J.13 Mexico Decarbonization Opportunities- Buildings and Industry Mini-Assessment.pdf

Buildings and Industry Mini-Assessment

MEXICO DECARBONIZATION

OPPORTUNITIES

MEXICO EMISSIONS AND CLIMATE

MITIGATION COMMITMENTS

Mexico and the United States have a long history of partnership on clean energy. Specifically in the energy efficiency space, USDOE and USAID have worked with the Mexican National Energy Efficiency Commission (CONUEE) for decades on minimum energy performance standards (MEPS). Currently, USAID, through LBNL, supports work with an emphasis on energy efficiency in buildings, and has developed a strong relationship with Mexico City.

This year, USAID will expand these efforts with deep technical support for main buildings energy efficiency policies, such as energy efficiency building codes, public sector building retrofits, and data resources for private sector investment in energy efficient buildings, as well as an evaluation of other opportunities to leverage clean energy investment in industry. Meanwhile, Mexico’s huge solar electricity resource remains mostly untapped, and the general environment for foreign investment has deteriorated.

Furthermore, the current status has strengthened the position of the national electricity utility (CFE) and weakened that of its regulator (CRE).

According to the Union of Concerned Scientists (Updated August 12 2020), Mexico is the third largest greenhouse gas (GHG) emitting country of USAID partners, behind India and Indonesia. Preliminary

1 Two important corrections were made to official energy statistics (SIE 2020). Some electricity allocated to industry was moved to buildings according to (Chatellier and McNeil 2020) and mineral coal allocated to Miscellaneous Industry was reallocated to the power sector.

2 Much of industrial electricity passes through a motor, including through pumps, air compressors, and fans.

analysis of emissions sources in Mexico reveal several important features.1 First, the transportation sector dominates emissions in the form of gasoline consumption, which implies the importance of passenger vehicles and short-haul freight. Second, a large share of industry emissions come from the cement and iron & steel sectors, which account for nearly all of the coke consumed in the country. Equal in emissions, the Miscellaneous Industry category is dominated by electricity, probably in the form of electric motor systems.2

Mexico’s nationally determined contributions to the Paris Climate Accord remained constant in the 2020 update, calling for unconditional reduction

Figure 1: Sector Contributions to Emissions in Mexico Figure 2: Emissions Breakdown by Industrial Sub-Sector adapted from SENER 2019 https://paperpile.com/c/85scak/Nvqg1 of 22% of greenhouse gas emissions and 51% of black carbon emissions by 2030 as compared to BAU, or a 26% reduction of GHG and 70% of black carbon contingent on support of financial, technical and technological instruments, as well as capacity-building which will accelerate the implementation of mitigation actions across the country (SEMARNAT 2020). Mexico’s NDC does not include sector-specific targets, but targets for energy efficiency and fuel substitution are provided in its Energy Transition Strategy (SENER 2020).

GHG EMISSIONS FROM BUILDINGS

Buildings accounted for about 23% of GHG emissions in Mexico in 2019, including direct emissions from fuel burnt onsite and indirectly from electricity consumption. The buildings share is expected to grow to 27% by 2050,3 driven by (1) increased electricity use in homes, particularly as air conditioning becomes more affordable and (2) the growth of the commercial sector with office buildings, shopping centers, and hotels. Fortunately, the building sector offers great opportunities to mitigate GHG emissions and contribute to overall climate goals. In fact, the building sector has the potential for zero net emissions, even without significant future technological advancements.

Throughout the last 50 years, policies targeted at the building sector, such as MEPS for home appliances and commercial/industrial equipment, minimum energy efficiency performance construction codes, and utility-managed demand-side management programs in the U.S., Europe, and Japan have yielded an ample track record of success. As a result of this success, the largest developing countries have since adopted and innovated on the building energy efficiency policy portfolio. Major challenges remain, however, to capture the full opportunity to reduce GHG emissions throughout the sector. Two factors will be critical to bridging the gap in the coming years:

• Buildings must be at the forefront of priority in government climate mitigation strategies and government departments responsible for policy implementation need to be empowered and resourced. This focus can be the subject of

3 LBNL, preliminary estimate.

4 After correcting for misallocation of commercial building electricity to the industrial sector. This correction is described in (Lo-rentzen and McNeil 2020) and “Cuaderno Número 3/Nuevo Ciclo de la Conuee, sobre el consumo de electricidad de los edificios no residenciales en México” agreements with the United States through high-level climate policy dialogues.

• Major capacity gaps exist and can be addressed through technical assistance.

INDUSTRIAL SECTOR GHG EMISSIONS

As Figure 2 shows, nearly two-thirds of Mexican industrial emissions fall into the categories of cement, iron and steel, chemicals and ‘miscellaneous industry.’

