Mexico Energy Forum 2020: Highlights

How Will Mexico Achieve Energy Self-Sufficiency?

Mexico has prepared an ambitious plan to achieve energy sovereignty, sustainability and self-sufficiency. And while the drastic drop in oil prices this week is top of mind, it will not change Mexico’s strategy, Manuel Rodríguez, President of the Energy Commission of the Chamber of Deputies, told the Mexico Energy Forum 2020 audience on Wednesday at Mexico City’s Sheraton Maria Isabel hotel. “It is not the first time we have seen oil prices plummet and it will not be the last time either. We are certain that the market will recover as we have seen it recover in the past,” he said.

To achieve self-sufficiency, Mexico will focus on oil and gas as well as renewables. Regarding oil, the first order of business, Rodríguez said, was to reverse PEMEX’s 50 percent oil production decline since 2004. Storage is another important element in the strategy. "Storage continues to be the great challenge of renewable energy development," he said. At the moment, Mexico has an oil storage capacity of three days, and just two days for gas. Focusing on refined products, Rodríguez said the country imports around 70 percent of its products and 90 percent of gas. The goal is to reverse these trends by refinancing PEMEX’s debt. “The NOC has tools to reverse its fortune,” he said. “By aiming to foster the contracting of local companies for operations, communities nearby are poised to benefit as well. Storage capacity is aimed to increase to 14 days by 2021.” Furthermore, with the Dos Bocas refinery about to be built and the six current refineries improved, importing refined product will be less of a necessity as Mexico will be able to provide 70 percent of the fuels in consumes by itself, he added.

Gas is another benchmark for Rodríguez. “Currently, only 20 states in Mexico are gasified, and without natural gas, it is very difficult to develop the industry. The goal is to do it by the end of AMLO’s administration and recover the lag in certain areas of Mexico,” he said. A zero-emission fuel, natural gas is widely present in the north and center of the country.

Renewables are another important pillar in Mexico’s energy portfolio. Rodríguez said that 22.5 percent of the country’s energy comes from renewable sources. "The current goal for 2024 is that 35 percent of Mexico's energy mix is composed of renewable sources. We hope to even surpass that goal,” he said.

Rodríguez also discussed the Energy Commission’s approval of a reform to article 29 of the Energy Transition Law to include the promotion of electric power generation programs on federal government real estate. Another initiative from the commission is related to stability. Energy projects are planned ahead for the maximum of a presidential term. By planning ahead for 15 to 30 years, investors would have the certainty to invest billions of dollars, according to the commission. The commission as drafted an initiative to create the Center for Energy Analysis and Development Studies (CEADE) to provide technical support for its legislative work.

Addressing concerns from an audience member that with the renewed focus on oil, renewables and other sources of energy would suffer, Rodríguez sought to dispel anxieties. President López Obrador is committed to supporting the Energy Reform and is open to the industry’s concerns, incorporating their remarks in new policy, Rodríguez said.

Natural Gas Paves the Road to the Future

Mexico Energy Forum 2020’s first panel discussion, held on Wednesday at Mexico City’s Sheraton María Isabel hotel, covered the commodity considered to be the most realistic and best-positioned path toward the transition to a decarbonized future: natural gas. While still technically a hydrocarbon and non-renewable resource, natural gas continues to be the best option to fulfill global energy demand while a decades-long comprehensive transition to renewable sources can take place, according to the panelists.

Moderator and Baker and McKenzie Partner Benjamín Torres-Barrón began the conversation by establishing some of the basic characteristics of natural gas that define it as this best option: its generous abundance, its corresponding consistently low prices and the way in which it enables cheap energy granted it what Torres-Barrón termed “21st century protagonism” as a source of power. He then narrowed down his focus for his first question to the panel, which concerned the role that the natural gas sector must play in the Mexican economy.

