Regional demand for I-RECs on the rise

Renewables certificates are becoming more prevalent in Latin America, although the outlook is uncertain in Mexico

High levels of renewable energy in Latin America have boosted demand for International Renewable Certificates (I-RECs), mostly in those countries where hydropower capacity is abundant. But the outlook for these certificates, still at an early stage in the region, is uncertain in Mexico, threatened by a power reform bill aimed at hindering private-sector investment and a faster renewables expansion.

Chile is witnessing a rapid growth in I-RECs, thanks to its abundance of renewable energy and growing demand from companies seeking to lock in lower emissions. Chile's registry of these certificates began in 2018 with just six renewables plants, Santiago Climate Exchange (SCX) tells Argus. The number has since jumped to 79 including solar and wind projects, as well as hydropower.

I-REC volumes nevertheless remain modest, and the secondary market is still small and opaque, SCX says. Just 7pc of the 36GWh of renewable energy generated in Chile last year registered I-RECs. SCX is targeting 10pc in 2022, driven by demand from climate-minded sectors such as agroindustry. As more companies sign up, the cost of registering is expected to decline. I-REC registration costs €1,000 ($1,131) every five years. Each injection of energy costs €0.025/MWh, in addition to €0.06/MWh when the energy is assigned to a client.

The still embryonic sector reflects a wider constellation of environmental, social and governance criteria that companies are increasingly expected to meet. Chile has been a regional pioneer, along with Brazil and Colombia.

I-REC sales reached 4mn in Brazil in 2020 and more than doubled last year to 9.5mn amid growing demand from companies that voluntarily report their carbon emissions and want to reduce their footprints, despite a lack of mandatory quotas for renewable power, Instituto Totum director Fernando Lopes tells Argus.

Colombian demand

Colombian demand for I-RECs has grown in leaps and bounds. Colombia sold 2.8mn last year, 2.17mn in 2020 and 600,000 the year before that, the consultancy in charge of issuing certificates in the country, ECSIM, says.

A total of 10 power plants are selling I-RECs in the country - five large hydroelectric projects, four run-of-river plants and one wind farm, ECSIM consultant and researcher Edison Giraldo tells Argus. ECSIM says it will sell around 3.5mn I-RECs this year after the local unit of US firm AES recently registered a 1,000MW hydroelectric plant and is set to begin selling certificates this year.

Among the registered hydroelectric plants selling these certificates is the 1,250MW Guavio plant, controlled by Emgesa, a local generator owned by Italian utility Enel. Medellin-based public utility EPM has registered five hydroelectric plants, including 688MW Porce 3, 405MW Porce 2 and 306MW Tasajera. Carbon finance consultancy South Pole represents and sells I-RECs produced by two small run-of-river projects - 5.7MW Magallo and 28.8MW Florida II.

I-REC demand comes mainly from multinationals or large electricity consumers with local operations in Colombia, as well as companies enrolled in global reporting initiatives. "Issuance of certificates should increase not only in the number of registered plants but also because new renewable projects are gradually coming on line," Giraldo says.

Colombia also has its own local renewable energy certificate known as Ecogox, led by grid manager XM. Local power generator Celsia, which has total installed capacity of 1,854MW, negotiates most of these certificates. Celsia tells Argus that to support the use of renewable certificates, it is important to develop initiatives to help clients that acquire them accrue additional benefits to achieving their sustainability targets.

Mexican handoff

The future of I-RECs in Mexico remains uncertain given President Andres Manuel Lopez Obrador's proposed power reform, which threatens private-sector investment and the country's action on climate change by even cancelling its own clean energy certificate (CEL) scheme.

The Renewable Energy Certificate (REC) foundation in January 2021 approved new issuance criteria allowing renewables plants in Mexico commissioned after August 2014 to issue I-RECs if they have decided not to participate in the CEL programme. But Lopez Obrador's reform bill would cancel all private-sector generation permits and prioritise power dispatch from state-owned CFE regardless of its environmental impact, jeopardising the outlook for I-RECs and other renewables certificates.

The law, if approved, would affect an estimated $28bn of investment across 17,000MW of renewable power capacity and impede up to $11bn of investment in renewable power projects being developed in 19 states, local wind association Amdee says. The previous government committed to generate 35pc of Mexico's power from clean sources, mainly wind and solar, by 2023, 40pc by 2035 and 50pc by 2050.

CFE held three long-term power auctions offering clean energy and CELs, adding almost 7,000MW of new renewable energy capacity, to meet these targets. Under the CEL regime, conventional power generators - including CFE and industrial companies - are required to present CELs for 13.9pc of their generation this year, rising to 35pc by 2024.

"The mechanism was designed to incentivise the construction of new clean energy plants and it has worked," the director of solar power association Asolmex, Nelson Delgado, says.

CEL-by date

The reform is the latest attempt to dilute the CEL mechanism following failed attempts to extend the regime to legacy CFE hydropower plants last year. The CEL regime is unpopular with the government, because CFE has had to spend 4.5bn pesos ($220mn) on CELs since the mechanism was launched in 2018 - money, it says, that has been used to fund the private sector at its expense.

"The certificates served to anchor private investments, they were not designed to meet environmental commitments but to guarantee foreign investments," CFE purchasing director Miguel Lopez says.

But without the CEL incentive, it is unclear how Mexico will reach the emissions targets set out by the previous government amid the present administration's tepid approach to renewable power development.

CFE is developing a 1GW solar park in Puerto Penasco, Sonora, and is renovating the country's existing hydropower plants but it does not have any other clean energy projects in the pipeline.

If the reform is approved and CFE dispatch prioritised, annual CO2 emissions are forecast to increase by up to 73.5mn metric tonnes, as more diesel, fuel oil and coal-fired generation is deployed.