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2017


“This is not a reform, this is a revolution on an unprecedented scale... this transformation touches every sector of the Mexican energy industry and goes well beyond.� Fatih Birol, Executive Director, International Energy Agency


2017

Mexico has left behind an energy monopoly that lasted over 70 years. It did so in less than three. From the proclamation of the much-hailed Energy Reform in 2013 to the first two long-term electricity auctions in 2016, the country has achieved something that many market participants did not believe possible on such short notice. While the energy regulators did their part, the government piled on the pressure by agreeing to energy efficiency and climate change targets with the UN’s COP21 that look to implement a much greener energy mix by the middle of the century.

In this new and dynamic environment, solar and wind power technologies are storming the industry as the main winners of the power auctions, while both the CFE and private players are starting to revamp old and inefficient hydrocarbon-fueled plants to run the nation’s baseload capacity on much cleaner and cheaper natural gas. Among other developments, 2017 will see the entry of private sector players as partners with CFE in transmission, starting with the highly awaited tender for a HVDC line connecting Oaxaca and the Valley of Mexico.

The launch of the wholesale electricity market in January 2016 was a breakthrough in the transformation of Mexico’s electricity industry, bringing it closer to modern standards of power generation and trading. Novelty and uncertainty are keeping some companies from entering the new model but growing interest from generators, qualified suppliers, off-takers and traders has started to lift the barriers, supported by the performance of public entities. Other obstacles, however, remain. With over 180 interviews, Mexico Energy Review 2017 paints the picture of the country’s radically transformed power market, bringing relevant players, old and new, together in one book.


ALL RIGHTS RESERVED Š Toguna, S. de R.L. de C.V., 2016. This annual publication contains material protected under International, United States and Mexican Laws and international Treaties. Any unauthorized reprint or use of this material is prohibited. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system without express written permission from Toguna S.A. de C.V. Mexico Energy Review is a registered trademark. The publisher has made all reasonable efforts to provide accurate information, and the information contained in this publication is derived from sources believed to be true and accurate. However, the information in this publication should not be considered to be complete or definitive, and may contain inaccuracies or typographical errors. The publisher accepts no responsibility regarding the accuracy of information and use of such information is at your own risk. The publisher will not be liable to any party for any direct, indirect, special or other consequential damages arising out of any use of information in this publication. The publisher provides no representations or warranties, express or implied, including any implied warranties of fitness for a particular purpose, merchantability or otherwise in relation to any information provided by the publisher in this publication.

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TABLE OF CONTENTS

1

STATE OF THE INDUSTRY

8

PROJECT DEVELOPMENT

2

OPERATING FRAMEWORK

9

WIND

3

POWER AUCTIONS

10

SOLAR

4

ELECTRICITY MARKET

11

NATURAL GAS & COGENERATION

5

OFF-TAKERS

12

POWER GENERATION & EFFICIENCY

6

TRANSMISSION & DISTRIBUTION

13

SUPPLY CHAIN

7

PROJECT FINANCING

14

INDUSTRY OUTLOOK


La Caridad power plant, Sonora, Grupo MĂŠxico


STATE OF THE INDUSTRY

1

After getting most of the regulations and guidelines out of the way, 2016 was the year when everything actually started to happen in the new Mexican energy market. The authorities launched the power auctions that saw private generators offer some of the world’s lowest electricity prices in long-term contracts with the CFE, initiating a process that could produce a wildly different energy environment for the heavily industry-dependent country in just a few years.

This chapter provides a glance at what happened during the last year from the perspective of some of the most important players in the sector, from the regulators who built the framework to the industry leaders that provided insight and worked side by side with lawyers and international institutions to achieve the best possible outcome for the country’s energy liberalization. It also explores some of the pending matters and yet-to-be developed opportunities on the horizon as public and private participants alike find a firmer footing in this new terrain.

5


7

CHAPTER 1: STATE OF THE INDUSTRY 8

THE YEAR IN REVIEW: Welcome to the Free Market

12

VIEW FROM THE TOP: Pedro Joaquín Coldwell, Ministry of Energy

13

VIEW FROM THE TOP: César Hernández Ochoa, Ministry of Energy

14

INSIGHT: Leonardo Beltrán, Ministry of Energy

16

VIEW FROM THE TOP: Jaime Hernández, CFE

20

VIEW FROM THE TOP: Guillermo García Alcocer, CRE

21

VIEW FROM THE TOP: Jesús Serrano, CRE

22

VIEW FROM THE TOP: Marcelino Madrigal, CRE

24

VIEW FROM THE TOP: David Madero, CENAGAS

25

VIEW FROM THE TOP: Roberto Ramírez de la Parra, CONAGUA

27

INSIGHT: Jaime de la Rosa, AME

28

INSIGHT: Roberto Martínez, OECD Mexico Centre

29

INSIGHT: Francisco Barnés, Mario Molina Center

30

VIEW FROM THE TOP: Víctor Ramírez, ANES

32

VIEW FROM THE TOP: Joana Torrents, CAMESCOM

34

RESEARCH: Renewable Resources in the Paso del Norte region


THE YEAR IN REVIEW

WELCOME TO THE FREE MARKET

8

Approval of the Energy Reform in late 2013 created

of the market’s dynamism. Price fluctuation will now

great expectations in the local and international markets.

be present as in any other market, but it will not be

But the truth is that little happened in the following two

related to the government in office; it will be a response

years as most efforts focused on getting the regulations,

to market conditions. Companies need to be aware of

secondary laws and manuals ready for kick-starting the

this and adapt their strategies to the new environment

next phase of Mexico’s energy industry.

to remain competitive,” says Guillermo García Alcocer, President of CRE.

2016 was different.

A NEW ERA This was the year when the wholesale electricity

The first megawatts in the new-look wholesale electricity

market started trading, with the first private companies

market (MEM) began trading for first time on Jan. 26, 2016,

participating as generators, qualified users and qualified

ushering in a new era for the sector. CENACE launched

suppliers. CENACE held the market’s first long-term power

the short-term market pilot in the Baja California system,

auctions, attracting investments of over US$6.6 billion in

isolated from the national grid, with CFE participating as

new clean energy capacity, while outside the spotlight,

the only generator and supplier. Three days later CENACE

the first-ever private contracts without CFE’s involvement

introduced the MEM to the national electricity system where

were also signed. The state-owned company itself started

it registered sales offers for around 32.36GW from CFE

a restructuring process to become a productive enterprise

and Generadora Fénix. Although some private qualified

with independent subsidiaries and affiliates.

suppliers were registered in the market, only CFE presented purchase offers.

“We need to erase the image of CFE as one huge company, which is no longer the case. CFE is now a corporation

The opening of the MEM unleashed the potential for

formed by different companies independent from each

new business models in the electricity industry. Private

other. We have already observed competition among CFE’s

companies have already taken note of these opportunities

subsidiaries to keep the best employees on their side.

and by the end of 2016 CRE had awarded market

For us, that is a good sign that the unbundling process is

participation permits to 269 generators, eight qualified

moving forward for real,” says Derek Woodhouse, Partner

suppliers, nine qualified users and one basic supplier. The

at Woodhouse Lorente Ludlow, a firm that participated in

numbers might not look impressive but considering Mexico

the preparation of CFE’s separation guidelines.

has never had a market of this kind before, having been under an iron-fisted monopoly for 78 years, it is a big step

These historic advances, however, do not mean the work

toward creating a robust MEM, a milestone the government

is over. The novelty of the market and the surrounding

plans to reach during 2017.

regulations as well as the still missing manuals and guidelines have wrapped the industry in uncertainty. Many project

Few people will argue that the long-term power auctions

developers, investors and off-takers are waiting to see

were the major events for the MEM in 2016, with the first of

how pioneering companies perform before diving into the

these held in March. News of the prices per megawatt-hour

new environment. Now, the greatest challenge for Mexican

and the scale of the projects tendered in the Mexican power

regulators is to complete the regulatory framework, with

auctions sent shockwaves across the world, thrusting

the manuals for Social Impact Assessments and Distributed

Mexico’s energy market under a global industry spotlight.

Generation at the top of the industry’s Most Wanted list.

“If you want to know the true price of renewable energy

Also on that list: enhancing market trust and understanding

in America —free from subsidies and mandates— look to

of existent rules while gaining a firmer grasp of the new

Mexico,” says Steven Chu, former US Energy Secretary and

dynamics. In the case of the private sector, companies must

Nobel Prize winner, in an interview with Forbes. Other big

learn to cope with a wider variety of options and price

names also took a favorable view of Mexico’s new market.

fluctuations in the newly free market.

Enel Green Power, Jinko Solar, ACCIONA Energía, Engie and SunPower were some of the well-known project developers

“Mexican companies are not used to the price volatility

that placed big bets on the market.

that comes with liberalized markets. They were used to having the same price per unit of natural gas and

As a result of the auctions 41 new clean power plants will

electricity in all the regions they operated in for long

be built in Mexico in the next three years, accounting for

periods. However, this situation was not a reflection

around 5GW of additional installed capacity, almost fivefold


the clean energy capacity built from 2014 to 2015, which

MAIN EVENTS IN THE ENERGY INDUSTRY

went from 18.1 to 19.3GW. The majority of these projects will be solar parks. This technology won 54 percent of the

Year

Event

energy tendered in the first auction and 45 percent of the second. The prices bid per megawatt-hour of solar energy broke global records in the first edition with average prices

2015 September

Publication of the Electricity Market Rules

of US$40.5/MWh, drawing the attention of solar companies worldwide. Prices were even lower in the second auction.

November

Ministry of Energy awards the first geothermal resources concession to a private company

“The results of the first bidding round were extremely NAFINSA issues the first Mexican green bond in the international market

surprising for solar energy companies, including Jinko Solar, which expected wind energy to get most of the megawatts tendered. In the past, the LCOE of wind

Publication of the first long-term power auction guidelines

farms used to be lower than solar parks, making the first tender’s results a turning point for the industry. The use of

December

Congress passes Energy Transition Law

2016

The Wholesale Electricity Market starts operations in Baja California

innovative business models was crucial for lowering the costs of solar energy and we feel proud to have helped our clients with the development of competitive proposals for the tender by providing high-quality technology at

Publication of CFE's Strict Legal Separation Guidelines

accessible prices,” says Alberto Cuter, General Manager Latin America of Jinko Solar.

January

Beginning of operations of the Wholesale Electricity Market in the National Interconnected System

The high number of rooftops available in Mexico has attracted major solar companies, including California

March

pioneer Solar City. Their focus is on the residential and commercial markets while national players have also been incentivized to step up their game to capitalize on the

May

segment. Distributed generation is expected to eventually the uncertainty over the rules for these systems stalled growth in 2016. Clarity is on the way, however, after CRE June

to be reviewed by industry stakeholders in the first half of 2016 and the final regulations were published in early

Publication of the second long-term power auction guidelines Publication of the National Electric System Development Program (PRODESEN 20162030)

enjoy big gains according to many industry players but

published the first draft for the interconnection manuals

CENACE awards the contracts of the first long-term power auction

July

CFE awards the first submarine natural gas pipeline to connect Southern Texas with Tuxpan, Veracruz Enrique Ochoa resigns as CFE's head

December. Now the hope is that many more business models will be possible under the new scheme, including

August

the possibility to sell energy and CELs to the MEM through an accredited supplier. In addition to the new schemes available in the MEM, the Electricity Industry Law allows legacy projects to

NAFINSA issues Mexico's first green bond in the national market

September

continue operating and offering services, creating a business line for companies looking for an anchor to the

Jaime Hernández appointed as new head of CFE

October

CENACE awards the contracts of the second long-term power auction CENAGAS launches the open season to reserve firm capacity in SISTRANGAS

past framework’s benefits. The deadline to receive legacy interconnection contracts was December 2016. All legacy

November

projects not complying with the requirements of the law, which included having the financing process completed,

Publication of auction guidelines for HVDC line connecting Oaxaca-Valley of Mexico

2017

lost their right to remain under the previous regulations. The door is now closed for new legacy projects to be

January

The Capacity Balancing Market starts operations

introduced to the market but those companies that received permits can maintain their projects’ status for up to 20 years. Contrary to the oil and gas industry, the old

April

Scheduled awarding of the Oaxaca-Valley of Mexico HVDC transmission line project

and the new will coexist in the electricity sector, at least in the medium term.

Source: DOF, CENACE, CRE, Ministry of Energy

9


RENEWABLE QUESTIONS The unprecedented growth in renewable energy capacity

GENERACIÓN DE ENERGÍA ELÉCTRICA POR POWER GENERATION PER TYPE OF TIPO DE TECNOLOGÍA 2015 (PORCENTAJE) TECHNOLOGY 2015

that will be added in the next three years has raised questions about the stability of the power network due to the intermittent nature of these sources. Some companies are betting on energy storage technologies as the right path for the future but although cost-effective solutions are available for large-scale applications, traditional, fossil-fueled power plants will continue supplying the system’s baseload. 10

Total Power Generated

21.9 TWh

“In Mexico, investing in combined-cycle made sense as the country is expected to have a reliable and cheap inflow of natural gas for a long period. Moreover, combined-cycle provides the advantage of being a baseload technology, with the flexibility to dispatch energy whenever needed,

52% Combined Cycle 4% Nuclear Power Plants Bioenergía y Cogeneración 14% Traditional 2%eficiente Geothermal Geotérmica, Solar, FIRCO. GD y FR2 Thermoelectrics 2% fluidizado Turbo Gas Combustión interna y lecho

share of renewables being connected to the grid,” says

Eólica 13% Coal-fired Power 1% Internal Combustion PlantsTurbogás 1% Wind Power Nucleoeléctrica 11% Hydropower 0% PV Solar Hidroeléctrica Carboeléctrica Source: Ministry of Energy Termoeléctrica convencional ciclo combinado experienced in 2012 and early 2013. PEMEX emitted the last

Ramón Moreno, Chief Technical Officer of Mitsui & Co. Power

critical alert to warn the industry to ration its natural gas

Americas, the second largest private operator in Mexico.

usage in mid-2013. Even with rising demand, companies have

acting as a complement for intermittent technologies, such as solar and wind. In the near future, we expect to see a growing number of efficient combined-cycle power plants providing the country’s baseload, as well as an increasing

little to worry about now as US$16 billion are being invested Mexico and particularly CFE have undergone an ambitious

in Mexico to add 10,000km to the National Pipelines System,

campaign to substitute old and inefficient power plants

an 85 percent increase compared to 2012 levels.

with natural gas-based combined-cycle facilities. The transitioning state enterprise had plans to revamp seven

The Energy Reform was also received with open arms

power plants accounting for 4.5GW capacity altogether. By

by the private sector as it freed the way to participate in

January 2016, it had already completed the conversion of La

commercialization activities and provided open access

Central de Manzanillo in Colima, Puerto Libertad in Sonora,

to the National Pipelines System and the possibility to

Emilio Portes Gil in Tamaulipas and Francisco Pérez Ríos in

reserve firm capacity through open seasons. CENAGAS

Hidalgo. The company has also promoted the construction

finally took ownership of the system and is in charge of

of new combined-cycle power plants, tendering five of

administrating and awarding the capacity reserve contracts.

these projects in 2015, which will be built by five different

To promote competitiveness in the market, PEMEX will give

companies, and one more in April 2016: Topolobambo II,

up 70 percent of the natural gas volume associated with its

awarded to Spain’s Iberdrola. The tenders for Topolobambo

commercialization activities over a four-year period. Entering

III and San Luis Potosi combined-cycle plants are pending.

the commercialization business seemed to appeal to private companies. By July 2016, CRE had already awarded 60

CFE has also invested in natural gas pipelines to accompany

natural gas trader licenses. The Mexican government hopes

its strategy to substitute coal and fuel oil with natural gas

that by increasing competitiveness, prices will fall and critical

in its facilities, having at the start of 2015 four pipelines in

alerts will remain in the past.

operation with a total length of 1,300km. In 2016, CFE tendered four more pipelines included in the country’s five-

SETTING GOALS

year expansion plan: South of Texas-Tuxpan, La Laguna-

Having more power production makes no sense without

Aguascalientes, Tula-Villa de Reyes and Villa de Reyes–

sufficient infrastructure to deliver it to the final user. Similar

Aguascalientes-Guadalajara.

connecting

to CFE’s gas pipeline tenders, the company’s call for building

Veracruz with Texas is a highly anticipated project because it

transmission and distribution assets attracted the industry’s

will be the first underwater pipeline transporting natural gas

attention. Working for CFE used to be the only way to

in Mexico and is expected to increase the system’s capacity

participate in electricity transmission projects. But that has

by 2,600 million cfd, supplying gas mainly to CFE’s power

changed, at least partially. Although the new law states that

plants in Tamaulipas and Veracruz.

electricity transmission and distribution are strategical areas

The

pipeline

and therefore remain under the government’s control, it The efforts of CFE together with PEMEX and the private

also allows for the private sector to invest and participate in

sector have solved the natural gas shortages that Mexico

transmission projects.


