projects) and the commercialization of electricity from RES. Som Energia set a reference for further developing REScoops in Spain, going from 300 members in 2010 to more than 38,000 in 2016 (PellicerSifres et al., 2018). 5 Sociotechnical analysis of the Mexican electricity sector

“National governments alone cannot deliver lasting prosperity without a transformation of social and economic development that seeks to minimize risk and seize the oppor tunity we have.” – Patricia Espinosa

The origin of the electricity sector in Mexico can be traced back to 1879 when electricity was first introduced in a textile factory in Leon, Guanajuato, and extended for public lighting, street cars, and mining activities. (JanoIto and CrawfordBrown, 2016; De La Garza Toledo, 1994). Ten years later, by 1889, the installed capacity reached 837.89 kW, provided by 60 power plants mainly represented by thermal (90.49%) and hydro (10.51%) power plants (De La Garza Toledo, 1994).

The country’s electricity industry went from a stage of low regulation characterized by private monopolies to a stage of state regulation and intervention that would end with the nationaliza tion of the industry in 1960 (?). Followed by the creation of a statecontrolled utility, the Federal Electricity Commission (Comision Federal de Electricidad, CFE) in 1975. CFE, now responsible for all the activities related to the public service of electricity, instituted a monopoly in the sector (Moreno, 2014). It was not until 1992 that private actors were allowed to participate in the elec tricity generation activities no longer considered as “public service”. This includes: i) selfsupply, ii) cogeneration, iii) small generation, iv) import, v) export, and vi) Independent Power Produc tion (IPP). The IPPs were only allowed to sell their electricity production to CFE (SEGOB, 1992).

The Mexican electricity system has been subject to a continuous transition that has resulted, not only by single events and technology developments, but also by the interaction between different actors and the external and internal pressures as presented by JanoIto and Crawford Brown (2016), and summarized in figure 5.1.

This chapter intends to extend the analysis of JanoIto and CrawfordBrown (2016), which uses the MLP framework to describe the transition of the electricity system from its formation in 1879 to 2013. This chapter describes the landscape events that have influenced the ongoing transition to a lowcarbon electricity sector, the current electricity regime, and the niche devel opments. The niches are analyzed from the perspective of the technology and the business models.

35 36 Sociotechnical analysis of the Mexican electricity sector

Figure 5.1. Sociotechnical evolution of the electricity sector in Mexico, reprinted from JanoIto and CrawfordBrown (2016) .

5.1. The landscape Under the MLP framework, the landscape was introduced in section 2.1 as a set of technology external and heterogeneous factors and structural trends that change slowly and autonomously (Geels, 2002). For the case of Mexico, it is possible to identify three major landscape develop ments that influenced the transition to a lowcarbon electricity sector as per below:

• Major changes in the political regime. • Climate change concerns and the pressure to reduce GHG emissions. • Changes in the energy supply markets in North America and the incumbent role of natural gas.

5.1.1. Major changes in the political regime A characteristic of landscape developments is that changes occur slowly and autonomously (Geels, 2002); however, it is possible that the landscape changes abruptly due to radically dif ferent outcomes of an election, which might cause the regime to lose stability and lead to the creation of windows of opportunity (Hölsgens et al., 2018).

After the reforms of 1992 that permitted (limited) private participation in the generation of electricity, the governments of Ernesto Zedillo (19942000), Vicente Fox (20002006), and Fe lipe Calderón (20062012) attempted to pass new reforms to put an end to the monopoly of CFE. However, they faced opposition and just resulted in minor changes in the regulation. It was not until 2012, with the change of government back to the PRI party, when the govern ment of Enrique Peña Nieto (20122018) proposed an energy reform that was finally approved 5.1. The landscape 37 by congress (JanoIto and CrawfordBrown, 2016). This energy reform, approved in 2013, con sisted of changes to the articles 25, 27, and 28 of the Political Constitution. This started a process to restructure its energy sector with the purpose of attracting private investment to modernize the National Electric System (Sistema Electrico Nacional, SEN), diversifying the generation ma trix, and increasing the competition in the market to reduce electricity prices (SEGOB, 2013). The new structure of the energy sector, defined by the Electric Industry Law (Ley de la Industria Electrica, LIE), was published in the National Gazette (Diario Oficial de la Federacion, DOF) in August 2014. The LIE set the new electricity market’s operation rules defined by the energy reform to transit to a new free competition model in the generation and retail sectors of the elec tricity value chain (SEGOB, 2014).

A new major change in the political regime occurred in 2018, with the election of Andres Manuel Lopez Obrador (also known as AMLO) as president of Mexico. Even when AMLO is a fierce critic of the previous administration’s energy reform, he has not yet called to reverse the energy reform and reinstate the monopoly of CFE. However, he is focusing on increasing the power of the state’s energy companies (CFE and PEMEX) at the expense of private companies’ interests, which has a direct effect as the latter are the ones driving the transition to a low carbon energy generation (O’Boyle and Rios, 2020; Barrera, 2020). The barriers derived from the energy policy of the incumbent government are further explained in section 7.1.

5.1.2. Climate change concerns and the pressure to reduce greenhouse gas emmisions In 2015, The Conference of the Parties of the United Nations Framework Convention on Cli mate Change during its twentyfirst meeting (COP21) held in Paris, France, resulted in the Paris Agreement’s signature. The Paris Agreement established a collective goal to reduce green house gas emissions (GHG) emissions to limit global temperature rise to well below 1.5 to 2 °C (compared to preindustrial levels). Member states established Nationally Determined Contri butions (NDCs) as an instrument to reach the GHG reduction goals (United Nations, 2016).

Mexico’s NDCs aim to reduce the GHG emissions in the order of 22% by 2030 (or up to 36% conditioned to an international agreement on carbon pricing as well as financial support and technology transfer to enforce mitigation actions), and by 50% by 2050 (compared to the emissions of the year 2000) (SEGOB, 2018). The electric industry is expected to reach 35% of generation from clean energy sources by 2024 to achieve Mexico’s GHG reduction goals (SENER, 2020a).

5.1.3. The incumbent role of natural gas During the past decade, natural gas (NG) gained increased attention due to its low carbon emis sion (relative to other fossil energy sources) and competitive prices in the North American market (Feijoo et al., 2016). In Mexico, natural gas demand grew by 71.8% between 2009 and 2019, which was led by the increased consumption of the power sector (Feijoo et al., 2016; BP, 2020). Following the drop of the production capacity of PEMEX (the stateowned oil company), pipeline and liquefied natural gas (LNG) imports have been crucial to meet the growing demand for NG. In 2019 alone, Mexico imported 57.4 billion cubic meters of NG that represented 63.2% of the national demand. More than 95% of the NG imports originated from the U.S. (BP, 2020), thus 38 Sociotechnical analysis of the Mexican electricity sector making clear the reliance on the neighbor country.

Combined cycle power plants are currently the dominant electricity generation technology in Mexico. This was possible due to the expansion and modernization of the NG infrastructure led by CFE (SENER, 2017d). The previous administration (20122018) constructed 7’542 km of NG pipelines to reach a total of 18’889 km by the end of 2019 and increase the import capacity to 11’000 million standard cubic feet per day (SENER, 2019a).

Figure 5.2. Sociotechnical evolution of the electricity sector (20132018). Own illustration using references cited in Section 5.2. 5.2. The regime 39

5.2. The regime Geels (2011, 2002) defined the regime as the locus of established practices and associated rules that enable and constrain activities within communities and stabilize the existing systems. As summarized in figure 5.2, the Mexican electricity regime has recently entered into a transition to low carbon electricity production. Pressure from landscape developments resulted in the open ing of “windows of opportunity” for the emergence of new actors and technologies.

The Mexican electricity regime analysis covers three interlinked dimensions, as distinguished by Verbong and Geels (2007). These are i) the network of actors and social groups; ii) the formal, normative, and cognitive rules, and iii) the material and technical elements as described in section 2.1.

5.2.1. Infrastructure of the National Electric System The National Electric System (SEN for its Spanish acronym) is divided into ten control regions; seven of them integrate the National Interconnected System (SIN, for its Spanish acronym). The remaining three correspond to the isolated systems of Baja California, Baja California Sur, and Mulege. The seven regions that compose the SIN are interconnected by transmission lines and share resources and capacity reserves. The Baja California system is interconnected to the Western Electricity Coordinating Council of the United States, and the Baja California Sur and Mulege systems are isolated from the other systems (SENER, 2018b, 2020b).

Generation By the end of 2018, the electricity generation in Mexico reached 317,278 GWh, out of which the higher share (51%) was produced with combined cycle, followed by conventional machines (13%) and coal (9%), while clean technologies accounted only for 23.2%. In this latter cate gory, hydro has the most notable share with 10.2%, followed by nuclear, onshore wind, and cogeneration with 4.3%, 3.9%, and 2.2%, respectively. Geothermal (1.7%), solar PV (0.7%), and biomass (0.2%) represent a small share, however, with a significant potential for future de velopment (SENER, 2019c). If analyzed from the installed capacity perspective, by the end of 2018, the installed capacity reached 70,053 MW; 66.9% corresponds to generation based on fossil fuels and 33.1% for clean technologies (SENER, 2019c). By the end of 2018, the installed capacity increased by 3.7% with respect to the closing of 2017 (67,958 MW), and solar PV (1,316 MW) and onshore wind (942 MW) were the technologies with the highest increase; other clean technologies accounted for 436 MW and fossil fuelbased with 443 MW (SENER, 2019c).

Most of the capacity installed by the end of 2018 belongs to the CFE (59.2%). The remaining was installed by private companies, mainly under the figure of independent power producers (19.2%), and selfconsumption (11.1 %) (SENER, 2019c). However, nonstate actors’ partici pation has been on the increase since the reform of 1994, as shown in figure 5.3. The different mechanisms for private participation and the main actors are described below:

• The Independent Power Producers. The Independent Power Producers (Productores Independientes de Energía, PIE) are private producers that develop generation infras tructure whose production is for exclusive sale to CFE based on the longterm contracts (SENER, 2012). This investment scheme attracted international players such as Union Fenosa, Iberdrola, Electricite de France (EdF), Mitsubishi, and Applied Energy Services (AES). The projects developed under PIE’s figure include 24 combined cycle (Natural gas) power plants and 6 wind parks CFE (2019). 40 Sociotechnical analysis of the Mexican electricity sector

• SelfSupply. The selfsupply scheme allows companies to produce electricity for their own consumption. Under the 1992 electric industry law, electricity could be produced onsite and offsite. For the latter case, companies under this scheme were allowed to use CFE’s grid to transport electricity to their consumption centers (Mexico Business, 2014). This scheme grew to be the main modality for developing renewables in Mexico (MuñozCabre et al., 2015). National and international industries tapped into this opportunity to develop wind energy parks in joint ventures with solar developers such as Acciona and EDF. The first one being the Mexican concrete company, CEMEX, in 2009, and quickly followed by Walmart and the Mexican Grupo Bimbo (Mexico Business, 2014). The reform to the Elec tric Industry Law of 2014 ended up limiting the selfsupply scheme to onsite generation, limiting the potential of this scheme (MuñozCabre et al., 2015).

• Cogeneration. Cogeneration consists of the simultaneous production of electricity and heat using a single fuel source. Based on the definition, this process is destined to sat isfy industrial users’ energy demands, with the national oil company, PEMEX, as a major player. Other actors include industrial users in the petrochemical, construction, and food industries (SENER, 2002, 2012).

• Others. Other generators include private generators’ capacity following the publication of the LIE and permits for electricity import and export destined for selfsupply schemes (SENER, 2002, 2012, 2019c).

Figure 5.3. Share of installed capacity by generator in Mexico. Own illustration with data retrieved from SENER (2002, 2012, 2019c). Note: the capacity of CFE for 2002 and 2012 includes the capacity assigned to LyFC 5.2. The regime 41

Transmission and Distribution The state has developed the electricity transmission and distribution infrastructure through CFE. The transmission network is used to transport electricity from the generation plants to the dis tribution grid, endusers, and interconnection points with other countries. This includes voltage levels equal to or higher than 69 kV. By the end of 2018, the transmission network reached a length of 108,018 km. The distribution grid distributes the electricity to endusers and operates at different voltage levels on medium (between 1kV and 35kV) and low voltage (lower than 1 kV). The distribution grid reached a length of 832,831 km by the end of 2018 (SENER, 2019c).

5.2.2. Electricity users and demand By the end of 2018, the population in Mexico reached 131 Million people, but only 98.75% of the population had access to electricity. Increasing access to electricity has been a priority for the Mexican government’s electrification programs, which have accomplished an improvement of 2.52% over the last 15 years (SENER, 2020b).

Electricity demand is increasing with the population. According to the Program for the De velopment of the National Electricity System (Programa de Desarrollo del Sistema Eléctrico Nacional, PRODESEN) for the period between 20192033, the electricity demand is expected to increase from 318,236 GWh in 2018 to 452,813 GWh by 2030 (SENER, 2018a). Therefore, the challenge is to replace existing fossil fuelbased generation while meeting the growing en ergy demand.

Electricity users in Mexico are divided into five different sectors. By the end of 2018, the residential sector represented 88.7% of the total electricity users, followed by the commercial sector with a share of 9.7%; the share of users in the agriculture (0.3%), services (0.4%), and industry (0.9%) sectors are relatively small (SENER, 2020b). Despite a few industrial users’ active participation under the selfsupply mechanism, most electricity users continue to take a passive role in the electricity sector.

5.2.3. The regulatory framework for the energy transition The Mexican government’s first efforts to promote the use of renewable energy sources in the energy policy date back to 2008, with the enaction of the Law for the Use of Renewable Energy and Financing of Energy Transition (LAERFTE for its Spanish acronym) and the Law for Sustain able Use of Energy (LASE for its Spanish acronym) (Valenzuela and Studer, 2016). LAERFTE mandates the Secretary of Energy (Secretaría de Energía, SENER) to establish the National Strategy for the Energy Transition and Sustainable Use of Energy (Estrategia Nacional para la Transición Energética y el Aprovechamiento Sustentable de la Energía, ENTEASE), a mech anism through which the Mexican State will promote policies, programs, actions and projects aimed at achieving greater use of renewable energy sources and clean technologies. Further more, it will promote energy efficiency and sustainability to reduce Mexico’s dependence on hydrocarbons as a primary energy source. This law was revised in 2011, requiring SENER to set a goal limiting electricity generation from fossil fuels to 65% by 2024, 60% by 2035, and 50% by 2050. (SEGOB, 2013). The LASE mandates the creation of the National Program for the Sustainable Use of Energy (Programa Nacional para el Aprovechamiento Sustentable de la Energía, PRONASE) (SENER, 2017; SEGOB, 2008).

Following the energy reform, the Mexican government implemented secondary laws to guide the energy transition. Figure 5.1 shows the different policy instruments developed as the legal framework of the energy transition (SENER, 2020a). This section discusses the scope of the main policy instruments. 42 Sociotechnical analysis of the Mexican electricity sector ) 2020a ( SENER Legal framework for the energy transition, data retrieved from Table 5.1. 5.2. The regime 43

General Law of Climate Change The General Law of Climate Change (Ley General de Cambio Climático, LGCC) was enacted in June 2012 to establish goals to guide the country’s development plan towards a low carbon economy. It set the goal to reduce GHG emissions by 30% by 2020 and 50% by 2050 (based on the emissions of the year 2000). In terms of electricity generation, the goal is to achieve 35% of generation from clean energy sources by 2024.(SENER, 2020a) This Law was revised in 2018 to include the commitment towards the Paris agreement and periodically reevaluate the goals considering the IPCC report (SEGOB, 2018).

Energy Transition Law The Energy Transition Law (Ley de Transición Energética, LTE) published in the DOF on De cember 2015, came to replace the Law for the Sustainable Use of Energy. However, it reinforces the Special Program for the Energy Transition (Programa Especial de la Transición Energética, PETE) and PRONASE. It mandates the inclusion of a transition strategy to promote the use of cleaner technologies and fuels (SEGOB, 2015a). This strategy had the following goals: • Foresee the gradual increase of the participation of renewable energy in the electricity in dustry to meet the goals for clean generation and emission reductions.

• Incorporate the externalities (including those affecting health and environment) in the eval uation of associated cost for operation and expansion of the electric infrastructure.

• Establish mechanisms to promote clean energy and energy efficiency.

Electric Industry Law The Electric Industry Law (Ley de la Industria Electrica, LIE) enacted on August 11, 2014, es tablishes a free competition regime to generate and trade electric power, and opened the doors to the participation of private parties with new contractual models. However, the LIE establishes that the planning and control of the SEN and the public service of electricity transmission and distribution remain activities exclusive to the state (SEGOB, 2014). The LIE came to redefine the different state actors, such as the SENER, the National Energy Control Center (Centro Nacional de Control de Energía, CENACE), the Energy Regulatory Commission ( Comisión Reguladora de Energía, CRE), and CFE. These actors were vested with new faculties and responsibilities within the Mexican energy sector, as shown in figure 5.4 and explained below:

The CENACE, previously under the umbrella of CFE, is an autonomous body in charge of the operation of the SEN and the newly created wholesale market (Mercado Electrico Mayorista, MEM), and is the institution instructed to guarantee free and nondiscriminatory access to the transmission and distribution networks (SEGOB, 2014).

SENER acquires the mandate to establish, conduct, and coordinate the energy policy and formulate the required development plans for the SEN. SENER also oversees the compliance of international agreements in clean energy and the promotion of distributed clean energy gen eration and establishes the criteria for the emission of Clean Energy Certificates (Certificados de Energias Limpia, CELs) in order to incentive the development of clean energy generation technologies (SEGOB, 2014).

The Energy Regulatory Commission is responsible for issuing the generation permits (re quired to power plants with a capacity equal or greater than 500 KW). Additional obligations of CRE include issuing the CELs according to SENER’s guidelines, introducing the tariff regulation for transmission, distribution, and basic supply, and designing the contracts and compensation schemes for distributed generation (SEGOB, 2014). 44 Sociotechnical analysis of the Mexican electricity sector

CFE, following its restructuring process, is mandated to operate, maintain, and expand the infrastructure of the national electricity system following the mandate of CENACE as system operator (SEGOB, 2014).

Figure 5.4. Responsibilities of government actors under the LIE, own illustration with data from SEGOB (2014)

Law of the Federal Electricity Comission A presidential decree created the Federal Electricity Commission in 1937. Following a constitu tional amendment in 1960 that nationalized the power industry and gave the federal government the exclusive rights to generate, transmit, distribute, and commercialize electricity, CFE installed a monopoly in the electricity sector. CFE remained the sole participant in the sector partly shared with the state company “Luz y Fuerza del Centro”(LyFC for its Spanish acronym). LFC operated in Mexico City and neighboring states from 1994 to 2009 when all its assets and market shares were transferred back to CFE (CFE, 2017).

Following the energy reform, the Mexican electricity sector went into a restructuring process, marking an end to the monopoly of CFE and allowing competition and private investment in the electricity generation and supply. CFE then became a stateowned productive enterprise through the Law of the Federal Electricity Commission enacted in August 2014. In December 2015, the Secretary of Energy published the terms for the strict legal separation of CFE. It established a horizontal and vertical separation of the state company and created a series of subsidiary and affiliate companies, as shown in figure 5.5 (CFE, 2017). 5.2. The regime 45

Figure 5.5. CFE’s corporate structure, Own illustration adapted from from CFE (2017)

The generation infrastructure of CFE is divided into five generation subsidiaries that compete with each other in the wholesale market. The distribution of the actives took into consideration the location, technologies, and other factors in order to ensure that every generation company can operate in the different regions and with diverse technologies. This prevents generation companies from having enough market power to influence the wholesale market or affect other players’ free entry. An additional generation subsidiary (CFE Generacion V EPS) was created to manage the contracts between CFE and the independent power producers active before the en ergy reform (COFECE, 2019). With the creation of subsidiaries for transmission and distribution, CFE remains the sole actor in this stage of the value chain as they are the state’s exclusive ac tivities. Private companies are now allowed to enter into contracts with CFE’s transmission and distribution subsidiaries to finance, install, maintain, manage, operate, and expand electricity transmission and distribution infrastructure. However, concessions for these activities continue to be prohibited (CFE, 2020).

