Project Financing to Weather All StormsBy Pedro Alcalá | Wed, 03/10/2021 - 15:10
You can watch the video of this panel here.
Despite the increasing complexity of Mexico’s political situation in terms of energy policy, financing trends will adapt thanks to the ongoing and overwhelming interest in the country’s potential. This idea was echoed by key decision-makers who participated in the second panel of Mexico Energy Forum 2021 on Wednesday, Mar. 10, titled “Financing Trends in Mexico's Current Energy Landscape.” The panel seeked to define what kind of projects and structures will be within the interests of investors in Mexico’s energy market.
The panel was moderated by Alan Sakar, Senior Associate at Clifford Chance, who highlighted the gap that will open up between two different future scenarios: one in which recently passed energy laws are struck down as unconstitutional and another in which the laws are upheld and enforced exactly as they are today. “The counter-reform moves ahead. We will experience changes in trends and businesses but the sector will continue onward, regardless,” said Sakar, who also mentioned his work with the World Energy Council to highlight what they consider to be the three core dimensions that define energy sustainability: energy security, energy equity and environmental sustainability of energy systems.
While panelist Rubén Cruz, KPMG Mexico Energy and Natural Resources Lead Partner, agreed with these assumptions, he also noted that in the eyes of investors, Mexico's political situation today is closer to that of countries like Chile and Malaysia, than to the US or Canada. Cruz also mentioned Mexico’s status as an importer of energy resources. “Mexico is a net importer of energy. In the last 10 years, our dependence on fossil fuels has increased.” Cruz’s solution is to focus investments on building domestic inventories, something that could only be done by financing storage projects. “We need to focus our investments on mitigating our dependence by building storage capacity and diversifying our energy mix,” he said.
In Cruz's view, investment in renewable projects would contribute not only to environmental sustainability but also to energy security. He contrasted CFE's focus on renovating existing hydro and turbine plants, which do contribute to both environmental sustainability and energy security, with the renovation of combined cycle plants, which increase reliance on US natural gas. Overall, Cruz saw an increasing focus on financing smaller energy projects oriented at distributed generation, self-supply and generation of less than 5MW. This also included rooftop solar panels for isolated supply projects, such as real estate developments, clusters and industrial parks.
Panelist Alejandro Méndez, CEO of Royal Eagle Capital Partners, agreed with Cruz saying these are the kind of projects that banks and institutional investors will be looking at. Méndez provided a direct investor’s perspective, making it clear that interest in Mexico and its enormous potential is alive and well, despite competition from other countries in the region that are also undergoing ambitious decarbonization and liberation plans, like Chile and Colombia. “We see legal certainty as something almost fundamental for investment. Social and environmental licenses, interconnections and rights of way are all crucial,” Méndez explained, adding that his portfolio includes hydro, solar and waste-to-energy projects, as well as green energy projects in specific locations. He expects banks to back more of these projects, especially as public bodies such as the CFE will be under pressure to keep transmission and distribution infrastructure as up to date as possible.
According to panelist Salomon Amkie, Director of Banking, Capital Markets and Advisory at Citi, the complication created by the latest energy laws must be faced against the massive potential and investor appetite that still remains in the country. “A lot of investment arrived after the energy reform. If clear rules are re-established and the route forward is clear, investors will renew their large investment appetite. Mexico’s potential is massive,” he declared. Amkie agreed with Méndez, saying it is simply a matter of translating the political vision of this government to project de-risking strategies. “We experienced snow and a lack of water and electricity in Texas last month. These unprecedented black swan events need to be included in the risk assessment of every new project,” said Méndez.
Cruz reaffirmed investors’ interest in the country but also used the oil and gas sector as an example of the variety of responses that private players could have. “A lot depends on the risk appetite and long-term vision of investors. We will see which companies consolidate in the market and find new niches and which ones pull out.” Amkie also said that Citi’s strategy is yet to be defined depending on the market’s response. “We will have to look at new opportunities depending on how the government renegotiates its contracts with private players and how it sets the new rules of the game.”