Jaime de la Rosa
President
AME
/
Insight

Major Investors Strengthen Electricity Market

Wed, 02/24/2016 - 09:22

In 1992, the Law of Electric Energy of the Public Service was created to allow private companies to generate electricity. In 1996, the Law was enacted under three different schemes, one of which was IPP, the driving force for the creation of AME the following year. Applicants bidding for IPP contracts were required to be experienced utility companies or large investors, and these large players shared common interests that consolidated the creation of AME. In principle, the association was founded in order to strengthen private companies in a market dominated by CFE and PEMEX

AME was consolidated when the first combined cycle plant from the private sector began commercial operations. Currently, AME has close to 30 members, who have collectively made investments of close to US$28 billion, mostly in power generation through the IPP, self-supply, and small producer schemes. In 2008, the organization entered the renewable energy market through LAERFTE, and its members began investing in renewables under the self-supply scheme. Today, members of AME are responsible for 34% of the energy generated in the country, with 1,000MW of wind power from private investments and roughly 17,000MW from combined cycle plants. Some current affiliates of the scheme include Iberdrola, Acciona, Gas Natural, Mitsui, Mitsubishi, Alstom, TransCanada, Ienova-Sempra, Enel, and Enagás, as well as other associations such as ANES and AMDEE.

In the wake of the energy reform, Jaime de la Rosa, President of AME, shares that the alliance of private investors has made concerted efforts to meet the government’s objectives for the electricity, oil, and gas sectors. In order to facilitate investment opportunities and provide better services in these industries, AME participated in several meetings with the authorities, mainly with the Ministry of Energy, as well as CRE and the Ministry of Finance. “Our role is to continue incentivizing private investment in Mexico and make sure that we have the mechanisms to continue investing as we have done in the past,” says de la Rosa.

Initially, members of AME were not pleased with the first draft of the Energy Reform, since qualified users were limited to participation in projects over 5MW. “This meant that the private sector would only have 166 possible customers,” de la Rosa laments. “After AME lobbied with the authorities in order to produce a more balanced law, participation is allowed with 1-3MW per customer.” Overall, the organization’s aim was to guarantee that the market in which it operates is transparent and that CFE, as the dominant player, abides by the rules. During government dialogue regarding the structure of the Reform, AME representatives negotiated the secondary laws so that these were appropriate for private investors, in an effort to ensure that CFE competes in the market under the same terms as the private sector.

Additionally, AME suggested the creation of a market for renewables, since it is more difficult for these resources to compete. De la Rosa explains, “This is why the rules of the market are important, because if a plant is going to dispatch energy below production costs, it will lose money. If we can compete fairly, then the country and the final users will benefit.” According to de la Rosa, the previous legislation was clear and straightforward, enabling the association’s affiliates to finance projects. Banks, financial institutions, and investors collaborated well, he recalls. Today, the situation is slightly challenging for AME because of the uncertainty surrounding the market rules, like the uncertainty regarding the management and bankability of clean energy certificates. According to de la Rosa, “The market transition is significant, and we need to be able to anticipate how it is going to evolve and what the drivers will be.”

So far, the alliance’s most rewarding experience has been with combined cycle plants under the IPP scheme, and de la Rosa attests to their efficiency. “We, the private investors, were able to establish a competitive tariff that is divided into two areas, one for capacity and another for energy consumption, which leads to a mutually beneficial situation for the investors and for CFE,” he explains. The benefit for the private investors is that they have a 25- year contract with a fixed tariff and natural gas charged as pass-through, resulting in moderate yet attractive returns. Likewise, CFE is released from the burden of providing the capital to build a plant, so the utility can spend money on infrastructure developments like transmission and distribution lines to provide electricity to remote locations.

In this way, private institutions incorporated into AME have a successful history of working in conjunction with public organizations such as CFE. Provided that the implications of the Energy Reforms result in favorable conditions for both parties, and that further guidance is provided on the implementation of these reforms, de la Rosa sees no reason why both sectors cannot continue to work together productively.