Calculating the Viability of Energy ProjectsBy Cas Biekmann | Fri, 05/08/2020 - 11:18
Q: What is the added value that the firm provides to the Mexican market?
A: We can quantify the flashing issues that occur at any power plant. We also developed a program which predicts the evolution of various financial variables throughout the life cycle of a wind, or solar project. Furthermore, we aid (mostly foreign) firms to gain a foothold in the Mexican electricity market. Right now, it is not a good time to invest in the Mexican energy sector. We believe, however, that in the medium and long term new and interesting business opportunities will arise. At a more general level, we are good in quantifying things that are hard to measure. At present Athena counts four consultants (including myself) and all four of them hold a PhD. When companies need an economic consultant, who knows the electricity Mexican market and who defends the client's point of view, they can count on us to provide them with solutions.
Q: What is the main concern of clients when they approach the firm?
A: Currently, uncertainty is a big concern. The cancellation of the long-term auctions also makes it more difficult for private companies to enter the Mexican electricity market. Despite the focus of the federal government, several states still want to encourage private investment in the energy sector. For example, Puebla and Tamaulipas have recently launched their own energy infrastructure plans. Unfortunately, procurement at the state level is not very transparent. There is, for example, no auction in which everyone can participate; instead, companies that have the right political connections get awarded contracts directly. At present, foreign companies that are not very well connected find it very difficult to enter the Mexican energy market.
Another concern lies in the renegotiation of previously agreed contracts and terms, that can have a detrimental effect on companies. An example is the case that occurred in Mexicali where a company invested US$900 million in a new plant only to see it put up for popular consultation, which led to the cancellation of the project. This type of situation does not encourage investment in any sector.
Q: Which of your services is most in demand?
A: Where we've been quite successful is in auction-related activity, not just in energy. Our best client now, for example, is not from the energy sector. We have had contracts with the Federal Telecommunications Institute, which organizes many spectrum auctions. There will soon be an auction of this type and we have calculated the minimum reference values, i.e. the minimum that must be offered to win a radio frequency.
An example of what we can do is from 2016 in the energy sector when we had to model the evolution of various financial variables. We implemented a Montecarlo simulation to forecast the evolution of several variables. Our model allowed us to quantify, for example, the probability that profits in the spot market exceed US$1 million in a given year.
Q: How would you describe the short-term prospects for the energy sector in Mexico?
A: We may have an indication from the delay in the government’s investment plan for energy infrastructure, which should have been presented last year. It was then scheduled for release in February but was postponed. The fact that this investment plan has been delayed so long could be good news. It may be that the moderates in the government are pushing for more private sector involvement in the Mexican energy sector. At the moment there might be some opportunity for PEMEX, and if something is accomplished it would be a matter of time before opportunities in the renewable energy sector reopen. If, however, the current administration continues with its ideology-laden policy against private participation in the energy sector, we may see a downgrade of PEMEX’S bonds to “junk” which, in the medium term, could seriously affect Mexico’s sovereign credit rating.
Athena Consultores is a Mexico City-based econometrics and theoretical economics consultancy that has developed a model to quantify the risk of investing in the country’s wind and solar power segments.