With alternative energy projects stalled in Mexico due to controversial energy reforms, companies are increasingly turning to smaller-scale renewable options that allow businesses to cut carbon emissions while dodging fights with Mexican regulators.

Solar companies and energy analysts said they are seeing an unprecedented surge in distributed generation (DG) solar projects, which are smaller and less regulated with a threshold in Mexico of 500 kilowatts - enough to power about 200 households.

Bread-producer Grupo Bimbo (BIMBOA.MX) and French energy firm Engie (ENGIE.PA) are among those increasingly turning to DG. Although these projects often provide just 10% or 20% of a company's energy needs, they are seen as the "only game in town" right now, according to Andres Friedman, chief executive of Canadian-Mexican solar startup Solfium.

Even with the explosive growth predicted in DG, analysts doubt it will be enough for Mexico to successfully address its energy transition, given that government policies continue to prioritize fossil-fuel generated electricity.

But for many companies they are the best option, with DG projects not requiring a generation permit and taking just weeks to get approved, versus months or years for utility-scale projects. It is likely to stay that way too - at least for now - said analysts, who do not foresee changes to DG regulation in the near future.

"Companies have said, 'that's it, we're going to be in control of our own destiny with distributed generation. We can do it immediately,'" said Friedman, who counts Engie, German industrial manufacturer Prettl and Legrand Group's (LEGD.PA) BTicino as clients.

AMLO'S QUEST FOR CONTROL OF POWER SECTOR
Mexico is embroiled in tensions with the United States and Canada, its major trade partners, over President Andres Manuel Lopez Obrador's drive to tighten state control of the energy market. The United States has demanded dispute settlement talks with Mexico, arguing the move is unfair to U.S. companies and likely in breach of a regional trade deal.

Lopez Obrador's quest has infused deep uncertainty in the renewable energy sector as at least nine major projects amounting to more than 1,000 megawatts (MW) by large developers like German company BayWa (BYWGnx.DE) and Italy's Enel (ENEI.MI) , are currently stalled as they await permitting from the state power regulator, according to Valentina Izquierdo, a Mexico-based solar analyst for Wood Mackenzie.

Spain's Iberdrola (IBE.MC) has an already-built 100 MW wind farm that was denied its generation permit.

The vast majority of distributed generation projects in Mexico center on easy-to-install solar panels that can be used on-site, rather than large wind turbines.

"Right now in Mexico, commercial and industrial clients don't have any other options, so that's pushed more clients towards the DG market," Izquierdo said.

Enlight, a Mexican solar company that focuses on DG projects for industrial customers, said it had clients that considered tapping renewable energy from larger sources, but the political climate swayed them to DG as a more proactive step towards their own ESG commitments.

"There was a lot of great growth for that type of client, for certain specific industries that have goals of very aggressive de-carbonization, such as the automotive industry," said Oscar Garcia, chief growth officer for Enlight, which has worked with Grupo Bimbo.

Sector experts have estimated DG investments in Mexico have topped $3.5 billion in the last eight years, with another $500 million expected by the end of this year.

There are also attempts to increase the threshold for DG projects, which is lower than in countries like Brazil and Colombia, with Green Party (PVEM) lawmaker Nayeli Arlen Fernandez Cruz pushing to double the capacity to 1 MW.

Mexico's most recent electricity development plan, for 2022 through 2036, delays by seven years the country's previous commitment to generate 35% of its energy from renewable sources by 2024. It now says that will only be possible by 2031.

But DG still features as a major area of growth in renewable sources - forecast to reach nearly 16,500 cumulative megawatts by 2036 under the best case scenario, a nearly 725% increase. In contrast, it did not include scenarios for utility-scale solar or wind projects, a sign the government could continue holding them back.

"This allows us to interpret that few permits could be given out for renewable energy generation utility-scale projects," said country manager Maria Jose Trevino for consultancy Acclaim Energy.