Power Generation Boosts Investor InterestWed, 02/22/2017 - 10:01
Q: Where do you see the most opportunities to finance projects in the energy market?
A: Power generation in Mexico will continue as the subsector with the most opportunities in the coming years. There is still a need for new, efficient power generation and not only in renewables, as we have seen in 2016, but also efficient gas-powered assets and maybe refurbishing of some older assets. That will continue to be the greatest opportunity of the sector. To a lesser extent, there will be opportunities in transmission starting 2017 but power generation will require the majority of financing.
Transmission is critical for the country's infrastructure with almost half the existing grid being over 20 years old, so while generation is critical in terms of efficiency, a renewed power grid is required to actually see its benefits. It is a massive market. At Citibanamex we have good expertise in financing projects of this sort and it is absolutely something that we will focus on.
Natural gas, wind and solar-based power generation are all areas of interest for us. But in general, to decide our participation, we look at the project, the sponsor and the technology needed to make sure it all makes sense.
Q: How can a financial institution like Citibanamex help create a flexible scheme for energy projects?
A: CENACE’s PPAs are new and all financial institutions are still wrapping their heads around the best way to structure this financing. At Citibanamex, we are being cautious of two things, with the first being the quality of the sponsor. Because of the way these auctions are awarded there is little consideration for permits. Companies can win the auction without much permitting in place so a good sponsor with a track record and proven development skills is critical. The second is the merchant risk the PPA carries beyond 15 years as well as the risk of underproduction for any given year before that. If a sponsor bids aggressively on production then the risk of underproduction might be higher, making financial institutions rely heavily on the contracted revenues. But if the contract has a merchant component then banks have to see how large of an impact it might have on the project’s cash flow. What we are seeing is that this risk is contained and not as relevant as we may have thought, which is good for sponsors and means we can increase the debt component in the overall capital structure.
Q: Are you also interested in working with other green financing tools?
A: Absolutely. We have great capabilities in issuing Green Bonds as we did this year with NAFINSA and the New Mexico City International Airport (NAICM). We are also looking at supporting distributed generation players, who can not only help our commercial and industrial SME clients but also residential users from the private banking sector who could benefit from having distributed generation solutions in their homes.
Q: How do you expect Mexico’s energy industry to evolve and what will be Citibanamex’s contribution?
A: We are very optimistic about the sector in Mexico, we think that it is going to be one of the larger areas of growth for the country and as such we want to play aggressively in the sector. In particular, I think there are two sets of clients that we will look at and where we can add the most value. The first are the players who have been in Mexico for some time and know the sector very well, having a strong business model already ongoing in the country. For this type of client, it is all about thinking strategically about their business model. There are going to be huge opportunities in capital markets, as well as some refinancing of existing projects. That is one area where we can definitely participate. The other set of players are those that are just entering the country. These could be multinational or local players that are developing their businesses here. They need to think about how to ramp up their business quickly in an evolving sector, which means project financing or equity structures that make sense. That is also an area where we can support and contribute.