The emissions shares of the top 3 sub-sectors are: iron and steel (20.6%), cement (16.5%), and chemicals (7.7%). These fractions are typical of these extremely energy intensive industries. In particular, steel manufacture requires huge amounts of heating energy, traditionally accomplished in furnaces fueled by fossil fuels. Cement production generates GHG emissions through combustion, but carbon dioxide is also produced directly in the production of clinker, an important component of cement. Likewise, the chemical industry uses about half of fossil fuels consumed for process heating, and the other as feedstock (chemical reagent). Natural gas accounts for 47% of energy use in Mexican industry, with petroleum and petroleum products accounting for 20% and electricity for 13%.4 Coal only accounts for 16% of the energy, but about GHG 25% of emissions from the sector.

Finally, the largest category of emissions from Mexican industry is allocated to the ‘miscellaneous (otras ramas)’ category. This category includes manufacturing of many different products and is a catch-all for sub-sectors not identified specifically in Figure 2. About half of the energy in this category is electricity, and 60% of all industrial electricity is allocated to this category after subtracting commercial building electricity. This is logical, since many of these industries use electric motors for production, including assembly lines, lighting, HVAC, and ventilation systems used in maquiladoras and other facilities. Care must be taken in this interpretation, however, since this category also serves as a statistical category for all energy not specifically allocated to other sectors and, as noted above, significant misallocations have been identified.

On this note, it is important to note that over 90% of industrial coal is allocated to this category. Unlike electricity, there is not an obvious reason for the use of coal here, suggesting the possibility of an additional, unrelated misallocation. Such a misallocation from a non-industrial sector, such as the power sector, would imply a negligible contribution in industry GHG emissions from coal.

MEXICO ENERGY EFFICIENCY LANDSCAPE

The general environment for energy efficiency in Mexico is positive, but gaps and barriers remain, some general and some specific to the country.

The basic framework for EE in equipment and construction practices are present, in the form of mandatory regulations promulgated by the federal government through the main government agency for energy efficiency, the National Commission for the Efficient Use of Energy (CONUEE). Among many responsibilities, CONUEE is the lead agency in directing policy towards the goals of the Energy Transition Strategy published by SENER in 2015 and updated in 2020. The main energy efficiency targets of the strategy are framed in terms of final energy consumption intensity, that is, the amount of electricity or fuel consumed, not including transformation energy, for each unit of GDP.

Due to CONUEEs long-standing program of MEPS, EE metrics, test procedures, and test labs, certification procedures exist for lightbulbs and major household appliances, as well as a handful of industrial applications such as 3-phase electric motors. While enforcement of MEPS is an issue everywhere and Mexico experiences specific issues. 5The situation for energy efficiency building construction codes is similar, although enforcement remains very low and is the limiting issue. Sub-

5 An example is the import of used window-type air conditioners, which are virtually banned in Mexico through the U.S. border.

6 This dynamic underlines the potential of programs that create economies of scale in kick-starting markets.

national governments in Mexico have much less capacity than federal agencies. Therefore, while they may possess important authority and working with them may be highly fruitful, capacity development is a high priority. Important capacity-building activities can start with general awareness-raising of the benefits of energy efficiency in supporting climate mitigation commitments, economic development, and other non-energy benefits. Following this, support for roadmapping and integration of key energy efficiency policies into government climate action plans informs concrete actions at the sub-national level. Finally, every policy or program considered– whether regulatory or voluntary– requires an understanding of issues of technical specifications, cost-benefit analysis, certification, or enforcement procedures. At this level, capacity building can be accomplished through training of government staff, or through technical consultation with international experts.

Mexico’s relatively advanced economy presents few barriers to the production and marketing of high-EE technologies. Instead, the main barrier to production is industry hesitancy to introduce high-priced products unless they perceive a sizeable market6 for them. In their own operations, private sector firms are generally aware of the concept of energy efficiency and its general benefits as an investment and as an element of laudable sustainability policies.

Energy efficiency is not generally prioritized.

Furthermore, businesses lack the capacity to take an energy efficiency project from start to finish, including benchmarking, energy audits and cost-benefit analysis.

Finally, as in most countries, a barrier exists to financing by private banks, which are unfamiliar with EE projects and lack the capacity to evaluate their risks and benefits.

An important determinant of the prospects for success in the development of energy efficiency policies and programs is a non-government, non-industry network of supporters and facilitators.

This important element of the ecosystem is quite strong. The network includes NGOs, International donors, research organizations and universities and professional organizations (see Appendix).

Energy Efficiency Targets

2020-2035 2035-2050

Average annual rate of 2.2% reduction in final energy intensity

Average annual rate of 2.5% reduction in final energy intensity

Table 1: Mexico National Energy Efficiency Targets (SENER 2020)

DECARBONIZATION STRATEGIES

The overarching strategy toward achieving transformative change in Mexican buildings and industry is to enlist multiple lines of action and engage with a wide range of stakeholders with attention to the greater goal. Other considerations can also bolster the prospects for success:

• Adopt a Mixed National/Subnational Approach

- While the current political climate in Mexico is not conducive to international collaboration in the renewable energy space at a national scale, the prospects of impactful cooperation on energy efficiency are still good. In many cases, the most effective approach remains to work directly with the federal government, through CONUEE, particularly in the development of regulations, many of which they have sole responsibility for. Engagement with subnational governments should occur at an equal level of priority, in the most complimentary way possible. For example, while the federal government issues mandatory energy efficiency construction codes, these are implemented at the municipal level. In this case, while CONUEE provides an important resource, the focus of engagement will be with local officials. Likewise, state governments may have resources and mandates through energy or environmental departments to coordinate actions in municipalities, and are most likely to take a long-term planning approach to climate mitigation and adaptation goals.