For electricity supply, CFE created a subsidiary company for basic service supply and an affiliate company for qualified service supply. CFE Calificados (CFE SSC) serves users with an energy consumption equal or greater than 1MW and participates in the wholesale market as a qualified service supplier and last resource provider (CFE, 2019). CFE SSC competes with other private firms in the wholesale market. However, keeps and advantageous position over the competition, same that was developed following the adoption of different business strategies, for instance, engaging in bilateral contracts with generators, electricity import and export activities with Belize, Guatemala, and the U.S., and also, with the signature of a contract to represent ex empt generators (generation lower than 500kW) in the wholesale market (CFE, 2018). In turn, CFE basic service supply (CFE SSB) serves all users with consumption below 1MW or qualified users that decide to remain represented by this entity. CFE SSB is registered in the wholesale market under the basic service supplier scheme. Private actors can participate as a basic ser vice supplier. However, CFE SSB is the sole entity in operations under that scheme(ASF, 2018). 46 Sociotechnical analysis of the Mexican electricity sector

As natural gas was adopted as the preferred technology for electricity generation in Mexico, CFE (as the primary consumer of fossil fuels) played a key role in developing the NG infrastruc ture. Under the new structure, CFE created CFEnergía, S.A. de C.V., and CFE International LLC, as affiliate companies to participate in buying, selling, transporting, and storing gas, fuel oil, coal, and other fuels (CFE, 2019). By venturing into new business models to supply CFE’s electricity generation plants and the national industry with natural gas, CFE seeks to transform from an electricity company to an energy company.

5.2.4. The Mexican Electricity Market The energy reform opened the doors for the participation of private actors in the Mexican en ergy sector and instructed the constitution of a wholesale electricity market. The main purpose of this market, operated by CENACE, is to provide transparency to the transactions between participants of the industry (SENER, 2017). Participants in the MEM can perform buy/sell trans actions of electric power, Power, auxiliary services, financial transmission rights, clean energy certificates, and any other product required for the national electric system’s efficient functioning (SENER, 2020b).

Participants of the Wholesale Electricity Market The different participants of the MEM and their requirements are defined in the Electric Industry Law and are listed below:

1. Generators are permit holders that represent power plants with a capacity greater than 0.5MW, and can participate directly in the spot market. These generators can also par ticipate in longterm auctions and celebrate contracts with qualified users and qualified service suppliers to sell electricity and associated products. Generation plants with in stalled capacity under 0.5MW (considered as distributed generation) can sell their energy production and associated products to a basic service supplier under the conditions estab lished by CRE or participate in the wholesale market through a qualified service supplier.

2. Qualified Users (UCPM) are endusers with an energy demand greater than 1MW that have the option to purchase electricity from a basic service supplier or participate in the wholesale market, either directly or represented by a qualified service supplier.

3. Qualified Service Supplier (SSC for its Spanish acronym) represents qualified users that are not direct participants in the wholesale market. This activity requires a permit by the CRE.

4. Basic Service Supplier, (SSB for its Spanish acronym) represents basic services users (i.e., users with a demand up to 1MW) and qualified users that opt to not participate in the wholesale market. Currently, the only participant in this sector is CFE’s basic service supply subsidiary. Private participation as a basic service supplier is permitted by law; however, private companies have faced different entry barriers are further explained in section 7.1.

5. Last Resource Provider represents qualified users for a fixed period of time to ensure the continuity of the service when the qualified service supplier fails.

6. Broker no Supplier, has the possibility to buy and sell energy in the wholesale market with out representing any physical assets. 5.2. The regime 47

During the first year of operation of the wholesale market (2016), only six companies were active. As the market continued to open, it attracted more and more companies. By the end of 2018, there were already 71 participants. As of the second quarter of 2020, the figure increased to 188 active participants (SENER, 2020b; CENACE, 2020b).

Structure of the Mexican wholesale market The Mexican wholesale market is composed of a) the shortterm energy market, that is in turn composed by the day ahead and the realtime market; b) the power balance market; c) the market for clean energy certificates; d) auctions for financial transmission rights; and e) short and longterm auctions for energy coverage contracts as depicted in figure 5.6 (CRE, 2020a).

Figure 5.6. Structure of the Mexican electricity market, own illustration adapted from (CRE, 2020a)

Large energy consumers, such as the qualified users and qualified suppliers, are allowed to sign contracts with generators registered in the market (SENER, 2017b). These bilateral contracts, also known as Power Purchase Agreements (PPA), allow both the generators and consumers to set a fixed price for electricity and other auxiliary services to be delivered at a specific time and place (node) in the future (Netherlands Enterprise Agency, 2020). By fixing the market products’ cost, the purchasing part reduces the risk of volatility presented in the spot market. The contracts and associated transactions shall be reported to CENACE as the operator of the wholesale market and the SEN. PPAs cover the cost of the electricity delivered at a specific node; thus, if the consumption point is in a different node, the purchaser will cover the transmission cost. This cost can be calculated from the difference in nodal prices and be covered using financial transmission rights, which is also a market instrument (SENER, 2017b). 48 Sociotechnical analysis of the Mexican electricity sector

Shortterm market The shortterm market is integrated by the dayahead market and the realtime (spot) market (SENER, 2020b). The shortterm market works under economic dispatch. This scheme seeks to guarantee fair market conditions and provide the lowest price to the enduser (Netherlands En terprise Agency, 2020). CENACE, as the market operator, uses optimization models to minimize the generation cost taking into consideration the capacity and marginal cost of the generation power plants, the electricity demand, and the physical and operative constraints of the national electricity system (SENER, 2020b). CENACE calculates the price for electricity and ancillary services (i.e., services related to primary frequency regulation and the capacity reserves of gen erators) for every system node. This is known as Local Marginal Price (PML for its Spanish acronym) and is used to reflect the value of energy delivered at every node of the system at every hour (RodriguezAguilar et al., 2019). The LMPs are composed of three elements:

1. Energy. This concept reflects the cost of producing for every MWh. The power plants with the lowest generation cost (typically based on renewable energy) are dispatched first. The price is set by the last generation power plant to be dispatched (CRE, 2020a).

2. Losses. Represents the cost to transport energy from the node where the energy is gen erated to the node where it is consumed. This concept has hourly variations and is set based on energy demand (CRE, 2020a).

3. Congestion. Reflects the effects of the demand in the transmission networks since nodes with high demand might require to consume energy from other nodes, thus creating a price difference (Netherlands Enterprise Agency, 2020).

The analysis of the different components of the PML provides price signals that help identify ideal locations for generation capacity additions since nodes with higher PMLs are most profitable (CRE, 2020a).

Power Balance Market Power is an associated product of the market that help generators meet their operation cost. Generators offer Power to guarantee the capacity to operate in the future. Energy users, in turn, are required to contract Power proportional to their consumption. Following supply and demand for Power, the MEM established a Power balance market that is operated yearly. This market allows generators and users to sell and purchase Power to meet the previous year’s require ments. One of this market’s purposes is to provide price signals to incentivize the development of new generation capacity to meet the energy demand.

Market for Clean Energy Certificates The Clean Energy Certificates (CELs for the Spanish acronym) are an instrument of the Mexican government for promoting investment in clean energy infrastructure and meet the clean energy generation goals at the lower cost for the enduser.

The CELs are emitted by the Mexican Regulatory Energy Commission to credit the produc tion of one MWh of electricity from clean energy sources. Eligible technologies include solar, wind, geothermal, landfill and biogenic methane, hydrogen fuel cells, hydroelectricity, nuclear, cogeneration and waste heat recovery, and central plants utilizing carbon capture and stor age (Bushnell et al., 2019). Only generation plants that obtained a generation permit from the CRE after the publication of the Electric Industry Law can benefit from this support mechanism. Distributed generation can also generate CELs; however, it must be represented by a qualified service supplier (CRE, 2020a). In turn, electricity suppliers (SSB and SSC) and large (qualified) 5.2. The regime 49 consumers must acquire CELs as a proportion of the electricity consumed by the load centers they represent. The quota, defined by the Secretary of Energy, was set to start with 5% in 2018 and increase every year, as shown in figure 5.7 (CENACE, 2020a).

Figure 5.7. Clean Energy Certificates requirement (20182022), own illustration adapted from CENACE (2020a)

The market for clean energy certificates is a component of the Mexican wholesale market that allows their participants to commercialize CELs in a spot market that operates at least once a year (CRE, 2020a). As a market instrument, the price of the CELs is not fixed and depends on the demand and supply (SENER, 2017). CELs can also be freely commercialized through bilateral contracts or the longterm auctions organized by CENACE (CRE, 2020a).

Auctions for Financial Transmission Rights The financial transmission rights are financial market instruments that cover the difference of the congestion component of the local marginal price between the node where energy is injected and the node where energy is consumed (SENER, 2017a). Users of the transmission network in operation before the energy reform, like the case for CFE’s basic supply business area, are given free rights. New participants in the market are to satisfy their financial transmission rights through auctions organized by CENACE yearly basis (SENER, 2017a).

Medium and Longterm Auctions The auctions are a mechanism that allows energy retail companies (e.g., the basic supply com pany, CFE SSB) to enter into competitive contracts to satisfy their demand for power, cumulative electric power, and CELs. The auctions, carried out by CENACE as the MEM operator, are an important channel to attract the required investment to develop new power plants or revamp existing ones. It provides sellers with a degree of stability over future cash flows. The contracts awarded through auctions have a term of three years for the mediumterm auctions (that com mercialize power and cumulative electric power). The longterm contracts are valid for fifteen years for power and cumulative electric power and twenty years for CELs (SENER, 2015).

The first mediumterm auction was celebrated between 2017 and 2018 and had the par ticipation of CFE subsidiary companies for generation and retail, and private companies (e.g., qualified users suppliers such as Iberdrola and Enel Energia) with participation in the MEM. As a result, two contracts were assigned to public and private generation companies, each one covering a capacity of 50 MWyear (SENER, 2018b).

Three longterm auctions took place in Mexico between 2015 and 2018. These auctions were recognized worldwide for the competitive prices for renewable energy technologies; the third auction reached record low prices at an average of 20.57 USD/(MWh+CEL), this is less than half of the prices achieved in the first auction in 2015, with an average price of 47.78 USD/(MWh+CEL) (SENER, 2020b). CFE’s subsidiary for basic supply was the sole buyer dur ing the first two auctions. However, in the third longterm auction, private buyers of electricity (e.g., Iberdrola Clientes and CEMEX) placed purchase orders to participate in addition to CFE. As a result of the first three auctions, a total of 7518 MW of renewable energy capacity will be added to the national electricity system. This is equivalent to 10.7% of the total capacity installed by the end of 2018 (SENER, 2019c). Solar PV was the preferred technology, followed only by onshore wind, as shown in figure 5.8. The second auction was the most diverse in technology 50 Sociotechnical analysis of the Mexican electricity sector since there was small participation of geothermal energy for electricity supply and hydro for the emission of CELs (SENER, 2018b, 2020b).

The auctions scheduled for 2018 and 2019 were canceled following the new administration’s claims to revise the contracts’ terms and conditions. A new auction is expected by 2020. This auction expects greater participation of qualified users expecting to reduce their electricity prices (Netherlands Enterprise Agency, 2020).

Figure 5.8. RES capacity additions by company as result of the longterm auctions (20152017), own illustration with data retrieved from Banco Nacional de Obras y Servicios Públicos, S.N.C. (2020); SENER (2020b). 5.3. Niche developments 51

5.3. Niche developments Geels (2002) introduced the niches as protected spaces for experimentation and development of radical innovations. Radical innovations play an essential role in the required transition to lowcarbon energy systems. Considering technological innovation alone might not be sufficient to achieve the required changes (Bidmon and Knab, 2014), the aim of this section is twofold: firstly, to introduce the different lowcarbon technologies that are developing at the niche level with a particular focus on solar PV and onshore wind; secondly, an analysis of the regulation and developments for distributed generation and renewable energy cooperatives as devices to commercialize technological innovation.

5.3.1. Development of lowcarbon technologies and social acceptance Several lowcarbon energy technologies are currently under development in Mexico. Hydro was the first clean technology to be introduced in the country, which dominated the electricity gen eration during the first part of the 20th century. However, while still significant, its share in the energy matrix is now reduced to around 10%. CFE has also played a key role in developing geothermal and carbon capture and storage (CCS) technologies. The first geothermal power plant started operations in 1973, and the capacity continued a slow development since the last geothermal power plant was installed in 2002. In turn, the Mexican government considers CCS as an alternative to reduce CO2 emissions; hence, mandated CFE and PEMEX (the stateowned oil company) to conduct pilot projects to test and commercialize the technology (JanoIto and CrawfordBrown, 2016).

According to the PRODESEN 20192033, the share of solar PV and wind generation capacity in the energy mix during this period is expected to increase to 8.1% and 12.90% accordingly, in order to meet the growing electricity demand and the energy transition goals. However, no dis tributed generation was considered in this planning instrument (Tornel, 2020). The new addition to renewable energy technologies’ capacity is expected to continue the model of largescale, privately owned, and internationally financed projects that have produced new forms of spatial and social inequalities (AvilaCalero, 2017).

The social impact of the new largescale renewable energy projects led to criticism and con flicts from civil society and indigenous groups at the local level (Tornel, 2020). JuárezHernández and León (2014a), Perez Brito (2019), and MejíaMontero et al. (2020) argue that the criticism is rooted in the lack of proper and informed consultations, the failure to involve the local commu nity in the design and development of the projects, the failure to account for the communal land tenure, and foremost the unequal distribution of the benefits. The later element takes relevance as these developments are often located in areas where the population suffers from energy poverty. Energy poverty affects around 30% of the population, even when the government sub sidizes electricity for 96% of the population (GarcíaOchoa and Graizbord, 2016). Gillard et al. (2017) conceptualizes the term energy justice as the incorporation of three distinct forms of in equality: distribution (income, energy prices, and efficiency), recognition (vulnerability, needs, and respect), and procedure (information access, decision making, and legal rights). All three forms are present on the demands of the opposing groups. In the same line, Jenkins et al. (2018) describe the importance of energy justice to differentiate between inclusionary and exclusionary niches. Exclusionary niches develop when, for instance, innovations funded by large companies exclude poor indigenous communities.

One example that has been researched by academia is the case of the development of largescale wind parks in the southeast of Mexico in an area called the Wind Corridor of the Isthmus of Tehuantepec. In this region, more than 24 largescale privateowned projects have been installed in a land historically inhabited by the Binnizá and Ikoots indigenous groups, which 52 Sociotechnical analysis of the Mexican electricity sector claimed that the above developments had impacted their territories, livelihoods, and identities (AvilaCalero, 2017; MejíaMontero et al., 2020). The opposition to the development of wind projects in the region resulted in new spaces of dialogue and the proposal from the commune members to develop their own wind projects. However, since these communities lack the finan cial, technical, or managerial resources, they were joined by an NGO (Yansa group) to develop a community wind farm adopting the European community model to Mexico (Hoffmann, 2012; AvilaCalero, 2017). Together with the NGO, the local community created the Yansa Ixtepec Community Interest Company, which in 2012 intended to compete in the open tender promoted by CFE. CFE dismissed their proposal, arguing that the Community Interest Company was not an existing legal entity in Mexico and the fact that it could not provide proof of sufficient capi tal or letters of credit (Hoffmann, 2012; Perez Brito, 2019; AvilaCalero, 2017). MejíaMontero et al. (2020) attribute the lack of participation of community projects to the lack of financial and planning support mechanisms combined with a regulatory framework designed to favor private utilityscale projects.

Solar energy 95% of the Mexican territory presents favorable conditions to produce electricity using solar PV technologies. With an average of 5.5 kWh/m2 per day (figure 5.9), Mexico’s irradiation is notably higher than Germany (3.2 kWh/m2), one of the world leaders in solar PV installed ca pacity (Netherlands Enterprise Agency, 2020; GIZ, 2018). A study carried out by SENER (2016) analyzed the potential for the development of solar PV generation projects, which resulted in 139,000 MW for systems within 2km of existing transmission networks and 639,420 MW for sys tems located at a distance of 20km from the transmission networks.

One of the early efforts to introduce solar PV technology in Mexico dates back to 1989 when the government launched the National Solidarity Program (PRONASOL) to electrify rural areas. As of 1996 (when the program was canceled), more than 24,000 solar PV systems were installed (Piscitello and Bogach, 1997). In 1994 the government established the Shared Risk Fiduciary Fund (Fideicomiso de Riesgo Compartido, FIRCO) intended to provide financial aid for imple menting solar PV projects for agriculture (JanoIto and CrawfordBrown, 2016).

Before the energy reform of 2013, largescale solar PV development was limited to projects under the figure of independent power producers (up to 30MW) and small producers(up to 10MW), whose production was sold in total to CFE as the operator of the electricity monopoly. It was possible to produce electricity for selfconsumption and sell excess energy to CFE. How ever, at a price that resulted in being unattractive to the industry. Before the start of operations of the wholesale market in 2016, only 14 large scale Solar PV projects were in operation with an accumulated capacity of 120.6 MW (PRO MÉXICO et al., 2017).

SENER (2018c) attributes the fast growth of Solar PV technology to the incorporation of distributed generation projects, which are dominated by solar PV technology, as described in section 5.3.2. Furthermore, the first three longterm auctions organized by the CENACE secured 4,867 MW of solar energy capacity (SENER, 2018d). 5.3. Niche developments 53

Figure 5.9. Global horizontal irradiation Mexico, reprinted from Solargis (2019).

Figure 5.10. Historical evolution of solar PV technology in Mexico (20072019), own illustration with data retrieved from SENER (2018c, 2020c). 54 Sociotechnical analysis of the Mexican electricity sector

Wind energy With an estimated potential of around 71 GW, Mexico has the secondlargest potential for wind technology in Latin America, just after Brazil. In particular, the region of the Isthmus of Tehuan tepec in the state of Oaxaca presents one of the highest potentials worldwide. Average wind speeds in this region (refer to figure 5.11) reach 10 m/s (compared to 6.5 m/s often used in wind projects around the world) has a potential calculated in more than 44 GW (SEGOB, 2015b; JuárezHernández and León, 2014b).

Wind technology was introduced to Mexico in 1992 with the construction of the first wind park,“La Venta I”, located in the Isthmus of Tehuantepec in Oaxaca. La Venta I, originally built as a prototype sponsored by CFE, consisted of five turbines of 224 kW. Despite the small capacity, it helped prove the technology’s potential and technical feasibility in the region (SEGOB, 2015b; Willow, 2019; Elliott et al., 2004; MejíaMontero et al., 2020). However, it was not until 2006 that CFE started constructing a new project, La Venta II (83.3 MW). This project was constructed by Iberdrola and Gamesa, marking the entry to transnational companies that now dominate the exploitation of the resource in Mexico (JuárezHernández and León, 2014b). While the local government and CFE promoted the first two projects, the majority of the new wind develop ments would be initiated by private companies under the figure of selfsupply and independent power producers. Selfsupply was intended for industrial, commercial, and service users around the country, and for the independent power producers, the energy would be sold in total to CFE (JuárezHernández and León, 2014b).