For transmission lines the new scheme works similarly to a

with private companies with expertise in smart metering and

highway concession where electrons are vehicles, roads are

power control. The arrival of cutting-edge technologies to

transmission cables and the toll rates, financial transmission

the Mexican power network has already proven useful as

rights. Under this system, CFE will award projects to private

CFE has decreased power losses from 16 percent in 2012 to

companies through a tendering process although the system

13.1 percent in 2015, reducing associated economic losses

planning will be CENACE’s purview. The winning company

by MX$9.75 billion. CFE is now looking to reduce the losses

will be in charge of building, operating and maintaining these

to 10 percent by 2018, bringing the country closer to the

assets during an established period of time, after which

Organization for Economic Cooperation and Development

ownership will pass to the government. The first of these

(OECD) standard, currently set at 6 percent.

tenders will be held in the first quarter of 2017. The new line will connect Oaxaca with the Valley of Mexico using High

Private companies across different sectors are also looking

Direct Current Voltage (HVDC) technology, a first for Mexico,

at new solutions to optimize energy production and usage.

and will have a capacity of 3GW.

The Internet of Things (IoT) and smart metering technologies are slowly digitalizing the Mexican manufacturing and power

Major electrical companies have already expressed interest

industries, making it easier to identify critical areas and

in participating in this tender. If successful, the next two big

act on them. Most of the new market participants already

transmission lines in CENACE’s plans —from Sonora to Baja

see efficiency solutions as an added value for their clients,

California and from Tamaulipas to Baja California— will be

in addition to competitive electricity supply. In the latest

among the most anticipated events in the Mexican electricity

Energy Transition Strategy to Promote the Use of Cleaner

industry.

Technologies and Fuels, Mexico made official its goals to reduce energy intensity by 1.9 percent between 2016 and

“The existing power grid already has the capacity to absorb

2030 and 3.7 percent between 2031 and 2050. This is the

a significant number of renewables but it is necessary

first time Mexico has defined targets in this area.

to strengthen the grid to prepare for the future so there are many infrastructure projects being developed and

Accessible financing is expected to be among the main

contemplated in PRODESEN 2016-2030. These three lines

challenges to improving efficiency but international and

will incorporate technology that has not been previously

national development banks are already implementing

used in Mexico, the HVDC lines, bringing both a leap in

initiatives to give Mexican companies easier access to

technology and in regulations for contracts for financial

efficient equipment. Given that transportation is the sector

regulation for renewable energy,” says César Hernández,

with the poorest efficiency levels, the government has plans

Deputy Minister of Electricity.

to electrify its entire vehicle fleet by 2050, which will bring new dynamics to power production and supply.

To ensure end users get all the electricity they need at the most competitive costs, CFE has also invested heavily

In the same document the government established a target

in reducing power losses in the grid, both technical and

of 50 percent clean energy production by 2050. Judging by

nontechnical. CFE has made use of public tenders to partner

2016’s results, that might be achieved even earlier.

ELECTRICITYPRICES PRICESBY 2014-2016 (MX$/kWh) ELECTRICITY CONSUMER 2014-2016 (MX$/kWh) 3.5 3 2.5 2 1.5 1 0.5

Industrial commercial Source: INEGIAgrícola

Comercial Servicios

services

industrial

residential

10/2016

07/2016

04/2016

01/2016

10/2015

07/2015

04/2015

01/2015

10/2014

07/2014

04/2014

-0.5

01/2014

0

agricultural

11


VIEW FROM THE TOP

SOUND POLICIES AT LOCAL AND GLOBAL LEVELS PEDRO JOAQUÍN COLDWELL 12

Minister of Energy

Q: What strategies has Mexico incorporated into its

We have 15 connection points on the US-Mexico border

energy policy to better face the global market?

through which natural gas is imported and distributed to

A: Despite the complex global landscape and price

the country’s manufacturing centers. When it comes to

volatility in the international market, the Reform is

pipelines, there are four US companies that are building

maintaining a favorable position and legal certainty, which

them, either on national territory or the border. The

in turn creates a trustworthy environment for investors.

opening of diesel and gas imports to Mexico has driven

When it comes to the electricity sector, the Reform

some US companies to create projects for importing oil

created innovative mechanisms to further open the

through the development of transportation infrastructure.

market and incentivize the entrance of new participants.

In electricity we are expanding and modernizing the points

The objective is to generate a higher supply of electricity,

of interconnection to increase our electricity commerce

giving priority to clean energies. In less than a year, we

and support infrastructure in the event of contingencies.

successfully executed two long-term power auctions that

There are 11 points of electricity interconnection with the

are promoting the construction of higher capacity and

US and we are working on creating three more.

sustainable infrastructure. In a few months, we will launch a third one. We have also introduced the CELs mechanism

Q: What are the ministry’s main goals for the next two

that establishes minimum percentages for renewable

years regarding the energy sector's development?

electricity consumption for large electricity consumers. In

A: The Ministry of Energy has defined four goals for the

2018, the requirement will be at least 5 percent and by

initial phase of the Energy Reform. The first involves igniting

2019 it will increase to 5.8 percent. We are also expanding

major public and private investment through the oil rounds.

the transmission grid to better deliver the energy

Our second goal is consolidating the energy market and

produced in areas of the country with high potential for

promoting new supply options to end users. The ministry

clean generation. We are working on making the Mexican

will continue liberalizing the natural gas market to make

energy sector more competitive, strengthening the

sure the pipelines administered by CENAGAS operate under

national industry and making sure it stays at the forefront

a capacity reserve scheme starting in 2017, along with a

of policies oriented toward the energies of the future.

further liberalization of prices in most parts of the country. The third objective is to continue expanding the National

Q: How are energy policies in Mexico affected by the

Pipeline Network as part of our Comprehensive Strategy

agreements at the North American Leader’s Summit?

for Natural Gas Supply. The government is committed to a

A: Mexico and the US have built a robust agenda of

considerable expansion of the national network of pipelines.

cooperation on topics such as energy exchange and

In the last four years we have obtained firm commitments

strategic integration. With the Energy Reform Mexico took

for 7,762km of pipelines up to 2019. The electricity sector

an important step toward the integration of the North

agenda is equally ambitious. The ministry plans to advance

American markets which will help transform the region

clean energy generation – our fourth objective – and we are

into one of the most competitive in the world. Of the

working on the design of the third power auction with the

48 new companies that are participating in the national

idea of launching it in April 2017. This auction will differ from

energy sector, eight are from the US. The numbers show

the previous ones because the private sector will be allowed

the interest and mutual benefits that can be achieved

to acquire energy, capacity and CELs. We are also working

through an interconnected economy.

on the tender for the first HVDC line in Mexico that will connect the Tehuantepec Isthmus with the central region,

Pedro Joaquín Coldwell has been Mexico’s Minister of Energy since the

the first ever opened to private players in this segment. We

start of President Enrique Peña Nieto’s government in 2012 and has

will also announce the tender guidelines for a transmission

overseen deep changes in the country as a result of the Energy Reform.

line to connect Baja California with the national grid.


VIEW FROM THE TOP

ENERGY REFORM PAST POINT OF NO RETURN CÉSAR HERNÁNDEZ OCHOA Deputy Minister of Electricity

Q: To what extent has the first year of the spot market

have already established the requirements that will be

fulfilled the Ministry’s expectations?

imposed on industry participants that are obligated to

A: The electricity market was expected to grow gradually

obtain CELs in the first and second year of this market.

since its inception and it will become increasingly open

We defined 5 percent as the mandatory percentage of

as it matures. Other countries took up to five years to

clean energy that these players must comply with in the

develop a short-term electricity market. We did it in two.

first year and 5.8 percent for the second. In March 2017

The market began operations with only three participants

we will determine the requirements for 2020. We need

and finished 2016 with more than 10, including some

to have all the regulatory mechanisms ready for 2018

private qualified suppliers. We expect the market to

when the law will be implemented but we are on the

gain more participants throughout 2017 and have all the

right path. In the end, CELs are not new in the world.

characteristics it was designed to have incorporated by

This certification mechanism is the Mexican version of an

the end of that year.

international system called Renewable Portfolio Standard (RPS), which has already proven to be effective in other

Q: What will be the main drivers of electricity tariffs

parts of the world.

under the new market landscape? A: The market is designed to stimulate competition so

Q: How is the Ministry of Energy preparing the field to

it operates under a model where cheaper energy is sold

ensure continuity in the Reform’s implementation?

first, favoring models and technologies that generate

A: The changes made in the electricity sector are

energy at lower costs. In the long term we believe these

irreversible at this point. We have already passed the point

models will bring electricity costs down through the

of no return. The process is so advanced that it would be

incorporation of new technologies and the displacement

more difficult to stop it than to continue going forward.

of older plants. Competition will generate incentives

The Ministry of Energy’s goal is to leave all the market

to improve services or lower costs but this is a market

rules ready for the market to continue its development

process and thus price determination is not under the

naturally. CRE will eventually take full responsibility for this

control of any regulatory entity.

but up to now it has been a joint effort and the Ministry has taken this process seriously. We expect to have all the

This new scheme will also cause electricity prices to

crucial financial and regulatory instruments in place by the

fluctuate depending on demand during the year. In

end of 2017.

periods when there is significant demand, prices will rise and vice versa. However, final users are often protected

The major challenge for 2017 is to continue operating

from these fluctuations so they do not perceive them.

under these new regulations as they imply a paradigm

In other countries, we have seen that energy markets

change. The Mexican electricity industry operated under

begin to show up to 25 percent lower tariffs after three

a monopolistic model for more than 70 years and it

to five years.

now has to get used to a brand-new model focused on competitiveness and structural separation. We must not

Q: What advances have been made toward the launching

forget that many of the market mechanisms did not exist

of the CELs market in 2018?

in Mexico before. It is a new field for all of us. The results

A: The creation of a regulatory system to allow the

have been positive so far but it is not an easy process.

efficient use of this instrument has been the greatest advance. CELs were foreseen since the constitutional

César Hernández was named Deputy Minister of Electricity at the

reform of 2013. Our role is to issue the regulations that

Ministry of Energy in Feb. 2014. His position oversees the development

will ensure these certificates work as expected. We

of the new Mexican electricity industry.

13


INSIGHT

DG, EFFICIENCY: THE NEXT FRONTIERS LEONARDO BELTRÁN Deputy Minister of Planning and Energy Transition

14

Mexico stood out in the clean energy arena in 2016 as

energy, CELs and capacity will be bought with little risk

it worked toward its ambitious targets for clean power

involved.”

generation: 25 percent by 2018, 35 percent by 2024 and 50 percent by 2050. Two successful power auctions that

That CFE was the first buyer in the market’s long-term

reached record low prices for solar energy also helped.

power auctions was also a positive signal for the country’s

The next steps are to clear the way for Distributed

transition strategy. “CFE is the largest power producer

Generation (DG) and to set energy-efficiency goals for

in Mexico so it was imperative for it to join Mexico’s low

the first time in its history, including plans for electrifying

carbon strategy to reach the national targets. Luckily, CFE

its vehicle fleet by 2050.

has made it clear that investing in renewables is part of its business strategy because it was willing to pay much

These initiatives are included in the country’s bold

more for clean energy in the first auction, although in the

strategy for transitioning toward cleaner technologies

end it was much cheaper than expected,” says Beltrán.

and fuels, designed with the Energy Transition Advisory Council, and made public in late 2016. “The Energy

Now that the government has made great advances in

Transition Advisory Council has representatives from all

boosting the development of large-scale renewable

relevant segments, including private sector, academia

projects, it is time to look at smaller but attractive

and the government. This has allowed the Ministry to

alternatives. DG is said to have high potential in Mexico

have a better understanding of the industry’s needs and

as 3.5 million consumers (including high consumption

to address them in a better way,” says Leonardo Beltrán,

domestic – DAC tariff – and commercial users) might find

Deputy Minister of Planning and Energy Transition at the

DG solar attractive due to their current electricity-related

Ministry of Energy.

expenses. According to some industry sources, the only issue keeping DG from exploiting its entire potential is

Having multisector groups involved in the drafting of

regulatory uncertainty as the guidelines for this system

policies, manuals and secondary regulations seems to

were not available for most of 2016.

be the right strategy. The power auctions, for which the guidelines were drafted with consideration of the private

“The government has been working on the regulation for

sector’s views, were a worldwide success, attracting

DG and CRE has finally made the guidelines available for

investments in new clean power plants totaling around

public revision and comments at COFEMER’s website.

