Paris Goals and Clean Energy Certificates

September 2015

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“…Mexico has a solid commitment on reducing GHG emmissions in order to provide elements to the new Paris Agreement to be adopted during COP 2015.”

MEXICO CLIMATE CHANGE COMMITMENT

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In order to find a global solution based on the principle of common but differentiated responsibilities, developed as

well as developing countries will have to acknowledge

their respective and collective responsibility in the

international pursuit of sustainable development,

considering the pressures their respective societies have

placed and keep placing on the global environment and

the technologies and financial resources that they

command

Paris Agreement will include mitigation, adaptation, financing, development and technology transfer elements

The adopted measures hopefully will include

opportunities with high impact on mitigation and

co-benefits in adaptation, health and sustainable

development for the period 2015-2020

MEXICO CLIMATE CHANGE COMMITMENT

MEXICO´S POSITION FOR PARIS AGREEMENT

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Mexico has proposed that the Intended Nationally Determined Contributions (INDCs) represent the commitments to the Paris Agreement and should include information related to:

• Quantifiable information regarding the baseline year

• Methodologies for quantifying and estimating INDCs in a fair way

• Time framework for implementation

• Planning process

MEXICO Intended Nationally Determined Contribution

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The INDC that Mexico is submitting encompasses mitigation purposes for both the reduction of GHG and SLCPs.

The INDC of Mexico has two components, one for mitigation and another one related to adaptation. The mitigation portion includes two types of measures: unconditional and conditional.

The unconditional set of measures are those that Mexico will implement with its own resources, while conditional actions are those that Mexico could develop if a new multilateral climate regime is adopted and additional resources and transfer of technology are available through international cooperation

This INDC is consistent with Mexico´s pathway to reduce 50% of emissions by 2050, with respect to 2000, as mandated by the LGCC.

Mexico reaffirms its commitment to combat climate change, to work within a multilateral agreement for sustainable development, with participation of all countries, as well as its solidarity with the most vulnerable countries.

In summary, the INDC of Mexico is quite ambitious considering that, for the first time, it translates

previous aspirational commitments into mandatory goals.

http://www4.unfccc.int/submissions/INDC/Published%20Documents/Mexico/1/MEXICO%20IN

DC%2003.30.2015.pdf

MEXICO HAS TWO COMPLEMENTARY POLICIES

Environmental Policy

• Compliance with Emission Reduction Obligations

• National Registry on Emissions

• Direct mandate on reducing GHG emissions:

• GHG emissions must be reduced according to the policy and the mandate provided by the General Climate Change Act (GCCA)

• Eventually there must be a cap and trade and a carbon market in Mexico that has to be linked with the CEL market.

Energy Policy

• Compliance with Clean Energy Obligations

• Clean Energy Certificates

• Promotes Clean Energy Generation in order to diversify the energy matrix according to provisions of the Power Industry Act (PIA).

• Reduces GHG emissions from the power sector

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MEXICO CLIMATE CHANGE COMMITMENT

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As a result of the implementation of the Global Climate

Change Act (GCCA), Mexico has established institutions and effective instruments to reduce greenhouse gases (GHG) and particle emissions, as well as to increase the adaptive capacity of the country.

Regarding mitigation, the GCCA sets a clear obligation to give priority to the least costly mitigation actions, that at the same time derive in health and wellbeing co-benefits to the Mexican population.

The National Strategy on Climate Change adopted in June 2013 - which sets the vision for the next 10, 20 and 40 years - as well as the Special Program on Climate Change (PECC in Spanish) 2014-2018 incorporate greenhouse gases and particles, also known as Short Lived Climate Pollutants

(SLCPs).

GOALS ON THE GENERAL LAW OF CLIMATE CHANGE (LGCC)

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2018 No methane (CH4) emissions from waste management in cities with more than de 50,000 habitants.

2020 30% reduction of GHG emissions with respect to 2000 baseline, subject to financial and technical support from developed countries.

2020 Subsidies and incentives for generation of clean energy and for efficient use of energy.

2024 At least 35% of the energy must be generated with clean energy sources.

2050 50% reduction of GHG emissions with respect to 2000

0% Deforestation (Without a fixed date)

NATIONAL GOALS ON CLIMATE CHANGE (LGCC)

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Conditional Goals for 2020 and 2050 Expected Emissions Roadmap

35% Generation from Clean Energy

30% reduction of GHG emissions with respect to 2000 baseline

50% reduction of GHG emissions on 2000

GOALS ON THE PROMOTION AND USE OF RENEWABLE ENERGY ACC

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2024 65%

2035 60%

2050 50%

Limits on electricity from fossil fuels:

MEXICO´S CONSTITUTIONAL MANDATE FOR CLEAN ENERGY AND EMISSION

REDUCTION OBLIGATIONS

One of the obligations for Electricity Suppliers and Qualified Users included in the recent Energy Reform is to comply with Clean Energy Obligations

