Transitioning From Old Objectives to a Bright DG FutureBy Cas Biekmann | Mon, 02/14/2022 - 11:18
Q: How has Prana’s business developed in recent years?
A: Prana Power has switched its focus from owning and operating large utility-scale projects toward distributed generation (DG), as well as new technologies that tie into this niche, such as battery storage, green hydrogen and energy use optimization. Prana Power developed a DG platform around three years ago. We mainly focus on large commercial and industrial clients, so our projects are usually between 0.2MW and 0.5MW, depending on the customer’s needs. Residential solar is an interesting niche too, with some houses paying as much as small commercial operations. Nevertheless, it is becoming a bit overcrowded with competitive players. We do not rely on PPAs for our projects and instead sell the equipment to our clients.
The company has researched the best options for energy projects below the 0.5MW regulation threshold and wants to provide better knowledge to its customers. DG is so much more than just installing solar panels on a rooftop. Energy consumption can be optimized, too. As a result, we have downsized our team substantially. Although we are no longer developing greenfield projects, we have utility-scale projects in their final stages of construction that will become operational in 1Q22. After these projects are finalized, we will be looking to sell them. Our funding was structured with pension funds, so a sale is necessary regardless of the regulatory situation in the market. For now, Prana Power wants to make DG a more sophisticated market and we are looking for partners to make this happen.
Q: What are the main challenges in attracting buyers for large projects in the current environment?
A: Having clear market rules is a major issue. All of these regulatory changes have destabilized what companies were planning for the next 10 to 20 years. Solar projects last a long time. Even if changes do not go through, this creates a great deal of uncertainty. Not having clear rules makes it a difficult situation for potential buyers, especially as the new electricity reform is being discussed in parliament. Hopefully, we will get some clarity within the next few months. With any luck, the reform will not pass and we will know where these projects stand. We expect that there will be many potential buyers if the law does not change. Mexico is still an interesting country to invest in. Solar projects in general are attractive and Prana Power’s projects are well-located and developed optimally. If the bill does pass, I estimate we will need to wait at least 18 months to see how the reform is implemented. The devil will be in the details, in that case.
Q: Financing is still a major challenge in the mission to develop DG projects. How has Prana formed partnerships to address this issue?
A: Somewhat surprisingly, international players have been establishing themselves in Mexico without having a prior presence in the country. We have merged certain parts of our business with such companies: they bring capital and we bring our expertise in the Mexican market. US companies arrive with an aggressive strategy, so we need to manage their expectations on returns and growth to some degree.
In terms of customers, we have not targeted Triple A clients exclusively because they take too much time to make decisions. We have searched for customers with good track records and credit. Although international funds and companies look for Triple A’s, we know that there is a great deal of opportunity to be found in the stable middle ground. This has kept the business going for now.
Rather than financing, logistics and supply chain issues such as scarcity in materials have been bigger problems for Prana Power because they have driven up costs in a business that already has low margins. We have worked to foster partnerships in these areas to add to our expertise and financing. Logistics, availability of equipment and timing are essential for DG projects.
Q: How would the reform affect DG regulation?
A: At first glance, the bill sent to Congress does not mention whether the government supports DG or not. When examining it carefully, one can see that DG will be affected. Nevertheless, I do not believe the government will touch DG or expand it in scope. It will just leave it the way it is now. Talk of expanding the DG threshold to 1MW has been going on for years. There is no major push to make it happen and nobody is raising the issue. This expansion would be a game changer for the market but it could also become a competitor for CFE on the industrial front. For this reason, they will likely keep DG the same for the next year and, therefore, Prana Power has not adjusted its strategy.
Q: How is the company forming partnerships to develop its expertise in battery storage?
A: We are looking to US companies and their expertise. The battery itself is one thing but the equipment that controls it is a different game. There are many software companies out there claiming to be the best. We work to figure out where the truth lies, since we already know how to source and engineer batteries. We have spoken to several players and are evaluating who could not only bring the biggest value today but also toward the future. The software should be adaptable to the unique Mexican market as well as our platform and should be easy to understand for our customers. We want to make our solutions as simple as possible for our clients.
Q: How do you assess the possibility of producing green hydrogen in Mexico?
A: We have been exploring how to adapt our DG project to produce green hydrogen. We know it is coming, although it is still early. Israel Hurtado, who is a very capable professional, leads the Mexican Hydrogen Association (AMH). Having him spearhead green hydrogen in Mexico is great because several countries are becoming very active in this area. For instance, once we see projects in Chile up and running, Mexico’s project will follow. Despite the hype, green hydrogen does not work for everything as an energy source when looking at the numbers. Public transport, for example, should run on electricity instead. Regardless, hydrogen is definitely worth exploring.
Prana Power is an energy-focused fund operated by Artha Capital, a private equity administration firm for alternative investments, focused on the creation, development, acquisition and operation of energy assets.