US$6.6 billion and placing Mexico closer to its clean

We expect them to be ready soon so this market can

energy targets.

take off. We are pushing for a flexible scheme that allows different business models to flourish in the market. We do

But it was not just sound regulations that brought private

not want to decide for the customer, we want people to

companies on board. Providing certainty was a crucial

select the best option for them. We are therefore opening

factor, says Beltrán. “The energy industry’s rules have

the door for new models through net-billing schemes but

strong foundations in the constitution and other Mexican

we are also maintaining the net-metering possibility. The

legal tools that provide investors with certainty over the

Energy Reform brings flexibility and we want to have it in

projects, motivating them to participate in the market

all market segments,” he says.

even though it is brand new. Private companies know that the possibility for the rules of the game to change is very

With all these initiatives in place, Beltrán says that “by the

small and that is a strong incentive for them to come to

end of this administration in 2018 we expect to produce

Mexico. Moreover, having CFE as the purchaser also adds

at least 25 percent of Mexico’s electricity from clean

certainty to sponsors because it ensures their projects’

energy sources, bringing the country closer to its targets


for 2024. We expect most of this new power generation

Ministry of Finance is using the Mexican Petroleum Fund

to come from solar, wind and efficient cogeneration

for Stabilization and Development to promote efficiency

technologies. We also aim to have a more mature

and renewable energies. We have already reached the

wholesale electricity market as well as policies regarding

point in which sustainability is a common objective for

energy storage, which will be a key factor to increase

different governmental entities.”

clean energy generation and reach the established targets. As this is still an emerging area, however, the

Mexico’s

government will be working to develop specific policies

technologies and fuels is not the country’s first attempt

and regulations to boost its development.”

to go greener. The country has long been at the forefront

strategy

for

transitioning

toward

cleaner

of climate change mitigation. It was one of the first He

says

the

ministry’s

transition

strategy

is

well

countries in the world to have a comprehensive Climate

developed regarding clean energy generation. “We

Change Law – approved in 2010 – that evolved five

now want to push energy efficiency forward as the next

years later into the Energy Transition Law, which sets

step toward a low-carbon economy. We have identified

the pathway to transitioning to a low-carbon economy.

transportation as one of the main areas of opportunity

Mexico was the second country to have a law of this

to push efficiency levels higher in Mexico. With this in

magnitude, after France.

mind we have set the goal of electrifying Mexico’s fleet of vehicles by 2050, displacing hydrocarbon usage in this sector, which will also help lower our total greenhouse gas emissions. Reducing fossil fuel-based transportation in Mexico will not only lower carbon emissions but will reduce the emission of harmful pollutants that affect human health in cities. The government is currently working on a roadmap to guide efforts toward the goal of an electric fleet in Mexican cities.” In the presentation of the new energy transition strategy, Beltrán together with other members of the council announced that Mexico plans to reduce the intensity of

“We have understood that going sustainable is in fact an opportunity and not an obligation so we are moving fast in transitioning to a cleaner economy” Leonardo Beltrán, Deputy Minister of Planning and Energy

Transition

its final energy consumption 1.9 percent by 2030 and 3.7 percent by 2050. “It is the first time that Mexico has

“Mexico’s main motivation to promote these regulations

set national objectives in this area. Reaching the targets

was not only to become a global leader in this matter. Of

will be challenging because we need to include all kinds

course, we want to contribute to the solution for a problem

of industries and not only the energy sector, but we are

that affects the whole world but could also have strong

already working on a strategy of engagement to bring

repercussions domestically. Signing global agreements

companies on board,” says Beltrán.

helps but it means nothing without a domestic agenda. We have understood that going sustainable is in fact an

“In addition to proper regulations, access to financing is

opportunity and not an obligation so we are moving fast

critical to boosting the adoption of clean and efficient

in transitioning to a cleaner economy,” says Beltrán.

technologies in Mexico. We are in talks with the Ministry of Finance to see the possibility of channeling part of

He adds: “Other developing countries are pushing for

the resources used for energy subsidies into a financial

historical responsibilities in terms of carbon budgets,

scheme for easing the acquisition of these types of

asking

technologies, covering part of the initial investment.

between developed and emerging economies and

Phasing out subsidies, even a small part, is not an easy

claiming that it is fair for them to continue emitting

task but we are on the right track,” he says.

until they reach the same level of wellness as more

for

different

emissions

reductions

targets

developed economies. Mexico does not think this way. Even with the challenges ahead, Beltrán is positive that

Responsibility according to past emissions should be

Mexico can reach its sustainability targets because most

accountable but not an excuse to avoid cutting down

of the governmental entities are working as a united front.

emissions. In the end, not taking climate action will

“Energy and sustainability are no longer concerns solely of

impact negatively not only at the global but at the local

the Ministry of Energy. The Ministry of Social Development

level, affecting our businesses and people. We want to

is already promoting clean energy technologies to

grow but in a sustainable fashion. It just makes sense

provide electricity to underserved communities while the

from all different perspectives.”

15


VIEW FROM THE TOP

NEW ROBUST SYSTEM TO BOOST COMPETITIVENESS JAIME HERNÁNDEZ Director General of CFE

16

Q: Which of the major events of 2016 will shape the future

will contribute to the government’s goal of expanding the

of CFE?

National Pipeline System by 75 percent in 2018. Having a

A: The Energy Reform’s approval in 2013 ignited one of the

more robust system will not only benefit CFE as a large

biggest transformations the Mexican energy industry has

natural gas consumer but also other Mexican industries.

experienced in decades, particularly in the electricity sector because it created open markets for electricity generation

Q: What are the main challenges faced by CFE’s new

and commercialization. The Wholesale Electricity Market

companies?

(MEM) was created with the fundamental principle of

A: Transmission and distribution will become core

dispatching the cheapest energy first, which will benefit

businesses for CFE in the short term and both will remain

the pockets of Mexican families. This market mechanism

under regulated tariffs. Among the major challenges in

also works as an incentive for power producers to optimize

these areas is to continue pushing the modernization and

their production costs, an area CFE has been focusing on.

expansion of the grid, using the tools introduced by the Reform to boost revenue. Another challenge we are facing

CFE’s restructuring process was another highlight of the

in the transmission and distribution sectors is the need to

year. From January 2017 our subsidiaries and affiliates

reduce our technical and nontechnical losses. CFE lost 16

started working independently, adding another milestone

percent of the energy it produced due to these causes

to the company’s new phase. We now have 13 companies

in 2012 but we managed to reduce that to 12 percent in

under one roof, which we need to continue consolidating

the last period measured. Our goal is to further lower our

financially in the coming months while respecting the

losses to 10-11 percent by 2018, a reachable objective given

strict legal separation principles. CFE’s new organization

our past achievements. In the case of CFE Calificados,

includes six generation companies competing against each

which mainly serves industrial users, we face the challenge

other as well as other private producers, one transmission

of upcoming competition, which is driving us to reshape

subsidiary working at the national level to ensure the

our approach to the sector. Regarding our generation

system’s security and one distribution subsidiary with 16

subsidiaries, the main challenge is to attract private capital

independent business units. We also have a subsidiary

to push for the development of new power plants.

to serve the basic segment, CFE Básico, and an affiliated company for qualified users, CFE Calificados. The company

Q: What actions is CFE taking to change its employees’

has two new units to commercialize hydrocarbon fuels

mindset to meet the needs of a productive enterprise?

in Mexico and the US, an interesting opportunity also

A: Creating this new operational structure has been a long

made possible by the Reform. By entering the natural

and complex process but CFE’s employees and their union

gas commercialization business, we expect to reduce our

(SUTERM) have risen to the occasion. We could not have

generation costs considerably as 80 percent of these are

accomplished the successful separation of CFE without the

fuel-related. To increase our competitiveness, we have

active participation of our employees. I have paid over 20

committed to the development of 85 strategic projects,

visits to our facilities in the past couple of months where I

totaling over US$25 billion in investments. These projects

have witnessed firsthand the enthusiasm and commitment

include new power generation facilities, transmission and

of our team members. CFE’s employees are its main asset.

distribution assets as well as natural gas pipelines. We

We serve a portfolio of over 40 million clients, generating

have 26 projects related to natural gas transportation that

annual sales of MX$300 billion (US$14.5 billion). This is only possible thanks to our 100,000 employees, who

Jaime Hernández is an economist and PhD in Political Economy from

are highly experienced professionals committed to the

Essex University. Before being appointed to the helm of the CFE in

development of the Mexican energy industry. Different

August of 2016, he served as the state-owned company’s CFO.

generations of CFE’s employees made it possible for


98.5 percent of the Mexican population to have access to

CFE CORPORATE ORGANIZATION STRUCTURE

electricity. I have no doubts about my team’s capabilities and commitment to implement the changes brought by

Subsidiaries

the Reform and to safely bring CFE to the next stage of

CFE Generación I: Production and commercialization of electricity through different technologies, excepting supplying activities.

its existence. But it is true that we need to change the company’s culture. CFE used to act as an authority to a

CFE Generación II: Production and commercialization of through different technologies, excepting supplying activities.

certain degree and we need to understand that now, in some segments, we are just another competitor. We need to reshape our strategy to better serve the needs of our

CFE Generación III: Production and commercialization of electricity through different technologies excepting supplying activities.

clients, understanding their concerns and offering more attractive services and tariffs.

CFE Generación IV: Production and commercialization of electricity through different technologies, excepting supplying activities.

Q: How has CFE’s relationship with the private sector changed since the Energy Reform? A: CFE was the main promoter of large energy infrastructure

CFE Generación V: Represents existent and upcoming power plants with legacy IPP contracts.

projects in the past, many of which were developed in collaboration with private companies. The Energy Reform has changed the context for CFE’s collaboration with the

CFE Generación VI: Production and commercialization of electricity through different technologies, excepting supplying activities.

private sector, allowing us to establish alliances and share each of the projects’ risks and benefits. The guidelines for CFE’s legal restructuring were among the fundamental

CFE Transmisión: Performs all the activities needed to provide electricity transmission services, included financing, O&M and infrastructure operation.

elements of the Reform. We expect the industry to remain vigilant about compliance with these, ensuring CFE passes through this transformation without losing its competitiveness but allowing the establishment of a level

CFE Distribución: Performs all the activities needed to provide electricity distribution services, included financing, O&M and infrastructure operation. (Divided in 16 business units)

playing field for other participants. In this context CFE is fully prepared and willing to continue collaborating with the private sector in the development of a robust and

CFE Suministrador de Servicios Básicos: Supplies electricity services to basic users according to the terms of the Electricity Industry Law.

competitive electricity market. It is important to highlight that Mexico’s Energy Reform is taking place amid a rising demand scenario as the country’s electricity demand is growing at around 3 percent annually. This feature makes

Business Unit

Mexico a distinctive case and ensures there is enough

Business Unit Nuclear Generation: Manages Laguna Verde, Mexico's only nuclear power plant, located in Veracruz.

room for CFE but also for new participants to capitalize on this market. Q: What is the future of CFE’s energy mix? A: Mexico has established the goal of producing 35 percent of its electricity from clean energy sources by 2024 and CFE is moving at the right pace to reach this target on time. The system’s stability is another key factor for us so we are also investing heavily in baseload technologies. In this area, CFE is pursuing an ambitious strategy to substitute expensive and polluting fuels for more sustainable alternatives. Between 2012 and 2015 we reduced our fuel oil and coal usage significantly, decreasing our GHG emissions by 50 percent. Using natural gas for power generation represents around 25 percent of the cost of using fuel oil, so we have also reduced our generation costs considerably. Our end goal is to have a diversified portfolio of technologies and fuels so we can react quickly to sudden changes in the international market or technological changes with the potential of disrupting the industry.

Affiliates CFE Calificados: Supplies electricity services to qualified users according to the terms of the Electricity Industry Law. It also represents Exempted Generators in the MEM and commercializes electricity and ancillary services in Mexico and abroad. CFE Intermediación de Contratos Legados: Administrates legacy interconnection contracts and represents legacy power plants and load centers in the MEM under the Intermediary Generator figure. CFEnergía (under Mexican law): Imports, exports, contracts transport and storage, and buys and sells fuels in Mexico and abroad. It also administrates assets and fuels and participates in the electricity market of Mexico and other countries. CFE International (under US law): Imports, exports, contracts transport and storage, and buys and sells fuels and electricity. Source: MBP with information from CFE

17


19


VIEW FROM THE TOP

CLEARING THE PATH FOR CLEANER TECHNOLOGIES GUILLERMO GARCÍA ALCOCER Chairman of the Energy Regulatory Commission (CRE)

20

Q: What does the universe of power-generation permits

Q: Why did CFE decide to bid a conservative amount of

handled by CRE look like at the moment?

capacity in the first power auction?

A: We are managing 1,072 permits under the legacy

A: The first power auction acted as a pilot, in a similar

scheme against 284 permits issued under the new

manner as phase one of Round One in the hydrocarbons

regulations. Not all of these belong to plants already in

industry. CFE was playing it safe to see how the market

operation. Some are from companies looking to establish

reacted before making any major bids. It was the

bilateral contracts or to participate in power auctions. Also

first time the Ministry of Energy, CENACE and CFE

interesting is the fact that half the permits we manage

conducted such a process, so they wanted to learn from

belong to clean-energy projects. Regarding authorized

it. The outcome of that first auction was qualified as a

capacity, however, traditional technologies continue to

success by several international media, including The

have the largest share as clean-energy technologies only

Economist, Forbes and Bloomberg, and this successful

account for 33 percent of the total megawatts awarded in

experience has given Mexican authorities the confidence

permits. The number is even lower when considering the

to strengthen and enhance upcoming editions. Even

capacity already installed in the country, in which only 25

though renewable energies are not as sensitive to

percent corresponds to clean energies. But we see a rising

resource limitations as traditional technologies, they

trend in the share of clean-energy capacity installed in the

are still based on natural resources that are a constraint

country and expect at least a 10 percent increase in the

to a certain extent. We want to avoid having critical

short to medium term given the number of new permits

situations, as happened in Spain where more solar

awarded as well as Mexico’s clean-energy goals.

energy capacity was installed than the country could handle, unbalancing the system and leading to a crisis in

Q: How is CRE improving the power auction processes to

their solar energy industry. Mexico wants to be cautious

resolve private sector concerns?

but is moving at a rapid pace in developing a clean-

A: The power auctions will be run by the Ministry of

energy industry, especially compared with other Latin

Energy in collaboration with CENACE up to the third

American countries.

edition. Afterward, CRE will take control of them. We have identified concerns from the private sector regarding

Q: How is CRE preparing for the CELs market that will

compensation, guarantees and timelines, but the Ministry

start operating in 2018?

is already working toward improving these. For instance,

A: We have less than two years to develop a robust system

the first power auction did not allocate any of the capacity

to keep track of all the CELs awarded to energy projects

required as the maximum price was set at MX$10,000

and traded in the market. We want to avoid double

per MW/year, too low to attract serious investment. The

accounting and balance sheet inaccuracies, so our main

second power auction corrected that, offering a price of

focus is to develop a comprehensive and reliable tracking

MX$1,688,706 per MW/year. The same happened with the

system. Our goal is to have a CELs platform that works

volume offered, which almost tripled from 500MW/year

similarly to a stock exchange market, having a value

to 1,483MW/year. In this way, companies can build more

administrator to keep track of the certificates’ ownership.

complex proposals, including technologies that are more

The same administrator will be in charge of following all

suitable for baseload power such as combined cycles and

the purchase-sales transactions performed in the CELs

hydropower plants.

platform. We are working with different financial entities to develop a stock-based instrument, which is expected

The Energy Regulatory Commission (CRE) is the entity in charge of

to be ready by 2018. In the meantime, we are working

regulating the industries of gas, refined oil products, hydrocarbons and

on the accompanying regulations needed to encourage

electricity in a transparent, impartial and efficient way.

participants to join the market by 2018.


VIEW FROM THE TOP

BETTER TO REMAIN VIGILANT THAN MAINTAIN CONTROL JESÚS SERRANO Commissioner of the Energy Regulatory Commission (CRE)

Q: How did CRE contribute to the energy industry’s main

Law, market liberalization should not begin until 2018 but

milestones in 2016?

Congress decided to bring the date forward one year,

A: We had many important events in the energy industry

allowing for the fuels market to begin flexibilization in

in 2016. It is worth highlighting CRE’s collaboration on

2017. By the end of 2017, we expect to have a completely

the opening of the wholesale electricity market, two

flexible market in the entire country.

basic service long-term auctions as well as the first steps toward horizontal and vertical separation of CFE. Also,

Q: What are CRE’s main challenges with these objectives?

CRE issued the regulations for CELs, including the rules

A: The challenge is technical. We have to be very

for the functioning of the registry and its penalties. As

careful in the technical aspects as an error in one of the

for natural gas and automotive fuels, 2016 was a year

regulations could have consequences such as creating a

to delineate the rules and conditions for the Mexican

distorted market or generating private local monopolies

market to open to private competitors. At the beginning

or noncompetitive markets. We are starting a market from

of the year CRE issued a resolution aimed at establishing

zero and it is hard to know what value companies give to

a Gas Release Program, which basically establishes a

openness. It is a lot easier to find the balance once the

natural gas commercialization market. To accelerate the

market is already working because consumers, with their

implementation of this market, CRE’s resolution forces

decisions, reveal the real value they give to it.

PEMEX to cede 70 percent of its portfolio to other marketers.

Q: What is CRE doing to involve all private players in the market liberalization process?

