country focus: MEXICO
New investment in wind and solar projects is slowing
By Rodrigo Amaral
The Mexican government’s sweeping reform of the energy sector to increase foreign investment and the share of renewable energy sources was greeted enthusiastically by global investors when it was first unveiled in 2013. Powered by a plentiful supply of loans and equity, projects to generate electricity with wind, solar and biomass plants sprung up around the country.
With a natural terrain best suitable to wind and solar energy, Mexico attracted more than $9 billion to finance such energy projects in the past four years. From having no wind or solar energy generation before the reform, the country now boasts 44 solar and 50 wind energy parks in operation, with 10 more expected to start producing soon.
“I urge caution until we fully understand the rules of the game and the direction that they will takeâ€
Hector Olea, Asolmex
But that steady flow of capital is slowing as investors have second thoughts about the commitment to the reforms by the government of President Andrés Manuel López Obrador. In the latest ranking of countries based on their attractiveness for renewable energy investments by consultant EY, Mexico slumped to 19 from 13.
That could have huge implications for the government’s pledge to respect a commitment to generate 35% of all electricity from clean sources by 2024, a target established by AMLO’s predecessor, Enrique Peña Nieto. At stake is billions in potential investments from local and international banks, as well as multilateral institutions, that’s now parked on the sidelines.
“Capital is available, but investors feel somewhat insecure at the time of signing a contract,†says Aniceto Huertas, a partner at Beel Infrastructure Partners, an asset management firm.
The hesitation stems from indications that the government would prefer to boost production at hydroelectric and nuclear plants, which are owned by the state, rather than expand the volume of generation from wind and solar plants, which are mostly owned by foreign private groups.
What’s more, many investors are concerned by recent steps by the AMLO administration to shore up the dominance of the state-owned oil giant Pemex, reversing the energy reform that ended the ailing company’s monopoly in the Mexican market.
By restoring Pemex to profitability, the government argues the company’s profits will flow into the treasury to fund economic and social programs. With tax breaks and government support, Pemex plans to raise oil production, which has been declining for the past 15 years, and return to profitability by 2021. The company narrowed its losses last year to $7.6 billion from $14.3 billion in 2017.
Investor concerns were heightened in October when the president of Comisión Federal de Electricidad (CFE), the state-owned firm that controls the electricity market, told Congress that wind and solar energies are too expensive. Even more worrisome was the cancellation of a renewable electricity auction last December. The auction of 3.8 gigawatts of additional capacity was expected to attract up to $1.6 billion in investments and would have been the fourth in a series of planned purchases of clean energy by CFE.
The auctions provide a significant degree of security to investors by guaranteeing that electricity produced by new projects would be purchased by CFE at a pre-agreed price and for periods of 15 to 20 years. Not many projects make economic sense without a committed buyer, according to Hector Olea, the president of Asolmex, an association of solar energy companies.
The first three auctions, in 2015, 2016 and 2017, were very successful. Healthy participation in the third one helped drive prices down to $20.84 per megawatt-hour, one of the lowest ever registered worldwide for electricity generated by wind and solar plants. This challenged CFE’s claim about the costs of wind and solar energy and underscored how competitive wind and solar can be in the electricity market.
Energy Secretary RocÃo Nahle has pledged to schedule a fourth electricity auction, but only after an evaluation of current capacity. She points out that none of the successful bidders in the last auction have even broken ground on their projects, even though the auction was concluded almost two years ago. She also claims that Mexico’s transmission line network needs an upgrade in order to distribute additional capacity produced by new plants.
Companies have other options to sell their energy. They can try and sign Purchase Power Agreements, PPAs, with large users or distributors of electricity, or to sell energy in the open market, where there is no guaranteed income. But investors feel less comfortable with this kind of arrangements, which are often short-term contracts.
“What is required today is that off-takers feel more confident to sign long term PPAs. A bank cannot properly analyse a financial structure with a five-year PPA,†says Carlos Carranza, head of Project Development at the North American Development Bank, NADB.
What’s more, companies with CFE PPAs were able to leverage projects up to 80%. Those that rely on the open market are unlikely to get more than 50-55% of leverage.
The NADB, along with other institutions like the International Financial Corp. and the development bank Bancomext, are trying to fill the void, “We have the ability to go longer, to set up structures with a short term and a long-term layer, and we can fill the gap of long-term infrastructure financing.†says Carlos Carranza, head of Project Development at the North American Development Bank (NADB). Still, the bank only participates in projects with private investors.
Despite the uncertainty among investors, there’s little doubt about Mexico’s energy needs. “The generation matrix needs to grow by 70,000 megawatts in the next 15 years. It implies huge amounts of investments from the public and the private sectors, as well as the participation of international banks, in order to meet the expected demand,†says Marian Esperanza Aguirre Nienau, the director of Energy Finance at Bancomext. “Talking to investment funds and companies, we have gathered that there is long term appetite for renewable energy in Mexico.â€
But instead of wind and solar, the government appears keen on promoting investments in 60 hydroelectric plants owned by CFE. In late October, it approved new rules governing the issuance of Certificados de Energia Limpia (CLE), certificates of clean energy that are awarded to power producers and can be sold on a secondary market.
Once limited to power plants that started to operate after 2014 as an incentive to spur investment in wind and solar energy, CLEs now can be issued to previously existing plants. Critics say that this will create an oversupply of certificates and devalue their worth, while benefiting CFE, which will be able to raise new funding by issuing certificates to its old hydroelectric facilities.
A group of industry associations, led by Consejo Coordinador Empresarial, CCE, issued a statement that the new rules aren’t fair because the money earned from selling certificates was an incentive for many private investors to participate in wind and solar projects.
“In the short and middle terms, we should live a scenario of uncertainty for renewable energy investments,†Olea says. “I urge caution until we fully understand the rules of the game and the direction that they will take.â€