Onshore wind is one of the technologies with the fastest growth in Mexico (SENER, 2019c). According to the Mexican Association of Wind Energy (AMDEE, for its Spanish acronym), ten new wind power generation plants started operations in 2019, reaching a total installed capacity of 6.238 GW. The technology is now present in 13 out of 32 states. The state of Oaxaca alone has an installed capacity of 2,756 MW, representing 44% of the country’s installed capacity. Tamaulipas follows Oaxaca with an installed capacity of 1,485 MW and Nuevo Leon with 524 MW (AMDEE, 2020a).

Despite public opposition to largescale wind farms, the enabling regulation and the high potential attracted a series of actors that helped driving down the technology’s cost. Although there is no company in the Mexican market with the capacity to produce entire wind turbines, components such as towers, generators, and blades are already manufactured nationally. Main actors in the Mexican wind industry include international companies such as Gamesa, Acciona, Vestas, Clipper, Alstom, and GE (OrtizGallardo et al., 2017).

Although there is a high potential for offshore wind parks in Mexico, the Netherlands Enter prise Agency (2020) identified a series of barriers for its shortterm development. These barri ers are the high installation cost caused by the lack of appropriate port infrastructure, logistics, manufacturing possibilities, and the current administration’s energy policy that would favor the development of oil and gas infrastructure over the offshore wind. 5.3. Niche developments 55

Figure 5.11. Wind resource of Mexico and Central America, reprinted from NREL (2017).

Figure 5.12. Historical evolution of wind technology in Mexico (20072019), own illustration with data retrieved from SENER (2018c, 2020c). 56 Sociotechnical analysis of the Mexican electricity sector

5.3.2. Distributed Generation Distributed generation was included as one of the strategies of the Mexican government for the energy transition. Thus, following the mandate of the LTE, the PRONASE, and the National Development Plan (Plan Nacional de Desarrollo, PND), In 2017, CRE issued the Resolution RES/142,2017 establishing the general administrative provisions, contract models, methodol ogy for calculating economic compensations and general technical specifications, applicable to power plants of distributed generation and clean distributed generation (CRE, 2017).

The different Mexican regulations consider a power plant with a capacity lower than 0.5 MW that is connected to a distribution network as distributed generation and is exempt from the obli gation to get a generation permit from the CRE (unless interested to participate in the MEM). Under the law, distributed generation will be granted free and nondiscriminatory access to the distribution networks (as long as it is technically feasible under the evaluation executed by the CENACE). Exempt generators will be able to sell excess or total energy produced to a basic supply company (i.e., CFE SSB) or a qualified supply company as long as the power plant does not share an interconnection point with a load (CRE, 2017).

In 2019, 35,000 new distributed generation systems were interconnected to the grid, which contributed to reaching a total installed capacity of 975 MW as indicated in figure 5.13. This represents a 41% increase with respect to the capacity installed in the previous year. (CRE, 2020).

Figure 5.13. Distributed generation capacity and number of interconnection contracts in Mexico (20072019), own illustration with data retrieved from CRE (2020)

Currently, solar PV is the preferred technology for distributed generation accounting for 99.28% of the installed capacity. The remaining 0.72% is obtained by using technologies such as: bio gas (0.51%), biomass (0.16%), wind (0.02%), gas (0.01%), diesel (0.007%), and hydro (0.001%) (CRE, 2020). 5.3. Niche developments 57

Exempt generators must comply with the technical specifications established in the inter connection manual and sign an interconnection contract before celebrating a power purchase agreement between the basic supply company (currently only CFE SSB) and the exempt gen erator. There are three possible models of contract that the generator can choose from (CRE, 2017):

1. Net Metering, considers all the flows of energy delivered and consumed to and from the general distribution networks and are compensated between each other in a billing period. This method requires the use of a bidirectional meter.

2. Net Billing, this method considers the energy flows to and from the general distribution networks and assigns a monetary value that can be different for the purchase and sale of energy.

3. Total sale of energy considers all energy delivered to the grid, and a monetary sale value is assigned.

According to the CRE (2020), around 25% of the current interconnection contracts were subscribed under the model of small and medium scale interconnection contracts (Contratos de Interconexión de Pequeña y Mediana Escala, CIPyME) before 2017. For the contracts sub scribed the last three years, the preferred methodology for distributed generation is net metering, as shown in figure 5.14. The more significant share of the distributed generation systems have a size between 1 and 5 kW (48.63%) followed by systems between 5 and 10 kW (39.26%), and systems between 10 and 30 kW (7.6%) (CRE, 2020).

Figure 5.14. Interconnection contract selection for distributed generation, own illustration with data retrieved from CRE (2020)

Early in 2020, the Mexican government started the discussion to modify article 17th of the Electricity Industry Law to increase the distributed generation threshold from 0.5 MW to at least 1 MW. With this action, the government is expecting to double the installed distributed generation capacity. It is seen as a mechanism to improve energy security, reduce losses in transmission, and advance citizens’ participation in electricity generation and reduce energy poverty. (Salinas Wolberg, 2020). 58 Sociotechnical analysis of the Mexican electricity sector

5.3.3. Renewable energy cooperatives in Mexico Mexico has a long history of cooperatives; the first one, named Cooperativa Union Progreso (used to sell Mexican handcrafts), was founded in 1872. There is no updated information on the current number of cooperatives in the country. However, more than 10 million people belong to a cooperative in Mexico as per the last general census. These cooperatives are often organized in federations, being the MEXICOOP, the largest in numbers with about 80% of the total (DGRV, 2018). To add to this topic, interviewee seven mentioned that in Mexico, “there is a significant social capital and lots of successful stories where cooperatives helped develop communities”.

The current regulation for cooperatives is the General Law for Cooperative Societies (Ley General de Sociedades Cooperativas, LGSC) enacted in August 1994 and came to substitute the first law in the matter enacted in 1938 (SEGOB, 2009). The LGSC defines a cooperative as a form of a social organization composed of people based on shared interests and the princi ples of solidarity, selfeffort, and mutual help. The same that are formed to satisfy individual and collective needs, through the realization of economic activities of production, distribution, and consumption of goods and services, and have the freedom to develop any licit economic activity (SEGOB, 2009).

Three kinds of cooperatives can be recognized: i) Consumption of goods and services, ii) production of goods and services, and iii) savings and loans. The first category may engage in supply and distribution activities and the provision of services related to education or housing; the second one are those whose members associate to work together in the production of goods and services; the last category is associated with financial services and is required to follow ad ditional regulations (SEGOB, 2009). In Mexico, the constitution and registry of a cooperative will be free of federal taxes and fees. However, shall observe the following minimum requirements (SEGOB, 2009):

1. Recognize one vote per member regardless of their economic contribution 2. Constitution as variable capital 3. Equal rights and obligations to all members (women included) 4. Indefinite term, and 5. Shall be constituted with at least five members

The joint research of the German Cooperative and Raiffeisen Confederation (Deutscher Genossenschafts und Raiffeisenverband e. v., DGRV) and the German Corporation for In ternational Cooperation GmbH (The Deutsche Gesellschaft für Internationale Zusammenarbeit, GIZ) published on December 2018, looked into the potential of renewable energy cooperatives in Latin America. For Mexico’s case, it noted that no REScoop was registered in the country to that date, this following to limiting regulation and a series of challenges (DGRV, 2018). The panorama came to change in March 2020, with the formal registry of Onergia (Sociedad Coop erativa de Trabajadores en Energías Alternativas y Estudios Sociales Onergia S.C. de R.L. de C.V.), the same that prides itself on being the first Energy cooperative in the country. Onergia can be classified as a service REScoop since its activities are limited to professional services for installing RES systems at a distributed level, energy efficiency solutions, and education (On ergia, 2020).

The Mexican regulations allow for REScoops to participate in energy production, consump tion, and services. However, firms cannot carry out schemes combining electricity generation and supply. Thus, business models such as the ones adopted by Som Energia and Ecopower are not possible under the current regulation. Onergia is currently the only cooperative funded with the idea of using RES to meet their identi fied needs. However, with the interviews, it was possible to identify examples of existing coop 5.3. Niche developments 59 eratives using RES to support their activities and social programs as listed below: • Energy production. The reform of 1992 allowed new actors to partake in the electricity generation for the first time in the electricity regime’s modern history. This opportunity al lowed private companies to seize an opportunity and started developing projects under the figures of selfsupply and independent power producers. One of these firms is the cooperative “La Cruz Azul”, the same that in 1998 obtained a permit from CRE for the development of a 30MW wind park “Fuerza Eolica del Itsmo”, the same that was destined to power its concrete production facilities and, in a second stage, other cooperatives from the same group (CRE, 1998). Later, the Electric Industry Law of 2014 and secondary laws and regulations came to redefine how new actors can produce and commercialize electric ity. The generation power plant’s capacity would then define the possible business models that could potentially be implemented. The cooperative La Cruz Azul has then recurred to distributed generation and engaged in different projects to meet its electricity needs em ploying RES such as photovoltaics and biomass (Cooperativa la Cruz Azul, 2015).

• Energy consumption. Energy consumption refers to the activity of electricity supply or re tail. There is currently only one active actor in the market for the basic electricity supply service (users with an electricity demand that does not surpass 1 MW); this is CFE SSB. The interviewee from the Regulatory Energy Commission recognized that even when the regulation allows for the creation of new actors in this sector, there are several entry bar riers. The entry barriers are presented in the form of obligations (e.g., the obligation to provide electricity at regulated tariffs and the obligation to provide the service to any user within the area of service) and restrictions (e.g., restrictions to procure electricity from the electricity market ). New basic service suppliers are constrained to acquire the energy from the medium and longterm auctions organized by CENACE as the system operator (CRE, 2018). This limitation could positively impact the development of more RES capac ity since RES technologies have dominated the last three auctions. However, since the new auctions for electricity supply were canceled after the new administration took office in 2018 (Netherlands Enterprise Agency, 2020), new actors with basic supply permits were left without options to procure electricity for their clients.

Three firms obtained basic service supply permits from CRE in August 2018; one of them is the firm Suministro Basico del Centro SUBACE SA DE CV, formed by the cooperative Luz y Fuerza del Centro (CRE, 2018). The cooperative Luz y Fuerza del Centro is formed by more than sixteen thousand members that were employees of the company that pro vided the electricity service to Mexico’s central area before it got dissolved in 2009 in favor of the incumbent company CFE.

• Energy services. Similar to the case of renewable energy cooperative Onergia introduced above, it is possible to find examples of existing Mexican cooperatives taking actions to promote RES as alternatives to the incumbent system. One example provided by one of the interviewees is the case of the Cooperative Union Tosepan. The Tosepan Cooperative Union is formed by eight regional cooperatives and three civil associations, serving 34,000 families in Puebla. Similar to the situation in the Isthmus of Tehuantepec, the members of Tosepan opposed the development of infrastructure projects by CFE, claiming that those projects would threaten their ways of life. This situation prompted the cooperative mem bers to pursue their energy sovereignty and untie from the power grid under the control of CFE. Tosepan adopted a campaign to promote locally generated renewable energy, and with the support of Onergia, started training members of their community to install solar systems. The first projects consisted of the electrification of the cooperative’s productive facilities and the electrification of houses without access to the grid.

6 Business models analysis: The incumbent business model

“A new business model based on old principles of social justice where people matter now that’s a revolutionary way to reduce inequality.” – Sharan Burrow

Chapter 5 analyzed the different actors, rules, and infrastructure that characterize the Mexican electricity regime. One actor that stands out is CFE, the stateowned company that, until 2013, instituted a monopoly in the sector. CFE went into a restructuring process to establish a fair ground for competition in electricity generation and retail. While the number of actors involved in electricity generation increases, CFE SSB remains the sole actor in the basic service supply.

Chapter 6 aims to understand the role of the incumbent power utility in Mexico (CFE SSB) as “part of the sociotechnical regime”. Section 6.1 provides an introduction of CFE SSB, which is followed by the analysis of the different elements of the business model.

61 62 Analysis of the business models

6.1. The incumbent business model In 2014, Mexico followed Europe (around the year 2000) and other OECD countries and lib eralized the electricity market opening the door to competition in electricity retail (Defeuilley, 2009; CFE, 2019). As introduced in section 5.2.3, CFE, the operator of the monopoly, entered a phase of horizontal and vertical separation of its activities. For electricity retail, CFE created a subsidiary company for basic service supply (CFE suministrador de servicios basicos, CFE SSB) and an affiliate company for qualified service supply: CFE Calificados (CFE SSC). CFE SSC serves qualified users (i.e., users with an energy consumption equal or greater than 1MW a year) and participates in the wholesale market as a qualified service supplier and as last re source provider (CFE, 2019).

Similar to the case of other liberalized markets, the Mexican electricity retail sector was ex pected to introduce and stimulate competition and increase the customers’ choices, which would encourage innovation and lessen electricity prices (Defeuilley, 2009). However, six years after the energy reform, CFE SSB remains the sole incumbent actor in the basic service supply. Only qualified users have the possibility to change to one of the growing number of qualified service suppliers. Even with the knowledge of the benefits of migrating to a qualified service supplier, by the closing of 2018, only 5.52% of the 761 qualified customers of CFE SSB (that acquired a service supply contract after 2014) migrated CFE SSC (CFE, 2019). This could be explained by Defeuilley (2009) as the incumbent retail company (CFE SSB) consumers are familiar with the service supplied and have a longstanding experience of the quality of the service, and know the expected electricity price that they have to pay. One of the factors that can explain the lack of competition in the basic service supply is the remaining enduser price regulations.

As the incumbent electricity retail company, CFE SSB forms part of the electricity socio technical regime. This incumbent and other regime actors (e.g., public authorities and financing institutions) will likely oppose a change in fear of new business models attempting to appropriate their current value capture source (Unruh, 2000). In this line, this section makes use of the framework introduced in section 2.2 to answer subquestion 3 (i.e., What is the business model of the incumbent power utility company?) and characterize the business model used by CFE SSB (business model as part of the sociotechnical regime). Figure 6.1 reflects CFE SSB’s business model canvas, whose elements are further explained below:

Figure 6.1. Business model for CFE SSB, own illustration with data retrieved from the different sources mentioned in this chapter 6.1. The incumbent business model 63

6.1.1. Value proposition The value proposition describes the value that the firm offers to its customers and how it com pares to the competitors (Osterwalder and Pigneur, 2010). CFE SSB, as a subsidiary company of the stateowned CFE corporative, has the mandate to provide the electricity service to all users in the residential, commercial, service, agriculture, and industry sectors, and at the same time generate economic value (revenues) for the state (ASF, 2018). CFE SSB grants its customers access to regulated and, for most residential and agriculture users, subsidized tariffs.

6.1.2. Customer segments CFE SSB serves all electricity users recognized under the national regulations as basic supply users (i.e., customers with a yearly electricity demand lower than 1 MW). These users do not have the option to participate in the wholesale market and therefore have access to regulated tariff (SENER, 2020b).

The customers of CFE SSB are divided into five different sectors as indicated in table 6.1, where the residential sector represents the largest user group with 88.7% of the users, however only represents 28.8% of the income; industrial users, on the other hand, while remaining a small sector in terms of number of users, account for 57.7% of the sales of electricity (SENER, 2020b).

Table 6.1. Main indicators of electricity users in Mexico for the year 2018, elaborated with information from (SENER, 2020b)

6.1.3. Customer relationships The relationship between CFE SSB and the customers is established through the signature of a service contract. Before the service request and the contract’s signature, the user must comply with the technical requirements established in the corresponding regulation.

The contract specifies the parties’ rights and obligations, the billing conditions, periods (typ ically bimonthly), channels, and the conditions for the suspension and cancellation of the con tract established for an indefinite time. The supplier is mandated to ensure the interconnection no more than two weeks following the contract’s signature. Depending on the contracted service, CFE SSB will install a metering device, while exceptions apply (e.g., street lighting or services where it is not viable to install a metering device); this metering device can be unidirectional or 64 Analysis of the business models bidirectional (for the case of prosumers) (CFE, 2013).

CFE SSB acts as a representative for exempt generators (distributed generation) in the wholesale market. Different billing schemes have been established for distributed generation, as indicated below: • Net metering • Net billing • Total sale of electricity By the end of 2018, CFE SSB processed 38’617 requests for interconnection under the dis tributed generation scheme; this is 48% larger than the previous year (CFE, 2019).

6.1.4. Distribution channels CFE SSB has implemented different channels to reach its customers; several regional offices have been established to open new service contracts and process payments and technical sup port. Additional communication channels include selfservice kiosks to process payments, a telephone number to report problems with the service, and a growing presence in social me dia (Facebook and Twitter), the official website (www.cfe.mx), and an online application (CFE, 2019).

Specific channels have been established for industrial users, which are assigned personal assistance to advise them on strategies to improve the efficiency and power factor; technical support and advice for selecting the optimal tariff and behavior for a reduction in the electricity bill; as well as technical support to access government grants intended for energy efficiency (CFE, 2020).

6.1.5. Key activities CFE SSB, as an electricity supplier, acts as an intermediary between the generators and the consumers of electricity by purchasing electricity in large quantities and then selling electricity to the endusers based on their demand. Four key activities can be identified as per below:

i) Purchase of electricity, CFE SSB has established a series of contracts with generators in order to get an economic advantage and procure electricity and associated products below the wholesale market clearing price. When the energy procured through bilateral contracts is not enough for meeting the demand of its users, CFE SSB participates in the wholesale market as described in section 6.1.6.

ii) Sale of electricity. As a stateowned company, CFE SSB is mandated to provide its service to all users in a nondiscriminatory fashion through a service contract’s subscription. The service provision tariffs are regulated, and thus, the CFE SSB has no authority for price setting.

iii) Customer acquisition, support, and retention The main advantage of CFE SSB is the lack of competition in the basic supply, for which it processes new service requests and man ages the customer support and retention (since qualified users can opt to procure their energy directly from the wholesale market).

iv) Billing, CFE SSB manages the revenue streams presented in section 6.1.9, and by differ ent channels established relationships with the clients for the remuneration of the service offered. 6.1. The incumbent business model 65

6.1.6. Key resources CFE SSB, as an electricity retailer, has no generation infrastructure and thus acquires the elec tricity to sell to its clients from three main sources as identified below:

i) Longterm auction. Following the opening of the wholesale market, CFE SSB has partic ipated in the three longterm auctions for renewable energy production. These auctions were organized by CENACE as the operator of the wholesale market. As a result of these three auctions, CFE SSB was able to secure longterm electricity coverage contracts (Con trato de Cobertura Electrica, CCE); these contracts cover the future supply of electricity and associated products (e.g., capacity and clean certificates) and not the actives(power plant) for a fixed price(CFE, 2019). Between the first (2015) and third (2017) auctions, CFE SSB benefited from a reduction of around 57% in the price of electricity (CFE, 2018).

ii) Vesting contracts have been introduced to ease the transition from a vertically integrated organization with only one player (i.e., CFE) to a liberalized one. The signature of vesting contracts between CFE SSB and the generation companies (CFE Generacion IVI) with the most efficient power plants allows the former to acquire electricity at marginal cost and bellow the marketclearing price. Prices average 40% lower than the local marginal price (i.e., the price of electricity in a given node of the power system for a definite period that is calculated based on the wholesale market rules) (SENER, 2017c; ASF, 2018).

iii) Wholesale market, CFE SSB is the only active participant of the shortterm market under the figure of basic service supply, and it is in this market where CFE SSB acquires the energy to meet its users demand that is not covered by vesting contracts(ASF, 2018).

