Severo López
Partner
Galo Energy
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The Future Of Energy: Exciting But Uncertain

Wed, 02/22/2017 - 10:16

Q: What must Mexico do to provide more certainty to international investors? 

A: Certainty for international investors is directly related to the pace at which Mexico can make its institutions and the people inside those institutions work according to the vast regulatory reforms. Most deregulation programs around the world have taken at least 10 years to take effect. Mexico is in the early stages and the new organizations need to be staffed and people’s mindsets and thinking need to change to understand a deregulated energy market. The spirit of the Energy Reform was mostly drafted and modeled after the market ideas of a renowned Harvard professor named William Hogan, along with the basic structural elements of other working markets like the PJM in the US. Therefore, Mexico’s model contains novel economic regulatory mechanisms and is characterized by a very aggressive and short time frame for implementation. This combination has not been seen in other countries and that makes us a world laboratory for deregulation.

Q: What risks are prospective clients worried about?

A: There are risks such as corruption that are aggravated by the weak anticorruption control systems in Mexico. There can also be problems with the acquisition of land for projects and rights of way for linear infrastructure layouts. This situation puts a very high burden on investors because they can see their profitable business scenarios drift away very quickly.

Q: Are companies losing opportunities to invest in the energy sector in Mexico?

A: Go-getter companies are definitely obtaining the lead. They are paying a “first-move price” but they will do very well in the long run. On the opposite side, those companies that work their business by remote-control, hesitate and are slow to get interested in Mexico will not advance as quickly as others. Once the sector became deregulated, opportunities for other utilities and companies to participate in the market besides the national champions opened up but there are many factors to consider when evaluating those. For example, Mexico’s deregulation process came at a complicated worldwide historical time, where firstly, the traditional power market utility business model is being challenged and questioned by distributed generation technologies as we speak. Second, the whole reform process is happening when Mexico does not have any policy or operational experience beyond the Independent Power Producer (IPP) or the limited self-supply model. Third, after almost all countries have deregulated their power sectors there is a new surge of renewable energy and sustainable solutions in response to climate change. All these trends are taking place in Mexico simultaneously and in a very short time span.

Q: How has the zero-corruption policy affected Galo Energy’s networking and business?

A: In addition to the ethical reasons that sustain the essence of the consulting model at Galo Energy, we believe that a zero-corruption policy and transparency help the system work and make it more valuable. Strong ethical business performance has been a great business proposal for Galo because once our clients begin working with us in Mexico they create a long-term and reliable relationship. This transparency is also important because we participate in other forums with even stricter regulations, such as those in the US. Our strategic partners also abide by these codes of conduct.

The energy industry is a high-stakes, high-returns industry that cannot be examined without involving complex political issues. It is no surprise it has become part of the anticorruption agenda of citizen organizations that are pushing for a more transparent and ethical business and political model in Mexico. The new regulatory structure gives enough space for any financial model but Mexico still needs to tap into a huge amount of resources from national and foreign investors that had not considered energy before because of the restrictive nature of the prior model. Important benefits of deregulating the market are that the risk portfolios can now be tailored for debt or equity and investors can come from wherever.