The Evolution of Clients Requesting for PPAs

Q: How has your offer evolved over the past four years and how have you navigated changes in the market during the past administration?

A: Initially, we offered a range of flexible options. However, as the regulatory landscape became clearer, we shifted to a more consistent market approach, concentrating on Power Purchase Agreements (PPAs).

We primarily serve three types of clients. The first group aims to save energy, typically having a technical or engineering background. They focus on improving energy efficiency across their operations. The second group is more concerned with cost savings, often comprising SMEs that seek to reduce their fixed energy costs to improve their financial results. The third group prioritizes meeting ESG standards. For them, the economic aspect is secondary to reporting comprehensive ESG outcomes.

Companies focused on energy savings tend to be of a certain high standard, like AA or AAA-rated companies, where energy efficiency is a key performance indicator. This is not solely based on ESG compliance but also on genuine energy efficiency improvements. Cost-saving SMEs, on the other hand, are often led by owners who are directly involved in financial outcomes. They focus on the overall financial impact rather than just reducing their energy bills. They want to see improvements reflected in their balance sheets. Finally, the technical-minded clients are focused on ensuring that plants are built and maintained correctly and operate efficiently. They seek solid technical arguments and evidence that the plants will perform as promised.

While we currently focus on PPAs, we are also exploring the construction of energy plants, though not necessarily selling energy directly. This approach allows us to better serve these distinct client needs while maintaining our commitment to flexibility and tailored solutions.

Q: How will the changes announced for distributed generation and isolated supply impact operations for companies looking to adopt these solutions?

A: Changes to the General Administrative Provisions (DACGs) have benefited distributed generation. While some provisions have been finalized, others are still in the proposal stage and have not yet been formalized. 

One significant benefit we have observed is the removal of the previous 500KW limit on photovoltaic plants measured in direct current (DC). Previously, this limit meant that while you could install panels rated for 500KW, the actual output in alternating current (AC) after losses would only be about 420KW. The new provisions allow for 600KW in DC to achieve the 500KW AC output, aligning more closely with real-world conditions. This change has already proven beneficial in practice. A 700KW limit has been discussed but has not yet been incorporated into the DACGs.

Regional variations in the application of these regulations remain a challenge. Each regional office of CFE interprets and enforces standards differently. For example, interconnecting a plant in Monterrey is quite straightforward, whereas in Oaxaca, it is much more complicated due to regional bureaucratic nuances.

Q: Considering the announcement of integrating CRE into SENER, how do you view the importance of standardizing regulations across Mexico versus addressing other regulatory concerns?

A: First, there should be a standardization of interconnection manuals and procedures for distributed generation across all of Mexico. However, an even more critical need is for a unified communication channel. Currently, if you go to CFE’s headquarters, the company cannot resolve issues related to regional offices, even though they are the highest corporate authority. The corporate office lacks the authority and initiative to intervene because communication is fragmented.

Regarding interconnection, while manuals exist, they are often ignored because there is no incentive for CFE to support distributed generation. They do not block it, but there is no motivation to promote it either. There is no incentive for CFE employees to connect a certain number of plants per month, for example. This lack of incentive makes the support for distributed generation irrelevant to them.

Q: What are the most common challenges companies have faced in recent years that you address with your solutions? 

A: Clients' needs have indeed evolved beyond the traditional profiles we have identified. Nowadays, they seek more comprehensive services. For example, while we primarily address the 'E' in ESG, clients are increasingly asking us to provide solutions related to water management, waste disposal, and monitoring systems. While Proterra is careful not to overextend into areas where we lack expertise, we started to integrate with other companies to offer a unified service.

A significant challenge has been the regulatory changes affecting legacy contracts and the Wholesale Electricity Market (MEM). Many clients who sought alternatives to CFE found that the MEM no longer provided the economic advantages it once did. As a result, contracts with private suppliers lost their appeal, and many clients reverted to CFE, despite higher costs.

To address this, there are two potential paths. One is to restore the competitiveness of the MEM, which seems unlikely. The other is to expand distributed generation limits beyond 500KW to perhaps 700KW or 1MW. Even better would be re-exploring isolated supply and local generation, where there are no 500KW limits. This would allow us to develop larger projects, up to 10MW, on sites with sufficient space for extensive solar panel installations.

The challenge is that navigating these larger-scale projects requires clear guidelines and cooperation with regulatory bodies like CRE and CENACE. While the sector is ready to undertake such projects, there needs to be greater transparency and assurance that the regulatory process will support these efforts. Achieving this would be transformative for the industry.

Q: What other challenges are currently plaguing the industry and how could these be addressed?

A: Integrating storage into our solutions will be key. Effective battery management will provide a significant competitive advantage. Beyond regulatory issues, we face challenges related to congestion in certain electrical nodes that can no longer accommodate additional capacity. Those who can manage these challenges will be able to deploy larger plants and meet CFE's requirement for managed generation instead of intermittent generation. 

Solar plants alone cannot achieve this without incurring economic losses by cutting back on energy output. Storage solutions, however, can differentiate us and open new opportunities for clients. If all goes well next year with the integration of batteries into our plants, we could see large-scale battery adoption by 2026. This would greatly benefit network stability, addressing CFE's primary concern of maintaining a stable grid despite irregular generation patterns.

Q: Regarding the nearshoring trend, how can your solutions help companies navigate a strained energy market?

A: From an industry perspective, I am cautious about nearshoring. While there has been talk of it for years, we have not seen a transformative shift yet. The investments and operations announced are primarily expansions of existing facilities, often linked to plans made years ago. Nearshoring has not yet reached the anticipated levels.

For nearshoring to truly take off, it would require more favorable conditions, such as the absence of significant tariffs from the United States. There are concerns that some regions in the United States, neglected due to past manufacturing relocations to China, may react negatively to a new wave of relocations. This could result in regulatory or tariff changes, impacting the nearshoring momentum.

Regarding feasibility, we do have clients in the contractual phase, including Chinese, Korean, and Taiwanese companies that have been operating in Mexico for years. These companies, while often labeled as part of the nearshoring trend, have been planning their moves for a long time.

Q: What are your objectives for the Mexican energy market in 2025?

A: We will focus on the ESG niche, as well as in energy savings. The market underwent significant changes between 2022 and 2024 due to the pandemic's aftermath and regulatory shifts, causing many clients to hesitate in their decisions. Now, we have secured agreements with clients who are certain of their commitments, and we will concentrate on serving their energy-saving needs.

Many companies transitioned from PPA providers to constructors or they moved to other sectors, entirely. Our goal is to cater to companies mostly interested in energy savings. Although our strategy might adjust over time, we see a substantial commercial opportunity in this niche for the coming year.

Clients increasingly understand that we are an additional energy provider, not an infrastructure investment. Previously, PPAs were often mistaken for credit products, where clients would finance their plants and end up with long-term debt. Now, more clients realize that a PPA is a service, similar to having multiple telecom or internet providers in one building. This recognition is crucial, and those are the clients we aim to attract and provide the most value to.

Proterra Capital specializes in the development, construction, financing and operation of decentralized renewable energy assets.