Also in 2016, CRE together with the Ministry of Energy and

A: We are making an effort on various fronts to bring

CENAGAS presented a strategy for the natural gas market.

all private players on board. CRE is offering courses

In addition to the Gas Release Program, this strategy also

for companies to understand the new regulations.

includes the start of a permanent regime for natural gas

Our website also has tutorials on how to make certain

transport, for which we established the rules needed

processes or how to get a permit from us. In the case of

for the transport system’s open access. This program

more specialized matters or to provide certainty regarding

includes three main elements: the migration to the new

specific processes, we have a hearings mechanism.

and permanent regime, which follows best international

If investors or private players have specific questions

practices. The second element is the openness and free

they can always ask for a hearing, a meeting with CRE’s

access to national and gas-import transport systems,

commissioners to express their doubts. We can also agree

especially those for imports because half of the gas used

to direct consultations with CRE’s team.

in the country is imported. The third element is generating user information. Our goal is to perform a gradual

Q: What are CRE’s main priorities for 2017?

liberalization for the natural gas market. We expect to

A: CRE will take over monitoring the electricity market

begin in the northern part of the country since we believe

in 2017. We will be defining tariffs before subsidies. The

that is the region with the most competitive potential.

second challenge will be to encourage participation of

Afterward we will continue with the rest of the country.

qualified users. We also need to attract more qualified

Initially, there will be price regulation but as we go along

suppliers and optimize the CELs market because we will

and the infrastructure is developed we will experience

start the registration process for generators and suppliers .

price liberalization. The drivers of the Energy Reform are market openness, competition and the empowerment

The Energy Regulatory Commission (CRE) is Mexico’s main regulatory

of users. We will also publish the conditions for the fuel

entity for the electricity sector. Jesús Serrano is one of the seven

market liberalization. According to the Hydrocarbons

members on CRE’s board.

21


VIEW FROM THE TOP

THE LEGACY OF A COMPETITIVE MARKET MARCELINO MADRIGAL Commissioner of the Energy Regulatory Commission (CRE)

22

Q: Where does CRE draw the line to ensure that

risks but there are more opportunities. The new market

regulations control the market but do not stifle growth?

also presents much more competition and forces suppliers

A: Decisions at CRE are taken by the seven commissioners

to offer better products. The transition may be hard for

after reviewing the projects prepared by staff under

some, as the old regulatory framework may have been

the commissioners’ direction, which allows for the

too easy and offered few challenges and extra comfort

introduction of many points of view to address the

in some cases. On the other hand, there may also be a

sector’s needs. To define regulations we often take

generational barrier to break. Those who have worked

into consideration international practices and adapt

in the sector for many decades may find it difficult or be

them to local needs. In the case of electricity, we have

reluctant to change. I would say that those who adapt

developed models that are simple yet effective and easy

fastest to the new model and can innovate will be the ones

to understand so that we facilitate the entry of new

taking advantage of the new opportunities.

agents into the market. I think this is already rendering some benefits as we can see for example with the large

Q: How is CRE preparing for new markets including CELs,

number of new suppliers for qualified services entering

capacity balancing, medium-term market and financial

the market and with the companies already operating in

transmission rights?

the short-term generation market.

A: CRE has already submitted the criteria for the clean energy market. During 2017 we will be developing an

Q: January 2017 is the MEM‘s one-year anniversary. What

online platform to register the production of clean energy,

are the main lessons learned?

provide a certification and verify every month the account

A: Close monitoring was of the utmost importance this first

status of every participant. This platform will be launched

year and we have learned a lot from it. We observed that

in 2018. The regulations for the other markets are being

some adjustments were necessary, which was expected,

developed by the Ministry of Energy, which is focusing

and certain procedures may require simplification as

mostly on those for the midterm market, transference of

some players are still getting to know the new rules.

financial rights and the short-term capacity market. While

Monitoring will have to continue over the coming years.

all are important, the auction for financial transmission

I feel that we have to work even more closely with the

rights needs to be developed quickly because it will

industry to help them understand the model and the

be the key instrument that suppliers will use to protect

advantages it can bring to them. We also learned that

themselves from short-term price fluctuations throughout

stable and predictable regulation is crucial to helping new

the energy market locations. This will allow them to offer

agents make their decisions.

clients competitive prices. During the first few months of 2017 these manuals will be finished and handed to us.

Now there are two different legal schemes: the legacy system and the new legal system. This makes regulating

Q: How successful have tenders for basic and qualified

the sector a bit more complex than normal. But to simplify

supply been?

this it is necessary to encourage companies to move

A: Long-term auctions for basic supply were largely

toward the new model and to help them fully understand

successful due to a combination of factors, the certainty

it. This new market may seem more complex but offers

of the contracts awarded, especially their length, the

companies many more opportunities. There may be more

fact that CFE Suministro Básico is the off-taker, which will continue to serve a large part of all energy sales, the

The Energy Regulatory Commission (CRE) is Mexico’s main regulatory

continuing cost reductions in clean technologies, as well

entity for the electricity sector. Marcelino Madrigal is one of the seven

as other favorable conditions in the capital markets such

members on CRE’s board.

as low interest rates available to the private sector. The


Mexican market is different to others worldwide because

lower. What this says is that the cost of complying with

of the long-term tenders, which have been extremely

the clean energy targets will be less than expected and

helpful to attract investment, proving the importance of

electricity tariffs will not be pushed up as it was forecast.

long-term instruments. For qualified supply, meaning large electricity-consuming companies, they will handle

Tariffs include generation, transmission, distribution and

their own energy purchases if they see better conditions

other service costs. Generation represents about 60

than the current tariffs in basic supply. As prices become

percent of the final cost but these costs are not easy to

more competitive I would expect private companies in

predict or reduce as they are heavily dependent on the

this qualified segment to reach out to renewable suppliers

price of the energy source, such as oil and natural gas,

on their own. Qualified users are different from basic

which are both expected to rise slightly in the coming

users, as the first can switch to better suppliers at will. As

years. The market is still fairly young for competition

competition rises, qualified users will increasingly choose

forces to reduce the cost of current generation for basic

alternatives, if may be not only for cost but for the added

supply. It will take some time. The good news is that the

benefits such as services and certifications that renewable

cost of clean energy targets will be lower than expected.

energy suppliers bring. So far basic service represents about 65 percent of energy consumption, while qualified

Q: What are your main projects for 2017 and what will be

users make up the rest.

your legacy? A: 2017 will be a transition year as we will be handed

Q: How will the tender prices impact electricity tariffs?

many of SENER’s functions. We will monitor the energy

A: There will be an impact on tariffs but that will only

market, finish some instruments and be responsible for

be in the mid-to-long term. When the clean energy

maintaining and modifying regulations when needed. We

requirements were established in the Energy Transition

are preparing for the new tenders and developing the

Law, the question was if the cost to comply with these

new regulations for distributed generation, which will be

clean energy targets was going to be too high because

launched early in 2017. We also expect that smaller users

some clean energy technologies were not yet seen

like home owners or small companies will also begin

as cost-competitive. However, we are seeing that the

using the options offered by the Reform. As options

cost of renewable energy is increasingly approaching

increase, users big and small will find their energy supply

traditional energy sources and sometimes it is even

options diversified.

23


VIEW FROM THE TOP

WELCOMING PRIVATE RETAILERS TO SISTRANGAS DAVID MADERO Director General of the National Center for Natural Gas Control (CENAGAS)

24

Q: How has CENAGAS evolved in the wake of the Energy

Q: What are the key hurdles for processing and assigning

Reform?

the upcoming requests?

A: In January 2016 we received PEMEX’s natural gas

A: Companies are required to disclose the injection and

storage and transportation infrastructure as a result of

extraction sites to determine the cost overrun parameter

the Energy Reform’s mandate. The transfer radically

(β) they are willing to pay to ensure capacity. We are

changed CENAGAS’ daily operations. The transportation

considering indivisible routes. The β parameter will allow

fees of the National Natural Gas Transportation and

us to determine the interest in each route, order the

Storage System (SISTRANGAS) began to flow as well

applications and fix the capacity we can allocate to each

as the associated payment responsibilities. As these

route according to our SISTRANGAS simulation system,

responsibilities evolved we developed and improved our

as well as the optimal price to assign each tranche. We

operational skills, strengthening our coordination with

designed a second-price system assignation where

PEMEX and CFE and closely following CRE’s regulatory

interested participants are required to provide a positive

updates. Early termination of contracts such as financing,

β. If a particular route is not saturated the price will be

legal and compliance services have allowed us to grow

zero. If the route is saturated all participants will pay the

while we continue collaborating with PEMEX on the

same β equivalent to the first cfd we are unable to allocate

operation of pipelines. In October 2016 we launched the

to the route. We will allow an extra week in the process to

first open season for reserving capacity in SISTRANGAS,

address any difficulty customers may have in submitting

which illustrates our evolution as the system’s technical

their applications.

operator, moving a step forward toward a stronger transportation model.

Q: Which companies will benefit the most from this process?

Q: What were the main challenges to successfully launch

A: CENAGAS’ main customers have traditionally been

the open-season process?

CFE and PEMEX. But now some additional retailers are

A: The first step was for CRE to assign PEMEX and

expected to participate as well as companies that do

CFE their corresponding capacity in the national

not wish to depend on a retailing company. Natural gas

pipeline system, a task on which we collaborated. The

commercialization is being liberalized in Mexico and now

productive enterprises of the state were assigned 40

we have over 20 CRE permits to do so. Some of these

percent of the total capacity for their exclusive use.

permit-holders should be willing to reserve capacity in the

For PEMEX this mainly means to use it for refining and

natural gas pipeline system. The interest of companies to

industrial transformation processes, while CFE will use

sell gas and acquire capacity in the system from CENAGAS

it for power generation. Neither company can use that

should become very clear.

capacity for commercial purposes. Private companies will get the remaining 60 percent of the pipelines’

Q: What are CENAGAS’ goals for the upcoming years?

capacity, either for commercialization or direct usage.

A: CENAGAS’ goal is to be among the Top 25 transporters

We have to comply with assigning the capacity agreed

in terms of efficiency, efficacy and safety, hopefully by

in previous contracts, which in the end leaves us with

2025. It will be a challenge. We will be competing against

around 2 billion cfd to assign in the open season to the

the highest international standards. The next three years

remaining interested parties.

will be a phase of constant evolution. By 2018 we expect to have a consolidated company and by 2020 we are

CENAGAS is a decentralized organism that acts as an independent

expecting to reduce operating costs and consolidate our

operator of the National Natural Gas Transportation and Storage

role as a technical operator with clear responsibilities

System (SISTRANGAS).

and functions.


VIEW FROM THE TOP

BALANCING THE RELATIONSHIP BETWEEN ENERGY AND WATER ROBERTO RAMÍREZ DE LA PARRA Director General of the National Water Commission (CONAGUA)

25

Q: What is CONAGUA’s role in ensuring water demand for

of pollution or damage to the environment or to

energy projects without compromising the supply?

third parties. CONAGUA and the Ministry of Energy

A: CONAGUA is responsible for issuing water concessions

work together to achieve compatibility between the

for hydrothermal wells, at depths of several thousand

Geothermal Energy Law and the National Water Law

meters where water is over 80° C and not suitable for

and to avoid the overlapping and contradictions of

any other use. Article 81 of the National Water Law states

excessive regulations. The Geothermal Energy Law

that if the well has no direct connection to the aquifers

includes measures to modify Article 81 of the National

above it the concession is not subject to considerations

Water Law, so as to apply to private developers the

of availability or to the rules for usage of the latter so the

concessions for water steam previously limited to CFE’s

use of those wells is not in contention with other uses for

geothermal fields. We are also working on the guidelines

subterranean water.

for geothermal matters in national waters to prevent damage to the environment, public works or third

There are also regulations and policies for the operation of

parties as a result of geothermal well exploitation.

dams for electric generation matching other regulations for agricultural and human water supply. These policies

The guidelines' focus is on the separation of aquifers

are revised weekly during the meetings of the Technical

from hydrothermal resources, determining the water’s

Committee for Water Works, which includes the entities

“base

involved as well as universities and other institutions.

potential negative effects on water quantity and

condition”

and

identifying

and

monitoring

quality, the environment, public infrastructure and Q: What measures ensure the integral management

the population from hydrothermal activity. There are

of water basins in Mexico and how do they impact the

also provisions on the order of generation permits,

energy sector?

environmental impact, concessions and construction

A: There are management plans that include more

permits leading to the interconnection with the national

efficient uses of water via modernizing and refurbishing

grid that have reduced procedural lengths from three

of

years to one and a half years.

irrigation

infrastructure,

sustainable

sources

for

supplying urban centers, the use of treated residual water for applications not requiring clean water but which can

Q: How did CONAGUA contribute to the transition of

be used for human supply, artificial refilling of aquifers,

geothermal permits belonging to CFE and Grupo Dragón?

rainwater collection and desalinization of both inland and

A: The concessions for water steam to CFE remained

seawater. New regulations regarding the management

current on the same terms but the volumes in the

of subterranean water, specifically of 333 aquifers

concession were discounted according to the provisions

not previously regulated, will take into consideration

regarding aquifers in article 81 of the National Water Law.

the demand of water for energy generation so the

Following that law, in August 2015 CONAGUA granted

development of the energy sector can coexist with the

the first water steam concession to Geotérmica para el

other uses of water.

Desarrollo, part of Grupo Dragón, for 43.8 million m3 a year for the San Pedro Dome hydrothermal field in Nayarit.

Q: What has changed in the procedures involving

In December of that year another permit was granted to

CONAGUA for the construction of hydrothermal and

Mexxus Drilling for the El Ceboruco field in that same state.

hydroelectric plants? A: CONAGUA’s authority applies to permits regarding

The National Water Commission (CONAGUA) is Mexico’s main

water concessions, permits to the discharge of residual

regulatory entity for water usage for human and industrial purposes as

water and to measures regarding the prevention

well as water bodies.


Manzanillo thermoelectric power plant, Colima, CFE

26


INSIGHT

ONUS ON KEY PLAYERS TO SEE PROJECTS THROUGH JAIME DE LA ROSA President of the Mexican Energy Association (AME)

After a successful first year for Mexico’s newly minted

the most interesting areas of the new energy paradigm,

electricity market, the challenge now is to get all the

such as the spot market, will take a little more time to

projects in the pipeline moving forward to benefit the

develop as new players come to understand the rules

country’s economy, lower energy prices and improve the

and slowly start to dip their toes into the waters. The

industry’s overall competitiveness.

spot market, where companies will go to meet shortterm energy requirements not covered by PPAs or

The heavy infrastructure investments associated with the

basic supply, will gradually see more participants such

projects tendered during 2016’s two long-term power

as qualified suppliers, the energy middlemen who are

auctions will add value in the form of jobs and technology

starting to pop up in the country. “The new mechanisms

development but it is up to developers, communities,

will contribute to increasing Mexico’s competitiveness

investors and authorities to see them through to

on the global scene and enhance the internal energy

completion, says Jaime de la Rosa, President of the

security of the country while bringing new players to the

Mexican Energy Association (AME), which groups dozens

market. There is still a long road ahead to arrive at this

of national and international players in the power sector.

ideal scenario but the regulations are clearly marking the route we need to follow to reach this target.”

