Offtakers Drive Opportunity Despite Complicated Market Outlook
The main issue for Mexico’s energy industry over the past years has been regulatory uncertainty, as well as problems with clean energy traceability, as a slew of problems continues to foster a negative outlook for the industry. Nevertheless, the country’s offtakers still find opportunities in challenging times, driving the development of a significant part of Mexico’s energy mix.
ESG issues have become crucial for Mexico’s industrial sector as companies are looking to incorporate environmentally-friendly actions. Energy seems to be the easiest problem to solve for many. “Over two of every three clients include clean energy in their proposals. Clean energy is not an option anymore, it has become the standard in the industry,” said Jean-Nicolás Lejeune, Managing Director Energy Management and Supply, ENGIE Mexico.
However, Mexico’s energy policy has hindered private efforts to further develop the local clean energy sector, a key part of sustainable operations. In part due to the pandemic, the government has remained sluggish regarding permits as well as regulatory proposals to allow more development in renewable energy, contributing to uncertainty in Mexico’s energy sector.
Amid this uncertainty, renewing hedging contracts to comply with offtaker demands can cause power suppliers to lose out since the market conditions make it less attractive to sign. Some experts have argued that Mexico’s nearshoring boom is stifled because companies aiming to move supply chains do not believe they can find sufficient clean energy in the country. “For instance, now that Tesla is going to invest in Mexico, I cannot imagine it producing clean vehicles without clean energy,” José Buganza, General Director, Enegence, stressed. According to Alejandro de Keijser, Energy and Sustainability Director, Deacero, companies start to perceive energy efficiency from a cost-focused perspective to a competitive advantage approach as they mature.
For Lejeune, the energy supply’s current conditions are not optimal. The basic supply offered by CFE does not allow companies to specifically choose clean energy. Onsite generation could be a great option, but the available capacity to install solar rooftops is sometimes insufficient to meet companies’ energy consumption. In this sense, the only all-encompassing option is the Wholesale Electricity Market (WEM). Here, offtakers can ask for clean energy in their contract. Nevertheless, the energy generated is injected into the public grid, which makes it difficult to trace where clean energy actually goes.
As the sustainable electrification of several industries is becoming a reality, experts believe the demand for electricity, especially coming from clean sources will skyrocket. “The main source of energy in the world will be electricity, the oil sector is being displaced. Now oil companies are becoming electric utility companies, look for instance at BP and TotalEnergies,” said Buganza.
De Keijser said the emission trade system that is to be launched in 2023 in Mexico will not affect the true commitment of companies in reducing their emission since this system is focused on scope 1 emissions. Therefore, companies will have to lean on electrification and sourcing from clean sources, since energy is considered to be causing scope 2 emissions.
Unlike some years ago, offtakers no longer can secure their electricity supply with 20-30% savings against the CFE Basic Supply tariff by going to the WEM. While consumers can still navigate the market, its savings have been depressed to around 15 percent regardless of the technology used.
According to the Mexico-Germany Energy Alliance, Mexico has great opportunities to build competitive renewable energy projects. Nevertheless, even for already established companies and energy projects, Mexico has a long list of obstacles that undermine the energy sector’s potential. “The Mexican market still does not have the appropriate mechanisms to promote the ecosystem. Given the numerous obstacles that were limited throughout the study, such as the lack of funding and knowledge hubs, legal limits and the lack of qualified personnel, it is important to focus attention on the areas of opportunity identified and on the proposals designed to support to startups and ventures in their integration into the sector,” reported the alliance.
According to Ariel Garfio, Partner, Von Wobeser y Sierra, when formulating a contract, it is important to consider force majeure and regulatory change clauses. Other than that, “Economic feasibility, traceability, clarity, transparency and cost predictability are essential factors to consider in a contract between offtakers and energy suppliers,” Lejeune added.
The experts agree that Mexico has plenty of power production capacity, what it lacks is energy efficiency and a modern transmission and distribution system. If these issues can be addressed, offtakers would benefit.