Wind Energy Projects November 30

The Thesis Committee for Gilberto Adolfo Calderon Certifies that this is the approved version of the following thesis:

Wind Energy Projects in Mexico

APPROVED BY SUPERVISING COMMITTEE:

Supervisor: Christopher Jablonowski

Surya Santoso

Cesar Acosta-Mejia

Wind Energy Projects in Mexico

Gilberto Adolfo Calderon, B.S.

Thesis

Presented to the Faculty of the Graduate School of The University of Texas at Austin in Partial Fulfillment of the Requirements for the Degree of

Master of Arts

The University of Texas at Austin December 2009 Dedication

To my family and friends who have always shown me their support.

Acknowledgements

I would like to thank my thesis advisor Dr. Christopher Jablonowski for his guidance in this research. I also like to thank Dr. Surya Santoso for sharing his knowledge in wind energy, and to Dr. Cesar Acosta-Mejia who supervised the statistical analysis in this work. I express my gratitude to all the members of the UT-ITAM Partnership for Mexico Energy Sector Development for all that I learned from them. Special thanks to my sponsor The Training, Internships, Exchanges, and Scholarships (TIES) Initiative funded by the U.S. Agency for International Development through Higher Education for Development (HED). Special thanks to Dr. Michelle Foss for taking such a keen interest in my academic and professional development. Last but not least, I thank all my friends who made my time in Austin a wonderful experience.

December 4th, 2009

v Abstract

Wind Energy Projects in Mexico

Gilberto Adolfo Calderon, M. A.

The University of Texas at Austin, 2009

Supervisor: Christopher J. Jablonowski

The interest in renewable energy has grown in recent decades because of environmental effects of fossil fuels and technological advances that have made some renewable energy technologies competitive with conventional gas fired power plants. Wind energy is playing a major role in increasing renewable energy’s share of electricity production worldwide. The global installed capacity of wind power has grown at a rate of more than 20% each year since the year 2000 (WWEA, 2009).

Currently, the Mexican electricity sector is comprised of fossil fuel fired power plants. However, Mexico has a large endowment of renewable energy resources that can be harnessed to generate electricity. For example, the Comisión Reguladora de Energía estimates that Oaxaca´s wind power potential is about 10,000 MW (CRE, 2006). Studies have shown that Baja California´s wind power potential is also about 10,000 MW (Walker, 2007 cited in KEMA and Bates and White, 2008).

This thesis focuses on wind energy because it is expected to grow at the fastest rate during the next decade in Mexico relative to other renewable energy sources (Sener, 2008). Mexico’s installed wind power capacity is 202.5 MW. This capacity will increase

vi by 456 MW by the end of 2010. Another 2,123 MW will be added during the period 2010-2012 (AMDEE, 2006).

This research investigates various aspects of the wind farm development process in Mexico. The initial chapters describe the electricity sector and its participants. Subsequent chapters describe the regulatory framework and the mechanisms used by private investors to finance renewable energy projects. The final chapters describe the economic aspects of wind energy projects using a conventional discounted cash flow model. Statistical simulation is used to estimate capacity factors, and design of experiments is used to statistically analyze performance under different scenarios.

vii Wind Energy Projects in Mexico

1 Introduction ...... 1 2 Mexican electricity sector: structure and regulation ...... 2 2.1 Government entities related with the Mexican electric sector...... 4 2.2 External Energy Producers...... 5 3 Independent Power Producers (IPP) ...... 9 4 Renewable energy ...... 13 5 Wind energy ...... 14 5.1 The CFE´s wind energy projects ...... 18 5.2 Wind energy in the world ...... 19 6 Incentives for renewable energy projects...... 21 6.1 Green Fund ...... 23 6.2 The Clean Development Mechanism (CDM) and carbon certificates ... 24 7 Wind turbines ...... 26 7.1 Wind turbines subsystems...... 27 7.2 Power performance curve...... 30 8 Wind farm development process ...... 32 9 Funding sources available for energy projects...... 35 10 Case study: EURUS wind farm...... 37 11 Case study: La Venta II wind farm ...... 39 11.1 La Venta demography ...... 39 12 Project economics: wind farm output estimation...... 41 12.1 Methodology ...... 41 12.2 Main assumptions ...... 43 12.3 Simulated scenarios ...... 43 12.4 Base scenario analysis ...... 44 12.5 Impact of a delay in the project’s start of operation ...... 47 12.6 Analysis of results factorial experiment ...... 47 13 Conclusions and key findings...... 50 14 Appendix A Plants operated by External Energy Producers...... 52 15 Appendix B- Eurus wind farm emissions reduction...... 53 16 Appendix C- Cash flow spreadsheet...... 54 17 Appendix D- Oaxaca wind resource map...... 55 18 Appendix E- Worldwide wind power capacity 2008...... 56 19 Appendix F- Baja California wind resource map...... 58 20 References ...... 59 21 Vita ...... 65

vii

List of Tables Table 3-1 Total capacity of each independent power producer...... 9 Table 4-1 Installed capacity share...... 13 Table 5-1 Wind projects in operation ...... 14 Table 5-2 Projects under construction 2009-2010...... 15 Table 5-3 Projects planned for 2010-2012...... 16 Table 5-4 Wind farms operated by the CFE ...... 19 Table 7-1 Commercial scale wind turbine classes...... 26 Table 7-2 Gamesa G52 Power Curve ...... 31 Table 10-1 Wind farm characteristics...... 38 Table 12-1 Key descriptive statistics for the capacity factor ...... 42 Table 12-2 Scenarios considered...... 44 Table 12-3 NPV and IRR ...... 46 Table 12-4 Effect on NPV if start of operations is delayed...... 47 Table 12-6 Analysis of variance (ANOVA) table ...... 49 Table 12-7 Main effects...... 49 Table E-2 Worldwide wind power capacity 2008 ...... 56

viii

List of of Figures

Figure 2-1 Installed capacity share...... 7 Figure 2-2 Capacity for public service ...... 8 Figure 3-1 Independent power producers capacity share...... 10 Figure 5-1 Worldwide wind power capacity ...... 20 Figure 5-2 Annual wind capacity growth rate...... 20 Figure 6-1 Financial transfers: Green Fund mechanism ...... 24 Figure 7-1 HAWT designs...... 30 Figure 7-2 Gamesa G52 850 power curve...... 31 Figure 8-1 Wind farm development process...... 34 Figure 12-1 Capacity factor distribution...... 42 Figure 12-2 Net cash flow for base scenario ...... 45 Figure 12-3 NPV for the 3 capacity factors considered...... 46

1 Introduction This thesis investigates various aspects of the wind farm development process in Mexico. The initial chapters describe the electricity sector and its participants. Subsequent chapters describe the regulatory framework and the mechanisms used by private investors to finance renewable energy projects. The final chapters describe the economic aspects of wind energy projects using a conventional discounted cash flow model. Statistical simulation is used to estimate capacity factors, and design of experiments is used to statistically analyze performance under different scenarios. A full factorial experiment is carried out to determine the effect on the Net Present Value (NPV) with changes on three factors: interest rate, debt term and debt structure.

2 Mexican electricity sector: structure and regulation The Mexican electric sector is served by two state-owned utility companies: Comision Federal de Electricidad (CFE), Federal Commission of Electricity and Luz y Fuerza del Centro (LYF), Central Light and Power. The Comision Reguladora de Energía, Energy Regulatory Commission, regulates both companies. LYF has a presence in Mexico City and in 132 municipalities located in the following states: State of Mexico, Hidalgo, Morelos and Puebla (LYF, 2009). CFE serves the rest of the country. These companies generate 70% of the nation’s electricity and have exclusive rights in the transmission, distribution and retailing of electricity (Sener, 2008). On October 11, 2009 President Felipe Calderon published a decree to dismantle LYF. The CFE will be the only state owned utility and will take over all the operations previously performed by LYF (DOF, 2009). The main reason for this policy is LYF’s history of inefficient operations. According to the federal government the costs of LYF were almost twice the revenue for electricity sales in the period 2003-2008 (DOF, 2009).

