Carlos Ochoa
Holland & Knight
View from the Top

Confronting Mexico's Energy Infrastructure Challenges

Wed, 11/01/2017 - 17:07

Q: What challenges are developers facing in constructing new energy infrastructure?

A: Real estate, interconnections and obtaining PPAs are the largest challenges developers are facing. real estate is a unique challenge in the Mexican market. The first thing we have to do when a new developer enters the market is explain the different types of real estate rights regimes in Mexico.

It is hard for foreign companies to understand how the Agrarian Law works and why it makes it so difficult to obtain land. About five to 10 years ago, there was a misinterpretation of the Agrarian Law and banks would automatically reject projects that touched upon this issue. If agreements are well drafted from the beginning and the process stablished within the Agrarian legal frame work is followed, then there should be no problems to secure agrarian land for the development of these generation and transmission projects.

Another thing that worries developers is that they do not have certainty on interconnection processes. In the past, these processes would be carried out through CFE but now it must be done through CENACE. The problem was that under the former system, this process had no cost, therefore many developers filed for their feasibility study, for projects that were no longer developed, however for matters of control and reports the national electric grid is “virtually” busy.

In this regard the role of the regulators, particularly CRE, will be of the upmost importance, since they will have to terminate, as they are currently doing, permits granted under the former regime that does not comply with the requisites stablished in the transitory articles of the Electric Industry Law, which will result in the decongestion of some areas of the national electric grid, giving opportunity to the development of new projects in certain areas of Mexico. Now, with the current regime there will not be space for speculators, since guarantees must be filed for the interconnection.

Q: Why has there not been any Fibra Es issued for energy infrastructure?

A: We do not have enough projects in Mexico to issue a Fibra E. There was an effort made for midstream pipelines, but it did not go through. The only projects that I can envision being part of a Fibra in the short term are those that have been built through the former system. The only players that could raise a real Fibra would be PEMEX, CFE or the major utilities with a long-term presence in Mexico.

Q: How would you evaluate the development of social and environmental impact studies (EIA and EIS)?

A: The sector is facing various problems when it comes to EIA and EIS but there are many companies that have been doing a great job. This was something that needed to be included in the Energy Reform. In terms of real estate, giving back to the communities and environment is an important factor in the development of infrastructure. In the oil and gas sector it is a lot more noticeable than the power sector.

Because developers must now give royalties to the landowners, they feel that they are part of the project and that they have a say in the development of their surroundings. What we have seen in the power sector is that now some land owners are asking to have the same agreements that exist within oil and gas.