In 2018, 79% of the energy required to satisfy the demand of the user of CFE SSB was acquired through vesting contracts. The remaining 21% from the wholesale market, the latter is subject to volatility in the electricity prices (Batres, 2019).

6.1.7. Key partnerships Following the legal separation of CFE due to the energy reform, CFE operates through different subsidiaries and affiliates, all of which have established key partnerships with CFE SSB employ ing a framework contract. CFE, as a parent company of CFE SSB, represents the most crucial partnership for the latter. CFE provides financial, technological, and legal services. CFE also administers the human resources and infrastructure (e.g., buildings, vehicle fleet) and provides general services of maintenance and security (SHCP, 2018).

The subsidiary generation companies of CFE (CFE generacion IVI EPS) have subscribed bilateral (vesting) contracts for the provision of electricity at special rates and conditions, as explained in section 6.1.6. Additionally, CFE’s subsidiaries for generation, transmission, distri bution, and fossilfuel supply provide additional revenues to CFE SSB for the concept of “guar anteed demand” as further explained in section 6.1.9(ASF, 2018).

As a stateowned company and subject to regulation from different government entities, CFE SSB has established key partnerships with the CENACE as the operator of the wholesale mar ket, the Regulatory Energy Commission as the entity in charge of designing tariff applicable for the basic supply, the Secretary of Energy as the entity in charge of the energy policy that affects the operation of CFE SSB, and the SHCP as the entity in charge of the compensation from the subsidy to electricity instructed by the government. 66 Analysis of the business models

6.1.8. Cost structure CFE SSB, as a state company, has the mandate to provide electricity to its users at the lowest cost possible. Thus, it can be considered a costdriven company as described by Osterwalder and Pigneur (2010). Different cost categories can be identified from the analysis of the financial statements described below (ASF, 2018; SHCP, 2018):

i) Power purchase, the cost of the electricity and associated products (e.g., green certificates and capacity) required to meet the demand of the users, same that is obtained at different prices based on the instruments introduced in section 6.1.6.

ii) Transport of electricity, payments to the subsidiaries for transmission and distribution for the transport of the electricity from the generation point to the final users.

iii) Services offered by the parent company CFE, including financial, technological, and legal services. CFE also administers human resources and infrastructure (e.g., buildings, vehi cle fleet) and provides general maintenance and security services.

iv) Operation of the wholesale market, participants of the wholesale market are required to pay for the cost incurred for its operation, the same that is administered by CENACE.

v) Operation cost, which includes payment of salaries and benefits, as well as the cost in curred in the communication channels with the customers and the billing process.

vi) Taxes.

6.1.9. Revenue streams The main revenue stream for CFE SBB comes from the sales of electricity to its users, same that represents 72.7% of the revenues declared in 2017; the remaining 27.3% comes from the compensation from the Mexican government for the application of subsidies (13.1%), and the compensation for the concept of “guaranteed demand” (14.2%) (ASF, 2018). The concept of guaranteed demand charges comes from the contract between the subsidiary companies of generation, transmission, distribution, and CFE SSB. The former receives compensation for the guarantee of electricity demand (ASF, 2018).

The users of CFE SSB are subject to a regulated tariff. The regulatory energy commis sion is instructed to design the methodology to calculate the tariff for the different sectors. The methodology seeks to reflect the regional cost for generation, transmission, distribution, and the cost related to the wholesale market’s operation, the basic supply company, and the CENACE (SENER, 2020b). However, regardless of the tariff scheme designed by the CRE, the Ministry of Finance and Public Credit (Secretaria de Hacienda y Credito Publico, SHCP) has the authority to set the final tariffs for basic supply and thus has introduced special tariff for the residential and agriculture sectors that are benefited with a subsidy (SENER, 2020b; ASF, 2018). The Fed eral Government (through the SHCP) has reimbursed a part of the subsidies to the CFE SSB. However, the remainder is absorbed by the company to the detriment of its assets (ASF, 2018). 7 Business model analysis: The REScoop business model

“Strategies are great, business models are great, but the reality is your music has to mean something to people.” – Brother Ali

In understanding the role of business models within sociotechnical transitions, this research analyzed the business model of the incumbent power utility in Mexico (Chapter 6), as “part of the sociotechnical regime”. Now, Chapter 7 analyzes the potential of the REScoop business model as a “device to commercialize technological innovation” and accelerate the transition to a lowcarbon electricity production (Bidmon and Knab, 2014, 2018).

Section 7.1 introduces the different barriers and drivers for developing the REScoop busi ness model in Mexico. Section 7.1.5 provides an analysis of the impact that the above barriers and drivers could have in designing business models adapted to Mexico’s socioeconomic and regulatory conditions. The analysis results derive on section 5.3.3, which follows the nineblock decomposition framework to present four potential business models to create energy production REScoops in Mexico. Finally, section 7.3 answers subquestion 6 by comparing the incumbent and the REScoop business models based on the value proposition, value creation, and value capture.

67 7. Business model analysis: 68 The REScoop business model 7.1. Barriers and drivers for the development of REScoops in Mexico This section introduces identified barriers and drivers for the development of the REScoop busi ness model in Mexico. The barriers and drivers were identified through indepth desk research and with the help of expert interviews. The analysis of the barriers focuses on policy and regu lation, culture, and access to funding.

7.1.1. Policy and regulation barriers The major barrier identified by the expert interviewees is the uncertainty caused by the incumbent political regime. After taking office in December 2018, the new government under President Andrés Manuel López Obrador has called for a profound change in the energy policy, which set as a priority the “rescue” of the state energy companies PEMEX and CFE (LópezObrador, 2020). In such efforts, the executive, through the Secretary of Energy, has implemented a series of policy changes intended to strengthening CFE and put it in an advantageous position within the electricity market. Examples of these policies that not only give CFE an advantageous position but also harm existing business models by private market actors and create a bigger entry barrier for new actors like REScoops are described below:

Energy auctions As introduced in section 5.2.4, the energy auctions proved to be efficient in allocating new gen eration capacity from RES. According to the second state of the union address of the incumbent government, as of the second half of 2020, the progress of construction of generation power plants resulting from the first three long term auctions have a progress of 71.78% for the first auction (2015), 87.48% for the second auction (2016), and 49.18% for the third auction cele brated in 2017 (LópezObrador, 2020). The auctions allowed the state company CFE SSB to secure long term supply contracts at record low prices of energy and CELs. However, the new incumbent government decided to cancel the fourth long term auction originally scheduled for 2018. The government claimed the necessity to review the scope of and effects of the long term auctions, despite their international recognition (Viscidi and Yepez, 2020).

The auctions are the means for basic service suppliers, like CFE SSB, to secure longterm contracts to acquire electricity and CELs. New basic service suppliers have been unable to start operations due to the cancellations of the longterm auctions. One of the companies that have suffered from that decision is SUBACE, the cooperative Luz y Fuerza’s proposal to compete with the incumbent company. Thus REScoops are currently unable to participate in energy supply services.

The business model for most European REScoops is based on energy production and sale (Yildiz, 2014). This is partly possible thanks to supporting mechanisms like the feedin tariff and feedin premium that have positive effects on risk reduction and, in consequence, reduce the capital cost (Mitchell et al., 2006). Since Mexico lacks those support mechanisms, large scale projects are set to commercialize their energy production in the wholesale market and are therefore exposed to price variations. The longterm auctions could represent an opportunity for REScoops to develop largescale RES projects since the accepted bids secure longterm contracts where the revenue streams are known in advance. However, according to the REN21 (2017), report on renewable energy auctions and participative citizen projects in Latin America and the Caribbean, the auction design often includes requirements that can be very costly and create barriers to participation, especially for small or newer actors, like the case of REScoops. These barriers to participation are presented below: 7.1. Barriers and drivers for the development of REScoops in Mexico 69

1. Requirement of participation fees and financial guarantees. In Mexico, bidders are re quired to demonstrate having acquired financing for a project of equal or greater size and are required to pay a fee to CENACE to access the auction rules and the right to evaluate their bids. Additionally, the bidder shall provide bid bonds (that are collected and returned to unselected bidders) and a performance guarantee if the bid is selected (Viscidi and Yepez, 2020). It can be more difficult and costly for REScoops to obtain such guarantees than for big corporations with a stable and solid financial history and availability of financial resources (REN21, 2017).

2. Requirement of technical experience. Bidders are required to prove technical experience in developing, operating, and maintaining a project with similar technology and at least one third of their proposals’ capacity (Viscidi and Yepez, 2020). Requirements as the technical capacities let out community projects and small developers unable to prove that they have the required experience, skills, and capacities comparable to large firms (REN21, 2017).

In general, energy auctions are designed to favor large firms with technical and financial cap ital and favor projects that offer the lowest cost over projects offering secondary benefits (e.g., social, economic, or environmental). Furthermore, the development of largescale projects might affect indigenous communities and compete for land, water, and biomass resources; therefore, these communities could oppose if they feel a threat to the ownership of the land, collective rights, and culture (REN21, 2017).

Clean energy certificates The Clean Energy Certificates (Certificados de Energías Limpias or CELs), as introduced in section 5.2.4, are the Mexican government’s sole instrument for promoting new investment in clean energy infrastructure. Generation plants that obtained a generation permit from the CRE after the publication of the Electric Industry Law (2014) can benefit from this support mecha nism, which is intended to provide an additional revenue stream from the commercialization of the certificates. On the other hand, from 2018, representatives of electricity users in the elec tricity market, such as the CFE SSB, must acquire and cancel CELs in a proportion defined by SENER. Options for CFE SSB to obtain the required CELs include their existing contracts with private, clean generation plants, the CEL market run by CENACE, and the long term auctions. Since the current contracts cannot provide CFE SSB’s quota and the CEL market has not started operations, CFE SSB has used the long term auctions to meet its CEL requirements. However, in October 2019, SENER published a decree to modify the criteria to recognize CELs. By this decree, the government changed the CELs market rules by allowing older clean generation as sets to be eligible to benefit from said certificates.

SENER’s decree would enable CFE to credit CELs from its older hydro and nuclear plants, the same that would be enough to meet CFE’s CEL requirements. However, the decree was quickly challenged and suspended following a series of Amparo trials (i.e., legal procedure in the Mexican Law that seeks to protect individuals or groups against the violation of human rights (MejíaMontero et al., 2020)) promoted by private companies and Mexican organizations such as the Mexican Association of Solar Energy and the Mexican Association for Wind Energy. Which claimed that the decree would violate environmental rights, destroy the value of power plants in operation, and reduce the investors’ confidence in Mexico.

Distributed generation power plants can benefit from CELs. However, only one largescale private company could credit certificates for its electricity production. The different interviewees agree that the procedure for claiming clean energy production at the distributed generation level is not clear. When contacting the Regulatory Energy Commission, the entity in charge of the 7. Business model analysis: 70 The REScoop business model implementation of the CEL system, in addition to the unclear regulation, it was possible to identify additional entry barriers that could limit exempt generators from crediting CELs. These barriers are costprohibitive for small projects since clean energy generation power plants must undergo thirdparty audits and install special metering equipment.

Rollback of the Regulation on Collective Distributed Generation In November 2019, CRE signed the Agreement No. A/034/2019, for which it approves the con tract model between the basic supplier (e.g., CFE SSB) and the representative of a distributed generation power plant and the methodology for calculating the economic compensation appli cable to collective distributed generation. This Agreement intended to replace the Resolution RES/249/2012, from 2012, that provided communityowned systems the possibility to enter into a net metering scheme with the basic supply company. However, it suffered from an unclear methodology and restrictive limits on capacity (CRE, 2012, 2019).

This muchexpected regulation, intended to reflect the changes in the electricity sector formal ized through the LIE (e.g., the right granted to exempt generators to use the general distribution network to sell the energy produced). The Agreement, devised as the missing link for conceiving communitysolar projects, created much expectation within the national electricity sector. This hype resulted in several studies, such as the Jiménez (2020) technoeconomic analysis to im plement new business under the collective generation scheme. However, in August 2020, CRE announced the regulation’s cancellation to be further reviewed and aligned to the new policy (CRE, 2020b).

Subsidy to the electricity Both the residential and agriculture sectors are highly subsidized in Mexico. For the 2020 fis cal year, the government approved a budget of 70,000 million MXN for electricity subsidy, 31% higher than the budget approved for 2019 (around 52,000 million MXN)(Solís, 2019). However, Husar and Kitt (2016) argue that electricity subsidies remain highly regressive and in favor of rich households and farmers that consume most of the electricity in their corresponding sectors; while the three lowest income deciles received around 16% of the subsidy, the top three income deciles received around 40% of the subsidy.

On the same line, as analyzed by Castañeda et al. (2019), the subsidies to the residential and agriculture sectors are partly compensated by the “cross subsidy scheme” where sectors that do not receive a subsidy like the DAC, commercial, services, and industry partially cover the subsidy budget by paying tariff above the production cost. This subsidy scheme has, as a consequence, that subsidized residential users (paying only around 40% of the real production cost) consume more than necessary. For the sectors without subsidy, the high prices make them less competitive. This scheme also affects renewable energy technologies as the subsidy makes it economically unfeasible for the residential sector’s lower consumption bands to install solar panels.

A report by Sánchez et al. (2018) presented alternative programs that could be more effi cient in allocating the subsidy to reach the most vulnerable population of the country; the first one consisting of the modification of the residential tariff, so the number of users in the high consumption band moved from around 2% to 20%; two other options consider a reform to the subsidy, so the resources are reinvested in i) financial support for lowincome households to install solar systems and transform users in prosumers, and ii) financial support to incorporate energy efficiency measures in the lowincome households (from the substitution of home appli ances to improvement of isolation standards). 7.1. Barriers and drivers for the development of REScoops in Mexico 71

Regulation for distributed generation Under the Mexican regulation, power plants with capacities under 0.5 MW are considered as distributed generation and do not require an operation permit from the CRE. This limit is consid ered relatively low.

On the other hand, the interviewees involved in the development of projects at the distributed generation level report that the current regulation on distributed generation is often not met since CFE SSB has no uniform procedures for the interconnection requests throughout the country and often is unable to meet the time frames indicated in the regulation; therefore affecting the project development and its economic feasibility.

7.1.2. Financial barriers Access to funding is recognized as one of the main barriers to developing small scale renewable projects and SMEs in general. According to PérezElizundia et al. (2020), despite the importance of the SMEs in Mexico (employing 69.3% of the working class and representing 43.3% of the GDP), their growth is limited due to the absence of credit, since the support is equivalent to just 0.03% of the GDP (in contrast to Brazil with 0.5% of the GPD).

European REScoops have relied on cooperative banks as strategic partners for financing. However, despite the large presence of Cooperative banks in Mexico, Mexican regulation limits legal persons (i.e., firms) to access funding from cooperative banks. Since cooperatives are considered legal persons, they are restricted from getting loans (SEGOB, 2009; Gutierrez, 2019).

7.1.3. Cultural barriers The expert interviewees identify education and information access as the main cultural challenge for the development of REScoops; they agree that most of the population is not aware that they can produce their own electricity or the requirements to do so. This is in line with the report of Linvill and Brutkoski (2017) that identifies customer education and acceptance as an important barrier for the development of distributed generation. The study argues that customers are not aware of the potential benefits (e.g., cost, environmental impact, energy sovereignty), and therefore, is disregarded an option to meet their electricity needs.

7.1.4. Drivers Cooperative movement According to Bauwens and DevineWright (2018), factors such as regulation, supporting mech anisms for renewable energy and spatial planning, the culture of local energy activism, and the attitudes toward the cooperative model play critical roles in the potential development of REScoops. There is a particular emphasis on the latter factor since those countries famil iar with the cooperative model are more aware of the benefits, thus facilitating their develop ment(Bauwens et al., 2016).

Mexico has a long story of cooperative activism, as introduced in section 5.3.3. This move ment is incredibly strong in rural areas where the concepts of communal ownership, social jus tice, and participatory decisionmaking are deeply rooted in the culture of the communities (King et al., 2013). Furthermore, cooperatives play an important role in the economic development of communities, and therefore have a strong influence on the cooperative members; for instance, an example provided by one of the interviewees is the case of the Caja Solidaria Chiquiliztli, a rural cooperative bank in Chiquiliztlan in the state of Jalisco, Mexico, where most of the families in the community are members of the cooperative. The cooperative Chiquiliztli is now develop 7. Business model analysis: 72 The REScoop business model ing a project to support its members installing solar systems in their houses and implementing energysaving measures (C. Osorio, personal communication, September 1st, 2020).

Maturing RES market The energy reform opened the doors to private investment for the development of new RES capacity. This expansion in the capacity was further promoted with the implementation of the longterm electricity auctions (Netherlands Enterprise Agency, 2020), which helped increase RES’s accumulated share in the energy matrix. While the energy reform has mainly benefited the development of largescale centralized projects, project developers at a distributed generation scale have benefited from creating a competitive market, which allowed them to access skilled labor and components at continuously dropping prices.

Emergence of pilot projects Niches were introduced in section 2.1 as protected spaces for experimentation where radical innovations can develop (Geels, 2002). Experimentation occurs in the form of pilot projects and demonstration plants, that according to Raven et al. (2008), do not emerge from “vacuum”, but are build upon experiences of similar projects. These experiences constitute a reservoir of rules (e.g., organizational models, best practices publications, and standards) in a context independent structure. While these rules guide the development of local projects in terms of design specifications, partnerships, and market choices, they leave room for local variations, as the local actors reinterpret them to respond to the local situation and the interests and values of the communities (Sengers et al., 2019; Raven et al., 2008).

The Mexican National Institute of Social Economy (INAES) is the branch of the Mexican gov ernment that promotes the social economy, which includes cooperative societies. Cooperative societies are recognized as vehicles to promote democracy, change behaviors, and improve the social tissue. INAES is currently developing pilot projects to promote renewable energy technologies as an alternative for communities to meet their energy needs while enabling them to control and decide how to benefit from their electricity production. The first pilots, 6 in 2020 2021, are to be developed in different parts of the country in collaboration with cooperative banks (Sociedades Cooperativas de Ahorro y Préstamo, SOCAPs), which are recognized as key part ners to finance and codevelop these projects. Furthermore, several NGOs and universities are joining the efforts of developing thermal energy and energy efficiency projects, contemplated as focal points for development (L. Lavariega, personal communication, August 13, 2020). These projects are intended to test different business models and, at a later stage, INAES plans to enable platforms to share knowledge and success stories (C. Osorio, personal communication, September 1st, 2020).

The plan and implementation of the project led by INAES are to be supported by the Gesellschaft für Internationale Zusammenarbeit (GIZ) and the German Cooperative and Raiffeisen Con federation (DGRV), two international organizations that promote the energy transition and the REScoop business model as a vehicle to overcome problems such as uneven development, in equality, and energy poverty(DGRV, 2020)(L. Lavariega, personal communication, August 13, 2020). 7.1. Barriers and drivers for the development of REScoops in Mexico 73

7.1.5. Effects of barriers and drivers for the development of REScoops in Mexico Section 5.3.3 introduced the regulation that enables the creation of REScoops in Mexico and the examples of ongoing efforts by existing cooperatives to promote the use of RES between their members. Central to this research is to identify the barriers and drivers for developing REScoops in Mexico. The barriers and drivers identified in this chapter directly affect the design of REScoop business models and their potential to accelerate the Mexican energy transition. This section analyses the effects on energy production and supply activities and the internal organization of the REScoop:

Effects on energy production activities Section 4.2.5 differentiated the business models of European REScoops based on the main activities carried out by them. These activities are energy production, energy supply, and en ergy services. The most common activity among European REScoops is energy production and sale. Policy instruments have favored this activity (e.g., feedin tariff or quota obligations) that supplement the electricity sales and reduce the risk, making certain RES projects economically feasible. These policy instruments had positive results in stimulating the development of RES projects. Most notable in countries like Germany, where, by 2016, citizens owned 50% of the country’s installed RES capacity (Lowder et al., 2017). Proving the potential of citizens to drive the transition to lowcarbon energy production.

