This research aims at assessing the role of domestic policies and the Clean Development Mechanism (CDM) on the deployment of small scale renewable energy technologies through the study case of solar water heating (SWH) technology in Mexico.

The paper reviews the current situation and trend of the energy demand in the residential sector and its related GHG emissions, describes the drivers and barriers faced by the SWH technology, and examines relevant issues regarding CDM definitions and procedures. This is followed by a cost-benefit comparison of SWH and liquefied petroleum gas (LPG) projects under a business as usual, capital grant supported; CDM supported and combined efforts scenarios. Then, it is appraised the separated and collective effect of several domestic policies and CDM incentives on SWH diffusion, and CDM related challenges and risks.

Finally, the paper proposes a wide range of domestic and international strategies, and cooperation schemes which should be undertaken by different participants to establish an integrated policy framework for SWH promotion in Mexico.
It is proved that SWH technology for residential applications has huge development potential in Mexico under present conditions, but it faces several barriers for its deployment at large scale. These difficulties could be tackled by implementing domestic policies and using international support mechanisms like the CDM within an integrated policy framework. This would give adequate signals towards market development, driving new participants such as international financial institutions, national development banks and private banks to enter the market providing new investment streams to finance large scale deployment of SWH technology, which could increase importantly its share in the water heating services supply over the next fifteen years.