IEnova Natural Gas Commercial Director Areli Covarrubias responded by elaborating on Torres-Barrón’s remarks on the advantages of natural gas. She added that natural gas’ cleaner emission profile coupled with its price made it the natural alternative engine for Mexico’s industrial and socioeconomic development. She then detailed IEnova’s experience with Mexico’s natural gas systems, which Covarrubias said was marked by the asymmetry between supply and demand. Supply was limited for a number of infrastructural reasons that made everything more difficult as demand continued to increase, leading power generators that depend on a natural gas feed to reach points of desperation where they “seasonally find themselves grasping to get natural gas from whatever sources they can.” She highlighted the need for a more robust supply platform and more long-term investment in its growth.

ATCO Energía CEO Ramón Basanta agreed with the need for this platform and that the issues were infrastructural, especially given the oversupply available in the US and the fact that low natural gas futures proved that oversupply could be expected to continue for the long term, also necessitating long-term investments. Basanta was clear about the role of natural gas in his assertions. "Natural gas is not a zero-emission fuel; however, for Mexico, it is the fuel with a shorter-term impact to reduce emissions." He added that the actual future of zero emission energy would probably depend on the development of green hydrogen, which technologically still has a number of obstacles in its development. Basanta also noted that natural gas should, in the relative short term, be able to generate the approximately 16 percent of Mexico’s energy mix currently occupied by fuel oil and coal. 

Emerson Strategic Accounts Director for Latin America David Vizcarrondo used his time to describe the technologically advanced state of natural gas monitoring and predictive systems, underlining Emerson’s relationship with CENAGAS along the way to illustrate the public institution’s capabilities to draw its development plans based on accurate digitalized simulations. In Vizcarrondo’s estimation, “automation enables reliable operation and supply.”

While Torres-Barrón continued his positivity regarding natural gas, later choosing to make note of its “little price volatility” and the “certainty” that it grants to users and investors, he also asked panelists to detail the most important obstacles to this resource’s development in Mexico. Covarrubias identified permitting, in particular environmental permits required before project construction can begin and whose issuing was particularly halted during 2019, and community engagement as the two most pressing issues to solve for more projects to go forward more quickly. Basanta identified the main obstruction to be the fact that natural gas in Mexico did not yet operate under a “fully functioning market, not in terms of liquidity, volume, price transparency, information symmetry, or any number of other variables that define a market functioning properly.” Basanta continued by declaring that “the path of pipelines and the general shape of distribution networks needs to be drawn by easily identifiable market needs and incentives rather than regulators or the ideology of a political party.” He concluded his remarks by saying that “without a functioning natural gas market, Mexico will not be able to build a functioning electricity market.”

Making Renewable Energy Finance Work

Renewable energy is finding its way in the Mexican industry, but projects in Mexico require long-term financing to be successful while the industry needs to face several challenges to take advantage of the country's potential, CEO of Zuma Energía Adrian Katzew told the Mexico Energy Forum 2020 audience on Wednesday at Mexico City’s Sheraton Maria Isabel hotel.

"Development banking plays a vital role in financing energy projects because those are projects that have to be financed for the long term. Commercial banking has been limited in this regard. Mexico should be open to long-term contracts as we see in Brazil. These contracts contribute to investment certainty and encourage new projects,” Katzew pointed out.

Another major challenge facing electricity markets is losing money on projects and how to recover it. "Markets are designed around price or cost. Cost-based models do not have a price differential and this affects long-term projects. An example to follow is Brazil, which has developed long-term contracts that provide certainty to the investment and motivates companies to develop new projects."

In Katzew's view, the optimal development of renewable energy in Mexico depends on three key issues: transmission infrastructure, commercialization schemes and long-term system planning.

In September 2018, Zuma Energía inaugurated the largest wind farm in Mexico and one of the largest in Latin America, which has the capacity to produce 424MW to supply power to 900,000 residents. The project, located in the Charco Escondido ejido of Reynosa, Tamaulipas, has an area of ​8,000ha with 123 turbines that provide clean energy, thus avoiding emissions to the atmosphere of 739,000 tons of CO2 per year.

