Providing the Guiding Vessel to Bring Projects to PortMon, 02/25/2019 - 14:17
Q: What is Latin American Rainmakers’ most valuable contribution to Mexico’s energy transition?
A: Latin American Rainmakers has worked hard to understand the new market’s rules and fully grasp its benefits from a business standpoint as well as its likely impact on the country’s industrial development in the mid to long term. The company is deeply involved in the generation and consumption ends of the energy market. On the power generation side, we identified early on that traditional project finance approaches, as existed for legacy projects under the previous regulatory framework, were no longer the best fit. Mexico’s new energy model is a costs market rather than a sale price market. This small difference is critical when structuring the financial model of a power generation project under the new regulatory framework. We are providing a steady course for power generation projects ready to reach operational phase but that were left adrift with the regulatory shift of the Energy Reform.
We are gradually transitioning from a PPA market to a coverage contract market and we are positioned as the guiding vessel to bring Mexico’s new power generation projects to port. Full-merchant projects will also become the next step of Mexico’s energy industry maturation process in the short to midterm. The increase in electricity rates we are witnessing is a reaction to market dynamics. There is an overwhelming demand for electricity supply from end users across the country and supply remains limited. Latin American Rainmakers’ primary task in this market is to advise developers looking to tackle full-merchant projects and bring them successfully to operation. On the consumption side, we are approaching potential end users to capitalize on the available options. We are assisting them in trimming down their energy consumption as a first step to then provide a tailor-made option to consume electricity at the most competitive rate available based on their specific consumption curve.
Q: What is required to see an increased number of full-merchant projects?
A: Based on the results of the long-term electricity auctions and the thin margins obtained, full-merchant projects are an increasingly appealing option due to higher margins. We believe this mounting interest will become a mainstream trend toward 2023. The supply and demand equation of Mexico’s energy market yields a supply shortage despite CFE’s close to 60GW of installed capacity. The state productive enterprise is facing the challenge of modernizing and injecting efficiency into its aging power generation assets. As long as supply and demand do not attain equilibrium and marginal prices reflect this imbalance, the appetite for full-merchant projects will continue growing.
Full-merchant projects are not developed without difficulty but financial institutions show a more conservative approach when it comes to financing this type of project due to their inherently high long-term risks. This translates into lower leverages, higher equity stakes from the developers’ end and robust collateral warranties. Our advice to developers is always to diversify risk and distribute the commercial aspects of a power generation project in a 60-40 scheme, with 60 percent output allocated in coverage contracts and 40 percent merchant output.
Q: What pending regulation will prove critical for the energy and oil and gas industries to reach further maturation?
A: Mexico’s energy and oil and gas regulatory authorities are overseeing a significant shift. The learning curve is not only theoretical but also empirical. Some regulatory requirements will not manifest themselves other than by the market’s experience. It is an ongoing process where portions of the regulation will be adapted to the reality observed in the market. The theoretical framework behind Mexico’s new energy model will be molded accordingly as it gathers an identifiable operational track record. Adjustments are necessary and should be an integral part of any market’s maturation process. Quick and effective reactions will be key to managing the requirements of such dynamic markets.