Mexican electricity demand grew significantly during the 1980’s because of increasing economic activity (CEFP, 2009). However, the installed electric capacity did not grow as fast as the demand did at the prevailing prices. This resulted in a backlog in demand for new infrastructure, but the two electric utilities were unable to develop new electricity generating projects. This was mainly due to financial constraints. The tariffs were not allowing the cost recovery so the debt of the state companies grew significantly, and they were unable to invest in new capacity (De Rosenzweig, 2007). The only way to increase electricity-generating capacity was to allow the entry of private companies. These companies were named External Energy Producers (EEP). Private participation in electricity generation for public service is forbidden by the constitution. Its 27th article establishes that electricity generation, transmission, transformation, distribution and retailing for public service can only be carried out by the State. This is due to they are considered as strategic activities in the 28th article.

(CPEUM, 2009). However, the Ley del Servicio Público de Energía Eléctrica (LSPEE), Electric Energy Public Service Law was modified in 1993 to allow private participation in electricity generating activities that are not considered as public service (Sener, 2004). This LSPEE modification is the most relevant change in the Mexican electric sector since its nationalization in 1960. LSPEE authorizes the participation of private companies in six cases or categories that are not considered as public service: self-supply, co-generation (heat and power producer), Independent Power Producer (IPP), small producer, exportation power producer and power importer. The companies interested to participate under these categories must obtain a permit from the Comision Reguladora de Energía, Energy Regulatory Commission (LSPEE, 1993).

Since their appearance, the share of electricity generated by private companies has grown significantly. The electricity generated by these companies represented 30% of the electricity generation in 2008 (SENER, 2009a).

The Ley para el Aprovechamiento de Energías Renovables y el Financiamiento de la Transición Energética (LAERFTE), Law of Use of Renewable Energy and Financing of the Energy Transition was passed in 2008. This law is part of the Energy Reform Bill, and creates a renewable energy council aimed to foster renewable energy development and to promote the use of international funding mechanisms such as the CDM. The LAERFTE mandates that the Secretaría de Energía (SENER), Ministry of Energy, with the help of the Secretaría de Hacienda y Crédito Público (SHCP), Ministry of Finance and Public Credit, Secretaría de Medio Ambiente y Recursos Naturales (SEMARNAT), Ministry of Environment and Natural Resources and the Secretaría de Salud, Health Ministry designs a regulatory mechanism to consider the externalities and the capacity contributed by renewable energy projects.The externalities of renewable energies will be compared with ones pertaining to fossil fuel plants.

2.1 Government entities related with the Mexican electric sector. There are five Government departments or agencies related to electricity sector regulation: Secretaria de Energía (SENER), Ministry of Energy, Comisión Reguladora de Energía (CRE), Energy Regulatory Commission, Secretaría de Hacienda y Crédito Público (SHCP), Ministry of Finance and Public Credit, Comisión Federal de Electricidad (CFE), Federal Electricity Commission, Luz y Fuerza del Centro (LYF), Central Light and Power, the Comisión Nacional para el Uso Eficiente de la Energía (CONUEE), National Commission for the Efficient Energy Use and Secretaría de Medio Ambiente y Recursos Naturales, Ministry of Environment and Natural Resources (SEMARNAT).

SENER is responsible for planning the development of the energy sector assuring the best possible use of renewable sources. The SENER is in charge of the establishment of policy guidelines and oversees compliance, providing certainty to participants (Sener, 2009b).

SHCP helps the SENER to determine the adequate electricity tariff for each category of customers: residential, commercial, agricultural and industrial (Sener, 2004).

CRE issues and manages operation permits for private participants or External Energy Producers. This Commission establishes the price of electricity that the utilities pay to the External Energy Producers and the interconnection rules. It also overviews the dispatch rules. There are five commissioners in charge of the CRE. (DOF, 2003).

CONUEE, promotes energy efficiency and the sustainable use of renewable energies. It was constituted in 2008 as part of the energy reform. One of its functions is to establish methodologies to determine the greenhouse gas emissions of the energy sector. This entity has taken the functions of the Comisión Nacional para el Ahorro de Energía (CONAE), National Commission for Energy Conservation (CONUEE, 2009).

SEMARNAT is in charge of enforcing laws regarding the protection of ecosystems, natural resources and the environment. This entity reviews the Environmental Impact assessments of the power plants (SEMARNAT, 2009).

2.2 External Energy Producers This section offers a description of the six modalities in which private companies can participate in the Mexican electric sector. The LSPEE in its 3rd article defines the modalities that can not be considered as public service, thus private participation is allowed. In 2004, there were a total of 330. Of those 89.7% were operating (Sener, 2005). In 2007, the Regulatory Energy Commission reported that there were 714 active permits, of which 90% were in operation (Sener, 2008).

Independent Power Producer. This mode represented 53.2% of the total permits granted by the CRE and 19.4% of the national installed capacity in 2007. The IPP´s total capacity reached 13,152 MW (SENER, 2008). When the CFE determines that there is a need to increase the electricity generating capacity and that it would be economically convenient that a private company build and operate the project, it publishes a tender. The CFE determines the capacity required, the plant technology and the contract length. The company that wins the bid builds, finances, owns and operates the project. The bid winner is determined by the lowest average generating price. The contract between the CFE and the plant owner is usually a 25-year power purchase agreement. This contract specifies the price at which electricity will be bought and the payments that the CFE will make to the operator (CFE, 2004).

Self supply. This mode is used by companies that generate the electricity they need to run their business.

Co-generation. This mode refers to electricity production using secondary thermal energy. The entity that holds the permit has to provide the CFE the electricity generated that is not used by their processes.

Small producers. This mode applies to plants with a capacity of 30 MW or smaller. All the electricity generated has to be sold to the CFE unless the project has a capacity not greater than 1MW and is going to be used to serve isolated areas.

Export. This mode is used to export electricity generated from cogeneration, independent production and small production.

Import. This mode refers to electricity import by individuals or companies to satisfy their own needs.

Self-supply and co-generation plants can sell their electricity surplus to CFE (LSPEE, 1993).

Mexico’s electricity generating capacity reached 59,008 MW in 2007, the CFE owns 65.1% of this capacity. Independent Electricity Producers Productores Independientes de Energía own and operate 19.4% of the installed capacity (see Figure 2-1). The electricity generated in 2007 reached 263,386 MWh (Sener, 2008).

Figure 2-1 Installed capacity share.

Source: (Sener, 2008)

The fuel used to generate the 51,029 MW generating capacity designated for public service is mainly natural gas, 38.2%, fuel oil and diesel jointly accounting for 25.6%, renewables with 24.3% and finally nuclear with 2.7%. It is relevant to note that Wind Power only accounts for 0.16% with 85 MW (see Figure 2-2) of the installed capacity designated for public service (SENER, 2008).

Figure 2-2 Capacity for public service

Source (Sener, 2008)

3 Independent Power Producers (IPP) Currently, there are 21 generation plants operating under this mode. These plants are managed by eight private firms (SENER, 2004). Two plants are under construction and will be connected to the grid by the end of 2010 (SENER, 2009a).

The main External Energy Producers are: IBERDROLA, Union Fenosa and Gas Natural. The total capacity of each participant is shown in Table 3-1. Their respective capacity share is found in Figure 3-1. The plants owned by Gas Natural were built and previously owned by Electricite de France (EDF). EDF sold all the plants it had in Mexico to Gas Natural (Reuters, 2007).

Table 3-1 Total capacity of each independent power producer.

Parent Company Capacity1 Iberdrola 4,506 Gas Natural 2,469 Union Fenosa 2,309 Intergen 1,194 Mitsubishi Co. 1,084 Transalta Energy Corporation 593 Mitsui 563 AES 532 Iberdrola Renovables 103* Energía y Recursos Ambientales S. A. y Energías Ambientales de Guadalajara S. L. 102* 1 Indicates the capacity authorized by the CRE. In some cases the companies install a slightly lower capacity.

*These plants are under construction and are scheduled to operate by November 2010.

Source: (CRE, 2009)

Figure 3-1 Independent power producers capacity share.