• Expand Mexico City TA to Other Major Cities

- Expansion of work in Mexico City to the 10 Mexican municipalities of over a million inhabitants would more than double the scope of activities in terms of population.7 Two main factors should be considered in this assessment.

Smaller cities may have more or less economic intensity (GDP per capita) than the capital. Likely more importantly, however, per capita energy consumption is likely to be much higher in areas outside of the temperate Central Valley due to the use of air conditioning, which can more than double the electricity consumption of a home or business. Following the Mexico City example, 7 Wikipedia “List of Cities in Mexico” - https://en.wikipedia.org/wiki/List_of_cities_in_Mexico 8 (McNeil and Ana Carreńo 2015),(Kalavase et al. 2010),(Sanchez et al. 2007) are examples of impacts analysis of Mexican energy efficiency programs roadmaps can be developed on a city-by-city basis to assess the main opportunities and relate them to existing government plans. Additionally, many of the elements included in the Mexico City program can be addressed at the state or federal level, further expanding impact. Finally, it is important to note that the current Head of Government of Mexico City, Dr. Claudia Sheinbaum, herself a leading researcher in energy-related climate change mitigation, is a leading candidate for Mexico’s presidency, and regardless of the election outcome, is likely an effective champion for climate change mitigation throughout Mexico.

• Create Economies of Scale - Ultimately, the most important barrier to adoption of energy efficiency technologies and practices in Mexico is the real or perceived high costs of energy efficiency technologies. The most effective strategy for lowering this cost is to create economies of scale.

The main activities identified below are prioritized in terms of cost-effectiveness and ability to act on whole markets (e.g. all conditioners sold or new buildings constructed). Another strategy to achieve scale involves working with discrete economic sectors, through groups of companies or industry associations. Some examples of this include: hotels (both large resorts, hotel chains and small operators), large commercial real-estate developers, public housing agencies, and big box store chains.

• Perform and Disseminate Impacts Analysis - In addition to a basic strategy around data, the analysis of impacts of programs, both prospective and historical, is crucial to maintaining a healthy energy efficiency ecosystem. Rigorous analysis of impacts signals the value of these programs to important stakeholders in absolute terms and relative to other actions.8 Impacts analysis can have powerful effects on the perceptions of the programs they study. Metrics for evaluation are increasingly diverse and tailored towards a variety of audiences, including not only energy and emissions, but financial impacts, air pollution, job creation, economic growth, utility financial stability, etc.

NET ZERO BUILDINGS STRATEGY FOR

MEXICO

The global climate challenge requires transformative changes to the use of energy. In the buildings sector, this means building and operating net zero energy (NZE) buildings.9 In order to achieve net zero, buildings are constructed with efficient “passive design” measures, including envelopes designed to minimize heating and cooling use, and installation of high-efficiency equipment. The residual energy that is needed is then provided by carbon-free energy such as photovoltaic panels for electricity and rooftop solar water heaters.

While NZE buildings are not yet widespread in Mexico, climate conditions are favorable to them, particularly in areas with low cooling loads. For this reason, a long-term strategy to achieve mass-adoption of NZE building stock in Mexico can feasibly be initiated over the next few years. An achievable set of milestones towards this goal will mean that the buildings sector helps meet or raise the ambition of Mexico’s NDC commitments.

The following assessment identifies concrete and specific ways in which international technical assistance can be a catalyst for a net zero GHG emissions building sector in Mexico. The elements of a net zero strategy for Mexican buildings impact whole sectors (e.g. all new commercial building construction), in order to make long-term, transformational change. The strategy goes beyond demonstration and analysis to realization of market shifts, and as such is ambitious but well-grounded in the political and economic realities of the country.

The theory of change requires that all potential bottlenecks and barriers be carefully addressed, as any one of them could result in maintaining the status quo.

All elements must therefore work together towards the unified goal of real change, e.g. a financing and capacity-building strategy are equally important as development of technical specifications to ‘get to the finish line.’

FOCUS ON COOLING

Mexico is often described as having only ‘moderate’

9 Embedded GHG emissions due to the production of construction materials can also be considered in the construction of Net Zero Carbon buildings, which reduces the demand for energy-intensive industrial activities such as cement manufacturing and steel-making.

cooling (air conditioning) load, due to the relatively low adoption of air conditioning in homes to date and the concentration of population in the temperate central region of the country (INEGI 2018a). This picture is somewhat misleading, however. In fact, ownership of air conditioners in Mexican homes has been on the rise for some time, and air conditioner owners are a majority in the warmer parts of the country. As Figure 3 shows, cooling in the residential and commercial building sectors already accounts for a quarter of all electricity use in the summer months and in the warm climate portions of the grid, peak demand can be 50% higher in the summer than in the winter. Electricity blackouts in these areas have become more common in recent years.

