Resilience a Requirement for Energy Transition

Mexico’s private energy players face fresh hurdles from nationalization but the potential remains for companies staying the course.

From its first day in office, President Andrés Manuel López Obrador’s government has moved to alter the landscape in the energy sector, favoring national companies over the private sphere. The result is an uncertain environment for private companies eyeing investment in the Mexican industry. Those who stay the course, could benefit.

Among the first concrete indications that a shift was afoot happened in 2019, when the administration tried to expand clean energy certificates (CELs) to include legacy CFE hydropower plants. CENACE then restricted new renewable interconnections to Mexico’s grid and changed the dispatching of power plants. This was followed by a policy agreement from SENER that proposed altering the roles of CENACE, CRE and CFE.

These actions were followed in June 2020 by CFE slapping an 800 percent increase on the wheeling rates for older energy projects operating on legacy contracts. In October 2020, CRE then published a regulation that prevented companies from modifying the end user of their legacy project. Furthermore, regulatory processes slowed down greatly, to the point that permitting became virtually non-existent. These measures were met with amparos that finally saw most of the moves invalidated by Supreme Court rulings. President López Obrador then turned his attention to pushing changes to the Electrical Industry Law (LIE) through Congress, which approved the bill in March 2021. The bill is aimed at strengthening CFE.

In past administrations, auction-based and even full merchant projects gave investors the confidence needed to support long-term power plant plans. Today, players in the energy sector need to reorient themselves in light of the government’s that favors CFE.

Despite the uncertainty, opportunity abounds for players looking in the right areas; in particular, renewable energy. While the government has moved to strengthen CFE, it also aims to achieve its climate goals, which were reaffirmed in the recent National Electricity System Development Program (PRODESEN). “Mexico still needs 9.6GW to achieve the 2030 target it has set. Mexico currently has around 10GW of solar and wind generation in over 120 projects. To meet these goals, the Mexican government must set clear rules between the public and private sectors in order to drive investment and transmit confidence,” said María José Treviño, Country Manager of Acclaim Energy. With close to 75 percent of renewable energy stemming from the long-term energy auctions already installed, according to SENER, more will still be needed to reach the country’s targets.

Other trends spurring the development of renewables come from outside the country, especially the US, said Salomón Amkie, Director of Banking, Capital Markets and Advisory at Citi. “An overarching question for Mexico is how much will the US attempt to influence its allies and neighbors on climate change? (After) just weeks in office, President Joe Biden signed executive orders that not only brought the US back into the Paris Agreement but created positions, task forces and processes that put climate at the center of US foreign policy and national security.”

Furthermore, investors from various companies are exerting greater pressure to realize decarbonization. “As demonstrated in 2020 with green, social and sustainable bond issuances reaching new highs and savings materializing in new issues for sponsors, there is no shortage of investor appetite. For Mexico’s energy space, this means capital should be available for well-rounded projects in a variety of manners,” Amkie said.

Opportunity in Modernization

To meet these ambitious goals, innovation will play a key role. “We must redouble our efforts and propose innovative solutions. Modernization, more than discussions about how to interpret laws, will mark the future of our industry. We have many challenges but even more opportunities in 2021,” said Hans-Joachim Kohlsdorf, Managing Partner at Energy to Market.   

Kohlsdorf also cites the importance and impact of natural gas. “The start of operations of most natural gas pipelines also significantly boosted cogeneration and on-site generation. The availability of cheap natural gas presents great opportunities for the business sector and will have a positive impact on the country's competitiveness.” Modern gas turbines and engines remain crucial to update Mexico’s generation capacity. However, further work to expand the reach of natural gas is required. Recently, Mexico experienced a gas shortage, putting storage into focus as well.

With confidence in utility-scale investments harmed by uncertainty, players looking to make use of Mexico’s excellent solar potential continue to move toward the less-regulated area of distributed generation. Here too, however, there are hurdles. “Many of us support increasing the maximum size of the exempt generation from 0.5MW to 1.0MW. For ease of projects, however, the solar sector must drive innovation and accompany this new regulation with clear standards on inverter quality and battery integration,” Kohlsdorf noted. For players in the wind sector, opportunities to innovate in the use of storage, better use of technology in O&M and more advanced social approaches will be among this year’s key opportunities.

Nevertheless, the main hurdle challenging Mexico’s transition is the country’s aging transmission and distribution infrastructure. Without an adequate system, all capacity added to the energy mix cannot reach its intended targets. “In the most recent PRODESEN, the grid diagnostic showed that all regions of the electric system operated at or above their limit,” said Leonardo Beltrán, Board Member of SEforALL and Non-Resident Fellow at Institute of the Americas. “The upside is that there are a number of projects identified to upgrade or strengthen the grid. The downside is that budget constraints are preventing action.”