Source: (CRE, 2009)

IBERDROLA is based in Spain and is the EPP with the largest installed capacity in Mexico. It has an installed capacity of 4,506 MW. It has invested more than USD 4 Billion in its 5 projects in Mexico. These plants are fueled with natural gas. Its operation in Mexico represented a €484.9 Million profit during 2008. The exchange rate had a negative impact on their operations: €35 million were lost due to the Dollar´s depreciation against the Euro. This company is listed on the

Spanish stock market and is the world’s largest operator of wind farms (Iberdrola, 2009a).

Union Fenosa has invested US $ 2 Billion in Mexico and its plants account for 17% of the IPP capacity. These numbers include a 450 MW plant that is under construction and will be operating by January 2010. It had a net profit of €1.2 Billion in 2008. The new plant is being built in the northern state of Durango (Union Fenosa, 2009).

Gas Natural has invested US $ 1.7 Billion in its five Mexican plants. It has a total capacity of 2470 MW. The net profit reached € 1 Billion in 2008. Gas natural entered into the IPP business by buying the plants that were built by Electricite de France. The sale took place on December 2007 (REUTERS, 2009). In addition to its participation as an IPP, Gas Natural participates in natural gas distribution (Euroinvestor, 2007)

Intergen is jointly owned by the Ontario Teachers’ Pension Plan and GMR Infrastructure Limited. It built the first privately funded power plant in Mexico (1998). It now operates 4 plants with a total capacity of 2,211 MW. Its participation grew significantly in 2008 when it acquired two power plants that were built and previously owned by Transalta. The sale was closed at US $ 303.5 million. (Transalta, 2008)

Two examples of how IPP fund their power plants are the Samalayuca plant and the Bajio power plant.

Samalayuca

The Samalayuca plant was built in 1996 by a consortium formed by GE Power Systems, GE Capital Structured Finance Group, El Paso Energy International, Intergen and a Mexican construction firm called ICA. The plant was built on a Build-Lease-Transfer (BLT) agreement. The CFE will lease the plant for 20 years, after that time the plant ownership will be transferred to CFE. The project

11 required US $ 660 million which was financed by four commercial banks. The U.S. Export-Import Bank provided US $ 410 million in political risk insurance. The plant uses combined cycle gas turbine technology (Power Technology, 2009).

Bajio

This 600MW plant required US $ 435 million. The plant was built on a Build Own Operate agreement in 2000 by a joint venture formed by American Electric Power and Intergen. The financing plan included loans from the Inter-American Development Bank (IDB), funding from the U.S. Export Import Bank, using Eximbank’s Comprehensive Guarantee Program, and commercial banks loans.

IDB provided US $22.5 million under an A Loan. US $113 million were obtained under a B loan from a consortium of commercial banks: BNP Paribas, Deutsche Bank, Citibank and Dresdner Bank. Citibank provided US $215 million for the Eximbank Comprehensive Guarantee facility (Intergen, 2000).

4 Renewable energy Mexico’s main renewable energy source used for electricity generation is hydroelectric, it accounts for 22% of the electricity generation capacity. Geothermal ranks second with 1.88% of the generation capacity and wind ranks third with 0.16% of the total electricity generating capacity. According to the official forecast wind capacity is expected to have a 0.92% capacity share, with 595 MW in 2014 (Sener, 2005). Although the capacity of renewable energies will be increased their share does not reflect that growth since the capacity of fossil fuel fired plants will increase at a significantly higher rate.

Table 4-1 Installed capacity share.

2004 2014 Geothermal & Wind 3.1% 2.5% Nuclear 4.4% 2.5% Hydropower 12% 8.9% Fossil fuels 80.50% 86.10% Total capacity 46,552 MW 64,210 MW Source: (Sener, 2005)

This work focuses on wind farms because this renewable energy source is of interest to private investors. Hydroelectric and geothermal projects are usually built and managed by the government owned utilities (Bazua, 2001).

Private companies build and operate wind farms under the self-supply scheme or as Independent Power Producers. They are regulated by the Energy Regulatory Commission, who oversees the interconnection contracts (the connection between the producer and the grid). The difference with respect to the Independent Power Producers that are fired with fossil fuels is that Renewable Energy Projects have access to special incentives. These incentives are discussed in section 6.

5 Wind energy Mexico has significant potential for electricity generation with renewable sources. The CRE estimates that Oaxaca´s wind power potential is about 10,000 MW (CRE, 2006). Baja California’s wind power potential is about 10,000 MW (Walker, 2007 cited in KEMA and Bates White, 2008). These amounts are considerable since they represent about 40% of the actual installed capacity of 51,029 MW for public service. If Mexico develops this potential it would surpass the actual 7,118 MW installed in Texas (AWEA, 2009b). Currently Mexico’s wind power installed capacity is 202.5 MW in operation (Table 5-1). This capacity will be increased by 456 MW by the end of 2010 (Table 5-2). Another 2,123 MW will be added during the period 2010-2012 (Table 5-3) (AMDEE, 2009).

Appendix D shows the wind resource map for the state of Oaxaca. The one for Baja California is shown in Appendix F. Other states with wind power potential are Zacatecas, Hidalgo, Sinaloa and Yucatan.

Table 5-1 Wind projects in operation

Capacity Project (MW) CFE (La Venta I, II) 85 Iberdrola (La Ventosa) 80 Eurus (phase I) 37.5 Total 202.5 Source: (Amdee, 2009)

The typical capital investment required to develop a wind farm is US $900/KW to US $1,400/KW. The operating cost (electricity generation cost) is typically from 3.5 to 4 cents USD/KWh (SENER, 2004). The cost difference between wind farm locations arises from the cost of turbines, land leasing agreements and geographical conditions that impact the cost of building a wind farm. Some areas

14 with high wind potential are in unpopulated areas or in mountainous terrains so the building stage is more complicated. The fact that sites with high wind potential are not near the highly populated areas brings up a need of transmission infrastructure. In order to plan for the transmission requirements for wind energy projects in Oaxaca, the CRE conducted a temporada abierta, open season. In this process, project developers book transmission capacity based on their wind farm’s capacity. Project developers share the costs of the infrastructure with the CFE. The first open season was declared in 2006; 12 companies reserved capacity for 2,000MW (CRE, 2007).

Table 5-2 Projects under construction 2009-2010

Project Capacity (MW) Cisa-Gamesa 26.35 Electrica del Valle de Mexico 67.5 Eoliatec del Itsmo 22 Eurus (Phase II) 210.5 Fuerza Eólica del Itsmo 30 La Venta III 100 Total 456.35 Source: (Amdee, 2009)

Table 5-3 Projects planned for 2010-2012

Project Capacity (MW) Desarrollos Eólicos 227.5 Mexicanos Eoliatec del Itsmo 142 Eoliatec del Pacifico 160.5 Fuerza Eólica del Itsmo 70 Oaxaca I 100 Oaxaca II, III and IV 300 Preneal Mexico 395.9 Union Fenosa 227.5 Zemer 500 Total 2,123 Source: (Amdee, 2009)

Profile of Mexican wind energy projects

Oaxaca I is a 101 MW project that will require an investment of US $176.6 million. The wind farm will operate as an independent power producer and will be built by a consortium formed by Energía y Recursos Ambientales y Energías Ambientales de Guadalajara. The project will connect to the grid through a 115 kV transmission line (Milenio, 2009). Three more similar projects are planned by the CFE: Oaxaca II, Oaxaca III and Oaxaca IV, each one with a 100MW nominal capacity (Amdee, 2009).

Projects in Baja California

These projects will be installed in an area called La Rumorosa, near the California, US and Baja California border (See Appendix F). Three projects have been proposed (KEMA and Bates White, 2008).

Zemer Energía and Union Fenosa plan to install two wind farms in Baja California with total capacity of 500 MW. This project will export the electricity into California. Utilities in California will use the electricity generated by these projects to meet the requirements set by their Renewable Portfolio Standard. According to Zemer the average wind speed in the zone is between 6.5 and 7.7 m/s.

Fuerza Eólica and Clipper Energy have plans to install wind farms in La Rumorosa with a capacity of 300MW.

Sempra Generation-Cannon Power plan to develop a 250 MW wind farm near La Rumorosa. The project consists in 125 wind turbines and will require US $ 400 million. The electricity will be sold to Southern California Edison under a 20 years PPA (KEMA and Bates White, 2008).