Despite all the challenges that the industry faces in Mexico, having the necessary elements and with the right support, a clean and renewable future is not so far away, Katzew said. He highlighted the financing of Zuma Energía’s project, which totaled US$600 million and was achieved through development and commercial banks. “The Mexico-Reynosa wind farm was the first auction project to be financed. There was always dialogue with the private sector and there was always feedback from the financial sector and that needs to be done with every single project,” he added.

This project is part of the second long-term electricity auction organized by the Ministry of Energy (Sener) and the National Center for Energy Control (Cenace) held in September 2016, in which Zuma Energía was the winner of a portfolio totaling 725MW in renewable energy, 424MW of which is delivered by the Reynosa wind farm.

The Future of CELs in Renewable Energy Finance

CELs will be ever more important in Mexico’s diversified energy market, and supportive financing is key to reach renewable energy goals. On Wednesday at the Mexico Energy Forum, MÉXICO2’s Director General Eduardo Piquero explained what lies ahead for CELs in energy financing. “It is important to have private companies backing us up in the challenges that society will face in the coming years, such as climate change,” Piquero said, adding that CELs would be key.

A CEL, in short, is the Mexican term for a Renewable Energy Certificate. This is a negotiable asset, proving that electricity has been generated by a renewable, and thus green, energy source.

CELs play an important role in different countries. Eduardo Piquero highlighted the US case, where its commitment to clean energy for both companies and end users, enforced on various governmental levels as well as associations and NGOs, ensures compliance with regulations. He stressed that the “voluntary” segment of renewable energy users has grown significantly over the past years. Backed up by government requirements, it has become an attractive market for investors as well.

One reason for the success of renewables in the US is that there is confidence in its surrounding regulatory system. Piquero argued that this is not necessarily the case in Mexico, due to the government’s proposal to add old CFE plants as capable of issuing CELs. “The CELs market will not disappear, but the absence of legal certainty casts doubts on its effectiveness,” he said. Furthermore, he warned that a steep increase in CELs being available will collapse prices, and effectively end its role as an instrument for financing new projects. Another issue is the lack of transparency: although no fines for noncompliance have been issued in Mexico as of yet, this might not be due to Mexican companies having a spotless record.

Although Piquero mentioned much work needed to be done to protect CELs’ benefits for Mexico, he placed renewable energy at the highest importance looking toward the future. The current oil price war provides a glimpse at how the market would be without hydrocarbons. Piquero said he believes fossil fuels will not be able to compete with renewables. Although the oil market will recover due to a cycle in which investments drops, supply decreases and prices rice once again, he said that each bounce back to the top will be smaller than the last. Renewable energy, however, will continue its upward trend. “Renewable resources are much more competitive than they were before, and they will continue their advance,” Piquero said. Oil companies are aware of this, and it contributed to some of the sector’s giants to start heavily investing in renewables. “The collapse in oil prices will usher in a transition in the energy industry. The energy transition is knocking on the door, and the shift will happen sooner than one might expect,” Piquero concluded.

As he answered questions from the attendees of the forum, Piquero acknowledged that despite renewables’ potential in Mexico, barriers related to storage as well as finding financing would need to be addressed. After all, Mexico has such great promise that Piquero considered it strange that the country did not have more projects under construction, as he said that Mexico is, in potential, as resourceful in terms of sunlight as Saudi Arabia is with oil. By overcoming its hurdles, Mexico might yet make good on its potential.

Investor Education Crucial to Renewable Financing

The second panel discussion at Mexico Energy Forum 2020 on Wednesday at Mexico City’s Sheraton María Isabel hotel explored a subject that involved the interests of everybody in the room: how best to finance renewable energy projects, and how that process should change in the coming years.