In Mexico, following the energy reform of 2013, the private sector can freely participate in en ergy production and sell its energy in the wholesale market or through PPAs with qualified users (users with consumption over 1MW) (CRE, 2020a); however, the only policy instrument that might favor this business model is the quota obligations through the commercialization of clean energy certificates. Since new generation power plants are subject to the wholesale market’s volatility, they are exposed to high risk, directly affecting the cost of capital and, consequently, the economic feasibility. With the creation of the wholesale market, the Mexican government instrumented the medium and longterm auctions. While the auctions aim to secure longterm contracts for the basic service suppliers to procure electricity and CELs at the lowest price and re duce their exposition to the wholesale market’s variability, the energy auctions have also favored the addition of new capacity from RES technologies. The longterm auctions could represent an opportunity for new actors to develop largescale projects and reduce capital cost by securing revenue streams; however, the auctions’ current design presents many barriers for the participa tion of small actors, such as REScoops. These barriers include the requirement of participation fees or financial guarantees and technical experience that small actors might struggle to provide. A change in the design of the longterm auctions would be required to enable the participation of REScoops; section 8.3 presents several recommendations raised by REN21 (2017) to allow for this participation.

While the private sector’s participation in electricity generation continues to favor largescale and centralized projects by incumbent actors, the regulation for distributed generation could present favorable conditions for the development of REScoops. Distributed generation in the Mexican regulation is limited to below 0.5 MW, which is rather low compared to European coun tries where the limits reach up to tens of MW (Tecnalia, 2007). The limit on the regulation has a direct effect on the size, cost, and technology selection. European REScoops play a key role in promoting and increasing the acceptance of onshore wind technology (Warbroek and Hoppe, 2017), making it their second most used technology (Yildiz, 2014); however, the limit imposed for distributed generation in Mexico constraints REScoops from developing wind projects since the average size of a commercial wind turbine (5MW) exceeds the limit tenfold (Gallegos and Rodríguez, 2015). 7. Business model analysis: 74 The REScoop business model

The Mexican regulation recognizes generation plants at the distributed generation level as exempt generators. Exempt generators do not require a generation permit from the Mexican energy regulatory entity, which favors the development of projects. It reduces the permitting cost and time, compared to large scale projects. Exempt generators have two options to sell the energy produced, either directly to the basic service provider or to the wholesale market represented by a qualified service provider, provided that all the energy produced is fed into the grid (CRE, 2020a). Given the risk associated with the wholesale market’s participation and the lack of support mechanisms, business models for electricity production and sale are rarely used in Mexico. Most of the solutions are restricted to behind the meter (i.e., equipment connected behind the utility meter of commercial, industrial or residential customers, primarily aiming at electricity bill savings (IRENA, 2019)), with the application of the net metering scheme.

The net metering scheme present in Mexico allows for designing different business model solutions behind the meter. With the net metering, the electricity users can use the grid as a storage for their electricity production; the basic service provider compensates for excess energy at the end of the billing period. The implementation of net metering facilitated the development of solar PV technology under distributed generation. More than 99% of the contracts celebrated between 2017 and 2019 were subscribed under the net metering scheme (CRE, 2020). Busi ness models for selfconsumption for one or more loads (e.g., different apartments in a building sharing an interconnection point) are possible. However, restricted to the Mexican regulation’s capacity limits, including the requirement that the power plant shall share the same interconnec tion point as the loads. Selfconsumption business models can be the most attractive to users without subsidies, such as SMEs, subject to high and variable tariffs. The production of energy in a location different from the load, as previously implemented by the cooperative La Cruz Azul (see section 5.3.3), is no longer possible under the electric Industry Law of 2014.

Effects on energy supply activities The electricity supply is another activity that is open for private participation following the elec tricity sector’s liberation in 2013. Private firms have the option to obtain a supply permit from the energy regulation entity as a basic service supplier or as a qualified service supplier (see section 5.2.4). While the number of qualified service suppliers operating in the wholesale mar ket continues to grow, the incumbent company’s subsidiary and previous monopoly, CFE SSB, continues to be the sole participant as a basic service supplier. Even when three firms obtained basic service supply permits from CRE in August 2018 (one of them formed by the coopera tive Luz y Fuerza del Centro (CRE, 2018)), these firms are still unable to start operations since the current regulation limits their options to procure electricity for their commercialization. Since basic service suppliers rely on the longterm auctions, the incumbent government’s decision to cancel the auction for 2018 and the subsequent years has limited new service suppliers’ ability to secure longterm contracts for energy provision, therefore, to start operations. Given that the previous three longterm auctions have favored RES’s development in Mexico, new basic service suppliers’ participation would allow electricity users to consume electricity from suppliers that guarantee that most electricity is produced with RES. Considering the differ ent barriers to carrying out electricity supply, these business models will not be examined in this chapter.

Production/consumption REScoop business models such as the ones implemented by Som Energia (Spain) and Ecopower (Belgium) (RESCoop 202020, 2013a) are not possible in Mex ico since the regulation does not allow for the same firm to participate in electricity generation and supply at the same time. However, it is possible to develop business models to provide en ergy to clients behind the meter. Companies like Banverde are already offering these services in Mexico. Banverde’s products are directed at commercial users subject to high and variable 7.1. Barriers and drivers for the development of REScoops in Mexico 75 electricity tariffs. Banverde offers an alternative for electricity users who want to install solar systems to offset their electricity consumption but lack the economic resources to invest in the system or are unwilling or unable to get a loan. Under a PPA, Banverde installs and operates a solar system in the customer’s property and sells the energy produced at a tariff lower than the one offered by the basic service supplier. At the end of the contract, the customer remains the owner of the solar system. (A. Barrera, personal communication, July 29, 2020). For the project developer, this secures a stable revenue stream, which reduces the capital cost. A similar ap proach has been implemented by the REScoop Coöperatie LochemEnergie U.A. (Netherlands) (RESCoop 202020, 2015), which proves that REScoops can also implement these business models in Mexico.

Effects on the organization of the REScoop The above sections presented different drivers and barriers that shall be considered for project development (e.g., location, size, technology, revenue streams) and the limitations to reproduce European REScoop business models in Mexico. While the above analysis can prove useful to any firm, this section focuses on the one characteristic that sets REScoops and forprofit firms apart: its purpose. The cooperative movement is widely practiced, recognized, and regulated in Mexico. The Mexican regulation defined the cooperatives as a form of a social organization composed of people based on shared interests and the principles of solidarity, selfeffort, and mutual help. The same that are formed to satisfy individual and collective needs, through the realization of economic activities of production, distribution, and consumption of goods and ser vices, and have the freedom to develop any lawful economic activity (SEGOB, 2009), which is in line with the seven cooperative principles outlined by the International Cooperative Alliance (RESCOOP.EU, 2020c) and followed by European REScoops. However, Mexican regulation might introduce additional restrictions and limitations to replicate European REScoop business models in Mexico. These limitations directly affect the composition (members) and, conse quently, access to funding.

Some European cooperatives were initiated with the aim to challenge the status quo and introduce an alternative to the incumbent energy companies; however, more and more coop eratives are finding energy companies and local governments as key partners to develop RES projects (de Bakker et al., 2020); these entities, with their experience and economic resources, can establish partnerships that benefit both parties. The Mexican regulation for cooperatives has stringent rules on the cooperatives’ members, which is strictly reserved for citizens. Fur thermore, cooperative banks (that can be considered a common ally for the development of European REScoops) are not allowed to provide loans to firms; since cooperatives are rec ognized as firms, they cannot access funding from cooperative banks in Mexico. INAES, the government entity in charge of promoting Mexico’s cooperative movement, has recognized this bottleneck (Gutierrez, 2019). INAES is currently in the development phase of pilot projects to start renewable energy cooperatives in collaboration with cooperative banks and international organizations such as GIZ and DGRV. This topdown approach has the intention to address two important barriers: customer education and acceptance. In particular, customer education is important since the expert interviewees’ common conclusion is that RES technologies are not advancing as quickly as possible because the general public is not aware of their benefits or the possibility of producing their own electricity.

An additional factor that plays a role in the motivation for joining a REScoop is the citizen’s economic power. When asked about Mexican electricity users’ motivation to switch to solar energy, one of the interviewees mentioned that it is 100% an economic incentive (A. Barrera, personal communication, July 29, 2020). This means that most users would only look for other options if it represents an economic advantage. For most electricity users in the residential sec 7. Business model analysis: 76 The REScoop business model tor, the switch to solar energy is often not economically feasible. Even with a very competitive solar PV market, it is complicated to beat electricity prices subject to a subsidy. Since the sub sidies to the residential and agriculture sectors are partly compensated by the “cross subsidy scheme” where sectors that do not receive a subsidy like the DAC, commercial, services, and industry partially cover the subsidy budget by paying tariff above the production cost; the latter sectors would have an economic incentive to join a cooperative to access electricity at a lower tariff. Section 7.2.6 further elaborates on target customers or members for a REScoop in Mexico.

Summary of the effects of identified barriers and drivers on the different elements of the business model framework The above analysis can be summarized based on the business model framework; these effects shall be considered for business models’ design.

1. Value proposition. The value proposition reflects the competitive advantage, and relies on the different blocks presented below. 2. Customer segments. The main constrain of the Mexican regulation on cooperatives is the restriction of membership, which directly affects the possibility of firms, such as cooperative banks, to become members of the cooperatives; this has a direct effect on the access to resources. 3. Customer relationships. The regulation forces systems at the distributed generation level to have an interconnection contract with the incumbent electricity retail company, which might negatively impact the project development time, and cost as the incumbent com pany often fails to attend interconnection requests within the timeframe established by the regulation. 4. Distribution channels. There are no identified barriers to replicate common practices by European REScoops. However, strategies shall consider limitations to reach populations in rural settings without access to modern means of communication. 5. Key activities. The main limitation to reproducing European REScoop business models in Mexico is reflected in the activities, which greatly influences the whole business model design. Due to high entry barriers and associated risks, participation at large or utility scale is not considered in this report. The solutions shall be constrained to distributed generation (projects with a capacity lower than 0.5 MW), which affects the technology selection (favoring solar PV) and restricts most potential business models to solutions behind the meter. 6. Key resources. The constraints limiting membership on the Mexican cooperatives directly affect the access to economic resources required for project development. Furthermore, there is not enough guidance and access to information (supplied by REScoop.EU, among others, for the case of Europe). While not limiting, these factors shall be attended to facil itate and promote the creation and professionalization of REScoops in Mexico. 7. Key partnerships. While partnerships are not constrained, the access to funding from actors, such as cooperative banks, is not possible, therefore limiting their possibility to access the necessary funding. 8. Cost structure.The cost structure is directly affected by the key activities, resources, and customer channels. Mexico has a very competitive market for installing solar PV technolo gies, which plays in favor of selecting this technology for project development. 9. Revenue streams. The lack of incentives and the existence of the subsidy to the residential and agricultural electricity users poses a difficult scenario to compete with the incumbent retailer; however, REScoops can still compete in the electricity supply for other electricity users, such as the SMEs, that are subject to high and variable electricity tariffs. 7.2. Business model design for Mexican renewable energy cooperatives 77

7.2. Business model design for Mexican renewable energy cooperatives This section results from indepth desk research to answer the fifth subquestion:

What is the potential architecture of the REScoop business model under the current Mexican regulations?

Four business models are proposed (see figure 7.1) considering both the specific socio technical system of the Mexican electricity sector analyzed in chapter 5 and the review of com mon practices developed by European REScoops as introduced in section 4. The resulting business model design was validated by conducting interviews with experts in Mexico and one of the founders of the REScoop Som Energia (Spain). The latter shared his experience in intro ducing the REScoop business model in Spain. About these efforts, the interviewee mentioned:

“When we started Som Energia, we looked at other models, mostly in Northern Europe. We tried to see what worked there, what was successful and what not, and then adapted to our local circumstances”

To introduce existing business models in new markets, it is essential to acknowledge the dif ferences between the countries, as these differences can affect the potential roles that market actors can play. These differences are particularly notable between developed and developing countries, where the challenges and opportunities to implant the same business model are un likely to be the same (Elmustapha and Hoppe, 2020). In the same line, the analysis of REN21 (2017) concludes that the transposition of community energy business models from other coun tries could have unwanted consequences if they fail to consider the social, cultural, and eco nomic differences. To be effective, these new business models shall promote the participation of lowincome communities.

The barriers and drivers identified in section 7.1 directly affect the business model design. Policy and regulation barriers, in particular, affect the potential role of the REScoop business model to accelerate the energy transition. While most European REscoops have benefited from the support mechanisms (e.g., feedin tariff or quota obligations) established by national gov ernments, the design of the support mechanisms established by the Mexican government con tinues to favor the development of largescale centralized projects from incumbent actors. For instance, the energy auctions organized by the Mexican government played a key role in se curing an increase of RES in the national energy mix at a low cost and could represent a great opportunity for REScoops to reduce the risk and participate in the energy production and supply; however, the design of the auctions excludes their participation and limits REScoops to develop projects at a distributed generation level. In Mexico, this is translated to projects with installed capacity below 0.5 MW. Additional barriers that limit the size and, therefore, the potential effect of REScoop projects are the limited access to funding and technical and administrative support from the local governments. Section 7.1.5 further analyzed the barriers and drivers and their impact on business models’ design.

The first two business models presented in figure 7.1 are based on the sale of electricity produced by the REScoop, whereas the last two are based on meeting the energy needs of the REScoop and its members. Since all the REScoop business models presented in this section rely on the exchange of energy with the electricity grid, the different arrows indicate the flows of energy and the selected compensation methodologies. The economic flows are calculated at the end of the billing period. This chapter provides an overview of each business model, followed by the nine building blocks decomposition describing and supporting the specific elements. 7. Business model analysis: 78 The REScoop business model

Figure 7.1. Potential business models for Mexican REScoops, own illustration with data retrieved from the different sources introduced in this chapter 7.2. Business model design for Mexican renewable energy cooperatives 79

7.2.1. Total sale The total sale business model (refer to figure 7.2) resembles the business model commonly implemented by European REScoops, as introduced in chapter 4.2. This business model is characterized by the production of electricity (most commonly with solar PV technology), the same that is fed into the grid; however, due to several entry barriers, the size of the projects is limited to 0.5 MW. The REScoop, formed by members of communities of place and communities of interest, invest in developing the solar PV project and receive economic compensation for the electricity fed into the grid. The revenue streams are limited to the social capital from the shares of the cooperative members and the economic compensation derived from the sales of electric ity; this compensation depends on the counterpart since the REScoop has the option to sign an interconnection contract with a basic service supplier, such as CFE SSB (with a regulated compensation equal to the MLPh), or with a qualified service supplier (where more favorable conditions can be negotiated under a PPA).

The cost for project development is highly dependent on its size and technology, and available resources (land/roof space and financial resources, for the case of solar PV). However, it is recommended for this business model to go for the maximum allowed capacity (0.5 MW) to take advantage of the economies of scale. This business model creates value for both the REScoop members and the electricity retailer as a designated customer of the REScoop. Further to social, economic (return on investment), and environmental benefits derived from the production of electricity, the REScoop members have an opportunity to take an active role in the electricity sector. The electricity retailer captures value from the access to locally generated electricity that can be distributed to its users. The retailer saves on transmission cost and, acting as the representative of the REScoop before the wholesale market, benefits from the commercialization of CELs.

Figure 7.2. Graphical representation for the total sale business model based on the business model canvas, data retrieved from the different sources introduced in this chapter 7. Business model analysis: 80 The REScoop business model

7.2.2. Leasing/PPA Similar to the total sale business model, the leasing/PPA business model is based on electricity production and sale; however, it differentiates from the former as the electricity is supplied to a customer of the REScoop and not directly to the grid. Potential customers for this business model include SMEs and users with high electricity tariffs. For this model, a solar PV system is installed in the same location as the customer’s load, which saves on the cost of rent for the roof/land as the customer provides it. The size and technology used are subject to the available resources and the customer’s energy demand. The REScoop remains the owner of the equipment and is typically responsible for the maintenance and opera tion of the solar PV system for the contract’s duration. A common practice is to transfer the own ership to the customer at the end of the contract; the contract is designed so that the REScoop recovers the investment cost plus an economic benefit. In addition to the meter installed by the electricity retailer company under a net metering scheme (private contract between the customer and the electricity retailer), the REScoop installs a metering device that can be used for billing purposes.

In contrast to the total sale, this business model offers an advantage to the REScoop, since the REScoop and the customer can agree on a price for the solar PV system’s rent or a tariff per kWh. Electricity production can be predicted with high certainty; thus, it is possible to model the revenues and reduce the cost of capital (if applicable)

The competitive advantage for the customers of the REScoop is the possibility to acquire electricity at a fixed tariff that is typically lower than the one offered by the electricity retailer without the high upfront investment cost that often holds SMEs from installing RES generation systems. Further benefits include the green image and the possibility to own the system at the end of the contract period.

Figure 7.3. Graphical representation for the leasing/PPA business model based on the business model canvas, data retrieved from the different sources introduced in this chapter 7.2. Business model design for Mexican renewable energy cooperatives 81

7.2.3. Selfconsumption It can be argued that the selfconsumption business model depicted in figure 7.5, does not represent an innovative business model since cooperatives have already applied this practice in Mexico (refer to section 5.3.3). Cooperatives created under this business model might not adopt the name of energy cooperatives since energy production is not the main activity; however, ex isting cooperatives can use the information provided in this section to modify their business models and benefit from the production of renewable energy. As existing cooperatives already have some of the necessary resources (a membership base, financial resources, and human resources), RES’s adoption shall be easier.

Under the selfconsumption, the cooperative benefits from the net metering scheme and celebrates an interconnection contract with the basic service supplier (CFE SSB). The system capacity shall be designed considering the energy demand. It is possible to install a system with a higher capacity and sell excess energy to the basic service supplier; however, it is necessary to calculate the benefits based on the cooperative’s location since the compensation is subject to the MLPh. Solar PV is expected to be the preferred technology; however, for cooperatives that produce organic waste, it could be possible to use biomass technologies.

Given the influence that the cooperative has over its members, it would be meaningful to develop campaigns to promote energysaving practices and environmental education. Given the presence and importance of existing cooperatives in Mexico, implementing the measures presented in this chapter can represent a big step towards achieving the goals set forth at the national level and contribute to the cooperative’s efforts to develop the local economy.

Figure 7.4. Graphical representation for the selfconsumption business model based on the business model canvas, data retrieved from the different sources introduced in this chapter 7. Business model analysis: 82 The REScoop business model

7.2.4. Collective generation Out of the four business models introduced in this chapter, the collective generation business model might bring the most benefits. This business model relies on a regulation that has not been exploited due to technical limitations and lack of knowledge between developers; however, this regulation is currently under revision by the energy regulatory commission, and it is worth to analyze how this business model can help on advancing the adoption of RES while enabling the members of the cooperative to benefit from the electricity production directly.

The collective generation scheme is based on the same concept as net metering; however, the energy produced by a single solar PV system can be divided into different loads sharing the same interconnection point. This definition allows for residential buildings (where apartments share one suitable roof) or clusters of SMEs (e.g., a local market) to invest in the installation of the solar PV system and benefit from clean energy production at a lower tariff than the one offered by the incumbent electricity retail company.