City municipalities are interested in the development of renewable energy projects. Municipalities are administrative divisions of the states. There are 2,438 municipalities. Municipalities are intensive electricity users since they are in charge of street lighting and water pumping for their communities. About one third of the typical municipality budget is spent on electricity (Banobras, 2009). Wind energy projects offer several advantages for the operators, the communities where they will operate and to the country. Some of these benefits are:

· A reduction in the greenhouse gasses emissions because electricity generated from wind turbines requires no fuel as opposed to electricity generated from fossil fuel fired plants. As shown in Figure 2-2, natural gas plants are the main sources of electricity in the Mexican electricity sector.

· Cost can be better forecasted since fuel price volatility is not present.

· Reduce the dependence on imported natural gas. There is a gap in the domestic production of natural gas and country’s demand.

· Additional income for landowners. They get a fixed amount for leasing their land while they can continue using the land for other purposes such as agriculture.

· Increase in the economic activity in the area and jobs creation.

Some disadvantages of wind energy vs. fossil fuel fired plants are:

· Location is determined by nature. Traditional power plants location is flexible since fuel can be transported to the power plant. In the case of Wind power it is unfeasible to take wind to another location.

· High investment to capacity ratio. This means that with the same capital more capacity could be acquired if a fossil fuel fired power plant is built.

· Intermittence or power fluctuation due to changes in the wind’s speed

(AWEA, 2009a).

5.1 The CFE´s wind energy projects The CFE operates 85 MW of wind power in Oaxaca and it has plans to install at least 500 MW in the next 10 years. The CFE´s experience with wind energy started with the Guerrero Negro project developed in 1982. The project has a capacity of only 0.6 MW. Twelve years later the CFE installed its second wind project, La Venta I. This project has a capacity of 1.575MW and was the first wind energy project connected to the grid (CDM, 2009b).

In 2007, the CFE started to operate La Venta II, the first large-scale wind farm in Mexico. This wind farm has a capacity of 83.3 MW. The CFE published an international competitive bid to find a project developer. The bid winner was a consortium formed by the Spanish firms: Iberdrola and Gamesa Eólica. The project was developed under a turnkey scheme: CFE owns and operates the wind farm (Iberdrola, 2005).

The CFE awarded to Iberdrola Ingeniería y Construcción a contract to build and operate La Venta III, a 103 MW wind farm. The plant will be operated for 20 years by this firm, as an Independent Power Producer. The wind farm will be located in the municipality of Santo Domingo Ingenio, Oaxaca. La Venta III is expected to start its operations by November 2010. The project consists of 121 wind turbine generators, each with a capacity of 0.85 MW. The WTG are located at a 44m height. Iberdrola calculates that La Venta III will avoid the emission of

150,000 metric tons of CO2 per year. This wind farm will use Gamesa G52-850 wind turbines. This wind farm will be connected to the grid through a 230 kV transmission line (Iberdrola, 2009b). This project will receive incentives for US $ 20 Million during its first five years of operation. The funds were provided by the Global Envornmental Fund (BNA, 2006).

Table 5-4 Wind farms operated by the CFE

Wind Farm Capacity (MW) Start of Operations

Guerrero Negro 0.6 1982

La Venta I (off grid) 1.575 1994

La Venta II 83.3 2007

Source: (CFE, 2009a)

5.2 Wind energy in the world According to the World Wind Energy Association the worldwide wind power capacity reached 121,188 MW in 2008 (See Figure 5-1). This represented a 29% increase from 2007. As shown in Figure 5-2 wind capacity has steadily grown at a rate of more than 20% each year since the year 2000 (WWEA, 2009).

Figure 5-1 Worldwide wind power capacity

Figure 5-2 Annual wind capacity growth rate.

6 Incentives for renewable energy projects This section addresses the incentives available for renewable energy projects in Mexico.

When an energy project developer considers what kind of power plant to build there are some factors that make renewable energy project less attractive from the investment perspective. First, the high investment to capacity ratio required to develop renewable sources makes them less attractive than fossil fuel fired power plants. Second, the externalities caused by electricity generation from traditional power plants such as greenhouse gas emissions and environmental damage are not considered in the private cost comparison analysis.

Mexican federal government claims that sustainable development is a central theme of Mexico’s policy agenda (Sener, 2004). The Government offers two incentives for wind energy projects: the interconnection contract and the accelerated depreciation scheme. There are no tariff incentives or production credits funded by the Mexican Government. The interconnection contract offers the project developer to pay for 30% to 50% of the interconnection and transmission costs and to exchange electricity between the periods of high generation and low generation (SENER, 2004). The depreciation incentive allows the project developer to depreciate 100% of the investment during the first year. This benefit requires that the wind farm operate for at least five years. However, the depreciation applies over the fiscal obligations of the sole purpose society that runs the renewable energy project not for the fiscal obligations of the parent company. This issue reduces the attractiveness of the incentive.

Currently Mexican laws do not provide any premium on the rate paid for electricity generated from wind farms. The only incentive of this kind is available from the Clean Development Mechanism (CDM) or the Green Fund (Sener, 2004). The CDM was established under the Kyoto Protocol. This agreement was signed by many countries to limit or control their greenhouse gas emissions.

Kyoto Protocol established three market-based mechanisms to control emissions: Clean Development Mechanism, Emissions Trading and Joint Implementation (CDM, 2009a).

International organizations such as United Nations Program for Development, the World Bank and the Global Environment Facility support the development of renewable energy projects in Mexico. Mexico has obtained more than US $ 81 Million from the Global Environmental Facility, World Bank Group and UN Development Program to promote the development of large scale renewable energy projects, foster technical development and research associated with renewable energy (SENER, 2009b).

The Ley para el Aprovechamiento de Energías Renovables y el Financiamiento de la Transición Energética, Law of Use of Renewable Energy and Financing of the Energy Transition established a MX$ 3 billion fund that will support renewable energy projects (LAERFTE, 2008). It is still not clear how are these funds going to be used, the Ministry of Energy needs to determine the mechanism that will be used to allocate them.

The Mexican Development Bank Banco Nacional de Obras y Servicios Publicos (BANOBRAS), National Works and Public Services Bank established financial schemes to incentivize renewable energy projects. BANOBRAS finances infrastructure for local governments and promotes investment in private projects. It aims to facilitate the financing/investment process. Besides considering the project risks, the bank considers the expected income flow of the project to align it with the loan payments. The main advantage of being supported by BANOBRAS is that it provides guarantees so that the projects can obtain commercial loans from private banks that otherwise would be denied. This bank has an Infrastructure Investment Fund that co-finances and develops investment studies (SENER, 2004).

6.1 Green Fund This initiative was funded by a strategic alliance between The World Bank Group, Global Environmental Facility and the United Nations Development Program (UNPD). The alliance is aimed to eliminate obstacles that renewable projects face. It compensates for the cost difference between conventional electricity generation and renewable generation. The program was initiated with a US $ 70 Million donation and is mainly based in the schemes that are currently operating in California and in the United Kingdom. The alliance pays between US $ 0.0075 cents/KWh and US $ 0.015 cents/KWh to the renewable energy operator. The diagram in Figure 4.1 shows the difference between the financial schemes for the combined cycled plants (natural gas fired) and renewable sources for electricity. The funding from this program lasts from 5 to 6 years and is also known as the Green Fund. To make this program self-sustainable the Government expects that in the future the CFE recognizes the benefits of electricity from renewable sources and pays an extra fee that substitutes the subsidy provided by the Green Fund (SENER, 2004). This fund was expected to support the development of 400 MW of wind power. Figure 6-1 shows how the Green Fund works.

Combyned Cycle Plant (Natural Gas)

External Energy CFE Final User Producer US $ 0.04 Tariff

25 years contract

Renewable Energy (Wind)

Renewable CFE Final User Energy Operator US $ 0.04 Tariff 25 years contract

US $ 0.01 Fund 5-6 yr support

Figure 6-1 Financial transfers: Green Fund mechanism

Source: (Sener, 2004)

6.2 The Clean Development Mechanism (CDM) and carbon certificates The Kyoto protocol established three market based mechanisms to reduce greenhouse gas emission and stabilize its concentration in the atmosphere: Emissions trading, Clean Development Mechanism and Joint Implementation (CDM, 2009a).