This discussion was contextualized and anchored by the current oil price war and collapse in addition to corresponding global reevaluations of investing strategies by banks and companies in the energy sector. Panel moderator José Urteaga, Senior Energy Specialist at the Inter-American Development Bank, explicitly mentioned this context in his opening remarks, during which he cited the Mexican maya oil mix hitting an abysmal US$27 per barrel. At the same time, he tempered these implications with statistics that left clear the continuing dominance of oil and gas: of the US$1.8 billion invested worldwide in energy projects during 2018, close to 44 percent was invested in hydrocarbon projects. This illustrates the dire need for massive change in the way renewable energy projects are financed, Urteaga said. It is crucial for environmental reasons that these investments be triggered and facilitated as quickly as possible if the global economy is to remain “under the UN’s worst predictions in terms of rising temperatures.”

Green Finance Advisory Council Executive Coordinator Cecilia Latapi clearly voiced the need for legal certainty for investors in Mexico’s renewable projects. At the same time, she also made it clear that investors, financiers and financial institutions needed to educate themselves, adopt new mindsets and be more open and adaptable when it comes to structuring their support for and involvement in renewable energy projects. She heeded the call for “hybrid schemes that respond to the new needs of innovative projects.” Latapi also said that she has seen positive movement toward this broader perspective from investors as she described what she called the “links and networks of feedback and mutual understanding between project developers and investors.”

BANCOMEXT Director of Energy Sector Financing Mariana Aguirre elaborated on Latapi’s remarks by explaining that the technical variety of energy project financing schemes and the high degree of PPA pliability meant that developers and investors should have access to the tools they need, provided they understand that these projects represent long-term investments “from 10 to 21 years on average.” Aguirre also made it clear that firms, funds and banks needed to further study the variables that could affect the conditions of their contracts with developers. Here, she also referenced recent developments by describing the way in which COVID-19’s shutting down of Chinese ports was affecting the supply of solar panels and reshaping the market for the production of these components.   

Citibanamex Director Head of Power and Energy Salomón Amkie underlined the fact that macro factors for renewable energy project investment in Mexico were actually quite flattering and beneficial. It is the regulatory and contracting nuances and uncertainties that needed to be defined to trigger larger volumes of interest from banks and sponsors, he said. Until these uncertainties are eliminated, he admitted that “it makes sense for banks to be cautious.” Acclaim Energy Country Manager María José Treviño agreed, highlighting the fact that “concrete decisions need to be taken by public institutions to address these uncertainties,” which include transmission infrastructure, data sharing and social engagement.

To this list, Zuma Energía CFO Hélene Dimitracopoulos added the question of local content. While she acknowledged that Mexico had tremendous potential in its human resources and national supply capacity, she also noted the gap that remains between that potential and the fundamentals necessary in any renewable energy national workforce. Dimitracopoulos said that closing this gap and the role that public institutions play in its closing were important elements to consider for investors, who at the same time needed to educate themselves regarding what their role was in this process.

Solar Energy Development in Mexico is Just 1MW Away

Distributed generation in the domestic industrial sector and in small and medium-sized companies is the alternative for the solar industry in Mexico, agreed panelists discussing the Development Outlook for Mexico's Solar Energy Sector at the Mexico Energy Forum 2020 on Wednesday at Mexico City's Sheraton Maria Isabel hotel.

“For us, the biggest challenge is clarity in the rules of the game. There are too many rumors and uncertainties, making investors nervous. For a year, we have been cautious and we have not been very involved, but at the same time we have not stopped and the distributed generation for us has been incredible. At the commercial level, there is investment and the market is still dynamic," said José Jové Cassis, CEO of Prana Power.

Distributed generation refers to a variety of technologies that generate electricity at or near where it will be used, such as solar panels and combined heat and power. Distributed generation may serve a single structure, such as a home or business, or it may be part of a microgrid, such as at a major industrial facility.

When connected to the electric utility’s lower-voltage distribution lines, distributed generation can help support the delivery of clean, reliable power to additional customers and reduce electricity losses along transmission and distribution lines. However, the Federal Electricity Commission (CFE) does not allow this.

Currently, the exempt generation cap is 0.5MW per installation, but the industry seeks to bring this ceiling to 1MW. This change could boost the speed of adoption of distributed generation. According to data from Asolmex and PwC, Mexico is about to reach 1,000MW of distributed generation and by 2024 it estimates that could reach 6,000MW. This means that the current law of the electrical industry contains a cap for energy generation that does not require permits from the Energy Regulatory Commission.