The main costs associated with this business model are subject to project development and capacity. It might be possible to develop a project with a capacity greater than the accumulated demand and sell excess energy to the basic service supplier or nonmember customers sharing the same interconnection point. The initial attempt to change the regulation included net billing as an alternative to net metering; this would allow the REScoop to assign a portion of the electricity produced to an electricity user in a location different from generation infrastructure; however, as the economic compensation would be based on the PMLs, this scheme might not be convenient from the economic point of view. Methodologies such as virtual net metering (further explained in section 8.3 might provide better conditions.

Figure 7.5. Graphical representation for the collective generation business model, based on the business model can vas; data retrieved from the different sources introduced in this chapter 7.2. Business model design for Mexican renewable energy cooperatives 83

7.2.5. Value proposition The value proposition reflects the firm’s competitive advantage, how it compares to the com petitors, and the value offered to the customers (Richardson, 2005). The potential architecture for the four REScoop business models introduced in section 7.2 identify three actors that could benefit from implementing the REScoop business model in Mexico, the same as described be low:

Electricity retailer CFE SSB is currently the sole participant of the market, serving users in the band defined as ba sic service. As such, CFE SSB becomes the default counterpart for the energy that the REScoop system exchanges with the grid. Under the total sale of the electricity business model, the REScoop establishes a direct relationship with the basic service supplier. The latter benefits from the total of the electricity produced by the REScoops generation facilities.

Customers For REScoop customers, the leasing or PPA business model represents an economic advan tage. These customers can access a cheaper electricity tariff with a low or no upfront investment for the RES generation system. Customers also benefit from a risk reduction since the electricity tariff is agreed in advance with the REScoop and is no longer subject to the wholesale market’s volatility.

REScoop members REScoop members’ expectations go beyond the economic benefit; for instance, interviewee three mentioned: “You are not going to set a project that is not acceptable to your members, for instance, you are not going to put a project on carbon, cause the benefits are only financial, financial benefits are not enough, you have to have a community goal, community benefits”

The potential benefits offered by the REScoop business model might be perceived differently by communities of interest and communities of place. Further to the environmental, social, and economic benefits such as job creation and the economic participation of the communities in the energy sector (P. Herrera, personal communication, August 12, 2020), two concepts that prevailed from the expert interviews are energy sovereignty and energy justice.

Similar to the claims of Akasiadis et al. (2017) and Hoicka and MacArthur (2018), the REScoop is identified by the expert interviewees as a vehicle to advance principles as energy democracy and energy sovereignty. It allows communities to take an active role in meeting their energy needs with the production and consumption of green energy, which helps overcome problems like uneven development, inequality, and energy poverty. Furthermore, the present efforts to implement the REScoop business model in Mexico are rooted in the concept of energy justice. Since different communities (especially indigenous communities) are the most affected by the largescale development of RES. These largescale developments are mainly carried out by multinational companies that fail to include the local communities in the decision making and the benefits.

7.2.6. Customer segments In the three potential business models for Mexican REScoops introduced in section 7.2, it is possible to identify three actors that can benefit from the electricity produced by the REScoop. These are the electricity retailer under the total sale of electricity, a direct customer under the leasing/PPA business model, and the members of the REScoop under the selfconsumption business model, the same that are explained below: 7. Business model analysis: 84 The REScoop business model

Electricity retailer The Mexican regulation allows exempt generators (generation capacity under 0.5 MW) to sell its energy products in the wholesale market. They are required to be represented by an electricity retailer (either basic or qualified service supply). Therefore, in the total sale business model, the electricity retailer becomes a customer of the electricity produced by the REScoop.

For the business models that use a net metering scheme, the electricity retailer acquires a more active role. It is responsible for the registry of the energy flows between the REScoops power plant and the grid. When unbalances occur, the retailer calculates the required positive or negative economic compensations based on the applicable tariff.

Direct customer According to the last economic census (INEGI, 2020), 94.9% of the Mexican companies are classified as microenterprises (010 employees), 4.9% as small and medium (11250 employ ees), and only 0.2% as big enterprises (more than 250 employees). Micro, small and medium enterprises (SMEs) play a significant role in the Mexican economy, employing 69.3% of the working class and represent 43.3% of the Gross Domestic Product (GDP). However, despite their importance in the Mexican economy, most of these enterprises are subject to the commer cial electricity tariff, the second most expensive electricity tariff (3.30 MXN/kWh, in 2018), just behind the (public) services sector that pays an average of 3.499 MXN/kWh (SENER, 2020b).

For most SMEs, electricity is one of the major cost for their operation, thus high variable electricity tariffs have inherent effects on their survival and growth (Wang, 2016), forcing them to look for alternatives for their electricity supply. In Mexico, the cost of installing a RES gener ation system is primarily an upfront capital cost. When selffinancing is a barrier for most micro, small and medium enterprises, and the market’s financing options are limited, many technical and economically viable projects are not realized.

The leasing or PPA business model could represent an alternative to alleviate the customer’s initial capital cost barrier. In this business model, the REScoop installs a solar system at the customer’s location with little or no upfront investment by the customer; the customer then pays a lower monthly tariff than the one offered by the incumbent electricity company.

REScoop members Like European REScoops, Mexican REScoops should target members from communities of in terest concerned about the energy transition and members from communities of place concerned about the local community and the role that energy plays in the local development. Regardless of the specific motivation to join the cooperative, the cooperative value of open and voluntary membership allows for structures that involve different actors that contribute to the social capital with their resources, skills, and experience.

While the national cooperative movement promotes inclusion and diversity, the Mexican reg ulation limits foreign nationals and enterprises’ participation (SEGOB, 2009). Foreign nationals can join Mexican REScoops; however, they cannot take managerial roles, and the law sets a limit for their economic contribution. In turn, enterprises are not allowed to be shareholders of the cooperatives. However, since the great majority (94.9%) of the SMEs are considered micro enterprises, mainly composed of individuals and their families, they can participate as individuals and benefit from the cooperative organization for their economic development.

The potential benefits of the cooperative members depend on the business model that is implemented. For REScoops that produce and sell electricity to the retail company or a third 7.2. Business model design for Mexican renewable energy cooperatives 85 company under the lease/PPA business model, REScoop members can expect a return on their investment. However, it is also possible for REScoop members to develop business models for selfconsumption; instead of economic compensation, the REScoop members benefit from the electricity produced by their generation infrastructure.

The selfsupply business model is particularly interesting for electricity customers on the tariff segments with no access to electricity subsidies like the SMEs introduced above. From the expert interviews, it is possible to identify different cases that can benefit from this business model as presented below: • Existing cooperatives. Cooperatives with production facilities and offices are subject to high and variable electricity tariffs. These cooperatives can invest in RES systems to meet their electricity needs at favorable rates.

• Communities with common social areas. In Mexico, it is common to find communities of place that share social areas and services (e.g., parks, community swimming pool, street lighting) where the electricity cost to run such services is divided between the community members. These communities can implement the REScoop model to organize and invest in RES systems to meet their common electricity needs.

• Residential and commercial clusters. In 2012, the Regulatory Energy Commission pub lished the Resolution RES/249/2012, the same that was developed to allow loads with a common interconnection point to the distribution grid (e.g., residential buildings) to use the netmetering scheme to divide the output of a collective RES generation system between several users. While this regulation presented several restrictions as further explained in section 7.1.1, this business model could represent an opportunity for households or SMEs sharing a common interconnection point to meet their electricity needs at a lower cost.

7.2.7. Customer relationships The way a REScoop establishes relationships with its customers highly depends on the imple mented business model. However, the regulation requires an interconnection agreement with the basic service supply company for all gridtied systems. The agreement specifies the parties’ rights and obligations, the billing conditions and periods, channels, and the agreement’s sus pension and cancellation conditions. Depending on the contracted service, the basic service supplier will install a metering device to register the energy flows to and from the grid. This me tering device can be unidirectional or bidirectional and is charged to the electricity user (CFE, 2013).

For the total sale of the electricity business model, the REScoop takes a relatively passive role since it is the basic service supplier that calculates the payment that corresponds to the energy delivered by the REScoop to the grid during the billing period. The leasing/PPA and the selfconsumption business models work under a netmetering scheme. The basic service supplier registers the electricity exchange with the grid throughout the billing period. In case of a positive balance (i.e., the prosumer produced more energy than it consumed), the basic service supplier must pay this excess energy at the corresponding average local marginal price. For a negative balance (i.e., when the prosumer consumption is greater than its energy production), the basic service supplier will charge that consumption based on the applicable tariff). For the PPA business model, the REScoop takes a similar role as the basic service supplier. It is required to install an additional metering device to register the electricity produced and delivered to the customer. The meter readings will be used to issue the corresponding bill at the end of the period and based on the agreed tariff. 7. Business model analysis: 86 The REScoop business model

7.2.8. Customer channels The customer channels are the means to communicate and engage with the cooperative mem bers, and for some business models, the customers. To set the right channels, it is crucial to understand the dynamics of the served communities. In urban settings, REScoops might require to install an office, an email, and a website, complemented by social media (e.g., Facebook, Twitter, Instagram). For the energy cooperative Onergia, webinars contributed to reaching new customers.

Rural settings often lack the required infrastructure to access digital platforms; thus, people know about the product or service from other people’s recommendations. However, rural com munities are used to the cooperative model of organization; thus, existing cooperatives, or ejidos (i.e., communitybased land tenure (Barnes, 2009)) that already have a network in place, could represent strategic partners to enter new markets.

All three possible business models introduced in this section use the existing distribution grid infrastructure; however, all cases require the endusers or producers (in the case of total sale) to install bidirectional meters to allow for the electricity exchange with the distribution grid when the energy production does not meet the demand.

7.2.9. Key activities As reviewed in section 4.2.5, REScoops can be categorized by the activities they carry out to generate value for their members and customers. These categories include energy production, energy consumption or supply, and energy services. From the analysis of the Mexican electricity regime’s rules and regulations, it would be possible for REScoops to develop all three activities. However, the expert interviews revealed several entry barriers for the development of activi ties such as the energy supply and largescale energy production (further discussed in section 7.1.1). Therefore this research focuses on energy production at the distributed generation level.

Section 7.2 introduced three business models for energy production. Despite some minor technical and managerial differences between the business models, they all require developing new RES generation infrastructure. REScoop members, with the aid of their partners, should go through the different project phases introduced in section 4.2.5 and 4.2.8.

The distributed generation regulation sets constraints on technology selection. Following the current trend on DG capacity in Mexico (refer to section 5.3.2), solar PV is expected to be the preferred technology for Mexican REScoops. Projects with other RES technologies such as biomass, wind, or small hydro are possible based on local resources. However, the possibility to select a business model different from the total sale of electricity would depend on their ability to develop the projects in the same location as the load. Furthermore, REScoops can engage in different energy service activities to provide further benefits to their members and customers. One key activity among REScoops is the promotion of energysaving practices, for which the REScoop can employ different strategies ranging from education and behavioral change cam paigns to the use of technology such as smart meters and online applications to keep track of energy consumption.

7.2.10. Key resources Key resources refer to the assets required by the REScoop to deliver the proposed value. This section identifies the required physical, financial, and human resources required to implement the different REScoop business plans presented in section 7.2. 7.2. Business model design for Mexican renewable energy cooperatives 87

Physical resources Further to office space and related equipment required for the management and operation of the REScoop, the key physical resource for an energy production REScoop is the infrastructure for energy production. Depending on the project’s scale and the implemented business model, the REScoop might require access to land or rooftop areas, directly impacting the project develop ment and operation cost.

Financial resources The necessary funds to develop and meet the goals of the cooperative can be originated from two different sources: the cooperative members and external sources as described below: • Self financing. Further to the contribution to the social capital required by the cooperative to become a member. Cooperative members can invest in the cooperative, for which they can expect a return on investment. Return on investment is paid out as share interest, which the cooperative members decide during the general assembly.

• Crowdfunding. Crowdfunding is legal and regulated in Mexico under the Financial Tech nology Institutions Law (Fintech Law), the same that establishes rules for the operation of crowdfunding platforms and sets limits for funding individuals and organizations. For organizations, the maximum limit for financing infrastructure projects is set at 1,670,000 UDIs (i.e., investment units, established by the bank of Mexico) and up to 6,700,000 UDIs with prior approval of the Mexican National Banking and Securities Commission (CNBV) (CNBV, 2019). Red Girasol is a Mexican crowdfunding platform raising funding to install solar systems and energy efficiency measures in houses and SMEs. The average project for Red Girasol is around 6.5 kWp; however, they have raised funding for projects up to 200 kWp. Investors in Red Girasol get a yearly return on their investment of around 16% (M. de Mucha, personal communication, July 30, 2020).

• Bank loans. The access to financing instruments from banks is identified as a barrier for the development of REScoops as further explained in section 7.1.2. However, following the electricity sector’s opening and the rapid development of distributed generation, more and more institutions are developing instruments intended to finance RES projects; exam ples of national banks include CIBanco S.A., and Grupo Financiero Ve por Más.

Financing from cooperative banks, known as “cooperativas de ahorro y prestamo”, presents diverse barriers since the current regulation for cooperatives does not allow enterprises to participate as members of the cooperative and thus limits the access to funding. Cooper ative banks could, however, finance their members to invest in other cooperatives, such as REScoops.

• Government funds. The Mexican government established different programs to support RES projects’ development at the regional and local level (SEMARNAT, 2015). These programs provide technical assistance and funding for the different stages of the projects. Supporting institutions and programs are further discussed in section 7.2.11.

Human resources Mexican cooperatives follow the same organizational principles as European REScoops. All members have one vote during the general assembly and elect the management and supervisory board for daytoday decisions. The extent to which the REScoop can work on volunteers or hire employees depends on the project’s size and the business model and technology selected. 7. Business model analysis: 88 The REScoop business model

7.2.11. Key partnerships Alliances and partnerships are required by Mexican REScoops to make the business model work. The following list reflects on partners at the local, national, and international levels that might play an important role in developing REScoops in Mexico.

Cooperative members The cooperative members are considered the most important partner for the development of REScoops. Similar to the case of European REScoops presented in section 4.2.7, members of REScoops in Mexico can take the role of owners and investors by acquiring shares; they can also become customers of the REScoop in the case of the loan/ PPA, and collective generation business models; finally, REScoop members are required to participate in the decision making, which takes place during the general assembly, and by taking part in the management of the REScoop.

Other cooperatives Existing cooperatives are considered a strategic partner for the development of new coopera tives. One example presented by one of the founders of the energy cooperative Onergia is the case of the cooperative group Tosepan that is currently providing economic resources and ed ucation to members of the community with the end goal to establish a cooperative to generate local jobs and meet the local energy needs (E. Aguilar, personal communication, August 27, 2020)

Mexican government The Mexican government at different levels plays a key role in the development of REScoops. At the national level, the Secretary of Energy (Secretaria de Energia, or SENER) and the Secretary of Environment and Natural Resources (Secretaria de Medio Ambiente y Recursos Naturales or SEMARNAT) are the institutions with authority to dictate the policy to guide the Mexican en ergy transition and establish the programs and supporting mechanisms required to achieve such efforts. In the same line, the Energy Regulatory Commission translates national policy into reg ulation that governs the electricity sector. Examples of these regulations are the regulation of distributed generation and collective distributed generation that dictate the rules for the possible participation of REScoops in the electricity sector.

There are currently no governmental programs intended for the creation and support of REScoops. However, the Mexican government created a range of institutions and programs to promote energy efficiency and savings, such as The National Commission for Efficient Use of En ergy (Comisión Nacional para el Uso Eficiente de la Energía, or CONUEE), the Revolvingloan trust Fund to Save Electricity (Fideicomiso Para el Ahorro de Energía, or FIDE), and the Green Mortgage Program (GMP). These institutions and programs could help REScoops achieve their goals (PreciadoPérez and Fotios, 2017; MartínezMontejo and SheinbaumPardo, 2016).

From the cooperative point of view, the National Institute of Social Economy (Instituto Na cional de la Economía Social, or INAES) is the government’s arm that dictates policy and pro grams to support the social sector of the economy and promotes the formation and development of social enterprises such as the cooperatives.

From the expert interviewees, it was possible to identify several examples of state and local governments’ efforts to promote cooperatives’ development. The most representative is the case of Mexico City, which established a law to promote the cooperative movement in the state, recognizing the potential impact of the cooperatives on the economic and social development of the communities. This law instrumented a series of programs aiming to promote the creation 7.2. Business model design for Mexican renewable energy cooperatives 89 and constitution of social and solidarity companies (e.g., cooperatives) through direct and indirect financial support. The programs also support existing cooperatives with specialized technical assistance and support to acquire equipment, machinery, and services focused on strengthening production and retail processes (Gobierno de la Ciudad de Mexico, 2020).

National and international organizations As a firm using the cooperative values to advance RES, REScoops can benefit from the support of national and international organizations supporting both the cooperative movement and the deployment of RES. At the national level, several organizations promote the use of RES. The most representatives are the Mexican Association of Solar Energy (ASOLMEX), the Mexican Association for the Photovoltaic Industry (AMIF), the National Mexican Association for Solar En ergy (ANES), and the Mexican Association for Wind Energy (AMDEE). These associations bring together operators, investors, suppliers, and developers of renewable energy technologies and promote the improvement of Mexico’s legal and regulatory framework. They also provide its members with capacity building, workshops, reports, and spaces for networking(AMIF, 2020; ASOLMEX, 2020; AMDEE, 2020b; ANES, 2020). The efforts are joined by international agen cies like the International Renewable Energy Agency (IRENA) that serve as a platform for inter national cooperation and a compilation of policy, technology, resource, and financial knowledge.

Through cooperation agreements between the Mexican energy ministry and energy agencies from the US, Germany, and Denmark, several foreign institutions advise the Mexican govern ment and local stakeholders on topics related to the energy transition, such as energy efficiency, capacity building, elaboration of technical studies, and road mapping. Internationally known in stitutions leading these efforts include the Danish Energy Agency, the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, and the National Renewable Energy Laboratory (NREL)(Watson et al., 2015).

On the other hand, the German Cooperative and Raiffeisen Confederation (DGRV) has a strong presence in Mexico. It has provided consultation and advisory services to communities and cooperatives’ associations to strengthen their institution and promote the creation and de velopment of cooperatives. Following the publication of its report on the potential for the creation of energy cooperatives in Brazil, Chile, and Mexico (DGRV, 2018), the DGRV, under the framework of its program titled: Participation, Energy, and Welfare within Cooperatives in Latin America (PEWLA), has joined the GIZ and INAES in the promotion of business models for the creation of REScoops in Mexico. The first stage of the project will produce a manual for creating REScoops as a tool for interested actors(DGRV, 2020).

Universities and research centers The National Council on Science and Technology (Consejo Nacional de Ciencia y Tecnologia, CONACyT), together with SENER, manages the Sectoral Fund for Energy Sustainability. This fund promotes applied scientific and technological research and adoption, innovation, and tech nological development in the fields of renewable energy sources and energy efficiency. This fund is directed to universities, research centers, and public and private institutions to advance the goals of the program (SENER, 2019b).

Private companies Private companies, especially at the local level, can play an important role in supporting the activities of the REScoop. REScoops can rely on private companies for project financing, con struction, and operation. External support is often required since the REScoop members might not have the required technical knowledge and resources to perform the required task. 7. Business model analysis: 90 The REScoop business model

7.2.12. Cost structure The cost structure refers to the costs incurred by the REScoop to create value. It is possible to identify two cost categories; the first category is related to the expenses associated with the operation of the REScoop, from the payment of salaries to the fixed cost of running an office and customer channels. The second category depends on the cost incurred for the installation and operation of the RES generation infrastructure.