Joint Implementation is used when two or more developed countries develop a sustainable development project. The Clean Development Mechanism is used when a developed country and a developing country carry out a sustainable development project.

Mexico has shown its interest in reducing climate change since 1993 when it supported the UN Framework Convention on Climate Change. Mexico ratified the Kyoto protocol in 2000. In 2004, the Mexican Government created a National

24 authority that is in charge of managing projects within the Clean Development Mechanism (CDM) and serves as the national authority for Carbon Certificate trading. This committee is known as the Committee for Projects to Reduce Greenhouse Gas. Its two main objectives are: to reduce greenhouse gases and to obtain financial resources to develop renewable energies in the country by carbon certificates trading (INE, 2009).

Mexico has no obligation, under the UN Framework Convention on Climate Change, to reduce its carbon emissions. However, if Mexico reduces its carbon gas emissions it gets credits or permits that can be traded with developed nations that do have the obligation. In order for a project to qualify to the CDM benefits it must comply with two requirements: show that it will contribute to the sustainable development of the country and that the feasibility of the project is only possible with the funds provided by selling of the carbon emission credits. The carbon reduction credits can boost the development of renewable energy projects. The Mexican Government has signed an agreement with the Japan Bank for International Cooperation (JBIC) that will increase information exchange so that Mexican project developers can easily find carbon reduction credits purchasers (SENER, 2004).

7 Wind turbines This chapter describes the components of a wind turbine and its operation.

Wind turbines are machines used to convert winds´ aerodynamic force into electricity. This is possible by the torque that the rotor applies to the rotating shaft. This torque produces mechanical power that is used to run an electricity generator.

The first windmills were built by the Persians approximately 900 AD. They were drag based, so they were inefficient and could not withstand high winds. Actual wind turbines are based in the windmills that appeared in Europe during the middle ages. The first time wind was used to generate electricity was right after the electric generator in late IXX century. Horizontal axis turbines need to be aligned with the wind direction. Current turbines are aligned by means of the jaw system (Manwell et al., 2002).

Wind turbines sizes vary greatly. There are microturbines with a diameter of only 0.5 meters and large commercial turbines with a 100 meters diameter. The nominal capacity of a wind turbine can be from 200 watts to 3 MW. Commercial wind turbines can be classified in: small, medium and large.

Table 7-1 Commercial scale wind turbine classes.

Swept Area Diameter (m) (square meters) Power Rating (kW) From To From To From To Small 10 20 79 314 25 100 Medium 20 50 314 1,963 100 1000 Large 50 100 1,963 7,854 1000 3000 Source (Gipe, 2009)

Small commercial turbines can be used to power schools, farms and small business. Medium commercial turbines can power factories, farms, and small wind farms. Large commercial turbines are used in wind farms.

According to Gipe the most important parameter to compare different turbines is the rotor diameter. Using the rated power for comparisons can be misleading since there are turbines with lower rated power that can produce more electricity than higher rated ones (Gipe, 2009).

Wind turbines are classified according to its rotating axis: vertical or horizontal. Actual commercially available turbines for electricity generation have a horizontal axis: Horizontal Axis Wind Turbine (HAWT). Vertical axis turbines are useful for other applications such as grinding and water pumping. Horizontal axis turbines are suitable for electricity generation given the high rotational speed as opposed to vertical axis turbines that characterize for lower speeds and higher net torque (Manwell et al., 2002).

7.1 Wind turbines subsystems A HAWT is subdivided into subsystems: rotor, drive train, nacelle and main frame, tower and foundation, and “balance of the electrical system”.

Rotor- The rotor comprises the blades, usually two or three, and the hub. The rotor is the most relevant component from a performance and cost standpoint. The blades are made of composites. . Composites are materials comprised of two or more different materials that are joined by a matrix. The most common composites used in blades are fiberglass, reinforced plastics and wood or epoxic materials. Carbon fiber is used to reinforce glass fiber blades

Drive train- The drive train comprises the rotating parts. The main components are: low speed shaft, gearbox, high-speed shaft, the rotating parts of the generator and a mechanical brake. The gearbox is used to change the slow

27 rotation rate of the rotor into high-speed rotations that feed the generator. (Manwell et al., 2002).

Generator

The generator uses the mechanical energy provided by the rotor to move magnets and create a rotational magnetic field that results in electric generation. The output frequency, rate at which electricity is transmitted, is determined by the number or rotational cycles of the generator and the number of poles.

The most popular generators are induction and synchronous generators. Induction generators have the advantage of being easy to connect to the grid and that they are inexpensive.

Nacelle and jaw system

The turbine housing is known as nacelle, and its main function is to protect the turbine from the weather. The jaw system is the mechanism used to align the rotor with the wind direction. Jaw systems can be active or passive: active systems have motors that rotate the nacelle in a horizontal direction. These jaws are controlled by an automatic system that determines the optimal alignment based on the wind direction. The wind direction is read with a sensor located on the nacelle. Passive jaws, also known as free jaw systems, rotate freely to align with the wind direction. Active jaws are often used in upwind design; meanwhile passive jaws are more common in downwind designs (See Figure 7-1).

Tower and foundation

The tower size is suited to the wind speed distribution in the area. Most towers’ height is from 1 to 1.5 times the rotor diameter. Downwind turbines are especially sensible to the tower designs since the shadow effect most be considered. This is produced by the airflow that goes around the tower before it hits the blades resulting in power fluctuations and increased noise levels.

Controls

The purpose of this system is to modify the rotor speed, jaw direction, blade geometry and blade pitch to manipulate the turbine operation. This system consists of sensors, controllers, power amplifiers and actuators that are found in the turbine.

There are two main objectives of the control system:

· Maximize the electricity output.

· Manipulate the aerodynamic rotor characteristics to modify its speed and limit the torque applied to the drive train.

Balance of electrical system

This subsystem is comprised by electrical components such as power electronic converters, transformers, cables, capacitors for power factor correction and motors.

HAWT can be classified according to the rotor orientation relative to the wind direction: upwind or downhill (See Figure 7-1), rotor control: pitch vs. stall, number of blades, hub design: rigid or teetering, its alignment to the wind: free jaw or active jaw.

Figure 7-1 HAWT designs.

Source: (Manwell et al., 2002)

Wind turbines need an over speed control since unusual high speed such as a gale can damage the rotor. Large turbines use mechanical brakes and aerodynamic brakes such as pitchable blade tips.

(Manwell et al., 2002)

7.2 Power performance curve There is a limit on how much wind power can be captured by the rotor. This is described by the Betz Law. This law establishes that only 59.3% of the power could be theoretically captured by the rotor in optimal conditions (Gipe, 2009). The amount of electric power that can be obtained from wind is lower than the Betz limit since there are losses in the conversion process and also because it takes time for the rotor to yaw to face the wind when there is a change in the winds´ direction. The actual electric power available at different wind speeds for a Gamesa G52 850 wind turbine is shown on Figure 7-2. These data is summarized on Table 7-2.

Figure 7-2 Gamesa G52 850 power curve.

Source: (Gamesa, 2009)

Table 7-2 Gamesa G52 Power Curve

Speed (m/s) Power (kW) 4 27.9 5 65.2 6 123.1 7 203.0 8 307.0 9 435.3 10 564.5 11 684.6 12 779.9 13 840.6 14 848.0 15 849.0 16 850.0 17-25 850.0 Source: (Gamesa, 2009)

8 Wind farm development process This section describes the process that companies would use to develop a wind farm in Mexico. The awareness of the process is useful to understand the planning and financial implications of each phase of the project (Eurus, 2008).

i. Location

· Identification of a location with high wind potential. This can be done through a qualitative site description by looking on the effect of wind on the vegetation (Gipe, 2009). A more detailed study can be done with anemometers. · Describe geographic and social conditions, and establish contact with the stakeholders (land owners, environmental agencies, etc). · Rough wind estimation. · Consider availability of transmission lines.

ii. Wind Analysis

· Thorough wind study describing its characteristics. o Wind speed distribution and direction. The wind distribution is used to compute the power density. Wind speed can be compared to a specific wind turbine power curve to estimate electricity output (Gipe, 2009). o Surface roughness estimation. This is useful to estimate wind speed at heights different than the one used for the anemometer. · Compute generating capacity. This can be done based on site´s power density and the swept area of the rotor chosen.

iii. Design

· Determine turbine specifications and wind farm configuration.

