Did You Consider Your International Operations in Emerging Markets?
In our past 3 blog posts our colleagues have shared the economic significance of renewable energy solutions, how to best garner internal buy-in, and the role of innovative technology.
We hope you have had a chance to dive into each of these blogs as they fill in many pieces of the “puzzle” you deal with daily. Today, we, Gerardo Ferrando and Mario Pani of BayWa r.e.’s Latin American leadership team, want to share one more puzzle piece with you: how to think about your global operations in emerging renewable energy markets. Your senior leaders will want to know you have considered the company holistically, and there can be specific considerations when you move from markets you know well, to emerging renewable energy markets. Our goal is for you to be just as equipped with strong procurement principles and best practices regardless of the market.
We will discuss unlocking the basics of a new market, deciding how you want to procure energy in emerging renewable energy markets, and selecting the right partners. While we look at these topics through the lens of Mexico, these are best practices that you can apply to any market in which you procure energy. We will provide you this framework in a downloadable worksheet at the end of this blog, so you can apply it to any emerging market.
1. Know the Basics of the Market You are Procuring In
First, always steep in the history and dynamics of emerging renewable energy markets. While this may seem obvious, it is an often forgotten first step. When a market opens to new entrants, or your company simply procures energy for the first time, it is wise to understand the main players and market history to strategically participate.
In Mexico, for example, the energy market was previously run by a vertically integrated monopoly: The Federal Commission of Electricity (CFE). CFE owned and operated the Sistema Electrico Nacional (SEN), and was responsible for running the national grid. However, in 2014 the Mexican government passed the Electricity Industry Law. This opened the market to competition in order to reduce electricity prices and to stimulate growth. Around the same time Mexico set out to increase the proliferation of renewable energy, with a goal to produce 35% of electricity via renewable sources by 2024. Today, in addition to CFE, the other main actors are the National Center for Energy Control (CENACE) and the Energy Regulatory Commission (CRE). CRE acts similarly to the Federal Energy Regulatory Commission (FERC) in the US; CENACE is like a combined Regional Transmission Organization and Independent System Operator.
Since this reform, Mexico has added the equivalent of Canada’s renewable energy capacity in 3 years, compared to the 23 years it took Canada. This can mainly be attributed to Mexico’s innovative long-term auction protocol, which the International Energy Agency (IEA) praises as “one of the most sophisticated procurement mechanisms for renewable energy.” Via these auctions, Mexico has attracted 44 foreign direct investment projects worth over $13.5 .
While we use the example of Mexico, the emerging renewable energy markets you enter likely have similar dynamics at play. What is true of Mexico, and many other emerging renewable energy markets, is the significant lack of information that makes it very difficult to successfully and strategically procure renewable energy. The main thing to remember is to steep in the market dynamics as best you can to lay a strong foundation. Once you understand this external landscape, you want to get answers to a few more questions, but this time looking internally to your organization. Sustainability Leaders should ask themselves:
- What is my company’s energy sourcing strategy and how does this strategy need to change to benefit from the dynamics of an emerging renewable energy market (like the energy reform in Mexico)?
- How important is energy to my company and in what ways could renewable energy benefit us?
- What is my company’s actual and projected annual electric demand, and what is the profile of such demand in this new market?
- How do we translate our annual demand, measured in kWh, to a nominal size of a renewable project, measured in kW? Also, what is and when is our peak demand?
- What is the overall energy infrastructure in this new market, and how will my company be best advantaged given this environment?
Having answers for these basic questions enables you to strategically enter emerging renewable energy markets with confidence.
2. Decide How You Want to Procure Energy
Once you know the answers to these questions, ask yourself, what kind of energy would best serve my organization and goals? In Mexico, for example, you have several options:
- Stay with the public utility, CFE
- Migrate to the new wholesale market
- Use an aggregator
- Use the self-supply legacy model
- Create an onsite source
Each has strengths and weaknesses. Spend time understanding each by charting what the pros and cons could be for your organization. Keeping with our Mexico example, here is an example of what this could look like:
3. Select the Right Partners
Lastly, once you understand the market you are operating in, your organization’s energy needs, and the way you would like to procure, it is time to select the right partner(s). We recommend asking the following 3 questions to potential partners:
- Who is fueling the business?
If your partner does not have the experience and financial wherewithal to execute on your contract, you will end up losing time and money, and your organization will suffer without the appropriate energy you need. Be sure that those you partner with have strong financial backing.
- What is their track record?
Just as you would vet any big decision, ask for examples of specific successful engagements. Have they developed a project like this before? Ensure your partners have the experience needed to execute on your agreement.
- Does the company have the assets already developed?
For example, if you are considering a PPA, you want to know if the asset is developed already. If not, who will own the asset when it is finished? Understanding these questions can reveal your partner’s motivations and provide a clearer picture of timelines and key stakeholders.
If you still have questions unanswered, it is better to start the process with a Request for Information or Qualifications (RFI or RFQ) to separate the wheat from the chaff before putting out a Request for Proposal (RFP). This is a great way to get further information on potential partners before delineating specific parameters in your RFP. We partnered with a multinational manufacturer on this very exercise as they initiated renewable energy procurement in Mexico. Our team provided insight into the right RFI questions to ask. This led to a strong RFP that included the correct project parameters based on their need and revealed the right partner.
We truly hope this has been helpful for you as you think about emerging renewable energy markets. We encourage you to share this video with your internal team, which summarizes the strategic steps of entering a new energy market that we have shared. Education and access to the right information are vital in making a strong procurement decision that will impact your organization for years to come. It is worth spending extra time up front to clearly understand the market dynamics, your organization’s needs, and the available options before engaging partners. To help, we have also compiled these key questions into a worksheet to guide you as you think through these questions for your own organization. This worksheet can be found here.
You are frontrunners, leading your organizations to a better answer – and we applaud you for your hard work in blazing this new trail!