Looking back at 2016, the MEM’s first year of operation, de la Rosa says the two power auctions were successes

Among the elements that need to be clarified are the

that put Mexico firmly on the global energy map.

relationship between participants in the spot market,

“The response to the first long-term electricity tender

subject for example to variable prices, and those taking

in March was quite successful, with over 103 private

part in the long-term fixed-price electricity tenders, de la

companies

of

Rosa says. Fortunately the authorities, from the Ministry

which 69 presented economic proposals. This level of

of Energy to Congress, have been willing to listen to the

participation was a historical milestone, not only for

needs of private players. AME “continues to collaborate

Mexico but for the global energy industry,” he says. “The

with CENACE, CRE and the Ministry of Energy to shape

process’ transparency and the record renewable energy

the future of the energy market, sharing our members’

prices received by CFE were also great achievements.

experiences in international markets and acting as the

Achieving an average of US$49 per megawatt-hour of

voice of private energy companies in Mexico.” AME is

wind and solar energy has been a major breakthrough

looking forward to future electricity tenders despite the

for the country and the renewable energy industry,

uncertainty that continues to swirl around the sector. “Our

especially as there were no subsidies involved.”

main expectation is to see a series of successful electricity

accessing

the

tender’s

guidelines,

tenders over the next years,” de la Rosa says. CENACE followed in September with another successful auction performance that “managed to surpass the high

“The challenge will be to eliminate the uncertainty

bar set during the first round, allocating a large share

regarding the functioning and potential scope of the

of the capacity required by CFE and achieving lower

other market components, such as bilateral contracts,

prices per megawatt-hour and CELs,” says de la Rosa.

which share strong similarities with the self-supply

“We were especially satisfied to see that the portfolio

scheme, a legacy from the old regulatory framework.

of technologies earning contracts was much more

So far, private companies are analyzing the possibility

diversified than in the first auction in which solar and

of partaking as qualified suppliers or marketers as

wind technologies got all the CELs and energy auctioned.

a strategy to diversify their participation in the new

Now, we also have combined cycles, geothermal and

market. However, we will have to wait to see how

hydropower technologies.” De la Rosa says that some of

successful these new elements become.”

27


INSIGHT

ENERGY SUBSIDIES HOLD BACK EFFICIENCY ROBERTO MARTÍNEZ Director of the OECD Mexico Centre

28

The “Getting It Right” report published in 2013 by the

One barrier to reducing energy subsidies is the general

Organization for Economic Cooperation and Development

fear that it will drive up inflation and affect lower-income

(OECD) found that energy subsidies represented around

Mexicans. But the OECD’s report showed that the main

1.7 percent of Mexico’s GDP during 2005-2009, including

beneficiaries of electricity subsidies are higher-income

electricity subsidies for the residential and agricultural

residential customers. The poorer 20 percent of the

sectors. In addition to being costly, the existence of energy

population only gets 11 percent of the total amount spent

subsidies can discourage investment in clean energy and

on electricity subsidies while the richest 10 percent of

efficient technologies, which goes against Mexico’s future

Mexicans gets around 20 percent of the full subsidies.

ambitions.

Similarly, 90 percent of the electricity subsidies given to water pumping systems in the agricultural sector benefits

Roberto Martínez, Director of the OECD Mexico office,

10 percent of the richest farmers.

believes the electricity market’s liberalization is the best opportunity for the country to start phasing out energy

The OECD believes that eliminating these subsidies and

subsidies and place them in areas with higher potential

replacing them with specific programs would be more

to benefit its population and move Mexico’s clean energy

effective for addressing poverty. The country has already

ambitions forward. “In the power sector, we consider

made some advances in this regard by substituting

it essential to follow an energy efficiency agenda, for

electricity

which reshaping the country’s strategy regarding energy

incentives in watersheds where they are needed the most.

subsidies and taxes is necessary. Before the Energy

The organization encourages the adoption of effective

Reform, we conducted an in-depth study to evaluate the

communication strategies to promote the acceptance of

impact of phasing out energy subsidies and to identify the

programs that reduce subsidies but Martínez also says the

optimal areas in which to invest these financial resources,”

Energy Reform might provide the right framework to ease

says Martínez.

the transition process.

DISTRIBUTION RESIDENTIAL ELECTRICITY DISTRIBUTION OFOF RESIDENTIAL ELECTRICITY SUBSIDIE BY DECILES (%) FROM THE TOTAL SUBSIDIES BY INCOME DECILES (percent) 25

subsidies

for

water

pumping

with

cash

“Mexico has already reduced its industrial electricity tariffs, making the gap smaller in comparison with American standards. A similar drop in residential tariffs would set the ideal timing to start phasing electricity subsidies out, which is more relevant than ever as they can distort the market by

20

artificially changing prices,” he says. The current subsidies also affect the development of clean energy technologies in

15

Mexico because they favor mostly fossil fuel technologies. According to the OECD, Mexico’s fossil fuel subsidies

10

accounted for US$8.95 billion in 2011, representing around 88 percent of the country’s total energy subsidies. Martínez

5

says that reshaping the fiscal strategy would have a positive 0

I

II

III

IV

V

VI

VII

VIII

Lower income 2008 Source: OECD, 2012

IX

X

Higher income 2010 2008

impact on the country’s clean energy industry and would be more in line with global energy trends. “The maturing of renewable technologies worldwide has driven us to design a policy framework favoring the rapid adoption and

2010 Source: OECD, 2012

implementation of clean energies, including tools to make them more economically attractive,” he says.


INSIGHT

GREEN GROWTH FRANCISCO BARNÉS Executive Director of the Mario Molina Center for Strategic Studies on Energy and the Environment

29

One knock against going green, some companies insist, is that

direction. “Mexico is building new pipelines to transport

implementing the available solutions can hamper economic

larger amounts of natural gas while developing its own

development. Advocates on the environmental side of the

production, which ensures energy security.”

ledger, say it is quite possible to have both. They even have a term for it: “green growth.” That phrase has been adopted

To complement the increased usage of renewable energies,

by the OECD and other institutions in reference to achieving

the Mario Molina Center is focusing on energy efficiency, an

economic advancement while reducing GHG emissions,

area it feels still requires a bigger effort. “Even though we

a target that is at the heart of the Mario Molina Center’s

have been working on electricity and transport efficiency

strategy to contribute to the environment’s well-being.

regulations, we still lack a national energy efficiency goal.” Barnés points out that the country’s Intended National

The Mario Molina Center for Strategic Studies on Energy

Determined Contribution (INDC), submitted at COP21 in

and the Environment is a not-for-profit organization that

Paris, does not have a specific section on energy efficiency

provides technical analysis to support decision-making

beyond the regulations that have already been mandated.

processes across all sectors. Its main task is to create consensus and engage decision-makers to ensure the

This is where green growth can play a role. The Center has

Center’s proposals and research turn into real-world

published over 10 strategies in the last four years targeting

solutions. Within the energy sector, one of the Center’s

energy efficiency in several industries including tourism,

top missions is to boost the adoption of renewable and

construction and automotive. “For example, we are

clean energy technologies in Mexico, keeping in mind the

working with the tequila industry to help them implement

philosophy of green growth. “We worked closely with the

sustainable

government during the approval of the Energy Transition

economic performance.” The future of the power industry,

Law. We studied the feasibility and the potential ways

and specifically renewable energy production, must

of achieving the country’s clean energy targets while

include the government’s involvement across the board.

taking into account our heavily oil-reliant economy,” says

“It should provide a comprehensive regulatory framework

Francisco Barnés, the Center’s Executive Director.

that allows the development of such technologies by the

practices

without

interfering

with

their

private sector,” says Barnés. “However, the government According to Barnés, the country has only scratched the

should also be directly involved in renewable energy

surface of its renewable energy potential. Even though

generation

significant progress was made with the power auctions,

following CFE’s legal division.”

through

several

state-owned

enterprises

Mexico’s promise in this area is much greater. Still, it would be impossible to rely solely on renewable resources due

The remaining challenges are plentiful, Barnés says, but

to the country’s growing electricity demand, which is why

the experience of other countries transitioning to a low-

a combination of fossil fuels such as oil and natural gas

carbon economy must be an example of what can be

will still prevail in the national energy matrix. “We need to

accomplished through collaboration and hard work.

diversify the energy mix, including both natural gas and

Policies must be integrated with the right amount of

renewable energies,” he says.

regulation and financing, research must identify market gaps and develop ways of brigding them, technology

With the low cost of natural gas from the US, attributed

developers must continue researching to make green

to a surplus of the fuel there, the hydrocarbon is a viable

tools cost-efficient and power companies must seek to

alternative to more polluting fossil fuels. This presents

integrate sustainability into their whole business strategy.

an opportunity for Mexico, says Barnés. The expansion

If everyone contributes, the Mexican economy itself can

of the national pipeline network is a step in the right

soon be an iconic example of green growth.


VIEW FROM THE TOP

PROSPECTS ABOUND FOR DISTRIBUTED ENERGY VÍCTOR RAMÍREZ Executive Director of the National Solar Energy Association (ANES)

30

Q: What were the highlights of 2016 for the Mexican solar

the national economy. The cost of energy in centralized

energy industry?

systems is also affected by the technical and nontechnical

A: The long-term power auctions were among the year’s

losses happening during transmission and distribution,

major milestones as most of the awarded megawatt-hours

which is not the case for distributed systems, which

and CELs were given to solar energy companies. Indeed,

decreases the need to invest in transmission infrastructure.

60 percent of the new energy that will be injected into the grid from 2018 as a result of the auctions will be from solar.

Around 2 percent of Mexicans still lack electricity

Mexican solar energy saw exponential growth in 2016 that

access and serving their needs will be cheaper through

exceeded all expectations. But even with the great advances,

distributed generation as most of these Mexicans live in

the amount of solar capacity that will be installed is still low

isolated rural communities. Rural electrification is also

considering the potential. We are therefore looking at new

an interesting option for SMEs that can obtain financing

niches beyond the power auctions to boost solar energy

through the Ministry of Energy’s fund for universal

production, for instance, distributed generation.

access to energy.

Around US$4.1 billion will be invested in solar as a result of

Q: What more is needed to encourage commercial and

the power auctions while the potential of distributed energy

high-consumption residential users to invest in solar?

just considering users under tariff two, the commercial tariff,

A: We need a more aggressive marketing campaign

and the domestic users under the high consumption scheme

that promotes the benefits of solar technologies. But

(DAC) could reach US$20 billion. Moreover, distributed

we also need to ensure there are regulations in place

generation is much more widespread than utility-scale,

guaranteeing the system’s quality. Using low-quality

allowing the entry of a higher number of SMEs into the solar

products or poor installation services might lead to the

energy business.

system malfunctioning, which impacts negatively on solar energy’s image in the market. I recently saw a solar heater

Q: What advantages does distributed generation provide to

on a building’s rooftop facing north, with an adjacent

the economy over traditional, centralized energy?

building projecting a shadow over it. Of course that solar

A: Distributed generation is a large market in which SMEs and

heater would never work properly and the owner might

big companies can step in. We are already seeing investment

think it is because solar energy is not reliable.

interest from big names in the sector. For instance, Solar City has come to Mexico’s retail market, even acquiring the

We need to ensure there are protocols and norms

Mexican company ILIOSS to gain a stronger position in the

guaranteeing that the technology and the installation have

country. There are also plenty of opportunities for lower-

the proper quality standards so consumers can enjoy solar

scale players, particularly as the Reform has promoted new

energy’s benefits. ANES has been working hard on the

initiatives to support SMEs with the training and technical

creation of official national norms (NOMs) for solar panels

skills needed to capitalize on this market.

and heaters, which we expect to become a reality soon as it is a priority for us and the government to promote

The solar industry also is known as the energy source that

further solar capacity.

creates more jobs per megawatt installed, mostly thanks to solar rooftop applications, which also positively impacts

Q: Some solar companies say financing is a barrier to exploiting solar’s potential. What can be done to bring

The National Solar Energy Association (ANES) is a nonprofit

banks on board?

organization designed to promote the development of solar energy in

A: The solar market can be divided into two parts. The

Mexico. It is comprised of dozens of companies in the Mexican market.

first is the MEM where the scale and longer terms of the


contracts awarded in the power auctions ease access to

A: Solar energy will represent at least 3 percent of

credit for solar projects. The major problem is in the retail

the total electricity consumed in Mexico by 2018, just

market, which is more relevant for distributed generators,

considering that the power auctions’ winning projects

because we have not yet seen special credits available from

will cover 5 percent of Mexico’s electricity demand

commercial banks for electricity users willing to invest in

and 60 percent of this power will be produced in solar

solar technologies. Part of the issue is that banks do not

parks. Solar energy has demonstrated it is the cheapest

yet understand that solar technologies are not only an

technology available in the market, not only in the

asset but also enable users to reduce expenses, recovering

Mexican power auctions but worldwide, offering prices

investments in a maximum of 10 years while increasing

around US$40 per MW/h, under natural gas-based

repayment capabilities. Financing solar technologies is a

technologies. Moreover, the construction of solar parks

good business for banks but they need to be aware of it.

is simpler in terms of logistics than other technologies,

We have already seen a greater availability of financing

which make it even more attractive. The generation costs

schemes for energy-efficiency projects and we expect

of solar energy drop even lower every month so I expect

solar to follow this trend soon.

solar to be the most attractive energy source in the near future, even reaching higher capacity than that projected

Q: What is your perspective about CFE Solar, given CFE’s

by the Ministry of Energy.

advantages in the market’s basic segment? A: One of the Energy Reform’s main objectives was

Q: What topics will be on ANES’ agenda for 2017 to

to eliminate monopolies. We are worried about CFE

continue driving solar energy forward in Mexico?

Solar affecting the sector’s growth due to its former

A: Our top priority is to enhance the market’s trust in

monopolistic nature and advantages of the basic users’

solar technologies, promoting norms and regulations that

segment such as historic consumption patterns, which

ensure solar products and services are always delivered

might be considered disloyal competition. We, as an

correctly. We want to raise awareness about solar energy’s

association, are helping SMEs and larger companies enter

viability and the fact that it is the cheapest energy source

the Mexican solar market and we expect to help them

at the moment. Solar panels require a considerable initial

create a level playing field so they can compete with CFE

investment but will create savings for the next 30 years

Solar under fair conditions. We consider that developing

and we want people to be aware of this. Thermal solar also

innovative business models and adding value in terms of

offers savings to both residential and industrial users in

customer services will be key for companies to increase

process heat. Distributed generation has grown about 85

competitiveness in this market.

per cent each year and can grow faster. We just need to have clear rules and financing available to make solar the

Q: What are ANES’ projections regarding the growth of

energy source of the future and we are working on both as

solar installed capacity in the next 10 years?

part of ANES’ agenda.

PV panels installation, Morelos, INEEL

31


VIEW FROM THE TOP

MEXICO-SPAIN ENERGY LINK BROADENS JOANA TORRENTS 32

Director General of the Spanish Chamber of Commerce (CAMESCOM)

Q: What elements of the Mexican market have made it so

new regulations to boost energy production and has

attractive for Spanish energy companies?

ambitious goals regarding clean energy production.

A: Spanish companies are interested in Mexico because it

These two factors have created the perfect landscape for

is an emerging and large-scale market that is strategically

Spanish companies to start operations in Mexico, using

located next to the US and offers significant legal stability.

their skills and expertise to develop successful projects

Mexico also is a widely open market, with a large number

and help Mexico reach its clean energy targets.

of international agreements in place. The advantages of the market here have become even more attractive to Spanish

Q: How has the Energy Reform impacted the commercial

companies after the economic crisis, which hindered the

relationship between the two countries?

conditions for new business development in Spain. The

A: Since the early stages of the Reform, Mexico has

business relationship between Mexico and Spain is not new.

worked to communicate to the world the objectives

A great number of modern Spanish enterprises have been

of the new legislation as well as the country’s interest

present in Mexico for over 30 years. Currently, there are

in attracting international investment. The Spanish

around 6,000 Spanish companies across different sectors

Chamber

operating in the country and that presence has increased

entities, has taken advantage of Mexico’s openness to

considerably in the last five years due to the conditions of

disseminate the message and highlight the business

the European market, which have pressured companies

opportunities this represents to Spanish companies.

to expand their operations globally. In the case of Latin

Particularly in the energy industry, the Reform has

America, the cultural proximity and the shared language

created great expectations, promoting a stronger

are two other important factors that attract Spanish

exchange of information and enhancing the commercial

companies thinking of expanding beyond Europe. Among

ties between the countries. The boom from the Energy

Latin American economies, Mexico particularly stands out

Reform has impacted businesses of all sizes and from

because it has shown positive growth for the past few

different subsectors, such as consulting, engineering

years and has put in place a range of structural reforms

or manufacturing, and has boosted the inflow of new

that have attracted the interest of international investors.

