Navigating the Complexities of a New Market

Players in Mexico’s electric industry can now develop new business models as generation, transmission, distribution and trading costs are gradually unveiled and auctions are conducted under a new and intricate regulatory framework. While there is still much to do, the Energy Reform is increasingly looking like a success.

“The reform is starting to prove effective. There were big expectations in the market, particularly in the eyes of foreign investors and companies interested in doing business in Mexico. Whoever has inserted himself as an active player in Mexico’s market understands that the chances of a positive return will be quite high,” says Jorge Sandoval, Associate at Goodrich, Riquelme y Asociados (GRA). The law firm has assisted and advised international companies throughout the analysis and review processes of the new rules, allowing them to invest and actively participate in the market. “We integrated these processes into an action plan, actively involving clients in public energy auctions, assessing their direct investments into developing projects and reaching out to final users to understand their needs.

” Wanting to capitalize on the new business opportunities unlocked by the reform, foreign investors are keen on absorbing the complexity of the Mexican legal structure and the entangled nature of the country’s new and revamped energy-related government agencies. A clear vision of who is in charge, who does what and the interaction between offices, agencies and governmental authorities, is a must. Permitting, among other complex processes due to their interdependent nature, can hold no secrets for potential investors. “If there is something that could foster or expedite foreign investment in Mexico’s renewable sector it would certainly have to do with simplifying administrative procedures,” Sandoval says.

Sandoval points out that whenever GRA had the need to engage regulators, to discuss either a legal requirement, or the structure of a potential business, they have proven to be receptive and open to establishing a dialogue, with as much transparency as they are allowed to have, engaging specific audiences from the different layers of this industry to keep them informed about the new relevant rules, regulations and the processes that fit their needs. “They are being receptive to criticism and to comments from private players related to strategies and business plans so they can design the relevant policies to support them, under a long-term perspective,” he says.

For Sandoval the long-term electricity auctions have created mixed feelings. “From an investors’ point of view, there is a lot of excitement about investing in Mexico through this scheme but the prices that were obtained from these auctions have stopped some other players in this industry from looking in that direction.” The investor community however is now able to understand the mathematics needed to anticipate the price levels required to participate by focusing on specific projects. “We have had reports of companies losing interest in these auctions due to price levels but this has only led investors to seek alternative ways of participating in this market.”

Besides grasping the full extent of the new regulatory framework and designing optimal bids for the auctions, Sandoval believes the ability to integrate a successful corporate social responsibility policy within an energy project is the norm for long-term success. “In these cases, we advise our clients to offer business opportunities to local communities, such as professional training, employment or local infrastructure projects for them to get involved in the business and eventually participate directly in the project,” he says.

Sandoval adds that GRA actively participates in international forums, advocating and explaining Mexico’s reform, fostering the interest of international players, investors and even international agencies. Many of the country's energy projects will require significant levels of capital and financing. A considerable number of financing institutions are looking at Mexico and offering their services to auction-awarded companies or private developers. “We have even been able to attract the interest of private banks and investors from the US, Europe and Canada by underlining Mexico’s growing market.”