The Power Industry Act (PIA) incorporates the use of Clean Energy Certificates (CEC’s) as its main instrument

A CEC is defined as a title issued by CRE that certifies the production of a 1MWh of electricity generated from clean energy and serves to meet the requirements associated with final users demand

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CLEAN ENERGY CERTIFICATES

• Establishes criteria to grant Clean

Energy Certificates (CEC Guidelines)

• Establishes requirements for CEC’s, to cover a gradually increasing fraction of the total energy consumed by final users

• Grants CEC’s to clean energy power generators

• Receives CEC’s from electricity suppliers or from qualified users

• Issues regulation for CEC’s including: – Requirements for ownership validation

– Tracking system

– Verification of compliance

– Criteria for non-compliance penalties

– Criteria for postponing compliance of certain portion of the obligations.

– Criteria for determining fossil-free energy content in efficient cogeneration

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ENERGY POWER ACT: INSTITUTIONAL FRAMEWORK FOR CEC’S

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Regulator CRE

ISO CENACE SENER

Obligated Parties

Suppliers Qualified consumers Self-supplied final users Legacy Agreements with partial clean energy supply

Operator of the Electric

Wholesale Market

CEC spot market + CEC auctions

Regulation,

Tracking & Compliance

Clean Energy Generation

Renewable energy Efficient cogeneration Carbon capture and sequestration

Defines rules & establishes

Clean Energy Obligations

bilateral

agreements

CEC’S REPRESENTS AN ADDITIONAL REVENUE FOR CLEAN ENERGY GENERATION

• National Clean Energy Goal will be translate into individual obligations

• Clean Energy Generators will receive additional revenues

To

tal In

co

me

Energy income

Revenue from CEL

• If transaction costs are near zero, then CEC’s price should be equal to the difference between clean energy generation cost and fossil fuel generation costs

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WHO IS ENTITLED TO RECEIVE CEC’S?

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Old facilities will not receive CEC’s

Clean Energy Facilities that initiate operations after August 11th, 2014

Legacy contracts that generate clean

electricity, as long as they migrate to the

new legal framework or add new capacity to

increase generation of clean energy

CEC’S REQUIREMENTS FOR OBLIGATED PARTIES

SENER published the requirements for clean energy consumption last March 31st for the first compliance period on 2018

Initial goal for 2018 was established at 5% of total final demand

SENER will increase gradually annual goals in order to achieve legal mandate of 35% clean energy

Up to 25% of yearly requirements may be differed up to two years, complying with provisions issued by CRE

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WHAT IS THE PROPORTION OF CEC’S THAT IS GIVEN BY CLEAN GENERATION?

Clean Energy Generators will be entitled to receive a CEC per Megawatt-hour generated without the use of fossil fuels in the Clean Power Plants they represent in the electric market.

When fossil fuels are used in a power plant that complies with efficient requirements established by CRE (efficient cogeneration or carbon capture and sequestration), the Clean Energy Generator will be entitled to receive a CEC per Megawatt-hour generated in the Clean Power Plants multiplied by the percentage of clean energy determined according to the methodology established by CRE.

Clean Distributed Generation will be entitled to the number of CEC´s as applicable, divided by the percentage of Delivered Energy. Those CEC’s will be marketed through the Supplier that represents the Clean Power Facility.

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GENERATION AND ALLOCATION OF CEC’S

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Clean Energy

Facilities generate

electricity

10 business

days

Cenace will report all

preliminary information

of generation to CRE.

CRE will issue and

register all CEC´s

5 business

days

Monthly

Monthly CEC

Immediately

CEC Adjustments

CRE verifies the

information and, if

necessary, makes que

required adjustments

Market

Purchase CEC Database

Permanent Trade-Off

Eve

ry m

on

th it is

re

pe

ate

d

10 business days

OBLIGATIONS

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Obligated Parties

and its Load Centers

consume electricity

Monthly

Cenace provides

preliminary information of

the consumption to CRE.

Other participants provide

the same information

Permanent Trade Off

Monthly Obligations

25% of the

requirement

could be

differed

CEC Database

Obligations 24 months

15 días hábiles

Previous

Obligations

Balance

CRE verifies the

corresponding information,

and if it proceeds, adjust the

amount of such obligations

Obligations Adjustment

Obligated Parties

report their

Obligations

FINAL CONCLUSIONS

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CEC mechanism established in the Electric Industry Act provides clear rules and a strong legal framework for complying with clean energy obligations as well as GHG emission reductions.

It will help Mexico to:

• Achieve national clean energy goals

• Reduce gas emissions that affects health, environment and global climate

• Attract new investment

• Have a smoother transition to a low carbon economy

• Comply with Paris goals for Sustainable Development

Thank you!

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