Spanish companies into the Mexican market.

Large Spanish companies such as Gas Natural Fenosa, ACCIONA and Iberdrola are playing an important role in Mexico’s new energy market development

of

Commerce,

like

other

international

Q: What are the main challenges faced by Spanish companies here and how can the Spanish Chamber of Commerce help? A: A generalized issue is the legal uncertainty resulting from the newness of the Reform, which has forced companies to wait before moving big investments forward. However, in the past few months we have seen the Mexican authorities take great strides in defining gray areas of the regulations, including sensitive topics like

Regarding the energy sector, Spain plays an important

social impact studies. The main challenge for companies

role thanks to its strong expertise in developing

already operating in Mexico is to keep their businesses

energy projects, particularly in renewables. Besides the

active during this transition period. For those planning

economic crisis, legislative changes in Spain that were

to enter the country, the main challenge is to design

unfavorable for renewable energy projects have also

a strategy to face the fierce competition before the

pushed companies working in the sector to expand to

regulatory framework is completely developed. This

other markets. Mexico, on the contrary, has just enacted

is a major challenge as companies do not want to miss


the Mexican momentum but cannot heavily invest until

some subsectors do have higher potential for investment

the regulations are completely clarified. Moreover, most

or are growing faster than others. The energy sector is

of these companies have little or no experience in the

strongly represented in the Chamber and we give them a

country.

special focus.

In the energy sector one of the key functions of the

Q: How can Mexican companies looking to collaborate

CAMESCOM is to keep Spanish companies informed about

with Spanish enterprises benefit from the Chamber’s

the latest trends and the potential of the Mexican energy

services?

market. During the internationalization stage, when

A: The CAMESCOM has the core objectives of promoting

companies start to move their operations to Mexico, we get

Spanish investment and business in Mexico, as well as

even more involved in helping them shorten their learning

the other way around. Therefore, we focus our efforts

periods. We continue to provide companies with updated

on Spanish companies operating in Mexico but also on

information and networking opportunities to connect with

Mexican companies looking to establish commercial

key entities and players in Mexico, as well as other Spanish

relations with Spanish enterprises. We have a large number

players that could be interesting. For companies based in

of Mexican service providers that have become members

Mexico, we work to keep them informed about legislative

of the Chamber as a strategy for establishing commercial

changes and function as a bridge between them and the

relations with Spanish members. We also regularly

Mexican authorities, institutions and decision-makers. The

organize activities addressed to Mexican companies

three main objectives of the Chamber are to represent,

planning to start operations in Spain.

provide exposure and link the different companies working in this market.

Q: Which energy subsectors do you expect to grow the most after the establishment of the Energy Reform?

Q: What are the specific objectives of the Energy

A: The theme of the electricity tariffs is generating

Commission created by the Chamber?

great interest, mainly due to its key role in the booming

A: All commissions in the CAMESCOM work in a

investment

similar way. A commission is formed by a core group

considerably high compared to international standards

of members that are relevant to the sector. This group

but this is expected to change as the new market evolves.

decides the particular lines of action and objectives of

Even though Mexico has always been an attractive

the commission. At the same time, there are different

market for Spanish companies, the high electricity tariffs

working groups within the commission in which all the

have also represented a barrier to establishing certain

members of the Chamber can participate according to

productive enterprises in the country. We are working

the guidelines established by the core group. Within

on communicating this situation to Spanish companies,

the energy commission there are four working groups

highlighting the opportunity that dropping electricity

focused on the electricity, oil and gas, sustainability and

tariffs could bring for productive investment in Mexico.

renewable energy subsectors.

Renewable energies are another subject attracting the

in

Mexico.

Local

electricity

tariffs

are

attention of Spanish companies. In general all commissions have the same objectives: collaborate with the Mexican authorities to exchange

Q: How does the Chamber plan to continue providing

knowledge and best practices, coordinate events with

support to companies working in the energy sector?

Mexican entities involved in the sector, network with

A: In the near future we plan to continue with the same

relevant players in the industry and participate as a key

line that we have been following in the past few years,

agent in the improvement of the business structure of the

keeping companies updated about the latest trends in the

sector, represent the different voices and viewpoints of

market and providing training services for our members.

Spanish companies before the Mexican government and

In this regard, the energy commission is already working

create analysis and communication tools to enhance the

on special programs to train human resources in various

knowledge and skills in the sector.

areas of interest, including renewables. The commission is mobilizing the resources needed to create an Energy

Q: What role does energy play in the portfolio of industries

Club in Mexico, based on the Spanish counterpart that is

within the Chamber’s scope?

dedicated to providing training and knowledge exchange

A: As an entity focusing on strengthening commercial

for companies working in the energy industry.

and investment relations between the two countries, all industries hold the same importance in our agenda.

CAMESCOM is an association of Mexican and Spanish businesspeople

Similarly, we give equal weight to the four working groups

working for over 100 years to promote and improve economic activity

involved in the energy commission. But we are aware that

and trade between Spain and Mexico.

33


RESEARCH

RENEWABLE RESOURCES IN THE PASO DEL NORTE REGION

The Paso del Norte border region, including Ciudad Juarez in Mexico and the US cities of El Paso and Las Cruces, enjoys a wealth of energy sources and provides support to the broader Mexican and US energy markets. Solar, wind and geothermal resources are in abundance. While renewable sources constitute a relatively small portion of the region’s energy, the incorporation of these resources, particularly solar energy, is growing. Following is an excerpt from the Hunt Institute for Global Competitiveness’ “Paso del Norte Energy Sector Review” from fall 2016:

34

The renewable energy resources located in the Paso del

accelerated pace and electricity generated by this

Norte region, particularly solar, wind, and geothermal,

renewable energy resource is increasingly competitive.

hold significant potential. The US currently generates

Since 2008, for example, solar energy output has grown

11.1 percent of its total energy from renewable energy

seventeen-fold in the US, from 1.2GW to an estimated

resources, and Mexico 7.6 percent, noticeably lower

20GW in 2015, enough energy to power almost 4 million

than the use of hydrocarbons in both countries. While

homes. With this expansion of scale, the costs associated

renewable sources are not presently a large share of the

with such infrastructure, and the price of the energy it

energy sources that the region utilizes, much like the US

generates, continue to decrease. In addition to the utility-

and Mexico at the national levels, growth in the inclusion

scale solar infrastructure, the cost of distributed rooftop

of these energy resources in generating electricity has

solar photovoltaic panels in 2014 was approximately 50

grown substantially in recent years, and that trend is set to

percent of what it was in 2011. But, physical and market

accelerate both regionally and binationally. Two principal

barriers and grid integration, specifically given the remote

reasons for this acceleration are the requirements to

location of the massive solar energy resources, continue

integrate more renewable energy sources into the grid,

to keep solar energy relatively expensive, especially when

commonly known as Renewable Portfolio Standards (RPS),

compared to energy produced by hydrocarbons.

and financial and tax incentives to stimulate investment in renewable energy infrastructure. Much like the extraction

Mexico

currently

possesses

little

solar

energy

and transmission of hydrocarbons, the harnessing and

infrastructure with 64MW of total installed capacity.

delivery of these renewable energy resources to the end

Nevertheless, the Mexican government has ambitious

user also must contend with the significantly divergent

plans to expand and expects to increase the use of solar

physical and regulatory infrastructure that converge in the

power from 64MW in 2014 to 627.5MW by the end of 2018.

Paso del Norte region.

Nevertheless, Mexico recently placed a 15 percent tariff on imported solar panels that could frustrate attempts

SOLAR

to reach solar energy production targets. The State of

The US and Mexico, and the Paso del Norte region in

Chihuahua is among several states in the initial phase of

particular, have some of the most abundant solar

installing solar energy capacity. In 2014, the majority of

resources in the world. Across the US, the annual average

Chihuahua’s installed capacity for energy was dominated

irradiation is 4.6 kWh/m . Texas and New Mexico, though,

by fossil fuels (98.6 percent). The remaining (1.4 percent)

have a comparative advantage with respect to the levels

included hydroelectric power and biogas. But, by the year

of solar irradiation, with average levels of 5.4 kWh/

2020, solar energy projects in the State of Chihuahua are

m2 and 6.4 kWh/m2, respectively. For El Paso and Las

expected to increase solar energy production by more

Cruces, the annual average irradiation is 6.6 kWh/m . In

than 9 percent. One of those projects is the recently

Mexico, the highest levels of solar irradiation are in the

operational solar farm, Los Santos Solar I, a 15.82MW solar

northwestern part of the country, with an annual average

facility in the municipality of Villa Ahumada, Chihuahua.

irradiation of 6 kWh/m2.

This project obtained its certification in April 2015 and

2

2

will provide electricity to an estimated 5,838 households. The State of Chihuahua leads Mexico with an average

And, while Ciudad Juarez hosts a major SunEdison solar

solar irradiation of 6.27 kWh/m . Similar to El Paso and

panel factory that annually exports 1.3 million solar panels

Las Cruces, Ciudad Juarez possesses high levels of

to the US, the city generates very little solar energy. A

2

solar irradiation with an average of 6.7 kWh/m (with a

new solar energy infrastructure plan, managed by the

minimum of 5.9 kWh/m2 and a maximum of 7.4 kWh/

CRE, to generate 188MW for the city has recently been

m ). Mexico Solar energy markets are growing at an

approved.

2

2


WIND

recent demonstration of a technically viable geothermal

In the US, Texas and New Mexico, like other plains states —

system on the Fort Bliss Military Base in El Paso County.

such as North Dakota, Kansas, Montana, Nebraska, Wyoming,

Currently, though, only one active facility is present in

Oklahoma, Iowa, and South Dakota— all have excellent

the region. Texas has a strong advantage in geothermal

wind energy potential. Texas ranks first in the nation in

energy. One such area is the tectonically active area of

wind energy production (and sixth globally), while New

the Rio Grande Rift that begins in Colorado and continues

Mexico ranks 12th nationally. As of 2015, Mexico ranks 18th

southward through New Mexico and Texas along the Rio

in the world in installed wind energy generating capacity.

Grande and then terminating in the Big Bend region. Areas

The highest amounts of wind energy sources in Mexico are

with geothermal resources potential can therefore be

present in the State of Oaxaca, located in the south of the

found in the Presidio Bolson, Hueco Bolson, and the Big

country. In the Paso del Norte region, El Paso and Las Cruces

Bend area. The Counties of El Paso, Culberson, Hudspeth,

have an annual average wind speed of approximately 4.8

Jeff Davis, Presidio, and Brewster could potentially make

m/s to 5.4 m/s. The State of Chihuahua and Ciudad Juarez

use of geothermal resources. Although geothermal energy

also possess significant wind potential. The US is among the

only produced 0.1 percent of the state’s total output of

leading countries in the generation of wind energy, with an

electricity, New Mexico contains, compared to other states,

installed wind energy generating capacity of 74,472MW. In

important geothermal resources.

the US, Texas leads wind energy generation with 17,713MW of installed capacity from 116 wind projects. New Mexico

Mexico is among the top five countries in the world utilizing

exhibits considerable potential for wind energy generation

or poised to employ geothermal energy generation with an

as well, and wind power currently contributes more than 6

installed capacity of approximately 823MW. The CFE has

percent of New Mexico’s electricity generation. New Mexico,

identified geothermal reservoirs in Mexicali, Baja California,

like Texas, is among twelve states located in the middle of

to the south of Imperial Valley, which has Mexico’s largest

the country that collectively have 90 percent of the total

geothermal energy plant, Cerro Prieto. It is also the second

commercial wind electricity potential in the US. New Mexico,

largest geothermal plant in the world and maintains an

though, is just beginning to utilize wind energy with a total

installed capacity of 720MW. Mexico also has geothermal

installed capacity of only 750MW.

resources in the State of Chihuahua, particularly in the Maguarichi zone, located in the southwestern part of

Mexico utilizes considerably less wind energy facilities.

the state along the Sierra Tarahumara, and eight other

Globally, Mexico ranks 24th worldwide, with an installed

states that could potentially generate more than 5,691MW.

capacity of only 1,900MW. Nationally, the CRE has

Another area with geothermal resources in the state is San

established an ambitious goal of creating 12GW of installed

Antonio El Bravo, near Ojinaga, Chihuahua, with an average

capacity by 2020. In an effort to reach this goal, the CRE

potential of 36MW. The CFE is set to increase its installed

has approved various projects with an authorized capacity

generation capacity by 17,092MW between 2014 and 2020.

of 3,339MW. To date, though, and in spite of the wind

New construction and upgrades associated with these

energy potential in the State of Chihuahua, no major wind

generating capacity upgrades will account for 71 percent of

projects exist there.

the budget with wind power making up 14 percent, and the rest allocated to hydroelectric geothermal and gas turbine

GEOTHERMAL

plants. Projects associated with this increase will require an

Geothermal energy has been a small, yet consistent, source

estimated total investment of approximately US$45.8 billion.

of electricity in both the US and Mexico, mostly located

In 2015, the Ministry of Energy granted 13 permits to explore

near tectonic plates. Indeed, most of the geothermal energy

geothermal resources and five concessions to continue

produced in the US and Mexico originates in Imperial

generating energy from certain fields in the States of Baja

Valley border region in southern California and northern

California, Baja California Sur, Puebla and Michoacan. And, in

Baja California. But recent advances in technology have

2016, it granted three new exploration permits for sites in the

broadened the potential of geothermal resources in other

States of Baja California, Guanajuato and Jalisco.

areas. While the US is already the world’s leader in terms of total installed capacity for utilizing geothermal energy with

The Hunt Institute for Global Competitiveness is a multidisciplinary

3.5GW, the US Geological Survey (USGS) has identified

research platform working to foster a broad and open discussion on

potential for geothermal energy production in 13 western

the Paso del Norte region’s development, focusing on two principal

states of up to 16,457MW from known geothermal systems.

objectives: data generation and economic analysis. The Institute

Since 2001, geothermal deposits have increasingly been

maintains a publicly accessible database of official sources from the

confirmed in other western states, including New Mexico

various jurisdictions in the Paso del Norte region, serving as a centralized

and Texas. The Paso del Norte region also has a strong

resource for knowledge regarding the region’s economy, infrastructure

base from which to produce geothermal energy, such as

and institutions. Website: http://huntinstitute.utep.edu

35


Bii Hioxo wind farm, Oaxaca, Gas Natural Fenosa


OPERATING FRAMEWORK

2

The opportunities are there for the taking. Mexican and international players can now enter the energy market as generators, suppliers, off-takers and merchants. Legacy holdings can still use the pre-Reform framework but the updated contracts offer many options and much flexibility. There is also a previously uncommon ripple effect: the financial uncertainty of an open market ruled by supply and demand. Developers, heavy manufacturing energy users and industry associations are also waiting for the final pieces of the puzzle to fall in place, such as the guidelines for the Social Impact Assessments (SIAs) that relate energy developments to the communities they will interact with and which can make or break a project.

In this chapter, legal consultants and attorneys who took part in drafting the new rules discuss the Reform’s initial outcome, alongside the consultants who are advising clients spanning from China, Europe and the US on how to better position themselves to succeed in the changing Mexican power industry. They also discuss potential areas of improvement on the horizon. Knowledge, they would say, is definitely power.