Furthermore, cooling use is likely to grow massively in the coming decades due to three main factors.

First, single room air conditioners, known as ‘mini splits’ are increasingly affordable to Mexican families

Figure 3: Cooling Impact on Electricity Consumption as the economy grows and incomes rise.10 Second, the commercial building sector is growing more rapidly than other economic sectors, and the electricity intensity per square meter of floorspace is growing, largely due to cooling. Finally, the effects of climate change are difficult to forecast, but it is likely that average temperatures will rise widely, exacerbating the need for air conditioning in the warmest areas and extending it to today’s temperate zones.

Fortunately, air conditioning is among the energy end uses with the most regulatory handles or “building blocks” as described by USAIDs Energy Efficiency for Development Program (EE4D)11 and has been highlighted as a priority for action in the next few years by CONUEE. In order to maximize the opportunity, EE4D held a Mexico Cooling Summit in Mexico City in 2018. This two-day event built a foundation for further action. Furthermore, the activity included the establishment of a Mexico Cooling Initiative (MCI) community of practice, which can serve as a hub for future activities around cooling in Mexico. The initiative covers 6 areas: Equipment Standards, Building Codes, Alternative Technologies (R&D), Cool Surfaces, Smart Buildings, and Voluntary Programs (Incentives). The MCI reinforces relationships and encourages dialogues among actors in the energy efficiency and air conditioning industrial space in Mexico, through technical assistance activities and a Cooling Community of Practice web platform covering the 6 distinct areas of intervention. A first activity within the MCI has been LBNLs engagement with CONUEE and industry stakeholders towards Mexico’s first MEPS for rooftop commercial air conditioners.12

The goals of the MCI include a 50% reduction in all air conditioning in Mexico versus BAU, which could save 100 billion $US in the form of reduced electricity bills and subsidies. The main targets to achieve these goals are:

• 100% Market Penetration of Mini-split Air Conditioners - Emissions from these are 4 mt today but expected to grow to 26 mt by 2050.

10 Notably, while this technology already dominates throughout most of the world, it is just now becoming common in the United States due to an already high penetration of centralized, ducted air conditioners there.

11 See https://ee4d.org/wp-content/uploads/sites/40/2021/05/USAID_EE4D_Energy-Efficiency_Building-Blocks_Toolkit_508.pdf for more details 12 This regulation was in a late stage of public consultation as of September 2021 and is expected to be finalized before the end of 2021.

Cutting this in half through a combination of codes and standards and financing by 2025 would avoid 13 mt CO2 in 2050 and 230 mt cumulatively, and would save 86 billion dollars in direct consumer benefits and subsidy reductions (LBNL Estimate).

• 100% Code-Compliant Building Stock by 2050 - Through expanded enforcement of current federal envelope codes and technical updates to increase stringency and scope, these could reduce future commercial sector consumption by up to half and further decrease residential cooling to yield an estimated 20 mt CO2 in 2050, or 350 mt cumulatively (LBNL Estimate)

• Research and Deployment - Development of complementary technologies and programs to decrease cooling use, such as alternative cooling technologies, cool surfaces, and smart buildings.

NET ZERO BUILDINGS IMPLEMENTATION

STRATEGIES

The following components are common to an integrated net zero strategy around the world, but here take into account the particular challenges and opportunities in the Mexican environment for energy efficiency.

Data and Measurement Infrastructure - An advantage of energy efficiency policies is that they do not require public investment in major infrastructure such as power plants and transmission lines. Instead, the infrastructure they rely on is data and analysis to determine how energy is used in buildings, and the likely effects of actions taken on user finances, GHG emissions, and job creation. In fact, the lack of credible evidence in this area is often the barrier that undermines the capture of important opportunities.

While the data available in Mexico is quite good in some areas, such as parameters included in surveys of the national statistics organization (INEGI 2018a, [b] 2018), important gaps remain. Closing these gaps require some up-front resources, but will have long-term dividends, especially if institutionalized by local governments. Some examples of data resources to be https://mexico-cooling.lbl.gov/2019/01/30/summit-on-space-cooling/ https://mexico-cooling.lbl.gov/ https://mexico-cooling.lbl.gov/ https://ee4d.org/wp-content/uploads/sites/40/2021/05/USAID_EE4D_Energy-Efficiency_Building-Blocks_Toolkit_508.pdf developed include:

• Municipal Energy Use - Mexico government energy use statistics are generally disaggregated to the state (federal entity) level. Engagement with municipalities requires a next level of data collection or disaggregation on, e.g. the building stock and local energy intensities.

• Non-Residential End Use Intensity - Fragmentary data on per-floorspace electricity for lighting, air conditioning, and other end uses exists (e.g.

(García Kerdan et al. 2015), but this resource requires updating and expansion. A robust assessment requires a combination of direct energy metering and electricity bill data in a segmented and representative dataset.

