Juan Ignacio Rubiolo
President and CEO
AES México
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View from the Top

Player Ready to Take on Utility Juggernaut

Wed, 02/24/2016 - 17:03

Q: How has the position of Mexico developed within the world of AES with the enactment of the Energy Reform?

In 1997, AES became the first IPP company to operate in Mexico by obtaining the permits from CRE for Merida III. In 2008, it acquired a second power plant in Tamuin, and now it has two units that serve CEMEX and Grupo Peñoles. At the beginning of 2014, we identified Mexico as one of our main markets in the Americas, with approximately 70% of our portfolio. Mexico forms part of the Central America and Caribbean structure and is the largest country in terms of installed capacity.

Worldwide, AES encompasses a broad range of technologies and fuel types like coal, hydropower, biomass, and wind. In Mexico we have two main growth pillars. The first is conventional power, which includes thermal and cogeneration, both based on natural gas. This pillar includes small-scale LNG distribution, and is definitely a viable energy solution for the replacement of diesel and oil derivatives. The second pillar is renewables and innovative solutions that will encompass wind, solar, and our energy storage product solutions.

Q: AES is planning to invest US$1 billion over the coming years. How are you planning to allocate this investment?

A: We have identified four markets as a consequence of the Energy Reform. The first two are CFE and PEMEX, which are markets of their own due to their size and specific requirements in projects and technologies. Thirdly, qualified users, and lastly, the wholesale market will constitute the remainder of our client base. Our focus will be on providing solutions to the private sector, and we will also participate to a certain extent in the CFE tenders, provided we find the right partners to remain competitive.

On the private sector front, we have established connections with potential customers, especially the companies that will benefit from the Reform by entering bilateral contracts with generators. Our current goal is to identify which are the viable projects that better fit our strategy. At the moment, there is a lot of potential, but in terms of concrete projects, there are many question marks floating around. Our goal is to add at least 1,000MW of installed capacity by 2018. Most of this installed capacity will come from cogeneration or combined cycles, while 20-30% will come from renewables and energy storage. At the moment we have just over 1,050MW, so we plan to double it.

Q: What are the concerns that off-takers share with AES, and how can these be overcome?

A: In order to make a project bankable, you need to have certain basic factors already in place. An adequate off-taker, a well-balanced risk profile between off-taker and supplier, avoidance of excessive risks and market exposures, and mid to long-term contracts are all essential for the success of the process. Off-takers always seek competitive power, and this means they might not want contracts that last more than three years in order to reduce long-term risks, or may ask for fixed prices to avoid commodity risks and potential loss of competitiveness over the long term. All these challenges must be overcome in order to develop successful projects in the new market.

Potential off-takers have approached AES with their concerns regarding how the market will evolve and what impact it will have for their businesses. Off-takers have little experience, whereas generators will bring expertise from other markets to the new field. At the moment we are working with prospective clients and at the same time contacting EPC companies, since the latter work closely with off-takers in convincing them what technologies and types of projects to develop.

Q: How will AES’ relationship with CFE evolve, taking into consideration CFE’s new position?

A: If CFE transitions, as the laws states, then it will be unprecedented in the continent. The new CFE will have to increase flexibility by streamlining its business model. AES would like to compete against an efficient CFE; it is much easier to compete with another company with the same level of expertise. AES will compete against CFE in the generation business segment and we are also preparing to challenge CFE in the wholesale market and the industrial segment. In the latter, CFE will have to be very aggressive and innovative due to its restricted cost structure.