Reconciling Economic Growth with Environmental EquilibriumFri, 02/01/2019 - 09:50
Mexico’s clean energy ambitions are ready to reach the next level in energy project finance, says Emmanuelle Matz, Global Head of Energy and Infrastructure at PROPARCO. “Mexico’s energy projects are starting to get an increasing taste of merchant risk, which not all banks are comfortable with when it comes to providing financing in this specific modality.”
PROPARCO is a subsidiary of the French Development Agency (AFD) and is focused on private sector development. It has been promoting sustainable economic, social and environmental development practices for 40 years. Matz says Mexico is a historically great market to invest in renewable projects, as showcased by the organic and smooth transition to its new energy model. “It is reaching maturity levels in record time compared to the industry’s global benchmarks.”
When PROPARCO expanded its mandate outside of Africa in 2010, it started by financing one of the first utility-scale wind farm projects in Oaxaca: Eurus. With an installed capacity of 250MW and with ACCIONA Energía at the helm of the project’s development, it was the largest wind farm Latin America of its time. “It was our first stepping stone in our support for renewable energy in Mexico. At that time, although the financing market was mature enough to bypass the involvement of multilateral financial entities and the ready-to-build status of the pipeline of programmed projects to be developed, the 2008 financial crisis hampered financing flows,” says Matz.
The key to the successful development of the Eurus wind farm, according to Matz, was to properly assess the project’s environmental and social aspects. “In Oaxaca, PROPARCO executed these critical aspects, properly and thoroughly, without issue. In so doing, ACCIONA Energy was able to capitalize on Mexico’s best location to develop additional extensions to the initial project,” Matz says.
With the emergence of merchant risk, inherent to developing utility-scale renewable energy projects outside of the long-term electricity auctions, PROPARCO and some auction sponsors are discussing the appropriate steps to support part of those projects’ financing plans. “We can design the appropriate structure to mitigate risks together with local Mexican development banks and international banks as well. We see a need for large-scale capital. That is part of our new role,” Matz says.
The right financial instruments for merchant renewable energy projects is a mix of different tools, Matz adds. “We can provide financing in US dollars on a long-term basis. The added value lies in complementing sizable financing plans to build current and future projects. Thanks to the competitiveness of Mexico’s energy projects, sponsors are also considering scaling up their portfolio and looking for investors, especially quasi-equity investors,” he says.
AFD’s agenda relating to renewables projects is to support and follow-up on COP21 agreements, added to the renewed commitments agreed upon by French development agencies during the COP23 in 2017. “Based on both precedents, PROPARCO is committed to exclusively supporting projects that would allow low-carbon development for all the countries it is supporting. That is exactly the case as well for Mexico. It means we will be financing and supporting renewable projects and increasing the country’s installed capacity to keep developing the country on a long-term basis,” says Matz.
At the federal level, AFD is proposing technical assistance and funds for Mexico to properly assess the optimization of this development trajectory. “PROPARCO is looking to support the financing of a consolidated database of specific studies that could shed some light on that. We are also focused on deploying the necessary tools for the Mexican government to support the implementation of this new thinking on that specific subject,” Matz says.