Social License, Key to Unlocking Yucatan's Wind Projects

Q: What recent success story highlights Vive Energía’s capabilities?

A: We recently concluded the construction of two wind farms in the Yucatan Peninsula. One is a 70MW legacy-project commissioned in late 2018. The other is a 90MW project that was won in the first two long-term energy auctions. It has been fully constructed and should be interconnected by summer 2020. In Yucatan, of all the companies that won contracts in the auctions, 65 percent have not been able to start construction. The other 35 percent are either under construction or operating. The number of companies that have not started construction have binding contracts and signed PPAs, yet they have not been able to start construction. This is due to many reasons, but one main factor has been social issues, which then turn into legal problems that put the social license at risk. As it turns out, the social license is as important as getting the project financing or signing the PPA. It is essential. Therefore, our success story is that we have been able to put together, construct and bring into operation 100 percent of the projects we have committed to in Yucatan. We achieved this because we prioritize the company’s sustainability considerations. We have a sustainability direction which conforms our largest department, both in budget and human resources. This department is divided into two areas, environmental and social sustainability, each with their own department head and teams.

Q: How is the company interpreting the government’s conduct regarding the recent changes in regulation?

A: It is obvious that Mexico’s renewable energy sector is facing serious challenges created by the federal government. I can describe these by highlighting four specific actions taken by the government. The first regarded CELs, where the government planned to change how they were obtained to benefit CFE, which would absolutely devalue these certificates moving forward. Today, CELs are actually not significant for project development, but you cannot affect projects for which these CELs had an important economic impact during their development. This defies economic and legal certainty.

The second specific action concerns the temporary ban of the COVID 19 interconnection of CENACE. This measure limited the ability of renewable energy plants to interconnect to the grid, based on a technically weak argument regarding grid instability due to renewable energy participation, which will not be resolved until the pandemic goes away. Mexico only has 7 percent of intermittent energy. Uruguay, for instance, has 90 percent, and Spain nearly 50 percent. There are clear examples available of how to easily integrate this energy into the grid. It is clear that the will to do that is currently absent in Mexico. There is no real technical challenge in order to achieve this. 

Third action is SENER’s May 15 energy policy announcement that changed the rules for dispatching energy. Previously, this was done based on economics: the cheapest energy was dispatched first. This results in companies competing for the best energy prices, making it cheaper for the final user and helping Mexican companies be more productive and competitive. SENER has now changed this criterion, placing the feasibility and reliability of the energy first. In fact, this measure sends renewable energy all the way to the last spot in the line. It makes energy more expensive, and spells trouble for those who had invested based on the notion that their energy would be favored during dispatch. It creates significant economic uncertainty.

Number four is CRE’s change in transmission costs for legacy projects. This is terrible because these projects had a specific cost in place, which was a part of their financial model. If this is changed, it might make the project economically unviable. In the energy sector, we have no issues with increased transmission fees or additional capacity charges.  The government would only need to create clear rules. What they cannot do is change the rules in a manner that affects the economic viability of existing projects. The result has been a series of legal actions that have successfully obtained protection from the federal justice system.

However, this is not the issue. What concerns me is the message that the government is sending: it does not favor renewable energy, private competition, or the legality of preexisting contracts. It is hard to convince international third-party investors that lawsuits can be won. Instead, these investment groups will look to different countries where additional legal certainty exists.

At the same time, we are optimistic that this is a short-term situation. After all, policies that do not make sense are unsustainable over time. The world is moving toward renewable energy systems. I am sure that different criteria that favors renewable energy will ultimately prevail in Mexico. While we do not agree with recent policy changes, we can say to this administration’s benefit that the government has proven time and time again that they are respectful of the decisions taken by the judicial system. This is a good message for the international community, as well as investors. Mexico might not have the best economic or energy policies in place at the moment, but it does have a solid judicial system and an executive system that respects judicial decisions and the separation of powers.

Q: How is the company mitigating these effects?

A: I am sure that if there is not a shift in public policy in the Renewable Energy sector, we will see a tremendous deceleration in renewable energy investment in the country, as well as private investment in general. Interest will remain in a wait-and-see mode. However, I must say that we are always looking for points of agreement with the current administration. We favor consensus-building over confrontation. We want to understand what the government is thinking and how we can collectively move forward. At the end of the day, we are all Mexicans and are trying to build a better country. We might have differences in opinions about how this should be done. Yet we should be able to build consensus through dialogue.  

Q: What are the company’s goals for 2020?

A: Getting the 90MW Eolica Renovable De La Peninsula Project in Yucatan interconnected and fully operational by summer 2020 is our No. 1 goal. Followed by the need to construct a strategy that will allow Vive Energía to move forward with more development of renewable projects in Mexico. We are also actively looking for investment opportunities abroad.

Vive Energía specializes in the assessment, development, financing, commissioning and operation of renewable energy projects. The company is 100 percent Mexican and its directors have been responsible for the implementation of more than 2,000MW in the country.