The cost of the generation infrastructure highly depends on the selected technology and size. Solar PV is by far the most developed technology at the distributed generation level (99.28%), which favored the creation of a competitive market. According to the report of GIZ (2020), the cost of solar PV in Mexico ranges between 1.4 and 1 USD/KWp. Table 7.1 shows the average cost for installation and operation and maintenance costs in 2020.

Table 7.1. Average cost for installation, operation and maintenance of Solar PV in Mexico in 2020, data retrieved from (GIZ, 2020)

7.2.13. Revenue streams The main difference between the business models introduced in section 7.2 resides in the rev enue streams. The revenue streams for each business model are presented below:

Total sale In the Total sale business model, the REScoop signs an interconnection agreement with the ba sic service supplier under the total sale calculation methodology. This methodology considers that all energy is measured and delivered to the grid, and a monetary sale value is assigned. At the end of the billing period, the retailer will compensate the exempt generator based on the corresponding average local marginal price.

From the start of operations of the wholesale market, the local marginal price for the intercon nected national system has decreased; thus, increasing the risk and the payback period for the REScoop’s project. Due to the lack of support mechanisms such as the feedin tariff, business models based on total energy sales are not common in Mexico.

Leasing/PPA Business models based on leasing and power purchase agreements (PPA) use a similar infras tructure arrangement, where the REScoop installs, for instance, a solar PV system on the roof of the customer; this system is connected to the customer’s load, and the energy provided by the REScoop’s system is measured. In turn, the customer signs an interconnection agreement with the basic service supplier under the netmetering scheme. This method requires using a bidirectional meter and considers all the flows of energy delivered and consumed to and from 7.2. Business model design for Mexican renewable energy cooperatives 91 the general distribution networks and are compensated between each other in a billing period. In case of a positive balance, the customer will be compensated by the retailer based on the average local marginal price; on the contrary, the customer will be charged the corresponding regulated tariff.

Under the leasing business model, the REScoop will receive a fixed rent for using the genera tion infrastructure; this allows the REScoop to have a predictable revenue stream and reduce the associated risks. For the PPA business model, the REScoop and the customer agree on a per kWh tariff for the electricity provided by the REScoop’s system. This tariff is typically lower than the one offered to the customer by the basic service supplier. With this business model, the rev enue stream is variable as energy production relies on weather patterns. However, nowadays, it is possible to predict the production with a high degree of certainty.

Selfconsumption The selfconsumption business model is the most widely adopted in Mexico. This business model differs from the previous business models since there is no direct economic compensa tion for the energy produced by the REScoops infrastructure. However, the benefit comes from the reduction in the electricity bill. The user is interconnected to the grid under a netmetering scheme. Therefore, at the end of the billing period, the retailer’s positive balance will be com pensated at the average local marginal price. On the contrary, the user will be charged the corresponding regulated tariff.

Collective generation The collective generation business model, also known as collective selfconsumption (CSC), is meant for electricity users(loads) with a common interconnection point to share the electricity produced by one RES power plant. Examples of users with a common interconnection point are multiapartment buildings and clusters of SMEs. The energy produced by the RES power plant is then divided among the users in equal parts (or as defined by a representative). The retailer processes billing in a similar fashion as the selfconsumption business model; however, for CSC, the users are not required to install a bidirectional meter since the RES power plant’s energy is directly fed into the grid and then virtually distributed among the users.

In addition to the revenues for electricity sales, the REScoop is entitled to generate and commercialize clean energy certificates. However, as further described in section 7.1.1, the regulation is not precise, and the technical requirements (i.e., the installation of specific metering devices) could be costprohibitive. 7. Business model analysis: 92 The REScoop business model

7.3. Comparison of business models One of the aims of this research is to understand the role that business models play in the en ergy transition. Section 6.1 presented the business model of the incumbent electricity supply company “as part of the sociotechnical regime”, and section 4.1 introduced potential REScoop business model as “a device to commercialize technological innovation”. It can be argued that the business models, as represented in figure 7.1, occupy different levels within the electricity value chain; however, both are centered on the energy supply to the final users. This section aims to answer the sixth subquestion by comparing the abovementioned business models based on their value proposition, value creation, and value capture.

Figure 7.6. Comparison of the business models, own illustration with data retrieved from references in chapter 6

Value proposition For electricity users in developing countries with high levels of energy poverty, such as Mex ico, environmental protection is not a priority; therefore, the incumbent electricity retailer, being able to offer electricity at a subsidized tariff, can retain its market power since alternatives for the consumers (e.g., installing their own PV system) are often not economically feasible. The incumbent company has the incentive to procure energy at the lowest price. The only obligation is to meet the quota of green origin established by the Secretary of Energy; thus, its possible contribution to the energy transition is limited. On the other hand, the REScoop business model offers citizens the possibility to take an active role in the energy transition while ensuring that their participation benefits are extended to improve their communities and favor the local economy. The Rescoop business model offers different social, environmental, and economic benefits, but more importantly, an opportunity to increase their resilience and sovereignty.

Value creation The value capture analysis comprises the customer’s analysis (customer segments, relation ships, and channels) and the activities and resources required to provide value to the customer (key activities, resources, and partnerships).

CFE SSB, as the sole electricity retailer for the basic service supply, benefits from an exten sive client portfolio that extends from the residential sector (the most numerous) to the industry (the most profitable). As CFE SSB operates in the whole country, it has standardized and well known operations and the capacity to provide the service to all populations with access to the transmission and distribution grids (administered by its parent company). As a retailer, and given the regulatory restrictions, CFE SSB has no electricity production infrastructure but bene 7.3. Comparison of business models 93 fits from power purchase agreements with the most efficient power plants of the CFE subsidiary companies, reducing the risk of being exposed to the variable wholesale market prices. One of the most valuable assets of CFE SSB is the network of partners within the regime. As a state company, it is supported by the different actors within the Mexican government and within the consortium of CFE; even when the market calls for free competition, its partners lobby in favor of special advantageous positions for CFE that create entry barriers for private actors.

The four different business models for implementing the REScoop business model introduced in section 7.2 differ from the incumbent model as they rely on the development of RES produc tion infrastructure. While the total sale of energy and the leasing/ PPA business models are intended to serve customers, the central beneficiaries of these business models are the cooper ative members. Further to the possibility of acquiring energy at preferable rates and the social and environmental benefits of these business models, REScoops are in a position to reach its members and customers and advance measures for energy saving. In the effort to present an alternative to the incumbent electricity retailer, REScoops rely on the support of the partners to access the required resources (e.g., funding and human resources). The REScoop mem bers are the main partner as they are the ones that invest and develop the projects; however, the support of external parties such as local governments, NGOs, and other cooperatives is in providing communities with the required technical advice and the funds to start the projects.

Value capture From the value capture point of view, CFE SSB is wellpositioned since it has no competition in the sector. It has a growing number of users and benefits from special conditions for electricity procurement, reducing its exposure to the wholesale market’s variable electricity prices. In turn, the REScoop business model relies on its capability to develop projects that can compete with the incumbent retailer’s tariff. The revenue stream for REScoops depends directly on energy sales or savings since no support mechanisms are available for projects at the distributed gen eration scale. An advantage of the REScoop business model is its flexibility since it can easily be adapted to meet the host communities’ specific needs and aspirations.

8 Conclusions, reflections, and recommendations

”Never doubt that a small group of thoughtful, committed citizens can change the world; indeed, it’s the only thing that ever has.” – Margaret Mead

This chapter summarises the results of this research by providing conclusions to the research questions (section 8), and a reflection on the application of the theoretical framework (section 8.2), the research design (section 8.2), the case study (8.2) and the limitations of the research. Finally, section 8.3 concludes the report by presenting a series of recommendations to policy makers and different actors and the recommendation for further research.

95 96 Conclusions, Reflections, and Recommendations

8.1. Conclusions In the effort to understand the role of business models as devices to commercialize innovation within the energy transition, this research presented a case study to identify the challenges and opportunities for new business models in the context of an emerging economy. Therefore, the main research question was defined:

What are the challenges and opportunities for the potential use and adoption of the renewable energy cooperative business model in the context of the Mexican energy transition?

The main research question was fragmented into six subquestions. The individual answers to the subquestions presented below help in answering the main research question:

What are common practices in the business models developed by European REScoops? REScoops around Europe have implemented a heterogeneous set of business models that have adapted to the local needs and the specific policy and regulation of European member states. European REScoops distinguish themselves from forprofit firms as their organization respects the seven cooperative principles outlined by the International Cooperative Alliance (2020). The cooperative principles have allowed for the local community’s involvement in the development, installation, and operation of low carbon installations, which helped to reduce the cost and in crease the value, acceptance, and attitude towards RES.

The different REScoop business models can be categorized based on the core activities along the electricity value chain. These include energy production, energy consumption, and energy services. Energy production is the most widely adopted activity among REScoops. REScoops have played a significant role in developing wind technology (Wierling et al., 2018; Bauwens and DevineWright, 2018). However, nowadays, solar PV technology is the pre ferred technology for most REScoops due to its simplicity and modularity, scalability, low invest ment cost, short lead times, and low maintenance requirements (Rijpens et al., 2013a; Yildiz, 2014; Wierling et al., 2018; Herbes et al., 2017). In countries like Germany, energy produc tion REScoops have relied on support mechanisms established by the national government. These mechanisms contributed to reducing the risk and, therefore, the cost of capital, making projects economically feasible. However, as the RES technology cost decreases, more and more projects can be realized without the need for subsidies. On a minor scale, REScoops engage in energy supply, consultancy services, and activities related to education and training, energy storage, and emobility. As REScoops grow and pro fessionalize, they can be involved in more than one activity, which allows for the strengthening of the organization and the diversification of the revenue streams. Energy saving is an important benefit implemented by REScoops, as these are wellpositioned to promote and influence their members to implement energysaving measures.

Finally, partnerships are vital for the different stages of the REScoop. REScoop members are the most important partner, as they take different roles within the organization (e.g., owners, investors, clients, and managers). The local and regional governments, more accessible and better attuned to local needs than the national governments, play a critical role in providing insti tutional support for REScoops by filling the gaps of national policies and supporting instruments and contributing to the creation and development of RESCoops. In turn, existing cooperatives can play a crucial role in developing new cooperatives(RESCoop 202020, 2013a). Collab orations between cooperatives include financing and knowledge sharing. Cooperative banks have played a big role in funding new REScoops and, in some cases, starting them. Further more, REScoop Federations, such as REScoop.EU are supporting the creation and growth of REScoops with different programs that range from internal to external roles. 8.1. Conclusions 97

What does the sociotechnical system of the Mexican power sector look like? The MLP framework has been useful in characterizing and understanding the Mexican power sector’s landscape, regime, and niche developments. The regime analysis covered three inter linked dimensions as distinguished by Verbong and Geels (2007); these are i) the network of actors and social groups; ii) the formal, normative, and cognitive rules; and iii) the material and technical elements.

From its formation in 1879, the Mexican electricity system has been subject to a continuous transition that has resulted, not only by single events and technology developments but also by the interaction between different actors and the external and internal pressures. During the last decade, landscape factors such as the climate change concerns, the pressure to reduce the GHG emissions, and the changes in the energy supply markets in North America (where natural gas plays an important role), were determinant to trigger the Mexican energy reform of 2013. The energy reform, aiming to attract private investment to modernize the National Electric Sys tem, diversify the generation matrix, and increase market competition to reduce electricity prices, came to redefine the rules and the electricity regime actors. The new rules of the sector, defined under the Electric Industry Law, enabled private companies to participate in the generation and retail of electricity, created a wholesale market and ended the state company’s monopoly. Fur thermore, the new regulation established clean energy certificates and longterm auctions as mechanisms to attract investment to develop new renewable energy generation capacity. New capacity additions are required to meet the General Law of Climate Change goals to reduce fossil fuel participation in the electricity generation matrix to no more than 50% by 2050. As a result of the first three longterm auctions, 7,518 MW of RES capacity (dominated by solar and wind technologies) is to be added to the national electricity system. This capacity addition represents 10.7% of the total generation capacity installed by the end of 2018; however, the new capacity additions follow the trend of centralized largescale and internationally funded projects, which has led to resistance from social groups. This resistance sparked as project developers fail to involve the local communities in the projects’ planning and benefits.

Following developments in North America’s natural gas market and the extensive infrastruc ture expansions led by the previous government (20122018), natural gas is now the primary energy source for electricity production (around 51%). While largescale hydro accounted for the significant share of clean energy technologies (10.2%), technologies such as wind and solar remain niches in the market. However, with a significant lift resulting from the energy auctions.

The Electric Industry Law recognizes the role that distributed generation plays in the energy transition. However, the secondary regulation and energy policy has limited its application to be hind the meter solutions. It is possible to feed electricity into the grid in exchange for economic compensation; however, since the compensation is subject to a variable, and lately decreasing marketclearing price, this business model has not attracted investment. The development of distributed generation is mainly carried out by commercial and residential users subject to high electricity tariffs that use solar PV technology and the net metering scheme as an alternative to meet their energy needs.

Although there are no records of renewable energy production cooperatives in Mexico, it is possible to draw examples from existing cooperatives advancing RES’s development. While the production of electricity is not their main activity, these cooperatives found a way to meet their electricity needs motivated by the possibility of accessing more affordable electricity for their activities or the resistance to the incumbent company’s business model. Following the cooperative principle of cooperation between cooperatives, sharing the accumulated knowledge and experience could play a key role in developing REScoops in Mexico. 98 Conclusions, Reflections, and Recommendations

What are the drivers and barriers to implementing the REScoop business model in Mex ico? According to Bauwens and DevineWright (2018), factors such as the regulation, supporting mechanisms for RES, and the attitudes towards the cooperative model play a critical role in the potential development of REScoops. It can be argued that all factors, at different stages of development, are present in Mexico. The latter factor is especially relevant since Mexico has a long story of cooperative activism, with a strong presence in rural areas, which facilitates the organization of cooperatives. Furthermore, the electricity market opening also created condi tions for cooperatives’ participation in electricity production and retail activities, benefiting from the growing availability of skilled labor and decreasing prices for RES.

Policy and regulatory barriers have limited the participation of REScoops to behind the meter business models at a distributed generation level. The energy auctions proved to be efficient in increasing the share of RES in the energy matrix; however, the auctions’ design imposed high entry barriers for the participation of REScoops. Furthermore, the incumbent government’s energy policy has created significant uncertainty in the electricity regime, particularly around the development of RES projects. To strengthen the position of CFE in the electricity market, the incumbent Mexican government attempted to modify the rules governing the two mechanisms implemented by the previous administration to promote RES; this is the energy auctions and the clean energy certificates. Moreover, the decision to cancel the longawaited regulation on collective distributed generation creates uncertainty about the future opportunities in this sector’s niche.

What is the business model of the incumbent power utility company? In understanding the role of business models within sociotechnical transitions, this research analyzed the business model of the incumbent power utility (CFE SSB), as “part of the socio technical regime” (Bidmon and Knab, 2014, 2018). The business model’s analysis employed the nine building blocks framework introduced by Osterwalder and Pigneur (2010); these building blocks are used to describe the firm’s value proposition, value creation, and value capture.

Following the nationalization of the power sector in 1960, the Mexican government granted the Federal Electricity Commission (CFE) exclusive rights to generate, transmit, distribute and commercialize electricity, establishing a monopoly in the sector. The monopoly of CFE lasted until 2013 when the energy reform liberalized the energy sector allowing competition and private investment in the electricity generation and supply. In 2015, CFE went through a horizontal and vertical separation that led to the creation of subsidiary and affiliate companies, aiming to allow a common ground for private actors’ participation in the newly created electricity market. For the retail sector, CFE created a subsidiary for basic service supply (CFE SSB) to serve all users with consumption below 1MW. While private actors are allowed to participate and compete as basic service suppliers, several entry barriers, as identified in section 7.1.1, contributed to keeping CFE SSB as the sole option for electricity users.

The value proposition of CFE SSB is based on providing a reliable and lowcost electricity service to its customers. One of the most significant assets of CFE is the client portfolio that it inherited from its parent company, the CFE. CFE SSB customers are subject to a regulated tariff and classified depending on their activity as residential, commercial, services, agriculture, and industry. The customers of CFE SSB include all generators or prosumers at the distributed generation level since they cannot directly participate in the wholesale market.

The Mexican regulation does not allow electricity retailers to participate in power generation; therefore, CFE SSB activities are limited to the electricity retail and the management of their client portfolio, including client acquisition and retention and billing services. The costs incurred 8.1. Conclusions 99 on delivering the value are closely related to the activities of the firm. The cost of electricity is the most representative for CFE SSB, and therefore, as a costminimizing firm, procuring electricity and associated products at the lowest price is vital. CFE SSB has three options to procure the power required to meet the demand of its customers. These are the wholesale market, energy auctions, and vesting contracts. The vesting contracts are agreements with the subsidiary gen eration companies of CFE for the provision of electricity at prices below the clearingprice of the wholesale market. In addition to the vesting contracts, energy auctions are established by the LIE for basic service suppliers to procure electricity and clean energy certificates. CFE par ticipated in the three longterm actions between 2015 and 2018 and secured power and CELs at record low prices. CFE SSB has been able to continue its activities as the sole player on the basic service supply market, mainly due to the support of the different governmental institu tions that dictate the electric sector’s policy and regulation (e.g., SENER, CRE, and CENACE). On top of the revenues from electricity sales, CFE SSB receives a payment from the Mexican government to apply for subsidies and compensation from the CFE’s subsidiary companies of generation, transmission, and distribution for the concept of “guaranteed demand”.

What is the potential architecture of the REScoop business model under the current Mex ican regulations? Like the European case, it is impossible to define a one size fits all business model for Mexico since every project shall be adapted to the local regulation, available resources, and the host communities’ needs and expectations.

Due to several barriers to participating in the energy production and supply at the largescale (see section 7.1.1), potential REScoop business models are restricted to solutions at the dis tributed generation level. In this regard, section 7.2 presented four business models that resulted from an indepth desk research of the rules and regulations of the electricity regime and were validated through expert interviews. The first two business models consider the sale of electric ity produced by the REScoop, while the last two are based on meeting the energy needs of the REScoop and its members.

The total sale of the energy business model, as widely used by European REScoops, is pos sible under the current regulation. However, due to the lack of support mechanisms such as the feedin tariff, business models based on total energy sales are exposed to the risks of variable shortterm market prices. REScoops can opt to implement a leasing or PPA business model with their customers to eliminate or reduce this risk. Under the leasing and PPA, the REScoop defines a fixed price for the electricity production (typically lower than the incumbent electricity company) and can estimate the revenue streams.

The selfconsumption business model is intended to meet the electricity needs of individual members of the cooperative or common electricity needs (e.g., electrification of a shared facility). This business model’s base is already common in Mexico, representing most of the intercon nections at distributed generation; however, it is implemented mainly by particulars in high tariff bands; therefore, the REScoop organization could help make this business model more acces sible.

