Santiago Morales
Becquerel Capital

Maximizing Success Probabilities

Fri, 02/01/2019 - 10:01

When it comes to financing, the energy landscape in Mexico appears to be a tale of two project types. Whereas those resulting from the long-term auctions have little trouble obtaining low-cost financing, it remains a challenge for merchant projects, bilateral PPAs and others outside the auctions, says Santiago Morales, Partner at Becquerel Capital. “Mexico’s energy market is evolving and operational self-supply legacy projects are becoming scarce,” he says. “The problem is commercial. Off-takers receive so many offers that it is difficult to convince them of the advantages of a legacy self-supply scheme.”
Morales believes there is a lack of awareness about bilateral PPAs and how they operate. Chief among the unknown variables is congestion risk and which market players are willing and able to absorb this risk. “The qualified supplier must be sophisticated enough to absorb risks but few large qualified users can understand the complexities of power trading at this level. This is exacerbated by scarce historical data,” says Morales. “A risk quantifying method for grid congestion and financial rights of transmission still needs to be developed. A balanced project requires balanced risks.” He adds that isolated supply and local generation can be two options to solve these issues but only if the qualified users’ facility is located close to a generation plant.
Becquerel Capital is a boutique investment and financial structuring firm specialized in clean energy infrastructure. Its team has an extensive track record in financing and developing renewable energy, fossil fuels, energy efficiency and water infrastructure projects. “Solar energy represents 90 percent of our activities while cogeneration and energy efficiency constitute the rest of our focus,” says Morales. The firm’s primary focus lies in maximizing the success probabilities of a project. “We understand what projects need to be bankable and how to structure profitable PPAs. We are able to save sizable amounts of time and money to developers that are still riding the slopes of Mexico’s energy market learning curve,” he says.
In their quest for bankability, developers of mid to large-scale projects look to the long-term electricity auctions. Morales says the aggressive offers that create small revenue margins, added to risk distribution, present problems for projects. “Awarded developers obtain successful projects but must manage the risk of speculating construction costs in the next two-to-three years, when they must begin generating and delivering energy,” he says. The credit capability of purchasers is also prone to speculation. “CENACE’s Clearing House, introduced in the third long-term auction, cannot quantify projects on a risk basis,” he adds. “Several variables have to be considered, such as who participates, their credit rating and how their offers are backed up.”
Through sophisticated credit risk analysis based on portfolio theory, Becquerel Capital was able to design replicable commercial schemes, allowing access to critical mass in renewable energy projects. “Our credit risk analysis presents commercial and industrial projects before rating agencies and banks as less risky and more attractive compared to utility-scale projects,” says Morales. The boutique firm knows there are ways to provide certainty to reluctant financial entities. “PV and wind powered generation, for instance, do not depend on future natural gas prices or any other input cost variation,” he says. For off-takers still hesitant to switch to renewable energy, Morales warns against the market noise caused from long-term electricity auction prices. “It is important that these consumers understand these projects are selling energy to CFE Suministro Básico, which still has to develop its generation portfolio within competitive margins to add distribution and transmission costs and risks,” he says. “While electricity rates are virtually impossible to predict in the long-term and committing to long-term supply that today can be very competitive, off-takers can play a fundamental role in absorbing part of the market’s risk.”