Mandatory Assessments Here To Stay

Mandatory Social Impact Assessments (SIAs) for energy projects were “a sound decision” by the Mexican government to make sure that the electricity boom brought about by the Energy Reform and CENACE’s power auctions benefits not only companies but also the local communities that host them," says Edmond Grieger, Partner at Mexico City-based law firm Von Wobeser & Sierra. They are also helping to promote good companycommunity relationships. But the framework could still use some adjustments to adjust to the reality of the country.

“Defining mitigation strategies for the projects’ negative impacts is no longer optional as companies are now required to show their SIA to CRE to obtain their generation permits. We know that the Ministry of Energy already has over 500 evaluations in the process, proof that SIAs are here to stay,” Grieger says. The SIA rules are not yet fully established but the framework is already helping projects in the hydrocarbon sector, for example. But requirements like presenting SIAs 90 days before starting negotiations with landowners, he adds, could be considered unrealistic. “SIAs require in-depth information that is not possible to obtain without contacting the landowner.”

But interest in the market is only increasing, as are the business opportunities for law firms with expertise in the area. From participating in the power auctions to signing PPAs between off-takers, developers and generators to playing a part in the upcoming bidding for a transmission line from Oaxaca in the south of the country to central Mexico, attorneys have no shortage of work. “The main challenge for our clients is to select and develop projects that have the potential to be competitive in power auctions or tenders. The first contact we usually have with clients that are looking to participate in the auctions is helping them to identify developers with projects under construction that will be attractive for a commercial alliance or joint venture,” Grieger explains. Since the clients usually have little time to finish their proposals, Von Wobeser & Sierra helps them look for interesting, innovative projects well advanced in the permits and authorization processes. “Afterward the challenge is to comply with the technical, financial and administrative requirements set by CENACE. The financing part is particularly complicated given the required guarantees and financial capacity, so companies need to analyze what are the best strategies for them to meet these requirements.”

The law firm is proud of the work it did during the drafting of the market regulation in areas that have had a dramatic impact on the feasibility and bankability of generation projects under the new PPA structure with CFE. It says the original 10-year terms seemed steep to developers. “The industry fought hard to establish these time frames during the evaluation period for the auctions’ guidelines,” Grieger says. “We are happy about this change as we think it has been a crucial factor for the great interest that power auctions have raised globally.”

And the world does not start and end at CENACE’s auctions but the opportunities for developing projects for the private sector such as PPAs without the involvement of CFE are still there and sometimes present a better alternative to the aggressive price environment created by the power auctions. The low prices of renewables are creating interest for off-takers and those sorts of deals are increasing in popularity, Grieger says. The downside of low prices is the difficulty in making projects viable. “Prices should stop falling. They are competitive already, so we are hoping to see higher offers that make projects more viable but we think prices will remain aggressive in comparison to international standards. On the bright side, we expect more foreign investors to enter the country although they will be pressured to reduce their costs.”

The wholesale electricity market is also an interesting place for companies to participate as suppliers, traders and qualified users. “Most of the foreign developers entering the market have plans to stay and engage in more than one project in Mexico, so they look for support in areas such as regulation, environmental compliance, financing and land rights acquisition. We know that all of these areas are necessary for a successful project, so we have a diversified services portfolio."