• Residential Air Conditioning Metering - In the Mexican residential sector, air conditioners are by far the largest and most variable energy consumer, but data on the level of consumption, critical for development of standards, building codes, rebates and other programs has been scarce. EE4D has contributed to addressing this situation through direct measurement of residential air conditioners in Sonora, but such a study should be expanded to constitute a representation of all climate zones and demographics in Mexico.

• Utility Bill Data - A primary large-scale data source is the monthly bills of building utility customers, which could be aggregated to ensure privacy. If obtained and correctly processed, this resource would provide a highly accurate and well-segmented assessment of cooling and base load usage in multiple sectors.

• Equipment and Construction Costs - Information on the price of major appliances, such as mini split air-conditioners can be collected en-masse from large internet retailers (through the IDEA database, for example), but this has not been implemented in Mexico with a program of regular updates. No such database exists for equipment not sold widely through the internet, such as commercial building installations, or for advanced construction materials. These data can be gathered from surveys of manufacturers, distributors and industry organizations.

• Benchmarking Database - A current task is underway to collect energy consumption data for

13 Instituto Nacional de Estadística y Geografía 14 An example is a new MEPS for rooftop air conditioners being promulgated with support from LBNL

Mexico City public buildings and analyze them using the BETTER tool to identify the most fruitful options for net zero retrofits. Expansion of this task to private sector buildings and other cities would create an evidence base that would alleviate an important barrier to change, particularly in the private sector.

• Dedicated Energy Surveys - The U.S. buildings energy efficiency landscape has long depended on two gold-standard data resources from the Department of Energy. The RECS and CBECS databases correlate building occupant surveys with utility bill data and regression analysis to give a clear, detailed and statistically representative picture of energy use in US buildings. In Mexico, the national statistics agency, INEGI,13 has begun to survey energy specific data in households (INEGI 2018b), and has the ability to add questions according to resources available. Using the same methods as applied by USDOE, a gold-standard survey is within reach in Mexico.

Policy: Codes And Standards - Codes and Standards are the foundation of large-scale and long-term reduction of energy demand and apply to buildings through minimum energy efficiency construction codes (building codes) and minimum energy performance standards (MEPS). Codes and standards also create a system of technical specifications, measurement, and certification that support non-regulatory investments. MEPS and building codes are developed by the Mexican federal government (CONUEE) through Mexico’s system of Mandatory National Standards (NOMs). Despite challenges to clean energy development in the current political environment in Mexico, CONUEE remains active in this space, and standards are considered positive or neutral.14 Despite a long history of success, there are important gaps in the development and enforcement of NOMS that currently pose a barrier to progress towards NZE buildings. These specific actions would act to remove these important barriers:

• Update of Mini-Split NOMs - Current MEPS for residential air conditioners currently inadequately promote adoption of high-efficiency, ‘inverter’ units. A program to consolidate and update these standards would strongly propel the market https://ee4d.org/wp-content/uploads/sites/40/2020/11/USAID_EE4D_Energy-Efficiency_Success_Story_508-2-1.pdf https://ee4d.org/wp-content/uploads/sites/40/2021/08/International-Database-of-Efficient-Appliances-IDEA.pdf https://better.lbl.gov/ https://www.eia.gov/consumption/residential/ https://www.eia.gov/consumption/commercial/ towards mass adoption of inverters.

• Nationwide Implementation of Building Codes -

Two main federal construction codes for energy efficiency regulate new commercial buildings (NOM-008) and homes (NOM-020). Enforcement of these codes lies with local governments (municipalities), and is negligible due to capacity limitations in these governments. A dedicated program of enforcement of these codes is underway in Mexico City, and could be expanded across the country, first through major cities until compliance is nearly universal.

• Technical Updates of Commercial and Residential Building Standards - In parallel to enhancing enforcement (NOM-008) and (NOM-020), CONUEE requests assistance on updating existing codes through enhanced simulation of climate conditions and effect of measures on energy consumption.

Financing - Lack of financing for equipment and construction can be a major barrier to project development for NZE buildings in Mexico. Technical Assistance supporting innovative financing for energy efficiency and distributed energy in buildings includes:

• Equipment Financing Programs - a key example of these in Mexico would be rebates for inverter mini-split air conditioners in hot climate zones, with financial backing or loan guarantees from the Development Finance Corporation or other financial institutions.

• SME Financing Program for EE retrofits - This program could potentially be implemented as part COVID economic recovery efforts.

• Project Pipelining for Key Sectors - Large owners and operators of buildings in Mexico include major retailers (big box stores), commercial real estate developers and the tourism industry.

Technical assistance simplifying energy efficiency audits and payback analysis (e.g. using tools such as BETTER) could help pipeline EE projects to commercial banks and/or development banks.

• Low-Income Housing - The Mexican federal government administers major programs providing public support for housing, including single family homes. Past programs to incentivize green building practices in this sector could be enhanced with financing options for high-EE and/or NZE construction.

Capacity Building - High levels of penetration of NZE will require increased human capacity in all parts of the energy efficiency ecosystem. Examples of specific needs include:

• Training of government staff on enforcement of codes and retrofit of public buildings.