“Before, solar energy did not think about megaprojects, it was focused on small businesses because there were limits to commercialization. However, the industry has stopped its projects and is again focused on the domestic industry. Hopefully, this will change with the proposal in Congress to modify this regulation,” said Casiopea Ramírez, Partner at Fresh Energy Consulting and Adviser to ASOLMEX.

In the Chamber of Deputies, people like Hernán Salinas seek to modify this. In his consideration, decentralized power generation is recognized for its high impact on socioeconomic issues. “Distributed Generation is a way to reduce energy poverty that affects around 12.4 million Mexicans. This type of generation has the ability to provide access to electricity in communities far from the main generation areas,” said Salinas in February at the Congress.

“There are more than 3,000 players in the market and this translates to a benefit for the consumer. We have prices that we did not see three years ago and now they are a reality because there are more competitors and better projects; however, we have come across requirements that CFE requests that are out of reality and that kill a project,” explained Juan Ávila, Director General of Top Energy.

Another challenge noted by Patricia Tatto, Vice President of ATA Renewables and President of MERM, is that there is a lack of transparency in the CFE auction process. “We see dynamism in the market but also a stagnation of large-scale projects. There is a lot of buying and selling and we hope that the opportunities will equalize over the course of the year.”

Mexico's Energy Market Boosted by Private Auctions

Mexico’s energy market has a great deal of potential. Although bigger projects have been put on hold, private auctions are being created to fill the void, according to the final panel discussion on Wednesday, at the Mexico Energy Forum 2020 at Mexico City’s Sheraton Maria Isabel hotel. Leonardo Beltran and Francisco Salazar moderated the panel that included Jeff Pavlovic, Miguel Alonso and Eduardo Arriola.

The panel highlighted the experiences of renewable energy producers, exemplified by Alonso, Country Manager of ACCIONA Energía. While he said it is true that bigger projects have slowed down, the company is nonetheless committed to advancing its operations in Mexico. "We are installing and operating 500MW in Mexico through a variety of projects. We plan to continue with our current strategy,” he said. "Mexico's goals haven't changed but the energy model has shifted to give CFE a larger role, and we must adapt.” The panel agreed that large-scale projects are a necessity for consumers because they keep prices down and efficiency up.

Indeed, the side of the energy industry focused on purchase and sale of projects is quite active in Mexico. Alonso said he did not believe new auctions would happen soon. It seems the industry agrees, and two companies are stepping into the ring to provide opportunity: Vitol Group and Bravos Energía. The companies have founded private auctions, boosting the industry by providing a new platform on which it can trade. These auctions are apolitical in nature, merely seeking to facilitate trade, said Arriola, Originator at Vitol, and Pavlovic, Director General of Bravos Energía.

Beltran highlighted the importance of legal certainty. The panelists agreed that for investors, longer contracts and a certainty that previously set rules would be respected are key. Beltran argued that the platform has great potential due to the fact that agreements are made between private players, who can keep it transparent. Added Arriola: "To make contracting procedures more efficient, a framing contracting model needs to be established.” The government, however, needs to provide stability in the rule of law as well, as giving investors the notion that regulation might change at any moment puts them off.

There are bound to be some flaws in agreeing on the terms of engagement among interest groups. "It is common for the efficiency of market design to clash with the individual rights of stakeholders. Mexico is no different,” Pavlovic said. In the end, he suggested, small flaws here carry less weight than the heavy potential investments the auctions enable. By keeping bilateral contracts simple, smaller companies can enter the fray as well, instead of seeing this part of the market dominated by a few big players. This, in turn, can decrease energy bills all around.

To conclude, the panel agreed that synergy between the private and public sectors is needed to reach Mexico’s ambitious goals regarding energy. Infrastructure and project development need to be boosted, for instance. If both sides of the sector work harmoniously, there is much to be gained.