· Develop an environmental impact assessment study. · Financial study to determine project feasibility. · Carry out the environmental impact assessment. iv. Bidding Process (In the case that the wind farm is intended to operate as an IPP)

· Communicate to the CRE the interest of the firm to participate in the bid issued by the CFE. · Present a proposal to compete in the competitive bid. v. Approval vi. In this phase the CFE chooses one of the proposals. The CFE selects the project that offers the lower cost among the proposals that meet the technical requirements. (In the case that the wind farm is intended to operate as an IPP)

· In this phase formal discussions take place with the electric company to schedule the grid interconnection. · Sign interconnection contract. · Obtain the permits required from the environmental agencies, municipalities and other government agencies. vii. Build facilities

· Infrastructure is built and turbines installed. · Grid interconnection. · Test operation and adjust turbine parameters. viii. Operation

rocess. Wind farm development p

1 - 8 Figure

9 Funding sources available for energy projects A renewable energy project can be divided into three stages: planning, development and operation. The stage that requires the highest investment is the development stage, it is also the most risky, many things can occur in a different form than planned. The impact of some of these risks can be diminished by insurance. The extra cost of insurance can be considered during the planning stage if the project management team foresees the risk.

According to Arne (1985) the expectations of the lender must match the risk of the project. Arne (1985) was focused on mining projects but his ideas can be applied to energy projects: the financial planning and the development stages share many characteristics between both industries.

Energy projects require considerable amounts of capital and the participation of many entities. The right election of a financing scheme for an energy project is crucial to the project’s financial performance. Choosing the best funding requires considering the following factors:

· Who are the project owners and what their share in the new investment is. · Scale of the project. · Capital needed. · Investment cash flow: how many installments are needed and when are they needed. · Pay cash flow: how is the company going to pay the loan? · Collateral available. · Tax credits or subsidies. · Company’s credit score. · Exchange rate. · Obligations imposed by the lender.

Companies interested in developing a wind farm have many sources of capital available:

Loans from commercial banks. The interest paid for the loan is tax deductable, which lower taxes.

Government funding. The three levels of Government: Municipal, State and Federal can provide funding. This can be in the form of a bond, loan or even equity participation in the project. Loans are granted or guaranteed by Nacional Financiera S. A. (NAFINSA) (DOF, 1986). This institution is a Development Bank that promotes infrastructure investments that will benefit the national economy. As its financial resources are limited, NAFINSA helps developers to get a loan from commercial banks by guaranteeing the loan. This not only assures the availability of credits but also reduces the interest rates as NAFINSA reduces the risks that the banks will take.

Private investors. This category includes individuals and companies that have capital ready to be invested. The accelerated depreciation for renewable energy investments might be of special interest to some companies.

Financing companies. These companies usually finance specific equipment rather than a complete project. They offer flexibility to the renewable energy operators since they can increase the capacity of a project by buying more equipment using this scheme.

Joint Ventures/Partnerships. These associations are becoming popular in the renewable energy sector in Mexico. It is common to see Joint Ventures that involve one domestic firm and another from overseas. In addition to the funds that a foreign firm may provide their main contribution can be their expertise in energy projects. The project proponent usually provides: knowledge of the terrain characteristics (weather, geology, etc.), the regulatory frame, risk assessment and human resources.

10 Case study: EURUS wind farm. This section provides an overview of the largest Wind farm that is being built in Mexico.

The EURUS wind farm will be commissioned by 2010 and it will be the largest wind farm in Mexico. The project is being developed by Acciona Energía. The wind farm is property of EURUS, S. A. de C. V. A company created by Cementos Mexicanos CEMEX for the specific purpose of running the wind farm. The power generated is sold to CEMEX, Mexico´s largest cement Company. The wind farm has a nominal capacity of 249 MW. It is located in a region called La Venta, near the municipality of Juchitán de Zaragoza, Oaxaca. This region is located in the isthmus between the Gulf of Mexico and the Pacific Ocean. The wind speed is consistently high all year and it ranges from 15mph to 22 mph. The project consists of 166 turbines and it is one of the biggest wind farms in the world. The rated power per turbine is 1.5 MW. The wind farm is located in a 6,180 acre property and it is connected to the grid though a 15 km and 33kV line (CDM, 2006).

The total investment required is US $ 395,412,000. This wind farm will supply 25% of CEMEX energy needs. The Wind farm will produce enough energy to power a city of 500,000 people, while reducing carbon monoxide emissions by 600,000 metric tons per year. The expected output is 983.6 GWh per year, giving a capacity factor of 45%. The expected CO2 emissions reduction is 6,002,342 tCO2 during the 10 years of its crediting period (CDM, 2006).

Table 10-1 Wind farm characteristics.

Turbine Model IT-1500

Manufacturer Ingetur (Subsidary of Acciona)

Rotor Diameter 77m

Turbines 166

Turbine Power 1.5 MW

Total Power 249 MW

Baseline emission 610.3 tCO2/ GWh factor

According to the project design document that was submitted by the project proponents to the Clean Development Mechanism the average annual income will be US $67,533,799 with a total investment of US $395,412,000. The Internal Rate of Return without sales of Certified Emissions Reduction is 11.76%. The IRR with CERs sales is 15.10% (CDM, 2006).

11 Case study: La Venta II wind farm La Venta II wind farm is located in the municipality of Juchitan de Zaragoza in the southeastern state of Oaxaca. This 83.3MW wind farm has 98 wind turbine generators (WTG), each with a capacity of 850 kW. The wind farm is property of the CFE and was developed by a consortium formed by two private companies: Gamesa Eolica and Iberdrola Ingenieria y Consultoria Mexico. The wind farm was completed on December 14th, 2006. The wind turbine selected for this project is Gamesa G52-850. This wind turbine has a nominal capacity of 850 kW (ASF, 2007).

In order to find a project developer for the wind farm, the CFE published a bid on June 7, 2005. The project was assigned to the winning bidder on August 31, 2005 (ASF, 2007).

The project feasibility was assessed by the Electric Engineering Division of the Engineering School of the Universidad Nacional Autonoma de Mexico (UNAM), National Autonomous University of Mexico. According to this study the benefit- cost ratio is 1.417 and the Internal Rate of Return (IRR) is greater than 100%. It required an investment of US $ 111,406.4 million (CDM, 2009b).

In 2008 the CFE paid MX $5 million to the landowners where La Venta II was built. According to the project design document that was submitted by the CFE to The United Nations Framework Convention for Climate Change, the project has an impact over 949.84 hectares. The average amount paid per hectare was about MX $5,264 for 2008 (CFE, 2009b).

11.1 La Venta demography The wind farm has an impact over 949.84 hectares of communal land, known as ejido La Venta. This ejido was founded in 1951 and has a population of 1,800. The main economic activity is agriculture and livestock. The population belongs

39 to the Zapoteco ethnic group. Oaxaca has a great ethnic diversity with 16 different indigenous groups inhabiting the state (IPDP, 2006).

The CFE agreed to pay the ejido an amount between 1% and 3% of the wind farm annual revenue. During the negotiations to build the project the CFE agreed to create a US $ 732,150 fund to meet some of the requests from the community. The fund was used in the following activities (IPDP, 2006):

· Expand public lighting infrastructure. · Street paving. · Build a small office with a boardroom for the ejido. · Install computer in the local school. · Build a new classroom for Universidad de Ciencia y Tecnología de Oaxaca, Science and Technology School University of Oaxaca.

12 Project economics: wind farm output estimation This section analyzes the economic aspects of a hypothetical wind farm project that works under the Independent Power Producer scheme. The purpose of this chapter is to determine a project’s key financial performance indicators: IRR (Internal Rate of Return) and NPV (Net Present Value). A factorial experiment is carried out to determine what is the average change in the NPV with changes in the financing scheme. In this analysis the project’s NPV is the response variable.

