Engineering A Successful Auction-Based Business

Q: What are the main challenges in obtaining awarded auction projects and how did Zuma Energía overcome these?

A: Auction participation implies different stages in business procurement, mainly development, participation and execution. These different stages present a particular set of challenges, while each company’s configuration in the market heavily influences the peculiarity of these trials. In Zuma Energía’s case, we are an independent Mexican energy producer. As such, our equity capital is raised and committed but we depend on project financing to launch projects. In comparison, large utility-scale companies can self-finance their projects, creating a different level of complexity. Understanding the typology and segmentation of the different players involved in the auctions and their distinct advantages and disadvantages is an important factor in talks with the authorities or when exploring business opportunities in the sector, even for suppliers spread across the value chain. In turn, this shapes the auctions’ regulatory framework. Even among independent power producers, there are those like Zuma Energía that take a long-term perspective to solidify their market presence and cumulate assets, whereas others take a project-by-project approach. When looking at Zuma Energías’ preparation for the auctions, we can boast a particularly diligent, multidisciplinary effort in mapping the competitive context. The auctions in Mexico were conceived as national, multi-technological, multi-product bids. To win, there are serious intricacies in discerning who your competition is. Identifying your desired placement in the offer structure and assessing your acceptable risk according to price levels is also imperative. So far, two strategies have dominated the auction process: either you equate your offer price to your cost structure and see if it sticks or you take a deeper look at the market, the competitive context and converge accordingly with the value chain to identify the prices that need to be reached. In contrast, the execution phase is highly specialized, working with banks and contractors to close pending contracts and begin project construction. This stage is particularly fulfilling in the sense that we are defining unprecedented financial structures — meeting the requirements of annual energy volume, CELs, alternate markets that used to honor those obligations — and studying their intrinsic risk in relation to our business, among other things. Zuma Energía was designed as a project-oriented platform. Our mission is to present our company as a reliable partner, an ally for developers, offering our full structuring capacity and capital base to turn projects into success stories. Our reliability rests on our vast expertise in structuring project financing, managing procurements and construction, operating assets and winning long-term auctions. We go beyond what is commonly known as project development, which is usually limited to terrain transactions, measurements and obtaining permits and licenses.

Q: Will you continue participating in the auctions or seek alternative ways of participating in the renewable markets?

A: We are primarily focused on the auctions. Zuma Energía invested a considerable amount of time in collaborating with the authorities and participating in the public and private-sector dialogue and designing efficient contracting schemes, providing the lowest generation costs to secure more contracts. We noticed some players strategically believe the new commercialization options available can offer more cost-effective opportunities. These will mature over time and we will see greater certainty and credibility cemented around published prices; some projects are starting to sell CELs to private players, for example. Certain elements still require analysis and implementation for commercialization to truly work, such as financial rights of transmission. Buyers are also experiencing a learning curve. Zuma Energía is not closed to future opportunities but auctions remain the primary source of the agility that ensures our continuous growth.

Q: How would you evaluate the performance of and interaction with the energy regulators and authorities?

A: First, we need to acknowledge the effort put in by the authorities to implement an in-depth transformation like the reform in such a short period of time. Globally, one of the lessons we take away from electric markets is their constant change and evolution. In that sense, there is not a conceptual reference model to turn to as a completed exercise. Ours is still emerging in some ways. The auctions, for example, resulted in awarded and signed contracts, opening the door to new players such as Zuma Energía. But the Clearing House to allow entry for new players from the supply side with CELs purchases is still in the pipeline. Standardizing the power generation market and implementing automated systems of O&M are pending issues. The success of the auctions also highlighted a challenge for the future in the imminent saturation of the transmission grid and the urgency to develop a decisive expansion plan for the power evacuation infrastructure.

Q: How can recently constituted Mexican energy companies keep up with veteran international conglomerates?

A: Our business model responds to a different logic despite the fact we practically do the same thing. International utility-scale companies are part of a global conglomerate, with good practices across the entire spectrum of their functions, decades-long learning processes and an international and expert workforce. Zuma Energía is implanted here and does not yet consider other geographies. For us, it is necessary to engineer a business model that works in Mexico, for Mexico and which outlines a deep commitment to our local market. These groups are also characterized by heavy bureaucracies compared to our decision-making flexibility. Zuma’s relationship with its shareholders and the outlined strategy has helped us attract distinctive talent, with average experience of 12 to 15 years in the sector, to lead our business. Our specialization in renewable energy, which encompasses clean energy, also gives us a competitive edge.

Q: What added value does Mesoamerica Investments and Actis provide to Zuma Energía?

A: The concept of Zuma Energía was born from these two companies. As our shareholders, Actis successfully leads our Mexican business model in Central America, Brazil, Chile, South Africa, Egypt and India, to name a few. It has a considerable capacity to transpose fruitful business models across geographies. Actis is tremendously active in our business and passes on the lessons learned. It brings a prime relationship with the value chain that reaches the highest levels, including equipment manufacturers and construction companies.

Q: How is your company tackling intermittency and power storage?

A: These challenges will become increasingly relevant as renewables increase their penetration of the power matrix. One is a consequence of the other in the sense that power storage is a possible solution for confronting intermittency. Instead of considering them challenges, Zuma Energía prefers to view them as opportunities. There is little doubt that renewable energies have persuasively demonstrated their status as competitive power generation sources; whether in terms of costs, power security and autonomy. Dialogue between private players and public regulators will be essential in drafting possible solutions. Besides energy storage you could also design bonuses for high-response thermal energy versus longer response time energy sources. More efficient dispatch and transmission schemes are also a tentative solution, among other considerations, that can foster new investment opportunities.

Q: What other strategic alliances, partnerships or joint ventures do you have in the pipeline?

A: All our projects are a result of alliances, co-investment or acquisitions with developers. By definition, Zuma Energía’s core business is to become a developer’s most trustworthy associate to win auctions together. We are analyzing other elements of the value chain, such as debt and capital financing, equipment and construction supply. But our most efficient approach at the moment is locating competitive, large-scale projects and winning auctions. The value chain is relatively mature, so in terms of awarded, mature projects with an attractive scale, there is significant appetite to compete for different activities. The most efficient approach is to sit at the table and negotiate with the best-positioned players.

Q: Going forward, where do you see Zuma Energía in the next five years?

A: For our business, five years is rather short term. In that time, we have a very clear vision of where we want to be, capitalizing on future auctions, increasing and operating our generation portfolio with our current business model, keeping our eyes wide open while looking at a tremendously dynamic sector that is seeing notable costeffective changes, taking into account that this term will witness new shifts and with it, new opportunities.

Zuma Energía is a Mexican company born from the possibilities triggered by the Energy Reform. It develops, acquires, finances, builds and operates renewable energy generation projects across the country.