Q: What makes Clifford Chance the key ally for companies looking to participate in Mexico’s renewable energy market?

AS: Clifford Chance’s reputation as a leading international law firm in Latin America spans nearly four decades and involves a track record that few firms can match. Our energy and infrastructure team combines substantive expertise with bilingual capabilities and cultural fluency, and has assisted with the structuring of some of the most innovative financing for renewable energy projects across the entire region. We know how to get deals done for our clients.

In Mexico, we have advised sponsors and financial institutions in the country’s most high-profile projects, such as the Eurus, La Bufa Wind and Aura Solar projects, which were developed under the previous system. We were also involved in the Reynosa Wind, Orejana PV and Santa María PV projects, which were awarded during the second long-term auction, and we are taking part in the financing of three additional projects awarded during the recent auctions. Our lawyers know Mexico very well and are extremely adept at navigating its business, legal and regulatory landscape. We understand the relevant policies, procedures and expectations within the Mexican market and are deeply familiar with the main equity concerns and bankability issues. As a result, we can circumvent these issues and provide commercial solutions to our clients participating in the next auctions or financing the projects to be awarded.

Looking across the region, in Uruguay we advised the lenders on the renegotiation of the PPA with UTE (the government’s state-owned off-taker) for the first wind farm financing to come to the market, becoming the benchmark for the country’s entire renewable energy program. In Argentina, we advised the government, under the institutional umbrella of the IFC, on the design and implementation of the RenovAr renewable energy program and are involved in nine financings of projects awarded under that program. In Chile, we closed the first financing of a renewable energy project with regulated PPAs and recently closed a complex wind portfolio financing, which will serve as a proxy for other developers in the country and in Latin America.

JG: Mexico has placed a strong bet on renewable energy, and the country is taking its first steps on a path we have had the opportunity to take with our clients over the last 20 years in markets across Europe and in Latin American jurisdictions for over 10 years. We are very familiar with advising on renewable energy projects, not only across jurisdictions but throughout their lifespan. This global vision applies to Mexico in a unique way, mainly thanks to our understanding of the Mexican energy sector, to our wide-ranging experience in renewables and to our relationships in the country.

For instance, we are one of the few international law firms capable of putting together a team comprising partners, senior, midlevel and junior Spanish-speakers from our Washington, DC, New York and Madrid offices, who are very familiar with the issues typically arising in financings structured in civil law jurisdictions.

Q: What is your assessment of Mexico’s project financing capacity for renewable energy projects?

AS: It is important to understand the structures available for the generators to sell electricity, given that there are different kinds of financing structures to develop projects based on whether it will sell only in the spot market or through a medium-term, a long-term or a bilateral PPA.

In the spot market, for instance, most power producers would rely on equity; it is difficult to finance a merchant project on the spot market due to the uncertainty of future electricity prices. However, we are seeing a trend in Latin American jurisdictions, where spot market prices can be projected over the long term thanks to a sufficiently long track record, in which banks are assuming a certain degree of merchant risk. 

With respect to auction projects, we expect to see soft and hard mini perms, which are a trend now in the region, with strong reserves and cash sweeps, which could be refinanced through the capital markets after achieving commercial operation.

JG: Project financing has always revolved around future cash-flow certainty. As the market evolves and operators gain maturity and experience, the range of possibilities in bankable projects expands. Not so long ago, merchant financing was unthinkable, but we are now starting to see incipient examples of merchant projects in different countries, signaling a breaking point with past practices. Formulas that allow future certainty through swaps, financial derivatives and the like are emerging. It is an ongoing and ever-changing process that ultimately will result in a market where financing formulas will diversify and the energy market will become increasingly competitive. 

Q: What market impact are you expecting from the third auction’s Clearing House?

AS: In the first and second auctions, CFE was the sole purchaser and virtually absorbed a measurable off-taker’s risk. Starting with the third auction, the Clearing House will represent a pool of purchasers per auction.

Clifford Chance applauds the authorities’ design efforts when structuring the electricity auctions. We understand that some banks were involved in the structuring of the Clearing House, which is a strong sign that the government took into consideration certain bankability issues, which the banks would raise during the financing of the projects. We have no doubt this model will be replicated in other countries in the coming years. The success of the upcoming auctions will be largely based on the independent performance of CENACE, which will manage the risk of buyers’ nonpayment, the guarantees and the reserve funds. 

Q: What added value does Clifford Chance bring to the success of utility-scale projects?

JG: Projects like these require complex coordination across international and local entities involved in the financing process. Clifford Chance excels at this. Among other notable matters, we acted as counsel for international sponsors in the financing of the three projects awarded to Zuma Energía during the second auction, and we were involved in the 425MW Reynosa wind farm, which was the first project to achieve financial closing among those awarded during the long-term auction of 2016. One key to success lies in our proven ability to establish synchronized and efficient communication channels between all participating financial entities. In our capacity as counsel to international sponsors, we helped foreign entities grasp Mexico’s practices, while also making sure that all local financial players were on par with the requirements of the international financing entities. 

Q: How can Clifford Chance provide support regarding the challenges for Mexico’s project developers in the long term?

JG: Mexico’s new electricity system is based on competitive offers. Behind every offer, there is a financial structure that allows developers to bid under these conditions. As a top-tier player in the power sector, Clifford Chance brings substantial industry expertise in the structuring of increasingly sophisticated and competitive mechanisms, which helps us lower costs and mitigate risks in favor of bankability. These mechanisms enable our clients to come up with competitive schemes and establish a strong footing to win auctions. Our proven track record is the main argument for our credibility.

AS: Clifford Chance has the advantage of having opened markets hand-in-hand with international, local and commercial financial entities. We understand the cultural and transactional reality of all the different jurisdictions we are involved in, including Mexico. Each jurisdiction has its own challenges, added to the jurisdiction’s cultural and commercial particularities. We understand the commercial objectives of the sponsors and, at the same time, of the lenders. 

Q: What are the prevailing challenges for Mexico’s electricity sector?

AS: Mexico has made tremendous efforts in the design and implementation of the wholesale market but the real success of Mexico’s electricity reform will depend on the proper execution of the grid modernization plan designed by the Ministry of Energy and CFE. Without a reliable electric system and a smart grid, Mexico’s energy-mix goals will be difficult to attain. CFE and the Ministry of Energy are making remarkable efforts to this end. For instance, in 2016, CFE published the pre-tender documentation for the development of transmission lines, under build-operate-transfer schemes while the Ministry of Energy recently unveiled a new contracting model for transmission line development with private parties. This is the next step in the implementation of Mexico’s electricity reform. The PRODESEN lists 410 transmission projects to be developed between 2017 and 2029, offering a wide array of opportunities for the private sector and financial entities. We expect to be involved at the cutting edge of some very interesting financing schemes for these projects, as we have done in jurisdictions throughout the region. We are fully committed to Mexico and look forward to these new developments.

Clifford Chance  is an international law firm with expertise in capital markets, corporate, finance, risk management and real estate, with particular expertise in energy and infrastructure.