Unique Value Proposition for 269MW Solar ProjectBy Cas Biekmann | Tue, 11/10/2020 - 13:52
Q: What has been the company’s most recent success story in Mexico?
A: In December 2019, we sold the largest solar project in our history in Mexico. BayWa r.e. has been around for about 11 years, and the project’s 269MW solar capacity located in Aguascalientes was a record sale for the company. The solar project is among the six largest in Mexico and it has been the largest single transaction we have done. We were able to finalize development and sell the asset. Now, we are in the process of building it, as we are doing the EPC and O&M contracting. It is a great success story because of its timing – right before the complications arising from COVID-19 and the government’s policies. We will provide the full suite of services, from development down to building with subcontractors and performing O&M. The value proposition is incredibly unique. Not many developers can sell the asset as a long-term investment, and also support hundreds of millions of dollars in contracts with our guarantees. The final buyer knows that we will handle any risk stemming from the project, and that also increases the value of the project.
Q: What impact have recent events, such as the pandemic and SENER and CENACE’s measures, had on BayWa r.e. in Mexico?
A: It has had a partial effect, with some implications for our supply chain as some products come from China. These were delayed due to ports not being operational, among other bumps on the road. It has not been very significant, with only a few weeks of delay. This is easily covered by force majeure clauses in our contracts.
Due to the stage of the project, the CENACE resolution has not had an effect on us. SENER’s policy impacts our long-term business model in Mexico, as well as our involvement in the market. However, we and many others in the renewable industry are taking action against the policy in an organized manner. All in all, the impact is still there, but it is not as significant as it could have been.
Q: How is the company advancing in its permitting process regarding its pipeline of projects?
A: In light of SENER’s current policy, which is putting up barriers for renewable energy companies, developing solar projects in Mexico is not a viable business. It might be a bold statement, but it is true. That being said, our 269MW project is in safe harbor with as development has concluded and construction is almost done. BayWa r.e. has a few, new and large projects in the pipeline but we first need to see how the situation in Mexico evolves. I believe that SENER’s policy will be either dropped or morphed into something where there is room for developers to work. Today, SENER has the sole power over the viability of a project to either say yes or no to a project, and that is not a market where we would be interested in participating. However, we will monitor the progress of injunctions and policies and how the different government offices act. Even before the policy was published, complications in the industry’s day-to-day business were already visible. CRE and SEMARNAT, for instance, struggled to perform their duties before any changes in policy had occurred. It has been complicated, but we are ready for the challenge.
Q: How is the company approaching PPAs, and how does it see the trend developing?
A: In the project we sold, we also sold the energy to a qualified supplier (QS) that had their own clients. We worked on this transaction for a little over a year, so it was an exhaustive effort. In parallel, BayWa r.e. was working with private off-takers, but we decided that the QS route was the right path. We will continue to pursue the strategy of finding a QS, but the path with C&I off-takers continues to be an option as well. For now, conversations with off-takers are somewhat on hold. The legal framework cannot support such contracts and does not give the two parties enough confidence toward a mutually beneficial situation. For any renewable project, these relationships are key. We have put a great deal of effort into it, and will continue to do so.
One of the results of what is happening in the sector is that companies envision that the current administration will not hesitate to increase electricity rates for the private sector to strengthen CFE. For those who know how this works, there are only two ways to go about it: either CFE gets subsidized with non-existing budget funds, or costs are passed on through increased energy costs. Since the government does not have the resources to subsidize, the industrial sector is quite concerned about how this will impact their businesses. Once the dust settles, I think we will see a lot of appetite coming from large consumers to secure PPAs with independent power producers. To answer what these PPAs would look like, we have continued to see a lot of appetite from C&I clients to secure mid to long term PPAs. A 20-year PPA may be a rare find but 10-15 years contracts will not be uncommon. In the past, the term has mostly defined by the risk appetite of investors, both banks and equity, that needed to see long-term contracts for their financing. That has changed a bit. In Mexico, we have seen some appetite for merchant plants, where contracted revenues are either a very small percentage or even non-existent. This may change given the drastic drop on the LMPs across the country.
Q: How is BayWa r.e. working to include innovative storage options at its projects?
A: It is exciting for the company to start introducing battery backup systems to our projects in Mexico. One of the key components for batteries is the recognition for capacity, or capacity payments. This is something we do in the US, where it is a straightforward process. In Mexico, battery systems are not yet included in the capacity recognition structure. We will work with CRE and other authorities in hope to make sure that this will be included. The whole issue with renewable energy is that it is intermittent. That has been the main issue driving SENER’s reliability policy. But this issue can be resolved fairly easily. Therefore, we will be aggressively pursuing battery systems in Mexico for large-scale solar.
Regarding the potential of storage options, the company’s goal is to incorporate existing technologies and to increase its market penetration. We are not necessarily market innovators; instead, we are smart about understanding what is out there and applying it to market segments. One example is single-axis trackers, which were not widely used in Europe, but are used at times now. When innovating, you need to make sure that investors are behind the technology. If this is not the case, market penetration will be minimal.
Q: Is the company looking to expand its portfolio?
A: The company continues to look for new projects. In fact, we are doubling down, based on market fundamentals. At the end of the day, Mexico is a very large market with continuously growing demand, despite the contraction in GDP. The existing generation capacity will have to double in the next 15 years to cater to this demand. When the reality catches up with the current administration, it will realize it needs the private sector to be able to provide the energy that is needed. If we were to stop developing projects now, we would not be in a position to capitalize on this opportunity. The company now boasts 1GW of projects in development. Over time, a few of these projects might fall off, but we are doubling down on our portfolio nonetheless. This is a different reaction than some other companies, but we have been quite successful in Mexico and we are happy to continue to invest.
By the end of the year, the company hopes to achieve two specific goals: first, to deliver the project we sold on time and within budget, which is looking promising. Second, we are looking to kickstart our O&M platform for solar in Mexico. It will begin with that project, but we will do a commercial rollout toward the industry sector as well. Expectations are high. Regarding milestones for some of our projects, we expect to bring one or two of them to a very advanced development stage by the end of 2020.
BayWa r.e. is a leading renewable energy developer, service supplier, wholesaler and energy solutions provider. With operations around the world, the company entered the Mexican market with a large portfolio of solar PV projects.