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Insight

Developer's Strategic Use of Legacy Scheme

Wed, 02/24/2016 - 18:24

Uncertainty is the word of choice for the energy industry and it has deeply characterized the development of renewable energies in Mexico. “Even though the Energy Reform promised the accessibility of the Mexican energy market and its plethora of opportunities, there was ongoing speculation across the sector during the debate,” recalls Benigno Villareal, Director General of Vive Energía. He recounts that the participation of financial institutions, equity investors, and off-takers was put on hold until everyone could identify the shape of the legislation. It is important to note that projects were not halted in their development, merely slowing down. “The whole sector had to undergo this experience, but the long-term benefits will justify that methodology.” Villareal is confident that a wholesale energy market in Mexico will certainly bring new developers, generators, off-takes, and participants that will ultimately create the robust market that has long been desired.

For Villareal, the constitutional amendment and the enactment of the secondary legislation are considerable accomplishments, but there are still hurdles to overcome, including the structuring of organizations such as CFE, CRE, and CENACE, and guaranteeing their efficient functioning. “Once we have an operating market in Mexico, we then need another more time to promote the market to banks and financial institutions in order to finance new projects.” For Villareal, an ideal operating market is one that gives space to developers in order to help them get the projects on time. “If I had to summarize an ideal market, I would say that it should contain certainty in legal and economic terms for all parties involved.” Vive Energía considers itself to have ample market knowledge, enabling the company to develop projects efficiently and to ensure time to market its projects. By providing cutting edge technology, Vive Energía is able to offer attractive prices, result in striking returns of investment.

In Villareal’s opinion, legacy and new projects will develop at different speeds. For companies such as Vive Energía, which have had a presence in the Mexican market for some time, legacy projects will provide short-term development material until there is a fully operating and functional energy market that offers certainty. One of the primary virtues of Vive Energía is that its portfolio has a 50:50 split between legacy and new projects. “Under the legacy scheme, we currently have over 500MW of projected installed capacity distributed across four different projects in the state of Yucatan, Guanajuato, and Tamaulipas,” shares Villareal.

Vive Energía opts to develop projects in inconspicuous locations because the company wants to access new markets. “We have tried to avoid congestion to a certain

extent, and we will continue to do so. The lack of wind can be compensated by higher energy prices. This does not necessarily exclude developing in places like Oaxaca, Baja California, or Tamaulipas.” Villareal believes Tamaulipas has great potential for wind energy generation and will be moving forward with its own Open Season and strengthening of the local grid. He foresees the development of between 300MW and 600MW in the Yucatan peninsula. Vive Energía expects to have a project up and running in Yucatan by the end of 2015, and the Guanajuato and Tamaulipas projects should be functional by 2016. Finally, the Yucatán II project is expected to start operations between 2016 and 2017.

The Yucatan Peninsula is growing in demand at over 6% annually, explains Villareal. “There is a project underway to build a new gas pipeline, and this will allow CFE and private companies to establish non-intermittent energy generation in that area.” As the population grows in the region, demand for energy will also grow. Therefore, transmission infrastructure and the grid must be reinforced, opening up future opportunities for additional interconnections.

CFE is working on a program to create a stronger and more robust transmission infrastructure in Yucatan. Villareal says private companies trying to generate solar and wind power in Yucatan have been asked to collaborate with CFE in order to precisely improve the infrastructure. “CFE usually asks companies to make modifications to their substations or to the grid itself in such a way that the existing infrastructure can receive and withstand a project’s energy. The investment companies have to make would not be necessary if they did not interconnect. With this in mind, it is only fair that CFE passes along this cost to the private developer,” expresses Villareal. This means that private companies with projects under development should have a pre-feasibility agreement that can be turned into an interconnection contract.

Vive Energía’s geographic strategy continues to yield business opportunities in spite of the uncertainty surrounding the market. Potential off-takers have already expressed interest in close to 300% of the generation capacity of Vive Energía’s current pipeline. “We are currently signing some of them for our ready-to-build projects,” says Villareal. Vive Energía selects its off-takers based on their credit history, but the company also looks at the possibilities of increasing the amount of energy that off-takers are being allocated. “The best off-taker is the one that can take energy from different projects of the pipeline.” Villareal says they want developers that can guarantee that a project will progress from a binder full of documents to an actual power plant.