News Article

Self-Supply Scheme: An Outlook on Finance and Off-Takers

Wed, 02/19/2014 - 11:38

With only a glance at the state of the renewable industry, one can notice the very long shadow that CFE casts over the energy sector. Allegations have been rife that the Mexican utility has been less than well disposed towards renewable energy projects. The Energy Reform has been hailed for giving the private sector more opportunities in the Mexican energy sector but private firms first got a foot in the door in 1992. The Public Electricity Service Law, passed that year, redefining the scope of the Mexican electricity sector. While the status of CFE was comforted as the sole entity responsible for generation, transmission, and distribution of electricity, the law included three categories in this scheme, categories that have remained essential to this day: cogeneration, self-supply and small power producers.

The self-supply scheme allows private companies to generate energy for their own consumption. While this might seem like an encroachment of CFE’s mandate, in 1992, SENER declared that the self-supply program ‘does not cause any inconvenience to the nation.’ Self-supply could come in the form of on-site generation as well as off-site generation, with the grid being used for the sole purpose of delivering power to the final off-taker. The small power producer scheme allowed smaller players to generate electricity and sell it all to CFE, with a maximum capacity of 20MW, now increased to 30MW. Essentially, this scheme is a smaller scale variant of the self-supply model with the option to sell electricity to CFE in addition to private off-takers.

The self-supply model whereby power is generated off- site for one or several off-takers proved to be a big hit in the renewable energy sector. CFE had already opened two wind farms before CEMEX became the first private company to dip its toe in the waters of self-supply in 2009 with the opening of the Eurus wind farm, signed under a 20-year PPA and using Acciona turbines. Walmart would follow suit in 2010, teaming up with EDF for the 67.5MW La Ventosa wind farm in Oaxaca. Manuel Gómez Peña, Walmart Sustainability and Energy Director in Mexico, says that La Ventosa now powers 378 Walmart stores in the Mexico City metropolitan area, proving just how useful such self-supply projects can be to off-takers. Grupo Bimbo, another strong off-taker, would also enter the self-supply market in 2010, signing a PPA to guarantee the demand of energy of the Piedra Larga wind farm. For developers to go ahead with wind farms, securing financing is essential. Having a company with a AAA credit rating, such as CEMEX, Walmart or Grupo Bimbo, as the project off-taker provided a major reassurance for banks that were still cagey about financing renewable energy projects in the Mexican market. Sharing the financial risk has always been a commonplace strategy. The Eurus wind farm for CEMEX saw US$375 million in loans, co-arranged by an array of institutions, including international lending bodies such as the IDB and the IFC, Mexico’s NAFINSA, France’s Proparco as well as private banks such as BBVA and Espirito Santo. La Ventosa was simpler, with US$80.6 million being put up by the Export-Import Bank of the United States, and IDB accounting for much of the remaining US$103 million.

The dilemma for financial bodies to consider is which projects to finance and reject without becoming a bottleneck, while knowing that bringing smaller off-takers into the self-supply mix is essential for Mexico to have a chance of meeting its renewable energy generation targets. NAFINSA, a Mexican development bank created to help small and medium enterprises, is dedicated to getting involved with smaller renewable energy projects, by taking on more risks but also acting as an anchor of trust to bring in other multilateral institutions. It also acts as a source of information, spreading knowledge to smaller players about the types of financial instruments they might be able to access for self-supply projects. Foreign financial players, having helped to foster the development of renewable energy markets overseas, are also playing a part. As explained by Stefan Blum, Mexico Director of KfW-DEG, the arm of the national German development bank devoted to emerging economies, wind farms in the country have proven themselves to be very competitive, an encouraging fact for future projects. Furthermore, with the increasing cost-competitiveness of PV technology, solar plants have also become an increasingly bankable option. One important solution to overcome the limited availability of AAA off-takers has been to find smaller off-takers and cluster them. One example comes out of Monterrey where developer Next Energy has brought together seven municipalities around the city together to build a 22.5MW wind farm. The company identified a common problem that these municipalities faced, the high cost of street lighting, which helped when negotiating between all the municipalities to seal the deal. Private companies have cottoned on to the fact that in unity lies strength, with entities like business parks proving to be better able to find financing for self-supply schemes to their members. However, the jury remains out on the long-term viability of the self-supply scheme involving smaller companies. Major developers, such as Acciona and Iberdrola, keen to shore up their future revenue streams, have called for a new model to be developed. They have even spoken out in favor of a green tariff that they say would allow companies to buy the energy they need in a much simpler manner.