• Development of benchmarking databases and retrofit analysis tools, and training of private sector builders, owners, and operators.

• Sector-specific training on identification and implementation of green investment (e.g. training on benchmarking, auditing, energy management, and financing in hotels).

Technology - Development and/or adaptation of established clean energy technologies and policies to accelerate adoption. For example:

• Evaporative cooling is a low-energy cooling system that is effective in very hot and dry climates, such as in the North of Mexico.

• Cool surfaces (white walls and roofs) and high thermal-mass buildings are traditional ‘native’ practices that may be applied to modern architecture.

This assessment identifies concrete and specific ways in which international technical assistance can be an important catalyst for a net zero GHG emissions building sector in Mexico. The elements of a net zero strategy for Mexican buildings target whole regions and markets, not individual projects in order to make long-term, transformational change. The strategy goes beyond demonstration and analysis to realization. All elements must work together towards this goal, e.g.

a financing and capacity-building strategy are equally important as development of technical specifications.

MEXICO CITY BUILDINGS

DECARBONIZATION ROADMAP

One concrete example of the feasibility of a net zero energy strategy is Mexico City’s Buildings Decarbonization Roadmap. The Roadmap, developed as a collaboration between SEDEMA, C40, LBNL and the City of San Francisco in 2019-2020 takes into consideration that the temperate climate of Mexico’s Central Valley implies relatively low air conditioning needs. Air conditioners are uncommon in households, but are more common in office buildings, restaurants, hospitals, hotels, and shopping centers.

https://better.lbl.gov/

Air conditioning use is important in these buildings, though moderate compared to the extreme heat of the North, or the humidity of tropical and coastal areas. The resulting moderate electricity demand, in combination with ample solar resources makes net zero energy more achievable than in many areas.

The Roadmap therefore calls for ambitious targets, including a commitment to net zero energy in Mexico City’s government buildings by 2030, and in all new buildings by 2035. LBNL analysis finds reduction of 2050 buildings electricity to 41% below 2016 levels, implying an 89% reduction in related emissions.15

SEDEMA has adopted these recommendations and specifically included them in the city’s Climate Action Program (Secretaría del Medio Ambiente 2020), which includes both long-term goals and specific actions to be taken during the current administrative term (2019-2024). This set of targets is integrated across all sectors and addresses both high-impact technologies such as rooftop solar and solar water heating, as well as measures that take a whole-building approach.

These policies and programs act at a large scale, including all public buildings, or all new commercial building construction, for example. They ultimately achieve net zero energy in these sectors, but require preparatory steps to pave the way.

In this way, the Mexico City example is illustrative

15 Assuming moderate decarbonization of the electric grid.

16 Assumes 0.1 $/kWh average electricity price and 0.05 $/kWh subsidy.

17 Assumes moderate decarbonization of the electric grid. Mitigation would be higher if current carbon intensity of grid electricity prevails.

of the general approach: robust analysis resulting in government commitments and subsequent technical assistance in order to facilitate their achievement. A key strategy for energy efficiency in Mexico’s buildings is the replication of this success in Mexico City. The roadmap estimates that undertaking all of these measures, with appropriate roll-out times, would reduce Mexico City building emissions electricity demand by 10 TWh in 2050 (equivalent to roughly 3 large power plants) resulting in an electricity bill savings through 2050 of $13 billion and a reduction of $5 billion for electricity subsidies.16 In terms of GHG emissions, implementation implies a 3.5 mt reduction in 205017 and cumulative emissions reductions of 50 mt through 2050.

Key aspects of the Mexico City buildings example are (1) an integrated approach to the entire buildings sector in order to yield transformative long-term impact; (2) a central role for data and analysis enabling robust planning and design; (3) engagement with a supportive government taking a leadership role to jumpstart processes that will be ultimately continued at scale by the private sector; and (4) a model for replication in other municipalities and states throughout Mexico.

RESIDENTIAL SECTOR

• Refrigerator Early Replacement Program

• Rooftop Solar

• Solar Water Heating

PUBLIC SECTOR

• Net Zero Energy Pledge

COMMERCIAL SECTOR

• Federal EE Code Implementation by 2021, Net Zero Energy Code by 2035

• Efficiency Retrofits

• Rooftop Solar

• Solar Water Heating

INDUSTRY SECTOR

DECARBONIZATION18

The industry sector, unlike the buildings sector, includes extremely large individual emitters which could make a significant impact themselves on emissions. In addition to these, there are many small-and medium-sized firms and facilities. This feature calls for a mixed strategy. The first of these is to take advantage of the fact that decarbonization of heavy industrial sectors relies on decisions by only a few corporate actors, so assistance resources can be concentrated and thus made more effective.

Alternatively, the constellation of smaller actors in the industry sector requires a more distributed approach.

