Opportunities for Private Investors, Off-Takers in Energy Market

A variety of factors, including legislative and executive actions, an international health crisis and political events, have all recently coalesced to impact the Mexican energy sector. Several administrative decrees were issued by the federal executive branch in these past couple of years that created obstacles for the development, generation, and supply of renewable energy by private generators in the country. Energy projects related to self-supply schemes (autoabasto) have been hit particularly hard by the executive branch, including the substantial increase of the postage stamp fees (porteo tipo estampilla) for transmission of renewable energy, restrictions on modifying existing self-supply permits and the continuous scrutiny of such self-supply permits by the Energy Regulatory Commission (CRE).

We have also experienced regulatory obstacles and uncertainty related to the interconnection of renewable projects since the pandemic emergency started in early 2020, together with executive acts and a legislative bill approved by Congress to, among other things, modify the existing dispatch order in the energy market favoring CFE power plants and displacing private clean and renewable energy power plants. All of this has impacted the confidence of private investors looking for opportunities in the Mexican energy market.

However, there is still good news to talk about. The judicial branch has shown no bias in favor of the executive branch’s energy policies, and has acted stoically to preserve the rule of law, issuing suspensions and favorable rulings that have stayed and sometimes declared the unconstitutionality of many executive acts intended to illegally benefit the Federal Electricity Commission strategy to generate electricity with obsolete fossil fuel power plants and impede the development, generation and supply of clean and renewable energy from private investors in Mexico.

Historic elections were also held on June 6 that we can view as a very positive signal for both foreign and national investors in the energy industry. In general terms, election day went by without any major incidents and government officials (federal and local) have refrained from discrediting the outcomes so far. This is good news for the rule of law and shows that we have solid institutions in place that support Mexico’s democracy. The Federal Congress will have a balanced mix of perspectives in the house of representatives (cámara de diputados) since it will not be dominated by only one party. Hence, any future attempt to pass an energy constitutional counter-reform will require the consensus of the majority of the parties in the house, plus the approval of the majority of the 32 state legislatures.

Given the present situation, what are the current opportunities for private investors and off-takers in the Mexican energy market? First, there is a steady, growing demand for clean and renewable energy in Mexico and worldwide. Many important industrial and commercial off-takers in Mexico have engaged in admirable and ambitious ESG (Environmental, Social and Governance) and Net Zero Emission goals, and there will be no turning back this global effort aimed at mitigating the adverse effects of climate change and engaging in sustainable and inclusive business strategies that strive for a better future for generations to come.

One answer is simple. If there is an increasing demand for renewable and clean energy being generated by private companies in the country, then the lenders, sponsors, developers, generators, suppliers and consultants should come up with creative business and legal strategies to address that demand and offer the most adequate energy supply solutions.

And how can we make this possible? Well, there are many energy generation and supply strategies available in the Mexican Energy market, which range from on-site generation schemes, such as local generation, isolated supply (abasto aislado) and distributed generation that address the requirements of different types of consumers and mitigate risks embedded in transmission of electricity, to medium and large-scale remote solar PV and wind projects, as well as qualified supply options through the Wholesale Electricity Market, that address the needs of other types of off-takers.

There is no single solution to cover the business strategy and energy requirements of all end users or consumers; instead, there are many generation and supply schemes that can be jointly or separately analyzed to cover the increasing demand for renewable and clean energy in Mexico. We have been seeing an upswing in these built-to-suit energy and sustainable solutions and we are sure we will continue experiencing a wave of opportunities for both investors and off-takers in the Mexican energy market.