When Tenders Are Mainstream, Go BilateralWed, 02/21/2018 - 15:30
The low prices achieved in the long-term electricity auctions are considered a major success for Mexico by the architects of the Energy Reform but, while some have praised the results, others have a more reserved opinion. José Arosa, Director General Mexico of IC Power, is among the latter group. For him, opportunity lies in the country’s safer but less-developed market: bilateral contracts.
“During the auctions, developers bid without having vital elements of the project in place. Many projects were ideas without a solid economic base, they were castles in the sky, which caused the prices of each project to drop drastically. This pushed companies that prepared a stronger economic analysis, like us, out of the game,” says Arosa. Prices at the first auction were low, hitting US$47.7 compared to international results that were around US$50 on average during 2016. The average price at the second auction was US$33.47, among the lowest in the world.
Instead, IC Power is putting its faith in bilateral contracts with industrial clients. “Industrial retail and manufacturing companies are easier to approach and educate because of the one-to-one relationship. Our wide portfolio of projects, including natural gas, diesel, fuel oil, hydroelectric and wind, allows us to offer energy solutions to almost any client,” says Arosa. This is an advantage in a large country with a variety of resources. Mexico’s oil and gas industry and trade relationships facilitate the use of hydrocarbons for the production of energy, while its richness in renewable resources is cited as a focal point for the development of the energy industry in PRODESEN and in the Electric Industry and Energy Transition Laws.
Mexico’s goal of producing 35 percent of its energy with renewables by 2024 and the minimum number of CELs that are required for obliged participants create an open opportunity for the implementation of renewables that IC Power wants to take advantage of. Renewables are energy sources in which Arosa sees the brightest future. “Wind has the advantage of higher capacity factors and production profiles. Solar can be deployed faster and cheaper in areas with higher irradiation, but it cannot
produce power at night, which is vital for providing project development certainty to sponsors and customers.”
While the business opportunity in bilateral contracts with industrial consumers is substantial, there are still problems that must be resolved. Although Mexico has considerable potential for renewables, the best resources are also focalized — solar in Sonora and wind in Oaxaca are perfect examples — and if a proper transmission and distribution infrastructure is not deployed, these resources might become isolated from their intended consumers. “Transmission and distribution are key pieces in the puzzle of Mexico’s competitiveness. Although we have achieved cheap generation prices, they only make up 40 percent of the final energy price for consumers, highlighting the importance of improving transmission and distribution,” Arosa says. The Oaxaca-Mexico City HVDC transmission line is a clear example of the efforts to improve Mexico’s grid but there is still much to be done in this area. “The necessity for projects has been outlined but most of these are too conceptual,” Arosa warns. “The Energy Reform has not yet properly turned attention to transmission and distribution.”
No matter the challenges, IC Power sees a market in Mexico, a country that is hungry for projects. “Industrial consumers are the most interested in the Energy Reform because its implementation, and the loss of subsidies, is going to affect them directly. They are eager to know the outcome and this is where we see an opportunity. By 2019-2020 we want to have between 400 and 500MWs installed,” Arosa says.
Without a doubt, both producers and consumers have to work for Mexico’s best interests, Arosa says. “We are committed to the country and so we have to maintain a healthy balance. Prices that are too low may cause developers to leave the country, bringing back the old monopolistic scheme. Mexico’s institutions will have to provide a transparent and clear framework to make Mexico a desirable investment country for developers in the long term.