Miguel Jáuregui Rojas
Partner
Jáuregui, Navarrete y Del Valle
/
Insight

Drivers for Investment in an Uneven Field

Wed, 02/24/2016 - 16:17

The radical shift in Mexico’s energy sector has led the authorities to urgently develop the necessary conditions for all players to participate in a competitive and egalitarian environment. However, Miguel Jáuregui, Partner at Jáuregui y Del Valle, is skeptical about the creation of a level playing field, particularly when considering that PEMEX will start rendering electricity services and the government will continue operating the grid through CENACE and CFE.

Jáuregui reminds us that the policy guiding the sector will be that of the Ministry of Energy and not necessarily the issue of CRE or CNH, since these are operators and should remain as such. “The Ministry of Energy is accustomed to the self-supply scheme and not to the open field, so it is at risk of suffering the same inadequacies as CNH,” he comments. Jáuregui believes the government should have established energy’s importance to the country and its neighbors, while demonstrating its compatibility with US energy and clarifying that the authorities will be committed to creating a state of equality

As for the parastatals changing into productive enterprises of the State, Jáuregui does not perceive any major problems in PEMEX’s ability to compete because the NOC faces no threat of a loss of customers. Conversely, he has reason to believe CFE will lose its best clients and effectively become a burden on federal resources. “CFE’s focus should be on the residential segment, as it could continue to serve the underprivileged and subsidized markets,” he argues. Given the social function CFE will play, Jáuregui stresses that the company will have to invest in capital goods, power generation plants, and improving its equipment in order to reduce inefficiencies.

“Taking into consideration the energy shortages, voltage fluxes, and inexperience, the utility will prompt the private sector to generate for industrial players, and this is happening as we speak. While CFE holds a place in history in social terms, there are other companies with modern equipment and cheaper technology that are capable of increased efficiency, so the organization could end up disappearing.” Just as Jáuregui thinks that CFE is superfluous, he also believes that PEMEX should not be highlighting its decision to produce electricity, because this shows a deviation of focus from its core business.

Jáuregui posits that without an even playing field, Mexico could struggle to become attractive for investors. However, this could be solved by Mexico’s commitment to adding renewables to the energy matrix. “The adoption of renewables is now necessary if Mexico is to comply with the codes and treaties it has ratified,” Jáuregui explains. He believes it is mandatory for the authorities to support renewables with the right policies. However, Jáuregui is concerned about unions in the renewables, hydrocarbons, and electricity sectors, as these groups have been left in the dark. “Let us recall how the Mexican Electrical Workers Union (SME) never generated a single kilowatt when it was employed by Luz y Fuerza del Centro. In all this upheaval caused by the Reform, where are the unions? This is a matter that must be clarified.”

According to Jáuregui, renewable energies are not designed for subsidized consumption due to their sophistication, which demands proper PPAs and clients. Therefore, private players in this sector must ensure that the energy goes straight to the consumer through private finance and that there is a proper handling of the grid. “Iberdrola is here because it has enough capital to expand its renewable energy base. The company is now a leader of the pack, but it is unclear if this aggressive positioning will scare others away, since all will depend on the playing field.”

In Jáuregui’s view, the fact that reforms to electricity and hydrocarbons were implemented simultaneously means there is limited capacity to deal with both. “The opening of the electricity industry should have been broader, more specific, and better planned to stand as the real success of the Energy Reform.” Nonetheless, Jáuregui’s advice to players wishing to enter Mexico’s renewable energy market is that the entry of new players will accelerate its development. If it is dual fired, then the companies get the green light from the country as long as they have the right technology, capital, project finance, and are reinforced by their headquarters. “Players should not wait to enter the electricity market. The time is now and Mexico is open to business,” he urges.