Furthermore, energy efficiency and decarbonization likely requires a different approach than in buildings, where regulations are well-established and effective. In contrast, Mexican federal, state, and local governments do not have a history of a strong regulatory hand in most aspects of the industrial sector. Corporate actions will therefore likely be voluntary, and the role of technical assistance will be one of demonstration of opportunities and benefits, financial and otherwise.19

DECARBONIZATION OF HEAVY INDUSTRIES

Over a third of industrial emissions in Mexico come from the two most carbon-intensive industries: iron and steel (20.6%) and cement (16.5%). According to industry-watchers, there are 35 cement plants in Mexico producing about 55 million tons per year. Of these, 15 (43%) are owned by CEMEX, which controls 46% of construction, doubling the largest share of any of the next 5 market players. 20The steel industry has seen a similar amount of consolidation. In this case, Ternium, the largest producer, produces about twice as much as its next largest competitor, giving it about a third of the market with revenue of $5 billion USD.

In February 2020, CEMEX defined an ambitious new 2030 target of a 35% reduction of its net CO2 emissions per ton of cement produced compared

18 We use the term ‘decarbonization’ instead of ‘energy efficiency’ for heavy industry, since efforts there can include fuel switching and reagent substitution.

19 In this way, the relationship between government and private sector in Mexican industry resembles that of the United States.

20 See https://cementamericas.com/2020/06/01/country-report-the-cement-industry-in-mexico/ 21 https://www.cemex.com/-/cemex-moves-ahead-with-its-strategy-to-address-climate-change 22 https://us.ternium.com/en/media/news/ternium-announces-plan-to-reduce-co2-emissions--02496215821 23 LBNL is undertaking a detailed technical assessment of potential in both sub-sectors to be completed in early 2022. This study will include assessments of the ambition of current industry targets.

with its 1990 baseline, aligned with the IEA technology roadmap for the cement sector to fulfill the Paris Agreement’s commitment under a 2-Degree Scenario.

Additionally, the company established a new ambition to deliver net-zero CO2 concrete globally to all of its customers by 2050.21 Similarly, Ternium has announced the adoption of a decarbonization route with the mid-term goal of achieving a 20% reduction in its CO2 emissions by 2030. The plan will be accompanied by a wide-ranging program of investments in environmentally friendly projects and technologies.22

The stated sustainability goals of these two industry leaders are illustrative of the potential for direct engagement. Technical assistance can both support the achievement of these goals and increase their ambition. According to a study published by SENER (SENER 2018), energy efficiency measures could reduce GHG emissions by 14.5% in the steel sector, and 2.9% in the cement sector. However, much of the decarbonization potential in cement production goes beyond energy efficiency, and includes clinker substitution and includes carbon capture utilization and storage (CCUS). Therefore, the estimated mitigation potential is likely underestimated.

Preliminary investigations by LBNL also indicate that opportunities may be larger in the iron and steel sector.23

Industry associations are relatively well-established and effective in Mexico. The relevant associations include CANACERO for the steel industry, and CANACEM for cement. In addition, major industries participate in “clusters” at the state level, through which firms coordinate with state and federal governments, academic institutions, and technical experts. For example, both Cemex and Ternium are members of the Energy Cluster of the State of Nuevo León. The first step in engaging with industry may be through technical exchanges, either directly or through clusters that assess the main opportunities for decarbonization at the sub-sector and plant level.

LBNL has developed dedicated assessment tools such as EAGER-Steel and BEST-Cement.

https://cementamericas.com/2020/06/01/country-report-the-cement-industry-in-mexico/ https://www.cemex.com/-/cemex-moves-ahead-with-its-strategy-to-address-climate-change https://us.ternium.com/en/media/news/ternium-announces-plan-to-reduce-co2-emissions--02496215821 https://www.canacero.org.mx/en/ https://canacem.org.mx/ https://clusterenergetico.org/ https://clusterenergetico.org/ https://china.lbl.gov/eager-steel https://china.lbl.gov/best-cement

ENERGY MANAGEMENT SYSTEMS

Beyond heavy industry sub-sectors, much of Mexican industrial activity involves less energy-intensive manufacturing sectors. Energy use in this “miscellaneous” sub-sector is dominated by electricity, where it mainly powers motor systems. In addition, operational end uses such as lighting, HVAC, and refrigeration can be very important. The energy efficiency of electric motors has long been the subject of minimum energy performance standards (MEPS) globally, and Mexico also regulates motor efficiency.

CONUEEs most recently updated NOM was published in 2019 with the intention to harmonize with U.S. standards. Electric motors are generally quite efficient, so the gains from equipment standards are modest - a few percent at most.24 Large additional savings are available through the optimization of motor systems, which involves measures such as the use of variable speed motor drives, optimal sizing, rewinding of older motors, etc. These measures, along with efficiencies in other equipment or systems, can often be addressed through voluntary adoption of Energy Management Systems (EMS).

Energy management systems are internal programs within firms and organizations integrated with company goals to set policies and targets concerning energy consumption, identify specific areas of opportunity, implement changes and set policies, and subsequently systematically track performance.

CONUEE has implemented a program of capacity building around energy management systems which has trained approximately 6000 people, usually energy managers or facility managers of industrial plants or large buildings. However, CONUEE lacks the capacity to fully track the energy impacts of its program. An analysis of impacts would entail surveying participants about actions taken and collecting data on energy performance before and after implementation, as well as associated costs and financial benefits.

