Derek Woodhouse
Partner
Woodhouse Lorente Ludlow
 Giancarlo Schievenini
Giancarlo Schievenini
Associate
Woodhouse Lorente Ludlow
/
View from the Top

CFE Required to Act Against Its Own Interests

Wed, 02/19/2014 - 16:37

Q: Does the current legal framework meet the standards required to attract national and international investors?

DW: The legal framework actually looks very good. Problems do exist, not at the legal level but in the details, and the main problem is in the power held by CFE. Mexico decided not to create a system based on feed-in tariffs or subsidies, so instead the responsibility of developing this industry hes been left to the private sector. A big effort has been made to create legislation that allows the development of renewable energy projects. New legislation and reforms were passed, and CRE created instruments, such as access to an energy bank and transmission infrastructure, that changed the industry completely. Everything is in place to create significant interest in Mexico’s energy sector, and the number of companies that are currently trying to make projects work in Mexico is incredible.

Q: If the required legal framework is in place to foster renewable energy projects, why has the industry not taken off more rapidly?

DW: There is a flaw in the way the rule of law has been designed, which is that we rely on CFE for things that go against CFE’s interests. This flaw is the main reason that projects have stopped moving ahead. Ultimately, only around one in 10 projects will move ahead, with the remainder facing problems resulting from this flaw in the rules. CFE’s main priorities are to be as efficient as possible and to provide access to transmission infrastructure for newcomers. But for CFE, this means doing more and receiving less. On top of that, the current operating framework allows private companies to focus on the CFE customers that are paying the most, which results in CFE losing those customers. CFE therefore has no interest whatsoever in getting private sector projects up and running, but the rules require CFE to sign off on many of these projects.

Q: What are the major impacts you see the Energy Reform having on the Mexican renewable energy sector?

GS: Mexico is opening up the possibility for the private sector to generate electricity, since power generation is no longer defined as a public service, although the government keeps control of the national power system as well as exclusivity over transmission and distribution. 

The impact the reform will have on the renewable sector is still unclear. Renewable projects depend largely on longterm PPAs to make them financially viable. It is expected that electricity rates for private generators will be lower than current CFE rates, but the impact of the reform on CFE’s production costs also remains uncertain.

On the other hand, the reform does not clarify how the participation of renewable generation in the new power market will be ensured, given the fact that its production costs are considerably higher than those of conventional technologies. Still, the reform acknowledges the 35% renewable energy generation target by 2024, which certainly opens up a window of opportunity for renewables in Mexico.

Q: What other legal challenges do your clients face and how can they be addressed?

GS: An issue we have to deal with is that most banks are requesting certain kinds of guarantees. If you do not have an AAA off-taker, it is going to be complicated to find financing in Mexico. If we take into account that there are very few AAA companies in Mexico, the opportunities become even narrower. The issue is how we tackle such guarantee requirements from the banks to conduct projects that do not serve AAA companies. One of the things we came up with at Woodhouse Lorente Ludlow to address this concern was to work with municipalities as off-takers. Municipalities are paying the highest electricity rates as the electricity for public lighting is the most expensive in the country. By using a PPP scheme, we create a way of making self-supply projects viable and bankable.

Q: What are Woodhouse Lorente Ludlow’s ambitions within the renewables sector in Mexico, given potential developments in the short and long-term?

DW: Our objective is to become the number one boutique law firm in this industry. Our intention is not to be perceived as a very large law firm that covers every industry. We want to improve the way things work in our country – Mexico has a lot of resources and it is a pity that they are not being put to use. We will therefore seek to help the country make the best of its resources. We want to make sure that whoever we are advising gets the best possible advice.