The wind farm considered in this analysis is located in the state of Oaxaca. This wind farm has similar characteristics to La Venta II wind farm, such as the same nominal capacity 83.3MW and the same investment USD $111,449,963.71.

12.1 Methodology The amount of electricity that will be generated during the life of the project is needed to understand the project economics. The electricity generated per year can be computed with Equation 1. The wind farm’s capacity factor is dependent upon the wind characteristics and the wind turbine selected. For this analysis the capacity factor is assumed to have a Normal distribution with a mean of 35 % and a standard deviation of 2 %, N (35,2) (see Figure 12-1). The number of replications used to estimate the capacity factor is 1,000. Key descriptive statistics for the estimated capacity factor are shown on Table 12-1.

Electricity Generated (MWh) =Operating Capacity (MW)*Capacity Factor*24hrs*365days

Equation 1

Figure 12-1 Capacity factor distribution

Table 12-1 Key descriptive statistics for the capacity factor

Normal Min 26.98% Max 41.97% Mean 35.02% P10 32.59% P50 34.89% P90 37.60%

A full factorial experiment is carried out to determine the effect on the Net Present Value (NPV) with changes on three factors: interest rate, debt term and debt structure. This analysis is aimed to determine each factor’s relative impact on the project NPV. According to Montgomery (2005), a designed experiment is a test to identify changes in a response variable when controlled changes are made in the control variables. Control variables are also known as factors. In this analysis an experiment consisting in three factors was selected: debt structure, interest rate and debt term. Debt structure is modeled with three factors: 50%

42 debt, 75% debt or 99% debt, Interest rate is considered at two levels: 6% and 8%. Debt term presents two levels: 15 years and 20 years. In the case of debt structure the remaining percentage is covered with equity. In factorial experiments each of the possible values that a factor can have is known as its level.

12.2 Main assumptions

· Once a capacity factor is determined for a scenario, the capacity factor is considered to remain constant during the operating life of the project. Thus the annual electricity generated is the same during the wind farm life. · The wind farm is built during the first year; no electricity is generated in that period. · The model considers an operating life of 20 years. · The wind farm is registered under the Clean Development Mechanism for its first seven years of operation. The tons of equivalent CO2 emissions avoided for each MWh is 0.6257 tCO2 and the price of the emission reduction credit is US $7.23/tCO2 · The land leasing cost is considered to be 1.5% of the value of the electricity generated. · The factorial design used in this analysis assumes a general model. · The price paid for electricity is USD $ 0.07/MWh. · The tax rate is 28%.

12.3 Simulated scenarios Three cases with a different capacity factor were considered:

Case A: capacity factor is 32.586% (P10).

Case B: capacity factor is 34.895% (P50).

Case C: capacity factor is 37.6% (P90).

The capacity factor is the ratio of actual electricity output and the one that would be observed if the plant had operated at full capacity in a certain period.

For each case, twelve scenarios were considered to perform the factorial analysis. The different values considered for each variable are summarized in Table 12-2. This table also shows the Net Present Value and Internal Rate of Return for each of the combinations of different levels in the factors. Each combination is also known as a treatment (Montgomery, 2005).

Table 12-2 Scenarios considered

Capital Loan Interest P10 P50 P90 Structure length Rate NPV IRR NPV IRR NPV IRR % Debt (years) 50% 15 6% -8.29 8% -3.36 9% $2.43 11% 50% 15 8% -14.04 6% -9.10 8% $(3.32) 9% 50% 20 6% -4.99 8% -0.05 10% $5.73 12% 50% 20 8% -11.35 6% -6.41 8% $(0.63) 10% 75% 15 6% -2.66 9% 2.27 11% $8.06 14% 75% 15 8% -11.28 5% -6.34 7% $(0.56) 10% 75% 20 6% 2.30 12% 7.23 15% $13.02 18% 75% 20 8% -7.24 4% -2.30 8% $3.48 12% 99% 15 6% 2.75 15% 7.68 63% $13.47 142% 99% 15 8% -8.62 2% -3.69 6% $2.09 13% 99% 20 6% 9.29 192% 14.23 252% $20.01 322% 99% 20 8% -3.29 - 1.64 5% $7.43 186%

12.4 Base scenario analysis A base scenario was selected to get an insight on the project cash flows (Figure 12-2) for each of the three capacity factors considered. The scenario selected as base scenario considers a capital structure of 75% debt and 25% equity, loan repayment term 20 years and an interest rate of 6%. The project’s cash flow was computed with a model built in a spreadsheet (See Appendix C). The NPV and IRR obtained are summarized in Table 12-2. As Figure 12-2 shows, under the base scenario, the project is expected to have a positive cash flow during its

44 operating life. The only period that presents a negative cash flow is during the wind farm construction.

Figure 12-2 Net cash flow for base scenario

As it was expected, a higher capacity factor was reflected in a higher NPV because the wind farm is generating more electricity (Figure 12-3). This revenue has two components: tariff revenue and revenue per sale of emissions reduction credits (see assumptions in section 12.2).

Figure 12-3 NPV for the 3 capacity factors considered.

The IRR was also higher when higher capacity factors were considered. Comparing case A and case B it can be observed that an increase of 2.3% in the capacity factor increased the Net Present Value of the project by more than 300% (Figure 12-3).

Table 12-3 NPV and IRR

Capacity Case Factor NPV IRR A 32.59% $ 2.30 12% B 34.89% $ 7.23 15% C 37.60% $ 13.02 18%

12.5 Impact of a delay in the project’s start of operation Once a wind project is being built, project economics are affected if the project’s start of operations is delayed. All future cash flows will be delayed too. Moving the revenues farther in the future makes them less valuable today because of the time value of money. The wind farm has a construction time of one year. The effect of delaying startup one year was determined by considering this change in the cash flow model. In this analysis the debt repayment isn´t affected since the original debt contract considered a construction period of one year. During the second year, the project developer has to pay the debt annuity although there are no revenues since the plant isn´t complete. The variations in the NPV are shown on Table 12-4. For case C (capacity factor equal to P90) the NPV is reduced in 59%.

Table 12-4 Effect on NPV if start of operations is delayed.

1 year 2 year construction % change construction (as planned) Case A $ 2.30 $ (4.37) -290% Case B $ 7.23 $ 0.10 -99% Case C $ 13.02 $ 5.33 -59%

12.6 Analysis of results factorial experiment The 3x2x2 (number of levels in each one of the factors) factorial experiment was analyzed using the software Minitab 13. The relative importance of each factor, is known as “main effect.” The main effect is the average change in the response variable when controlled changes are made the control variables. An interaction is present in experiments where the difference in the response variable at different levels of one factor is affected by the level of other factors. The main effects for each of the factors considered in this experiment are shown on Table 12-7. This experiment considered interactions among two factors. (Montgomery, 2005).

In factorial experiments, a model can represent the observations. In this experiment an effects model was selected (Equation 2). The significance or impact of each of the components of this equation is determined from the analysis of variance (Table 12-6).

i =1,2,3

y ijk = m + t i + b j + c k + (tb) ij + (bc ) jk + (tc) ik + e ijk j = 1,2 k = 1,2

Equation 2

In Equation 2, m represents the overall mean effect. The mean effect of the experiment depends on the capacity factor considered (See Table 12-5).Table 12-5 Overall mean effect.

Overall mean effect Case A -4.78582 Case B 0.150516 Case C 5.934054

The effects of each factor level are defined as a deviation of the overall mean effect. The symbol tI represents the effect of ith level of the first factor, bj the effect of jth level of the second factor and ck the effect of the kth level of the third factor. The estimates of the effects of these three factors is summarized on Table 12-7. The model error is represented by e.

In order to determine if an interaction is statistically significant hypothesis tests are carried out. Equation 3 shows the hypothesis test used to determine if the interaction between the first two factors is relevant. An equivalent test is done for the other two interactions.

Equation 3

The column P in Table 12-6 shows the P-value of the tests. The p-value for each of the three interactions is smaller than 0.05. This means that at a 95% confidence, those interactions are not significant. Equation 2 considers the interactions between two factors. However their effect was not calculated since the analysis of variance showed that they were not statistically significant.

