Helping Clients Navigate a New Political, Financial LandscapeBy Cas Biekmann | Mon, 07/26/2021 - 10:14
Q: How is Deloitte helping investors understand and navigate the regulatory reality of Mexico’s energy sector?
A: The last two years have been a rather interesting period regarding our advisory services for our clients. Many companies entered Mexico because of its fertile ground for renewable energy development. In recent years, the regulatory environment has become more challenging. Our support goes roughly from 0 to 100. Some companies just want to know how regulatory changes could impact their business. Others want to know how to secure their investments or are pausing their project development. There are also companies that want to make use of existing opportunities for independent power producers and qualified users. We help these offtakers make their switch to the electricity market a reality, as well as helping them gain a better energy efficiency by explaining the options available. Companies are often unsure whether they should approach a qualified supplier, install their own power plant or stay in their current scheme. With all the governmental regulation, which is now unfortunately being challenged in court, some of our clients are involved in judicial procedures. Waiting to see how the situation develops is a common strategy.
Q: How do you assess the success of private companies achieving amparos against regulatory changes?
A: Several procedures have been started against the changes to the Electrical Industry Law (LIE). Recently, a court revoked a definitive suspension against the changes to the LIE. But this was just one resolution; several other amparos are still holding the general suspension in force. The path to a legal resolution is a long one. Until the Supreme Court, or a competent court in its place, issues its final ruling or the final resolution nothing is written in stone. For companies involved, we recommend they have a legal case built on valid grounds so that they can challenge measures or regulatory changes.
The most important issue here, however, is what the sector was calling for: the opening of a real discussion about energy regulation in Mexico. The private industry is used to seeing regulation change when it comes to electricity, oil and gas. Every government has the ability to change the rules of the game and if it does not affect current investment. In the end, we want to see strong private investment but we also want to have a strong state-owned company supporting Mexico’s transmission and distribution network, which is CFE’s exclusive responsibility.
These matters do not have a black and white answer. Not all rulings will move the same way. The issues will be interpreted differently by various courts. However, I do not believe that the energy sector’s model will be changed through these decisions. The current electricity industry setup will persist for a while. The government will try to amend the Constitution and the current energy model.
Q: Where do you see opportunity for the public and private sectors to join forces to increase stability and reliability in the electrical system?
A: Recently there has been some good news on this front but we need to temper the expectations for these partnerships. As long as CFE focuses on the opportunities present in the market, I think the sector will be in a much better position. The model established with the Energy Reform allows the private sector to participate in the generation and commercialization of electricity. Electricity is not a natural resource like hydrocarbons because it is more of an industrial process, meaning there’s not as much of a loss when the private sector performs these activities and lots to gain. CFE must focus on the transmission and distribution grid, getting electricity to the country’s disconnected and isolated areas. We need to figure out how electricity from the strong north can be transmitted across the country. It does not matter how much you generate if you cannot get the electricity to the places where it is needed. Demand will continue to destabilize the system.
The government wants to have full control over the entire energy supply chain, focusing on public investment schemes with some collaboration from regional governments and other organizations. This makes it difficult for CFE to concentrate its resources where they are needed the most, which is in transmission and distribution. Private investment can help in this regard but important bidding processes for transmission lines in this area were canceled some years ago. However, I do not see the government entering a joint venture to construct this infrastructure
Q: How will the reorientation of the energy sector affect the efforts of C&I companies to decarbonize and meet net-zero goals?
A: How we will reach the energy transition’s goals within these conditions is a common question. Private investment has been halted because of the prevalent uncertainty and a critical slowdown in permitting. However, Mexico is not an isolated country. It is part of a bigger world. The global energy transition cannot be stopped; it is already a global reality. Many companies in Mexico understand this and even have international and internal energy transition commitments to adhere to. These companies want to achieve their goals, despite an unfavorable regulatory environment.
Mexico is rich in wind and solar resources. I do not believe companies will sit with their arms crossed, waiting for something to happen four years from now. The most important effort in terms of the transition will come from the private sector. One of the positive developments that occurred in the last month marked by regulatory changes is that the industry is finally providing a unified front, saying that it wants legal certainty, assured investment and the possibility to develop projects to help the energy transition move forward. Private companies will drive the transition and push the government to retain the status quo in the sector. The next few years will be difficult but energy projects are long term. In the coming years, we will see the results of these efforts.
Q: What are Deloitte’s near-term goals?
A: For the short term, our goal is to continue helping our clients to navigate the new legal, regulatory, political and financial environments. Every regulatory change results in alterations to operations, financial agreements and risk assessments. Deloitte helps its clients understand which options among the vast array of options regarding energy supply could provide the most success.
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