Bidding in Auctions, Supporting Off-TakersMon, 02/25/2019 - 13:33
Q: What is Invenergy’s primary contribution to Mexico’s energy transition?
PA: If you look at the last long-term auction, there has been an abundance of renewable energy projects, starting from the first energy auction. Many of these are already in construction and some are already in operation. In that auction, Invenergy bid on a large-scale natural gas peaker power plant project. Mexico will have a new 605MW simple-cycle plant entirely as a result of the auction. The auctions have been attractive for participants, including ourselves. Our project will help make Mexico’s energy grid more dynamic by complementing the variable energy production of renewable projects with a flexible natural gas resource that will provide firm shaping and peaking capacity.
JP: Having the most efficient natural gas peaker plant in the country is no easy feat. It is not the typical baseload generation. This project really provides the flexibility that the system needs to incorporate increasing amounts of variable renewable sources. Invenergy does this in conjunction with its renewable energy projects around the world. We look at where other technologies can provide the flexibility and reliability that a system needs. In this case, it was natural gas, but we also look at battery storage and other developments that offer valuable services that the market needs.
Q: Is the Mexican energy industry ready for energy storage?
JP: Not yet but we will get there. Invenergy sees battery storage as a flexible technology that offers more than just energy. Storage opens a toolbox of opportunities, including transmission and distribution deferral, peak shaving, energy shifting, frequency regulation, black-start and voltage support. A storage facility can serve a variety of system needs at any particular node, point or interconnection. Mexico’s storage regulation is a minimum viable regulation since it allows companies to have a storage facility represented by a generator and registered as a power plant with CENACE. This is a narrow view of what energy storage as a separate activity in the value chain can provide. Consequently, we will see storage initially deployed only as an addition to renewable power plants. Invenergy sees value for storage not only at renewables facilities but also at natural gas facilities and beyond. Right now, we cannot benefit from the multiple value streams of the technology, so its applications are limited. Once those opportunities are unlocked, we will see more storage deployment.
PA: Some years ago, not even the US energy market was ready for storage. Yet, in Invenergy’s case, the company was one of the first movers. We started by building a relatively small pilot plant and grew from that. Mexico is probably not ready from a regulatory perspective but the country can get there relatively soon. Invenergy is working for it to happen because the benefits of storage are enormous. Five years ago, storage was measured in a few megawatts that could be discharged over a span of just minutes. Today, storage installations measure in hundreds of megawatts and hours-long durations, and this trend will continue.
Q: What does Invenergy’s deal with Bimbo say about the company’s plans in Mexico in terms of diversification?
PA: From the beginning, Invenergy always wanted to take a diversified approach to our business in Mexico. In terms of technology, we participate in renewables, including wind and solar, in thermal, including simple and combined cycle natural gas plants as well as cogeneration, and in battery storage. Commercially speaking, we are also diversified. Invenergy takes part in the auctions and is active with private off-takers like Bimbo in the US.
JP: We are looking to add value for different off-takers. For instance, Invenergy has announced the financial close of its first cogeneration facility in Mexico that will be for an industrial host. We want to understand the needs of the end user to provide the best technological solution. It is all about trying to mitigate their risks. The point is to create a mechanism where the off-taker gets value out of the projects that we develop.
Auctions have been a predictable process in Mexico. There is a volume that is being contracted and there is an increasing number of off-takers coming to auctions. The third auction already allowed other participants, so we have three buyers for our capacity power plant. That is also providing interesting opportunities for businesses to come online to provide services in the Mexican WEM. We see increasing opportunities for private and bilateral power purchase agreements (PPAs) that are maturing. There is still some resistance from private off-takers in new contractual mechanisms. Transitioning from that to the WEM is still a challenge.
Q: What is Invenergy’s strategy to establish itself as a long-term player among off-takers?
PA: In terms of market rules, Mexico has no dependency on Renewable Electricity Production Tax Credits (PTCs). The long-term nature of the country’s energy auctions is important and must continue. One of the uncertainties is whether there will be an auction in 2019. Off-takers should give us the certainty because otherwise there will be a lack of investment in developing that pipeline into future projects. Auctions are not something that can go away next year and then come back again in 2020. It is important to maintain the consistency that we have seen between 2016 and 2018 in order to maintain predictability. Otherwise, market efficiency may be harmed.
Q: How is Invenergy re-centering the discussion toward ROIs?
PA: We may not do as many deals as other companies but every deal that we do includes certain economic metrics and thresholds that Invenergy and its investors are satisfied with. In that sense, we are not going to chase market share. Over the long run, companies like Invenergy ultimately are rewarded while some players we competed against last year are already leaving the market. We know there are portfolios being either partially or entirely divested, which speaks to our approach in the market.
Q: Which of Mexico’s energy-intensive industries can benefit the most from Invenergy’s solutions?
PA: We are able to serve a very wide range of energy end users. We can tailor energy solutions for any industrial operator with needs relating to electricity, heat and demand response. Mexico will continue to see its economy diversify, which will provide opportunities for energy market participants.
JP: Especially in our cogeneration business, we look to energy-intensive sectors like petrochemicals or pulp and paper that involve large amounts of electricity and heat. These sectors will be more the case than automotive. This industry is electricity-intensive but not heat-intensive.
Q: What is the status of Invenergy’s energy portfolio?
JP: Invenergy’s portfolio in Mexico stands at roughly 4,000MW and is diversified across all technologies, including wind, solar, natural gas and battery storage. We are not pursuing a specific balance between technologies, and instead pursue each project according to the best opportunity and the particular site.
PA: Some of the best projects take time to incubate. It is all about finding the opportunities that make sense, which is what Invenergy is really good at. We look ahead, work on what makes sense to develop, do all the internal analysis necessary and then execute the projects.
Q: What are the objectives that Invenergy has set up for itself in Mexico toward 2020?
PA: By 2020, the first projects that Invenergy was awarded in 2017 will enter commercial operations. For instance, we have a cogeneration project for an industrial host in the Altamira area that should start operations in 4Q19. Additionally, the Los Ramones peaker project will enter operation in 2Q20, and our Las Fenicias wind project will start commercial operations in 3Q20.