37


CHAPTER 2: OPERATING FRAMEWORK 39

40

ANALYSIS: Escaping Limitations, Facing Uncertainties

41

INSIGHT: Israel Hurtado, AMDE

42

VIEW FROM THE TOP: Jorge Sandoval, Goodrich, Riquelme y Asociados

44

VIEW FROM THE TOP: Derek Woodhouse, Woodhouse Lorente Ludlow

Luis Fernández, Woodhouse Lorente Ludlow

46

INSIGHT: Edmond Grieger, Von Wobeser & Sierra

47

VIEW FROM THE TOP: José Prado, Holland & Knight

48

VIEW FROM THE TOP: Claudio Rodríguez, Thompson & Knight

50

VIEW FROM THE TOP: Jimena Elizondo, Rodríguez Dávalos Abogados

51

INSIGHT: Andreas Voss, Rödl & Partner

Rafael Torres, Rödl & Partner 53

INSIGHT: Pedro Reséndez, Greenberg Traurig

54

VIEW FROM THE TOP: Loïc Le Gall, EY

56

VIEW FROM THE TOP: Nicolas Melissas, Athena Consulting

57

VIEW FROM THE TOP: Ruth Guevara, Zumma rg+c

Jonathan Pinzón, Zumma rg+c

58

VIEW FROM THE TOP: Eduardo Reyes, PwC | Strategy&

60

VIEW FROM THE TOP: Rubén Cruz, KPMG

62

VIEW FROM THE TOP: Jim Heidell, PA Consulting

64

VIEW FROM THE TOP: Severo López, Galo Energy

65

INSIGHT: Soffia Alarcon-Diaz, The Carbon Trust


ANALYSIS

ESCAPING LIMITATIONS, FACING UNCERTAINTIES Laws, regulations and government agencies are not usually

and they are very efficient. In Mexico, since it is something

associated with speed. But 2016 was the year the Mexican

new, there is still a lack of information, which generates

energy sector achieved escape velocity from over 70 years

uncertainty regarding the process,” says Rubén Cruz, Energy

of a state monopoly in electricity. The segment landed in a

& Natural Resources/Industries Lead Partner at KPMG.

newly liberalized and dynamic market where options have 40

multiplied for power generators and users, and where the

Even as no one disputes the importance of SIAs and of

forces of supply and demand are expected to lead the

providing benefits to communities potentially affected by

development of a new economic paradigm for the industrial

energy projects, that regulation in particular casts a long

economy in Mexico.

shadow over both developers, lawyers and consultants as Mexico’s byzantine land-ownership legal framework

The new rules originating from 2013’s Energy Reform

makes taking control of the land needed for typically

survived a trial by fire with the first two long-term electricity

expansive solar parks and wind farms, not to mention gas

tenders held by CENACE and showed that Mexico is

pipelines, something close to a nightmare, according to

motivated to quickly develop the field of renewable energy

several market players.

generation. The ejido regime where communities control state-owned “The past 12 months have been the most dynamic in the

land is a particular source of commentary. And the short,

power sector this decade. Driven by the Energy Reform

90-day time frame allotted to this particular process

and resulting regulations, the market has changed,” says

has also been mentioned as a possible stumbling block

Eduardo Reyes, Partner Power & Utilities at Strategy&,

to a project’s completion. Those rules were still under a

PwC. That sounds like an understatement, as many new

consultation process in Mexico by 2016’s end. “The level

market roles where created, such as the qualified supplier

of uncertainty surrounding land acquisition processes is

expected to take on an increasingly important role as the

definitely a top concern in the industry as having right of

spot market gathers steam. The bases also were set for

way or land rights secured is crucial in the project financing

further developments such as the handing over of the

stages, particularly in Mexico where several land regimes

auctions from the market control entity CENACE to the CRE

exist and it is a complex task,” José Prado, Partner at legal

regulator, which is expected to happen in 2017.

firm Holland & Knight, says.

“Many tasks lie ahead to mobilize

Additionally, announcements made by US President Donald Trump about the renegotiation of trade deals with Mexico

new investment, develop regulations

and future US investments in Aztec lands could also cause

and institutions but the initial signs

sector because the country’s dependence on exports

are positive”

downturn. “If the new US government renegotiates NAFTA,

Mexico Energy Outlook, IEA

hesitation about pouring heavy investments into the energy to its northern neighbor could bring about an economic it could push Mexico into a recession,” says Nicolas Melissas, Director General of Athena Consulting.

But concerns remain. The testing phase is not nearly over

Financing is also a nagging worry as companies say banks

and there are many in the market still worried about how

are still unsure about the risk of lending money to long-

dominant a role the now-separated CFE’s units will continue

term projects such as utilities. The new PPAs signed with

to play in the market. They are also awaiting the rules for

CFE in 2016’s auctions last 15 years, much shorter than the

the mandatory Social Impact Assessments (SIAs) that have

life expectancy of most projects, which causes uncertainty

the power to make or break a billion-dollar investment and

regarding payment for the remainder of the project’s life.

are looking to see how the market will play in the long run.

But with over US$6 billion in projects to finance just from the auctions and development banks and international lenders

“The danger of participating in these schemes today is

like the IADB supporting Mexico’s energy development,

related to a lack of information rather than actual market

most players remain confident that Mexico’s banking system

risk. These markets are in place in several parts of the world

and capital markets will soon follow suit.


INSIGHT

MOVE TOWARD COMPETITION A COMPLEX PROCESS ISRAEL HURTADO President of the Mexican Association for Energy Law (AMDE) 41

The enactment of the Energy Reform has shifted the

The Energy Transition Law was approved in 2015, fixing the

country’s focus since 2013, following changes to the

roadmap in place to meet the international goal of clean

constitutional, legal and regulatory structure relating to the

energy use and generation. It also dictates a program

energy sector. The focus of the sector is sound strategic

to combat climate change up to 2025, which is when

investments in deepwater and onshore exploration of

Mexico must sustainably produce 35 percent of its energy.

oil fields, as well as the expansive growth of the national

Undoubtedly, that ambitious target will put pressure on

network of gas pipelines and the increasing competition

some industrial sectors that depend on natural gas or fossil

among gas stations on service and product quality.

fuels for their operations but the global trend is toward

Developments in natural gas and fossil fuels must benefit

green industry and renewable energy sources. The Energy

the population as much as clean energy generation, which is

Transition Law puts Mexico in line with this commitment.

also emerging as a prominent opportunity area for Mexico. Electricity generation is increasingly shifting toward solar, wind and geothermal energy, which will eventually have a knock-on effect on prices and offset the damaging impact of fossil fuels on climate change. Private and publicly owned companies have reacted to the Energy Reform with investments in technology and expertise-building and the industry has attracted further capital from abroad. National and international entities have responded favorably to bring Mexico up to date and out of the monopoly that PEMEX and CFE held in their respective

“The global tendency is toward green industry and renewable energy sources. The Law of Energy Transition puts Mexico in line with this commitment�

sectors. Moving toward greater competition has been the

Israel Hurtado, President of the Mexican Association

most complex part of the Reform. But now that PEMEX and

for Energy Law (AMDE)

CFE will compete fairly among all oil and gas-extraction and electricity providers, with subsidies and isolation that

Social responsibility was included in the creation of the

favored them as state-owned companies removed, interest

Reform. The Energy Industry Law covers sustainable

in participating in the new markets has taken off.

development and protection of human rights. Respect and guaranteed protection of indigenous communities within the

An increase in foreign direct investment in the country is

regions that undergo energy developments is stipulated in

visible in the industrial sector and construction of industrial

the law, which dictates they be consulted before beginning

parks. This is a result of access to more competitive

any project that might affect their interests and rights. This is

energy prices in the wholesale electricity market and

an important topic as most of these communities are located

associations that have united companies based in the

in strategic spaces for energy projects.

same industrial parks to access electricity together. These same associations can now also install solar panel farms

The evaluation of energy projects must be approached as

within their industrial parks or close by. Transactions in the

a management process, not as a product to manufacture.

wholesale electricity market have great substance since

Opportunities and advantages can emerge from energy

they permit energy to be commercialized. These benefits

developments for the population but they can also impair

must reach industrial parks and those companies within

local quality of life. It is fundamental that we carry out clear

them, who can choose different energy providers instead

and fair project management to promote the resulting

of CFE to supply their operations.

benefits and prevent consequential damage.


VIEW FROM THE TOP

SOLID REGULATION: THE ROAD TO COMPETITIVENESS JORGE SANDOVAL Associate at Goodrich, Riquelme y Asociados 42

Q: How does Mexico’s energy regulatory framework stack

includes another mechanism to incentivize participation

up against international standards?

of renewable energy projects in the market: auctions that

A: The government has done admirable work in preparing and

allow companies to sign long-term PPAs for selling CELs,

applying the Energy Reform, developing a legal framework

capacity and clean energy.

to transit from a monopoly to a liberalized market. However, the Wholesale Electricity Market (MEM) created as a result

Q: What are the potential benefits and disadvantages that

of this reform is extremely complex and the government also

long-term contracts offer to renewable energy developers?

has established tight deadlines that are difficult for private

A: The government established special auctions to sign long-

participants to comply with. The basis of the legal framework

term PPAs for energy, capacity and CELs to provide more

is adequate but the rules are constantly shifting, which brings

financial certainty to renewable energy project developers.

uncertainty to the market. This, combined with the vast

The government first established a 10-year period for the

amount of information that new players must process, has

PPAs that was insufficient for this purpose and it was later

delayed the inclusion of private participants in the electricity

decided that the contract length would be extended to

sector. The MEM began operations in January but only CFE

15 years, an improvement despite the fact that a 20-year

participated as a generator and qualified supplier.

time frame would have been more appropriate for energy projects. Long-term auctions also provide a solid opportunity

Q: How has the reform made renewable energy projects

for renewables to enter the market and participate in energy

attractive to international investors?

generation and supply. To understand the exact benefits this

A: The Energy Reform is promoting major changes in the

scheme will bring to renewable projects we would have to

country to eradicate monopolies in the oil and gas and

evaluate the periodicity of the auctions and the evolution

electricity sectors. Particularly in the electricity industry,

of prices, which are not favorable for some renewable

generation, transmission, distribution and supply used to

technologies. CFE has reported its highest financial losses

be carried out exclusively by CFE. In the case of electricity

in years and we expect that at some point electricity prices

generation private entities could participate under certain

will be readjusted to avoid bankruptcy at the state-owned

regimes such as self-supply, cogeneration or the small-

company and boost private participation in the market.

producer scheme but these were the only ways in which

Otherwise, Mexico will continue to have a monopoly within

private companies could generate and consume their own

a liberalized market.

energy and it did not allow them to trade electricity. Now the country has a liberalized market in which CFE remains

Q: What encouraged the prevalence of M&As in the

the main player, which makes the market’s structure even

country’s electricity sector?

more complex.

A: The guarantees required to take part in the wholesale electricity market are significant. It is also difficult to have

Although CFE has already split its business units, in practice

the financial and technical capabilities to participate.

it might take years to end its monopoly over the market. It is

Companies are now more willing to merge to complement

also important to highlight that the purpose of the electricity

financial capacities with technological assets and vice

reform is not to promote clean energies but to reduce prices.

versa as a strategy to participate in the auctions organized

The Mexican market is based on the Pennsylvania, Jersey,

by CENACE. In the past few months, we have seen

Maryland (PJM) model, which corresponds to a pricing

an increase in M&A cases in our practice and we have

market. At the moment, the only available incentives for

represented a significant number of companies in this

renewables are Clean Energy Certificates (CELs) and the

process, especially for the latest long-term power auctions.

distributed generation plan, which includes net metering

We represented solar company ILIOSS, which has been

but is only applicable for projects under 0.5 MW. The MEM

acquired by SolarCity, the largest solar company in the US.


After the acquisition went through we kept in contact with

Q: What are the main challenges facing the Mexican energy

SolarCity/Ilioss and we know the company plans to invest

industry in the coming years?

about US$1 million in Mexico. We also are helping them to

A: The country is not accustomed to a liberalized market

develop their business in the country.

and the old energy trading schemes have deep roots in the national mindset. The main challenges are to develop

Q: How are PPPs helping boost renewables and what

the market and incentivize private entities to participate.

challenges did you face establishing one in Sinaloa?

Otherwise Mexico will not achieve its climate change

A: This project is related to a 25-year PPP contract between

and clean energy targets, as CFE alone is not capable of

a solar energy producer and the government of Sinaloa. The

this. Without competition the country will face enormous

main challenge was to obtain the majority approval of the

challenges in offering low-cost and efficient energy, which is

state congress, a requirement of Sinaloa’s legal framework for

the key objective of the Energy Reform.

PPPs. The project won approval and was carried out under the old self-supply scheme, with all its benefits included.

Another challenge is to transform Mexico into a competitive

We believe that PPP is one of the key elements to boost the

country for the private sector and eliminate the current

use of renewables in Mexico, particularly considering the

monopoly. The complete transformation of the market is

high energy consumption of municipalities. Unfortunately,

expected to take up to 20 years because it is not possible

the new energy framework does not allow municipalities to

to eliminate a monopoly in a short period. But we are

participate as qualified users, which excludes a considerable

confident that the country has the foundations to grow in

number of projects.

the right direction and that the government is working hard to understand the needs of the private sector and include

Q: How have the processes changed for obtaining permits,

its concerns in the new electricity market. To help with this

licenses or authorizations for renewable energy projects?

transition, we are creating a dialogue between the private

A: Companies are only required to obtain a generation

sector and the authorities to ease the negotiations and we

permit when their power facilities have a capacity

are making our voice heard to ensure that Mexico becomes

equal to or higher than 0.5MW. In such cases renewable

more competitive in the coming years.

energy developers do not need to pay the generation permit fees introduced as an incentive for these types of

The country has great potential to develop renewable

technologies. We have lobbied CENACE to lower the costs

energy, not only natural gas-based projects. The MEM lacks

of interconnection feasibility studies as it charges small-

certain instruments that would be desirable but it is a fairly

scale companies about MXN$800,000 for these. This is

competitive market. In general, the work performed by the

excessively high and represents a considerable barrier for

authorities in the last 18 months is admirable and they are

small and medium-sized energy projects in the country.

open to listening to the industry to continue improving the

CENACE has been open to listening to our comments and

framework.

it is analyzing the possibility of decreasing its fees. From a tax perspective there also are incentives for renewables,

Goodrich Riquelme y Asociados is a Mexican law firm with over 75

such as tax-free purchasing or accelerated depreciation of

years of experience and a strong presence in the oil & gas and energy

renewable energy equipment.

sectors.

43


VIEW FROM THE TOP

THE JOB OF UNBUNDLING CFE

44

Derek Woodhouse Partner at Woodhouse Lorente Ludlow

Luis Fernández Senior Associate at Woodhouse Lorente Ludlow

Q: What role have Mexican law firms played in the

from using the name “CFE” but that was one of the battles

enactment of the Energy Reform in the last three years?

we lost. We are satisfied, however, that the separation

A: It was a small role at the beginning of the process

is happening in practice even if they use similar names.

but 18 months ago the government realized it needed

We have already observed some competition among

lawyers to draft the regulatory framework so it launched

CFE’s units to keep the best employees on their side.

a call for bids. CMS Cameron McKenna, our partner firm,

For us, that is a good sign that the unbundling process

and Woodhouse Lorente Ludlow competed against two

is moving forward.

other firms and won the bid, later helping the Ministry of Energy draft the electricity market rules and the

Q: Can private companies really compete against CFE’s

guidelines for CFE’s restructuring. We had contact with

subsidiaries and affiliates under this scenario?

several industry players during this process, including

A: Private companies were greatly concerned about CFE

other law firms and consultancies, and we observed a

being too strong to compete against but the state-owned

worrying lack of expertise in energy regulation matters,

utility has the disadvantage of being slow by nature. CFE

particularly regarding the electricity market. An open

had no competition before so it was used to doing things

power market is new to all in the industry and new

in line with its own rhythm and not the market’s. It now

guidelines and regulations are being drafted, so it

faces the challenge of changing its mindset to become

is difficult for Mexican law firms to catch up with this

competitive. Private companies are more likely to win

process. We think the situation will get better as the

contracts than the public entity so it is necessary for CFE

market evolves but the learning curve is still high for

to speed up the unbundling process and ensure its new

most of our competitors.

management has a commercial mindset.

