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Analysis

Access To Financing, The First Step To Sustained Growth

Mon, 02/25/2019 - 16:22

Commercial bankers are traditionally risk-averse and the federal election and subsequent inauguration of President López Obrador threw them a curve ball in 2018 that rippled across the energy industry. The uncertainty that lingered over the year called into question the path forward for the sector a time when the private sector was already struggling with financing clean energy projects.
“The world is facing significant challenges,” says Alfredo Álvarez, Energy Segment Leader at EY. “In Mexico, these include a political transition that has created uncertainty regarding the country’s vision for a cutting-edge energy industry.” The market, however, is optimistic, especially the electricity sector, despite the latest decisions taken by López Obrador, including delaying the fourth long-term electricity auction. “Mexico’s long-term electricity auctions and the electricity chapter of the Energy Reform is a success story,” says Ariel Ramos, Partner Global Energy at Mayer Brown. “We consider it as such because CFE, the Ministry of Energy and CENACE implemented auctions that were well-received by Mexico’s infant energy market.”
The context of the industry’s growth since the reform is also a source of optimism, and private sector players say that financial entities need to confront the challenges of a market that practically started from scratch in 2013 and deliver the financing that participating companies require. They point to a favorable regulatory framework for this type of investment, tax incentives and clean energy certificates issued by the previous administration. To these incentives it is necessary to add the transparency with which the auctions have been carried out, which has projected legal security.
So far, the main backers for projects have been multilateral banking institutions as all players adapt to the new energy reality. One reason is the size of the projects. “Mexico’s renewable utility-scale projects require long-term financing options that commercial banking by itself is not able to provide. Developers have primarily turned to multilateral banking institutions, development banks and Export Corporation Agencies (ECAs) to provide for their financing needs. Commercial banking’s participation is limited to certain tranches of these loans,” explains Ramos. EY’s Álvarez agrees. “Commercial banks are still very cautious when financing utility-scale projects. Given their lack of experience and risk aversion, commercial banks tend to be extremely conservative and only finance small percentages of these types of projects.”
As inherent risks hold back wider financing, some Mexican energy projects have turned to a model that has been growing at a much higher rate compared to countries with similar scenarios. “Mexico’s energy projects are starting to get an increasing taste of merchant risk, which not all banks are comfortable with when it comes to providing financing in this specific modality,” says Emmanuelle Matz, Global Head of Energy at PROPARCO. Smaller projects, such as the installation of solar panels are also facing a worrisome scenario, according to Angélica Quiñones, President of ANES. “The financial sector needs to be prepared to invest in new renewable technologies. If a company goes to the bank asking for a loan to install solar panels, the interest rate would be around 15 percent. This is the same interest rate that banks ask when lending money to purchase a car,” she says.
Going forward, disruptive models, key in other markets and industries, could play a preponderant role when attracting financing. Christoph Frei, Secretary General and CEO of the World Energy Council, believes digitalization could be a key disruptor. “Digitalization offers many opportunities and its capacity to create a future uberization in the energy industry is one of the most exciting." Uberization means the capacity of taking a capital-intensive sector and coming up with business models that bring additional value to existent assets via digital processes. That is, those companies that are able to offer added value to the value chain through technology will be among the first to receive financing.