In order to support energy management efforts on a global scale, the International Standards Organization (ISO), in consultation with international experts, 24 Overall energy savings from motors MEPS can nevertheless be huge, due to the enormous amount of energy used.

25 Another common mechanism for implementation of energy efficiency projects is Energy Service Companies (ESCOs), but the ESCO sector is not well-developed in Mexico.

26 This aspect in common with financing building energy efficiency. Financing is therefore a fruitful topic for technical assistance in that sector, although regulation may have a greater impact in the short term.

developed a system of management standards under ISO 50001. ISO 50001 is a set of protocols and procedures for management of energy consumption.

ISO 50001 can be implemented independent of any government as a voluntary measure by individual companies. Alternatively, compliance certification can be used as a metric for national industrial energy efficiency goals. Technical assistance in energy management generally and ISO 50001 specifically can directly support company staff in order to implement energy monitoring systems, identify energy savings measures and implement monitoring and evaluation systems. An example of this is the U.S.

Department of Energy’s 50001 Ready program, which recognizes facilities and organizations that commit to implementation of ISO 50001 and also provides online implementation tools.

To be clear, implementation of energy efficiency measures in the private sector can occur independently of energy management systems, but ISO 50001 certification offers a standardized approach to implementation that lends itself to technical assistance in the form of certification and workforce development, as well as implementation of monitoring and verification procedures. A key element of technical assistance in this area includes workshops, training, online tools to facilitate energy management systems, and establishment of sub-sector targets through voluntary recognition programs.25

FINANCING

Financing is a key issue in all Mexican industry sector decarbonization efforts, but gaps in financing will vary greatly. Many firms involved in heavy industries are large, global conglomerates with ample access to capital. At the other end of the spectrum small and medium enterprises may have significant barriers to borrowing. In general, however, investment in decarbonization technologies are unfamiliar to commercial lenders, thus posing an important information barrier.26 For heavy industry projects involving a relatively small number of corporate actors, financing assistance https://www.dof.gob.mx/nota_detalle.php?codigo=5624457&fecha=21/07/2021 https://betterbuildingssolutioncenter.energy.gov/iso-50001/50001Ready https://betterbuildingssolutioncenter.energy.gov/iso-50001/50001Ready will be project-specific support for direct pipelining.

Financing may be blended, and could involve commercial banks, local development banks, or international development banks. The latter category includes the U.S. International Development Finance Corporation (DFC), the World Bank, Interamerican Development Bank (IDB), and the International Finance Corporation (IFC) as well as European development banks. Of these, the DFC and IFC are focused on private sector enterprises, whereas the others generally lend to governments.

Collaboration with the DFC may be of particular interest due to its close relationship with U.S.

government agencies, including USAID. DFC has provided direct loans and guarantees of up to $1 billion for tenors as long as 25 years. Furthermore, DFC has a strong history of working in Mexico, such as the following examples:

• A nearly $20 million loan to Imperative Investments will finance affordable housing, boosting economic growth in less-developed regions of Mexico.

• A $100M on-lending facility for women-owned SMEs in Mexico with Credito Real.

Finally, DFC has some capacity to provide feasibility studies and technical assistance in support for the analysis of a potential DFC project, including support to increase the developmental impact or commercial sustainability of existing DFC projects or develop potential DFC projects.

Notably, DFCs activities include financial support for SMEs through a commercial financial institution in Mexico (Credito Real). Such a mechanism could fill an important gap in the energy efficiency / decarbonization space. The primary role for technical support to an existing facility is to raise awareness and capacity in the sector in identifying energy efficiency measures, evaluating return on investment and communicating financial flows to financiers.

Alternatively, government-supported financing programs could focus on SMEs and specific demographics. Historically, Mexico has had several such funds targeting energy efficiency. FIDE is a government-sponsored trust fund that provides ESCO-type services to Mexican businesses, but has been less active under the current administration.

Similarly, FIPATERM is a regional program based in Mexicali administered by CFE that provides incentives for energy efficiency, particularly in the housing sector.

An opportunity exists for technical assistance to build the capacity of the staff of these funds around industrial energy efficiency and methodologies for efficient and effective monitoring. Large scale adoption of energy efficiency in industrial SMEs requires a sub-sector approach. Sub-sectors likely to benefit from EE should be identified in early stages of the project, then guidebooks and trainings should be developed and disseminated through workshops and webinars, through federal and state governments and local industry associations.

IMPLEMENTATION PARTNER

COORDINATION

Finally, the overall effectiveness of implementation of a net zero strategy for Mexico’s buildings and decarbonization of industry depends on close coordination between implementing partners engaged through competitive bidding and non-competitive strategic partners such as U.S. National Laboratories.

Much of the implementation of any such program depends on local organizing of events, data collection, coordination with stakeholders and social and linguistic fluency which contractors with permanent staff in Mexico are best suited for. Furthermore, much of the day to day program management and communications / dissemination could be handled by them. These entities may also come with independent local networks that are critical to making real progress.