José Antonio Prado
Holland & Knight
View from the Top

Warming the Waters of Investment

Wed, 02/24/2016 - 11:48

Q: Now that the doors to the renewable energy market are wide open, how do you see private investment evolving?

A: CFE has to change from fuel oil to natural gas, which will require a lot of investment. In the past few months we have seen investors seeking legacy projects and are carrying out detailed analyses of projects that fall under the previous regime. While the industry has slowed down, we have seen new projects submitting for permits even though the regulations have not been fully established. CRE will request further information from these new projects as the guidance and regulations are being issued. It is important to wait and gauge how the regulatory framework will look in order to evaluate the project’s level of certainty. Another trend we have identified is that the industry has a voracious appetite for PPA agreements. As it stands, we do not want to take a project to our managing board without knowledge of how the model will be deployed. These projects, if approved, will be there for the next 15 to 20 years. We know that CFE will play a substantial role; it has the money and the experience to bid for projects that will generate cheaper energy, and private players will bear this in mind as they compete against CFE.

Q: What are the most economically viable renewable energies, and how do they prepare themselves to compete against hydrocarbons?

A: The renewable energy market will be supported with schemes such as clean energy certificates. The government is imposing a levy upon projects that will be producing electricity with conventional fuels such as hydrocarbons. The market has evolved over the years; technologies have improved and prices have dropped. There is a high interest in developing solar, wind, and small hydro projects. There is a significant piece of the puzzle missing; a solid green package must be implemented to strengthen the renewable market. This package must address the issues surrounding energy security and bankability. Mexico has an opportunity, and with the right incentives in place, this market could certainly flourish. The market is in its development phase and it is yet to reach its full potential.

Q: How would you describe the relationship between developers and banks?

A: Banks are certainly willing to finance renewable energy projects. We are currently involved in five different finance structures, in some cases we stand as the developer and in others as a bank. Financing is a sensitive issue in this market because, from the outset, the project must have all the details in place in order to become bankable. We have heard of success stories for wind and solar projects that are financed by the authorities. Unfortunately, there are some cases where developers do not consult with law firms or specialists, so they ultimately overlook some crucial information to make their projects bankable.

Q: What should CFE’s priorities be as a productive enterprise of the State? Which areas should it invest in?

A: The whole idea is to transform CFE from an electricity company to an energy company. CFE will take the place of PEMEX Gas and Petrochemicals. On the electricity side of the business, CFE must continue developing the infrastructure and conditions in order to provide coverage to the whole country. While 98% of the population might have electricity, the remaining 2% does not, which amounts to several millions. CFE will continue to supply small consumers such as the commercial and residential segments but private companies will prefer to supply large private projects. PEMEX has announced its cogeneration division and its ambition to become the second largest producer of electricity in the country. Conversely, CFE will mark its territory within the gas industry. PEMEX and CFE seem to be overlapping. In my eyes this move is desirable given that it is part of the goal to attract foreign investment.

Q: Which areas must be immediately addressed by the authorities in order to ensure the growth of the energy market?

A: There should be a special plan to solidify the role of the regulators. The regulatory issues are a crucial aspect of the Energy Reform and the government should pour resources into supporting the regulators. If the appropriate regulations are not issued, Mexico’s transformation will attract no confidence, no matter how many advantages the country possesses or how positive the environment may be. It must be a clean process and the authorities are in a strong position to create a solid regulatory framework.