Lastly, although restricted by the current regulation, the collective generation business model could bring the most impact to the REScoop members. Under the collective generation, different users can benefit from the production of a single RES generation plant. This business model can be interesting for apartment buildings and clusters of SMEs often exposed to high electricity tariffs. 100 Conclusions, Reflections, and Recommendations

How does the REScoop business model compare to the incumbent business model? The REScoop business model offers an alternative for citizens to benefit from producing their own electricity. The benefits are not only economic but can be extended to the environment with the development of lowcarbon energy technologies and the society as they promote local development. One of the major challenges of the REScoop business model is its forced reliance on the incumbent company. The same that, despite the liberalization of the sector, has been favored by the network of actors and the electricity regime’s rules. The artificial electricity prices (resulting from the subsidy to electricity) offered by the incumbent company make it difficult for systems at the distributed generation level to compete.

One of the major differences is the origin of electricity. While the incumbent retailer has access to supply contracts at favorable rates below the wholesale market, the REScoop relies on the electricity production of its own infrastructure.

General conclusion Now that the research has been concluded and all subquestions are answered, it is time to go back and answer the main research question:

What are the challenges and opportunities for the potential use and adoption of the renew able energy cooperative business model in the context of the Mexican energy transition?

Implementing the conceptual framework combining business models with sociotechnical transition theory from a multilevel perspective has proven to be useful in understanding specific dynamics and the roles of business models within the Mexican energy transition. While the Electric Industry Law of 2014 liberated the electricity market and created the required conditions for REScoops to participate, the secondary laws and the regime’s pressures impose a series of entry barriers for REScoops to compete in the electricity market large. However, the REScoop business model can be implemented to further advance electricity generation at the distributed level. Even when the effects on the energy matrix would be minor, the REScoop busi ness model provides benefits beyond the environmental benefits and could be a key element to advancing concepts such as energy sovereignty and reducing energy poverty in the country.

The emergence of pilot projects is fundamental to break the barrier of the lack of information and access to funding. Mexico has a great social capital and experience with the cooperative organization; however, it would need external partners’ technical support to kick start these projects. As the first pilot projects prove to be successful, it would be essential to follow learning, networking, and visioning paths to move into the regime. 8.2. Reflections 101

8.2. Reflections This section is intended to reflect on the methodology selected by the author to answer the research questions and the implication of the outcomes. This report represents ten months of work where the author got immersed in the challenging task of understanding the actors, rules, and dynamics of the Mexican electricity regime in order to be able to propose alternatives to accelerate the muchneeded energy transition without leaving anyone behind.

Theorethical framework This research followed the framework proposed by Wainstein and Bumpus (2016) to analyze the role of business models in the energy transition by combining Geels ’s multilevel perspec tive with Osterwalder and Pigneur ’s framework on business models. As the application of the framework developed Wainstein and Bumpus (2016) has been limited to practical examples, as far as the author is aware, this research is the first effort to use a case study to further explore the application of the framework.

One of the main lessons that can be drawn from this research is that, while information on common practices on business models is important to guide the development of business models on new markets, it is necessary to acknowledge the cultural, regulatory, and economic differences between economies and countries. Integrating the analysis of the sociotechnical landscape, regime, and niches played a crucial role in understanding how to design business models to adapt to the local conditions and increase the chances of success. This section ana lyzes the strengths and weaknesses of the MLP and business model frameworks and presents possible alternatives for improvement. Furthermore, it examines the limitations in the community energy literature and the possible contributions of this research.

Multilevel perspective framework The MLP framework has been useful in understanding the transition of the Mexican electricity sector by analyzing the different landscape factors, the actors, rules, and material and technical elements of the regime and the niche developments, both from the technology and business model point of view. This provided a clear picture to identify “windows of opportunity” for regime insertion that can be used to design new business models. Furthermore, the analysis of the incumbent electricity retail company’s business model, CFE SSB, provided a deeper under standing of the actors (or key partners as defined in the business model framework) and the regulations that help establish a carbon lockin. Identifying these barriers is a first step for iden tifying necessary policy and regulation changes to enable citizen participation in the sector.

In applying the MLP framework, it is difficult to define the point where new technology has abandoned the status of niche and transited to be part of the regime; doing this for a business model acquired an additional degree of complexity. This issue can be better illustrated in figure 5.2, where the author defined an arbitrary threshold of 10% to separate niche technologies from the ones in the regime. The MLP framework can then be improved by developing indicators or rules to define the level of development of technology, such as the rate of adoption (as defined in the previous example), yearly growth rate, number of users, etc. Furthermore, when applying the MLP framework to characterize the electricity regime, different authors use different dimen sions (e.g., network of actors and social groups, the formal, normative and cognitive rules, and the material and technical elements); given the framework’s flexibility, this can be seen as an advantage; however, it also complicates the task of comparing results. It would be an interesting addition to define the most important dimensions to be considered for studying transitions in the electricity sector. 102 Conclusions, Reflections, and Recommendations

Business model framework Using Osterwalder and Pigneur (2010) ’s business model framework proved to be challenging for describing the business model of renewable energy cooperatives. Since the cooperatives do not follow the same logic as a forprofit firm and the value proposition can and should be extended to include both customers and members of the cooperative, a modification on the framework could be useful to better capture the business models of the cooperatives. This could be addressed by creating specific building blocks reflecting the value proposition and the downstream of the value capture and value creation (customer relationships, customer segments, distribution channels, and revenue streams) to differentiate between customers and members of the REScoops.

Community energy literature This research is an effort to contribute to the emerging literature pertaining to community en ergy. The contribution to said literature is threefold: first, the framework combination used for this research proved to be useful to identify barriers and drivers that shall be considered in the design of business models for new markets; this takes relevance both in developed and de veloping economies. As members of the European Union continue to transpose the electricity and renewables directives, it is expected that more and more member states will develop the required conditions for the creation of REScoops; however, as there are recognized differences between member states (e.g., social, economic, regulatory), they too can follow the procedure applied for the case of Mexico.

Second, the reports on REScoop business models resulting from the RESCoop 202020 project presented the most comprehensive analysis of its kind; however, in a very dynamic mar ket as the one of energy, several barriers and opportunities arose in the last five years, forcing REScoops to reinvent their business models and adapt to new conditions. Even when it was not an expected outcome, by analyzing the latest literature on community energy, this research helps identify barriers and common strategies to address them. Furthermore, by using the busi ness model framework to guide data collection, the reader can benefit from a graphical and comprehensive analysis of all the different elements of the business model, something missing in the RESCoop 202020 reports.

Third, despite REScoops not being exclusive to the European continent, scientific research focuses on this geographical location. Countries like Brazil, Argentina, and Costa Rica have succeeded in developing community energy projects (REN21, 2017), but have failed to share accumulated knowledge. This research if filling this gap by focusing on Mexico; however, the author believes the analysis and design of the proposed business model design could be more effective had the analysis considered best practices from other geographical locations such as Latin America, Australia (with a similar approach to behind the meter solutions), and the US and Canada. This topic is further discussed in the recommendations for further research. 8.2. Reflections 103

Research design In the effort to answer the research questions, this research adopted an explorative qualitative approach. A case study was developed to get an indepth understanding of a phenomenon, the emergence of business models to advance RES for electricity production, within the context of the Mexican energy transition. Given the flexibility of the case study, this research relied on indepth semistructured interviews and secondary data. The expert interviews played a key role in identifying challenges and opportunities to develop the REScoop business model in Mex ico and provided valuable information to validate and extend the analysis of potential business models. As the information provided by the interviewees was validated against secondary data, the results presented in this research can also be considered valid. Furthermore, the snowball method allowed the author to get insights from different actors and approaches, which enriched the scope of this research.

Case study Selecting the country of Mexico as the case of study proved to be relevant for various reasons: firstly, it answers to the call of Elmustapha and Hoppe (2020) to extend the academic body of knowledge for transitions within the context of developing countries; secondly, as Mexico is going through two parallel processes, the liberation of its electricity sector, and the transition to a lowcarbon electricity generation, lessons drawn from this research help on understanding the specific challenges and opportunities for the development of new business models that consider a more active participation of electricity users and its importance on advancing concepts such as energy justice and support the effort to eradicate energy poverty.

Limitations This research aims at understanding the challenges and opportunities for the potential develop ment of the renewable energy cooperative business model in the context of the Mexican Energy transition. As a case study, the research relied on qualitative data collected from a series of ex pert interviews and secondary data; however, there were some limitations in the data collection process.

Firstly, the travel and facetoface meeting restrictions imposed worldwide due to a pandemic limited the possibility to interview existing Mexican cooperative banks that are currently devel oping programs to promote the adoption of RES; therefore, their opinion is not considered in this research. Furthermore, it was not possible to interview government actors involved in designing the different support mechanisms for RES’s promotion, the same that are failing to integrate small actors, such as REScoops.

Secondly, as the case study focuses on Mexico, most of the information collected through interviews and secondary data was available in the Spanish language and translated to English by the author. While this should not impact the analysis and the presentation of the results, the translation and definition of certain legal terms could differ from practices in other countries.

Finally, due to time restrictions for this research, the focus was on the development of energy production REScoops as a potential mechanism to increase the share of RES in the national en ergy matrix, however other activities such as energy supply/consumption and energy services cooperatives, such as Onergia, could also represent a positive impact towards achieving the aforementioned goal. Therefore it is recommended to consider them for further research. Fur thermore, the analysis of potential business models for REScoops focuses on solar technology; therefore, it is important to recognize that business models considering a different technology shall include the analysis of additional/different factors, especially the potential effect on the environment. 104 Conclusions, Reflections, and Recommendations

8.3. Recommendations Policy Recommendations The recommendations for policymakers address the challenges identified for the further devel opment of REScoops business models in Mexico.

Energy auctions The longterm energy auctions proved to be efficient in allocating new generation capacity to meet the clean energy generation goals at the lowest cost. However, the design of the auctions established several entry barriers for small actors, such as REScoops.

It is recommended that the government considers the participation of REScoops for the de sign of the new auctions. This can be achieved by implementing an accession process (REN21, 2017), which combines the efficiency of the auctions with the effectiveness of the feedin tariff as a support mechanism for community energy projects. Under this methodology, a portion of the capacity offered in the tender shall be reserved for REScoops. REScoops then could apply for PPAs with a price cap similar to the last bid accepted. Furthermore, the continuity of the auctions is important for enabling the integration of new actors in the electricity retail market.

Clean energy certificates The implementation of clean energy certificates is a step in the right direction. It has favored the selection of clean technologies in the past energy auctions. However, for the mechanism to work, it is vital to ensure that only new clean power plants are awarded CELs for their energy production. Furthermore, it is advised for the Regulatory Energy Commission to clarify and the mechanisms for distributed generation to benefit from and commercialize CELs.

Regulation on distributed generation The regulation in distributed generation is key in enabling the development of REScoops at the local level. Currently, systems up to 0.5 MW are exempt from the requirement of a generation permit, which plays in favor of the economic viability of projects. This limit has been consid ered relatively low and could constrain the economic viability and scope of collective generation business models; thus, policymakers are advised to approve the proposal of SalinasWolberg (2020), that seeks to increase the limit of distributed generation to at least 1MW.

Furthermore, the initial efforts to update the regulation on collective distributed generation, as presented in the CRE’s resolution, should continue to be discussed and implemented. It is advised for the Regulatory Energy Commission to include the virtual netmetering scheme in the corresponding regulation. The VNM scheme offers the different members or customers of the REScoop (e.g., homeowners, renters, and businesses) equal access to renewable energy generation benefits regardless of their physical attributes (e.g., location or the suitability of the roof) or ownership of their home or business by sharing one local renewable energy power plant. Compared to the netbilling, the VNM offers a more significant benefit to the endusers since they see a direct reduction in their electricity bills without the risk of shortterm market variability.

Finally, project developers are often exposed to prolonged and unstandardized procedures for the interconnection of DG systems to the grid, affecting the project duration and economic viability. Therefore, it is recommended for the Regulatory Energy Commission to require basic service suppliers to establish clear and standardized methodologies for the interconnection of distributed generation systems. 8.3. Recommendations 105

Subsidy to electricity The subsidy to electricity might not be the most efficient policy to support Mexicans in energy poverty; furthermore, the crosssubsidy scheme affects the competitiveness of SMEs that strug gle to survive. Policymakers are advised to promote pilot programs to establish energy coopera tives in regions with localized energy poverty problems. The subsidy can be better used to fund the projects. In contrast to the proposal of Sánchez et al. (2018) that considers the installation of solar panels in the roof of individual households, the REScoop business model could be more efficient in meeting their energy needs at a lower cost. It reduces the overall project cost by implementing economies of scale and has further social and economic benefits in the commu nities. Moreover, REScoops can play a key role in promoting energyefficiency measures and complement government programs.

Regulation on cooperatives Mexico has a great tradition of cooperatives, which have played an essential role in communities’ economic development. However, the current regulation imposes several constraints for coop eratives to financially support other cooperatives. Therefore, it is recommended to modify the corresponding regulation to enable cooperatives to participate as investors and shareholders for other cooperatives. Furthermore, the existing legal forms to classify cooperatives might not fit a renewable energy cooperative’s scope and needs. Thus it would be relevant that REScoops are recognized in the national regulation and the implementation of programs to promote and support the formation of REScoops as a strategy for national development.

Recommendations for State and local governments Further to the environmental and social benefits, REScoops contribute to local economic re siliency. REScoops can support local governments in advancing on their local job creation goals and developing the local economy since most of the profits are reinvested in the community. In this line, state and local governments can play a key role in the development of REScoops. As they are better attuned to the local needs, it is possible to fill the national regulation and program gaps. Local governments can establish programs to promote and support the devel opment of REScoops, including capacity building, technical and administrative assistance, and financial support. Furthermore, local governments can take a topdown approach and start new cooperatives or participate as codevelopers or customers of the REScoops.

Recommendations for public and private organizations, and existing cooperatives This research introduced the REScoop business model as an alternative for communities to take part in and benefit from the energy transition. However, for REScoops to be initiated from a bottomup approach, it requires special skills and knowledge of the RES technologies and appli cable regulations that could be hard to find within communities. REScoops can also be started from a topdown approach where existing cooperatives and public and private organizations can fill the knowledge gap.

The different cooperatives and organizations are advised to join the ongoing efforts of INAES, GIZ, and DGRV to promote the renewable energy cooperative business model. The elaboration of a guide for the creation of REScoops is a step in the right direction. However, this guide shall be complemented with capacity building and technical and financial support throughout the implementation of pilot projects. To be effective, these projects shall also consider interventions for energy efficiency. 106 Conclusions, Reflections, and Recommendations

8.4. Further research Alongside the research, the author was required to take several decisions to narrow down the fo cus of the research; thus, tapping on identified research limitations and proposed recommenda tions for the different stakeholders, this section presents recommendations for further research.

REScoop Business models for projects at utilityscale Section 7.2 introduced four potential business models to develop REScoops in Mexico. The design resulted from the analysis of the Mexican regulations and the effects of identified bar riers and drivers. Considering that projects at utilityscale (i.e., capacity greater than 0.5 MW for Mexico) presented further barriers and associated risks, this research narrowed its focus to distributed generation solutions. Further research can explore potential business model designs to circumvent the identified barriers for utilityscale projects.

This research raised two recommendations for policymakers intending to improve the con ditions for REScoops to develop projects at a utilityscale. Firstly, the recommendation of the REN21 report to reserve a quota of the energy auctions for participatory citizen projects shall be analyzed in detail. This recommendation is intended to reduce the risk of the REScoop by facilitating access to PPAs with fixed electricity rates while keeping the efficiency of the tenders. Further research can look at the specific design of the auctions and develop methodologies to determine several outstanding questions, like the most effective allocation of the capacity re served for citizen projects, the determination of the price and duration of the PPAs, and how to promote and support citizen participation. Secondly, the Mexican regulation limit to keep ing distributed generation projects below 0.5 MW has been identified as an important barrier (DGRV, 2018). There are current initiatives to change the regulation and increase the limit to 1MW (Mancera Espinosa, 2020); however, the limits introduced in this proposal still seems rather arbitrary. It will keep limiting the development of projects with technologies such as wind. Therefore, further analysis would be required to determine the maximum increase that can be supported without compromising the distribution grid’s integrity. This analysis can be of great use for policymakers to determine the right limits and the minister of energy to plan future grid expansions or reinforcements.

The role of existing cooperatives As the research progressed, the author faced multiple examples of existing Mexican cooper atives working towards RES promotion. Due to time and mobility limitations when writing this research, it was not possible to further explore those examples and their specific challenges. Further research can help understand these cooperatives’ motivations and activities to issue policy recommendations better attuned to the local needs.

Multiple case study Due to time constraints, this research was limited to understanding the barriers and drivers for the creation and diffusion of REScoops in Mexico. To better understand the potential of the re newable energy cooperative business model to accelerate the energy transition, a multicountry study can help identify common barriers and drivers for the development of this business model. Thus, further research can target countries like Brazil, Costa Rica, and Argentina that have succeeded in implementing community energy projects, or countries where REScoops have not occurred despite proper regulations and incentives (e.g., Chile, Colombia, and Ecuador) (REN21, 2017). Paying attention to developing economies is relevant since they continue to be unrepresented in available literature (Elmustapha and Hoppe, 2020). Reference List

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Section 3.1.2 presented the semistructured interviews as the selected methodology for collecting primary data for this research. This appendix contains the list of the participants in the expert interviews and their affiliation in figure A.1. Furthermore, it presents the interview structure and questions used for conducting the interviews. The structure of the interviews is as follows:

Table A.1. Participants in the expert interviews

119 120 A. Questionnaire for expert interviews

Introduction The interview starts with the author’s introduction, the same that communicates the goal of the interview, discusses respondents’ requirements regarding confidentiality, and asks permission for audiorecording of the interview. The author’s introduction is followed by three questions that aim to introduce the participants and identify the scope of their work.

1. Could you please introduce yourself, your role in your organization and, your experience?

2. What is the role of your organization in advancing renewable energy technologies (or the cooperative model)?

3. What kind of opportunities have you identified from the liberation of the electricity sector and the different policies and regulations implemented?

Validation of the business model This section focuses on a discussion of the elements of the business model framework intro duced in section 2.2.2. The author provided a draft of the potential business model elements that resulted from analyzing the common practices of European REScoops and the Mexican electricity regime as shown in figure A.1. The questionnaire was designed to validate the initial assumptions and identify additional elements of the business models. The questions pertaining this section of the interview are listed below:

1. What do you perceive as the main competitive advantage of the REScoop business model over the incumbent model?

2. What customers do you think could benefit from REScoops?

3. What do you think could be a more attractive compensation for cooperative members, eco nomic, or energy, and the reason for your selection?

4. What do you think are preferred channels to reach members and clients alike?

5. What kind of activities could REScoops engage in?

6. What do you perceive as the key resources for a REScoop?

7. Could you identify additional key partners for the development of REScoops?

8. Could you identify additional costs that could be incurred for the creation and operation of a REScoop?

9. Could you identify additional revenue streams? 121

Figure A.1. Draft of the potential business model canvas for the development of REScoops in Mexico

Identification of drivers and barriers for the development of REScoops This section focuses on understanding the perceived drivers and barriers for developing the REScoop business model and the participant’s suggestions on how to overcome such barriers.

1. What do you see as the main drivers/enablers for the future development of REScoops in Mexico?

2. Since the liberation of the electricity market in 2014 Mexican regulations allow for the cre ation of REScoops. However, no REScoop has been established in the country yet. Why do you think this did not happen?

3. What do you identify as the main financial barriers to the development of REScoops in Mexico?

4. What do you identify as the main technical, and cultural barriers to the development of REScoops in Mexico?

Closing To close with the interview, the author thanked the participants for their contribution and re quested to refer to additional sources of information (potential interviewees following to a snow ball method, or secondary data) that could be valuable for the research, based on the following questions:

1. Is there something else you would like to express?

2. Could you recommend other experts or documentation that could contribute to this re search?