Table 12-6 Analysis of variance (ANOVA) table

Analysis of Variance for NPV, using Adjusted SS for Tests

Source DF Seq SS Adj SS Adj MS F P debt 2 188.109 188.109 94.055 4319.38 0.000 term 1 60.166 60.166 60.166 2763.10 0.000 interest 1 245.074 245.074 245.074 1.1E+04 0.000 debt*term 2 4.337 4.337 2.169 99.59 0.010 debt*interest 2 17.555 17.555 8.778 403.11 0.002 term*interest 1 0.621 0.621 0.621 28.52 0.033 Error 2 0.044 0.044 0.022 Total 11 515.907

Table 12-7 Main effects

Debt Repayment Term Interest rate Level Main Effect Level Main Effect Level Main Effect 50% -4.88 15 -2.24 6% 4.52 75% 0.07 20 2.24 8% -4.52 99% 4.82

13 Conclusions and key findings Wind resources have not been thoroughly studied in Mexico. Some areas have been studied such as as the Isthmus of Tehuantepec, coastal areas of Yucatan and Quintana Roo and some areas in the Mexico-US border, but a great portion of the terrority has not been studied. Because of this, the wind power potential could be much higher than the current 20,000 MW estimate (See section 5).

The main two challenges that a wind energy project faces are the lack of transmission infrastructure, and high transaction costs and financing options. The main transaction costs are the studies needed to obtain the permits from the CRE, the SEMARNAT and the CFE. Because there is little experience with private wind energy projects in Mexico, lenders are still wary of the profitability of these projects and this risk manifests itself in the interest rates offered to fund these projects. The open seasons, temporada abierta, proposed by the CFE have been a successful tool to determine transmission needs and to serve them.

The estimation of the capacity factor has a major impact on project economics. An overestimation can result in revenue being lower than planned during the life of the project. This results in the actual return being less than planned and can even comprise the ability to pay back the loan used to fund the project. In the case of La Venta II for example, the project developer (CFE) reported to the United Nations Framework Convention on Climate Change (UFCCC) a planned capacity factor of 42.17% (CDM, 2009b), reflecting an annual average electricity generation of 307,728 MWh. However, the actual capacity factor for its first crediting period, July 1st 2007- June 30th 2008 was significantly less at 33.52%, yielding a generation of 244,658MWh (CDM, 2008). The capacity factor for the second crediting period between July 1st 2008- June 20th, 2009 was also below the forecast at 32.92%, yielding a generation of 240,250MWh (CDM, 2009c).

Regulation in the electricity sector was initially designed for fossil fuel fired plants. In the last decade significant progress has been made to modify these

50 regulations for renewable energy. However, there are still some issues that must be addressed such as the definition of the mechanism to assign resources from the fund created by the LAERFTE. Part of the funds are likely to be assigned as tariff incentives. The fund was assigned MX $3 billion for each year in the period 2009-2011. Germany and Spain, considered as leaders in the feed-in tarrif schemes have been recently reconsidering their incentives schemes (Greentechmedia, 2009). A major change in their policies could impact in the mechanism used to assign the funds.

Wind Energy projects also need to consider stakeholder´s interests. It is relevant to communicate the benefits and impacts of the project to all the stakeholders (land owners, ONG´s, media and local governments). Failure to have their support or acceptance can affect project economics and harm the project developer’s reputation. As section 12.5 shows a delay in the start of operations has a major impact in project’s financial performance.

14 Appendix A Plants operated by External Energy Producers. Table A-1 Plants operated by External Energy Producers.

Plant Bid Winner and Operator Began Net Capacity Operating (MW) Mérida III AES 2000 484 Hermosillo Union Fenosa 2001 250 Saltillo EDF International 2001 247,5 Tuxpan II Mitsubishi 2001 495 Río Bravo II EDF International 2002 495 Bajío (El Sauz) Intergen 2002 495 Monterrey III Iberdrola 2002 449 Altamira II Mitsubishi EDFI 2002 495 Campeche TransAlta 2003 252,4 Naco Nogales Unión Fenosa 2003 258 Rosarito 10 y 11 Intergen 2003 489,1 Tuxpan III y IV Unión Fenosa 2003 983 Altamira II y IV Iberdrola 2003 1036 Chihuahua III TransAlta 2003 259 Río Bravo III EDF International 2004 495 Río Bravo IV EDF International 2005 500 La Laguna II Iberdrola 2005 498 Valladolid III Mitsui 2006 525 Altamira V Iberdrola 2006 1121 Tuxpan V Mitsubishi 2006 495 Tamazunchale Iberdrola 2007 1135

15 Appendix B- Eurus wind farm emissions reduction. Table B1- Estimated Co2 equivalent emissions reduction. Eurus Wind Farm.

Year tonnes CO2 equivalent 2008 151.292 2009 600.234 2010 600.234 2011 600.234 2012 600.234 2013 600.234 2014 600.234 2015 600.234 2016 600.234 2017 600.234 2018 448.942 Total estimated reductions 6002.34

16 Appendix C- Cash flow spreadsheet

17 Appendix D- Oaxaca wind resource map.

18 Appendix E- Worldwide wind power capacity 2008.

Table E-2 Worldwide wind power capacity 2008

Capacity Capacity % Change in Country added in 2008 (MW) 2008 (MW) 1 USA 25170,0 8351,2 49,7 2 Germany 23902,8 1655,4 7,4 3 Spain 16740,3 1595,2 10,5 4 China 12210,0 6298,0 106,5 5 India 9587,0 1737,0 22,1 6 Italy 3736,0 1009,9 37,0 7 France 3404,0 949,0 38,7 8 UK 3287,9 898,9 37,6 9 Denmark 3160,0 35,0 1,1 10 Portugal 2862,0 732,0 34,4 11 Canada 2369,0 523,0 28,3 12 Netherlands 2225,0 478,0 27,4 13 Japan 1880,0 352,0 23,0 14 Australia 1494,0 676,7 82,8 15 Ireland 1244,7 439,7 54,6 16 Sweden 1066,9 235,9 28,4 17 Austria 994,9 13,4 1,4 18 Greece 989,7 116,5 13,3 19 Poland 472,0 196,0 71,0 20 Norway 428,0 95,1 28,5 21 Egypt 390,0 80,0 25,8 22 Belgium 383,6 96,7 33,7

Chinese 23 Taipeh 358,2 78,3 28,0 24 Brazil 338,5 91,5 37,0 25 Turkey 333,4 126,6 61,2 26 New Zealand 325,3 3,5 1,1 Korea 27 (South) 278,0 85,9 44,7 28 Bulgaria 157,5 100,6 176,7 Czech 29 Republic 150,0 34,0 29,3 30 Finland 140,0 30,0 27,3 31 Hungary 127,0 62,0 95,4 32 Morocco 125,2 0,0 0,0 33 Ukraine 90,0 1,0 1,1 34 Mexico 85,0 0,0 0,0 35 Iran 82,0 15,5 23,3 36 Estonia 78,3 19,7 33,6 37 Costa Rica 74,0 0,0 0,0 38 Lithuania 54,4 2,1 4,0 39 Luxembourg 35,3 0,0 0,0 40 Latvia 30,0 2,6 9,5 41 Argentina 29,8 0,0 0,0

19 Appendix F- Baja California wind resource map.

Source: (KEMA and Bates White , 2008)

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21 Vita

Gilberto Adolfo Calderon was born in Mexico City, Mexico. He holds a bachelor degree in Industrial Engineering from Instituto Tecnologico Autónomo de México (ITAM) where he was awarded the Academic Excellence scholarship to fund his studies. After completing his studies towards his bachelor’s degree he was awarded a scholarship to fund his graduate studies at the Jackson School of Geosciences at The University of Texas at Austin. This scholarship was part of the UT-ITAM Partnership for Mexico Energy Sector Advancement. The partnership was sponsored the Training, Internships, Exchanges, and Scholarships (TIES) Initiative funded by the U.S. Agency for International Development through Higher Education for Development (HED).

Email [email protected]

The thesis was typed by the author.