Q: As part of the team that drafted the guidelines, what

Q: Which of the market regulators will be in charge of

is your perspective of CFE’s restructuring process?

ensuring the market is actually competitive?

A: We were not completely satisfied with the outcome

A: It is a shared responsibility among different public

because we only reached half of what we wanted. We do

entities. There are two levels of competition that need to

acknowledge, however, that breaking up a huge player

be created in the market. The first is to avoid monopolistic

while maintaining its competitiveness and creating a level

practices,

playing field for everyone else was a titanic enterprise. It

Mexico’s competition authority, while the second level

will take time to complete the unbundling process but

of competition is more related to the daily market

we feel Mexico is moving in the right direction. Where

operations and will be the responsibility of CENACE and

we are now is enough to allow for competition and that

the surveillance mechanisms operating in the market.

makes the industry happy.

We call this second competition level “market efficiency”

which

will

be

overseen

by

COFECE,

to avoid confusion with COFECE’s jurisdiction but it The restructuring guidelines also have provided enough

actually refers to maintaining a competitive environment

incentives for CFE’s subsidiaries to act as independent

in the market.

entities, which was another factor to consider. Each subsidiary now has its own budget and must provide

CRE has already created a special division focusing

independent results so they have to plan and work

on the market’s efficiency and a privately owned

separately or they will risk their business. We now need

independent unit will also be present to act as a market

to erase the image of CFE as one huge company because

monitor. Both figures will have a more rapid response

that is no longer the case. To help the energy sector and

than COFECE and will be crucial for identifying and

the company itself we wanted to prevent the subsidiaries

fixing market distortions caused by artificially driven


price behavior. In the case of identifying monopolistic

is one of the most interesting cases. CFE Transmisión

practices, the market monitors could notify COFECE,

no longer cares about generation costs as it bases its

whose job is to keep large players from dominating the

revenues on the transmission tariffs defined by CRE. To

market and restraining competition.

be profitable, CFE Transmisión has to focus completely on running the grid properly, which will also incentivize

Q: Will it be positive or negative for Mexico if some of

investments in technologies to diminish technical and

CFE’s subsidiaries or affiliates disappear as a result of

nontechnical losses.

fiercer competition? A: CFE has several labor commitments to honor from

Q: CFE has experienced significant economic losses in

its past as a state-owned utility and many people rely

the past. What happens if the company cannot cope

on it. There is a social element here that cannot be

with this new phase?

ignored. Mexico created the legal separation guidelines

A: We do not think this will happen because CFE now

so CFE could remain competitive and survive in this new

has the opportunity to stop its economic losses. Many

environment but it might happen that some subsidiaries

of the bad results in the past came from irresponsible

disappear in the process, even if the ideal is that all

decisions that went unnoticed due to the company’s

remain. The market is not dependent on CFE’s survival

previous structure. CFE used to be this big black box

but we needed to give the former monopoly the tools to

where the money came in and out without anyone

be competitive so it can meet its obligations. Otherwise

knowing exactly what happened in between. Now it is

we would create a highly competitive electricity market

more difficult to hide bad decisions because the utility

but ignite a social revolution. A similar situation occured

has a more transparent organization. Having specific

in other countries that liberalized energy markets before

activities divided into several subsidiaries and affiliates

Mexico. Governments cannot just ignore their former

also makes it more accountable than before.

utilities’ commitments. We needed to find the optimal way to do it and we saw legacy agreements as the right

We think that CFE’s management board will now be

path to follow. CFE can keep its legacy power plants and

able to easily identify the causes of the losses, which

supply agreements and will have the time to revamp its

will help to control and reduce them. Moreover, the

facilities and increase its competitiveness before those

entrance of new players is an incentive for the company

legacy agreements expire.

to reduce its economic losses. Improving transparency and accountability was one of the major reasons why also

CFE’s unbundling was so urgent. We expect CFE’s

incentivizes competition because it frees the market from

transformation to be challenging in the beginning but it

paying the system’s debts in a different way – by taxing

is a unstoppable trend.

That

CFE

is

meeting

its

former

obligations

electricity tariffs, for instance, which would also lead to social rejection. Our solution is a delicate balancing

Q: To what extent is the market sending the right

act between free competition and CFE’s survival but we

investment signals to the industry?

are happy with it because it seems to be working. We

A: We think the facts speak for themselves. When Mexico

carefully analyzed this model before going for it and we

launched the power auction’s guidelines a large share

still think it was the best option given Mexico’s social and

of the industry said that we were crazy and no one

economic conditions.

would present a bid. In fact, CENACE received over 200 economic proposals from different companies willing

Q: How would the bankruptcy of one of CFE’s

to participate in the auction. A similar situation can be

subsidiaries or affiliates be handled?

observed in other areas of the market. We heard a lot of

A: It depends if it is a subsidiary or an affiliate. A

complaints but we see the market moving and a lot of

subsidiary is still part of CFE’s administrative structure

interest from the private sector. We think the market is

so its bankruptcy would be more difficult to handle.

sending the right signals not because we worked on the

Because of this, subsidiaries are protected by CFE’s

elaboration of the market’s foundations but because we

existing assets, which also give financial institutions

see the results. Every week we read about new companies

that have legacy contracts with the utility certainty

entering the Mexican market, establishing partnerships

about their former investments. An affiliate, on the

or going into long-term agreements. It is just amazing

other hand, has to be sustainable on its own and act as

how much is happening in the energy sector.

a completely independent unit so its bankruptcy would be managed like any other company in the industry.

Woodhouse Lorente Ludlow is a Mexican law firm with expertise in

The incentives given to CFE’s different subsidiaries

energy and project finance, among other practices. It has had an

have created a new market reality and transmission

alliance since 2013 with CMS Cameron McKenna.

45


INSIGHT

MANDATORY ASSESSMENTS HERE TO STAY EDMOND GRIEGER Partner at Von Wobeser & Sierra 46

for

financial and administrative requirements set by CENACE.

energy projects were “a sound decision” by the Mexican

The financing part is particularly complicated given the

government to make sure that the electricity boom

required guarantees and financial capacity, so companies

brought about by the Energy Reform and CENACE’s

need to analyze what are the best strategies for them to

power auctions benefits not only companies but also the

meet these requirements.”

Mandatory

Social

Impact

Assessments

(SIAs)

local communities that host them," says Edmond Grieger, Partner at Mexico City-based law firm Von Wobeser &

The law firm is proud of the work it did during the drafting

Sierra. They are also helping to promote good company-

of the market regulation in areas that have had a dramatic

community relationships. But the framework could still use

impact on the feasibility and bankability of generation

some adjustments to adjust to the reality of the country.

projects under the new PPA structure with CFE. It says the original 10-year terms seemed steep to developers. “The

“Defining mitigation strategies for the projects’ negative

industry fought hard to establish these time frames during

impacts is no longer optional as companies are now

the evaluation period for the auctions’ guidelines,” Grieger

required to show their SIA to CRE to obtain their generation

says. “We are happy about this change as we think it has

permits. We know that the Ministry of Energy already has

been a crucial factor for the great interest that power

over 500 evaluations in the process, proof that SIAs are

auctions have raised globally.”

here to stay,” Grieger says. The SIA rules are not yet fully established but the framework is already helping projects

And the world does not start and end at CENACE’s

in the hydrocarbon sector, for example. But requirements

auctions but the opportunities for developing projects for

like presenting SIAs 90 days before starting negotiations

the private sector such as PPAs without the involvement

with landowners, he adds, could be considered unrealistic.

of CFE are still there and sometimes present a better

“SIAs require in-depth information that is not possible to

alternative to the aggressive price environment created

obtain without contacting the landowner.”

by the power auctions. The low prices of renewables are creating interest for off-takers and those sorts of deals are

But interest in the market is only increasing, as are the

increasing in popularity, Grieger says. The downside of low

business opportunities for law firms with expertise in the

prices is the difficulty in making projects viable. “Prices

area. From participating in the power auctions to signing

should stop falling. They are competitive already, so we are

PPAs between off-takers, developers and generators to

hoping to see higher offers that make projects more viable

playing a part in the upcoming bidding for a transmission

but we think prices will remain aggressive in comparison

line from Oaxaca in the south of the country to central

to international standards. On the bright side, we expect

Mexico, attorneys have no shortage of work. “The main

more foreign investors to enter the country although they

challenge for our clients is to select and develop projects

will be pressured to reduce their costs.”

that have the potential to be competitive in power auctions or tenders. The first contact we usually have with

The wholesale electricity market is also an interesting

clients that are looking to participate in the auctions is

place for companies to participate as suppliers, traders

helping them to identify developers with projects under

and qualified users. “Most of the foreign developers

construction that will be attractive for a commercial alliance

entering the market have plans to stay and engage in

or joint venture,” Grieger explains. Since the clients usually

more than one project in Mexico, so they look for support

have little time to finish their proposals, Von Wobeser &

in areas such as regulation, environmental compliance,

Sierra helps them look for interesting, innovative projects

financing and land rights acquisition. We know that all of

well advanced in the permits and authorization processes.

these areas are necessary for a successful project, so we

“Afterward the challenge is to comply with the technical,

have a diversified services portfolio."


VIEW FROM THE TOP

SECURITY, PROFITABILITY, BANKABILITY IN THE SPOTLIGHT JOSÉ PRADO Partner at Holland & Knight 47

Q: What has been the major contribution of Holland &

of projects that are subjected to the processes indicated

Knight to the future of the Mexican energy industry?

in Chapter VIII of the Electricity Industry Law. Power

A: The Reform’s transformation process has been rough

generation projects such as hydropower or geothermal

but is moving forward. Many events have taken place in

power plants can use these guidelines according to CRE’s

the last two to three years and most of the regulations

criteria but solar parks and wind farms are not included.

set by the governmental entities are finally coming into

The level of uncertainty surrounding land acquisition

effect. A new reality and structure has been created for

processes is definitely a top concern in the industry as

business in the energy industry, including areas where

having right of way or land rights secured is crucial in

private companies were not allowed before. Holland &

the project financing stages, particularly in Mexico where

Knight has been working closely with the authorities and

several land regimes exist and it is a complex task.

its clients, helping to close the gap between the industry’s expectations and the reality of the new market. We have

Q: To what extent has the Energy Reform contributed to

maintained close communication with CRE, CENACE,

making business in the energy sector easier?

ASEA and CENAGAS depending on our clients’ businesses,

A: The business landscape in the energy industry has

exchanging information with the regulatory entities about

changed dramatically since the enactment of the Energy

the expectations and experiences the private sector has

Reform and it has been a positive shift. In 2015, all PPAs

had with the current regulations. We consider this crucial

seemed to be stuck, given the drop in CFE’s electricity

for the market’s development as regulations are among

tariffs. In 2016, however, electricity tariffs followed an

the most important factors that determine if private

upward trajectory, which has opened a new window

investors enter a new market or not. We are pleased to say

of opportunity for private developers to sign PPAs

the regulators have been open to listening to us.

with private off-takers. The power auctions are a great investment opportunity but we must not forget that we

Q: What are the main concerns for your clients?

now have the elements of qualified user and supplier,

A: The Mexican electricity market is a new scenario

which can establish contracts without CFE’s involvement.

created from scratch in the past three years. Our client’s

The new law permits private companies to register as

typical concerns are always related to three basic points:

suppliers and be competitive under the new regime.

the operation’s security, profitability and the bankability of the projects. We have had some cases of companies with

Q: Companies are not required to have all their permits

experience in other countries’ power auctions approaching

in place to participate in the auctions. Should CFE be

us for help to participate in the Mexican version because

worried about project attrition?

its novelty has raised some regulatory concerns. We

A: Project developers are now rushing to secure land

help them understand the local regulation and the basic

rights and meet all the regulatory requirements needed

guidelines they need to follow to structure competitive

to have their projects ready to operate by 2019 or 2020,

proposals for the auctions.

depending if they won the first or the second auction. The real issue, however, is whether these projects will sustain

Q: What are the industry’s concerns regarding land

the low prices offered or not and still be profitable. But

acquisition and rights of way?

the fact that all the winning companies in the first auction

A: Some uncertainty still remains regarding the specific

signed a contract is a good signal.

regulatory status that will apply in the case of land acquisition for energy projects. The law considers different

Holland & Knight is a law firm providing legal services and advice on

regimes for oil and other hydrocarbons and electricity.

corporate and project finance, domestic and cross-border financial

CRE has just enacted specific criteria for certain types

deals, energy, oil and gas and biofuels, among others.


VIEW FROM THE TOP

LINGERING REGULATORY CONCERNS HINDER INVESTMENT CLAUDIO RODRĂ?GUEZ Partner Global Energy Practice at Thompson & Knight 48

Q: What are your clients’ main concerns as a result of the

Thompson & Knight offers our clients, not only reading

Energy Reform?

and trying to interpret complex technical documents and

A: The Energy Reform has imposed challenges not only

providing a legal perspective. Our longstanding experience

for private companies but for the authorities as well

with the former regime allows us to complement their

and we help them to understand this new scenario. The

perspective. When people hire us they do not just hire a

second main concern is regarding minor issues that have

lawyer, they hire a consultant as well. We are attorneys

prevented private companies from feeling completely

and counselors in the energy industry and we provide an

comfortable with the new legal framework. This will keep

insight regarding the technical and commercial aspects of

developing over time and will eventually succeed but

the reform as much as the legal ones.

numerous clients are uneasy about when this will finish evolving. Sometimes new officials also have the challenge

Q: Which areas of the framework are the most unclear

of fully understanding the new legal framework, which is

and how does that affect the perspective of investors?

new to them as well. We expect that in 2017 many of these

A: It is not a lack of clarity but rather the novelty which

issues will be resolved. Thompson & Knight is detecting

presents the main challenge in the Mexican market.

opportunities in the small print of the legislation and has

Numerous off-takers in the industry felt quite comfortable

been able to advise our clients about new opportunities

with the previous regime due to its transparency and they

based on our experience in mature power markets.

are hesitant as to whether to continue with that scheme through the legacy contracts or to participate in the market

Q: What main challenges are the regulatory institutions

either as a qualified user or as a market participant. With

facing?

the market liberalization, companies have to debate the

A: The expertise of all the workers in CRE and CENACE is

best way to cope with the power, capacity and CEL needs.

outstanding but naturally they are understaffed and they

CELs have been the most controversial aspects of the

are as new to the legal framework as any other company,

regulatory framework because many industries consider

institution or individual. Even though the institutions

them an imposition which will hinder their competitiveness.

enacted the Energy Reform, external advisers were employed to create the guidelines, so even for CENACE

Q: What percentage of companies do you expect will

and CRE’s employees the documents might present

comply with their projects on time and what reasons

challenges and complexities.

might hinder others? A: The prices offered at the power auctions were very

Q: What role have law firms played in the development

low and small companies might find it a burden both to

of the Energy Reform and what will be their continued

finance and build the projects. Large companies will not

involvement?

have problems complying because they have access either

A: Experience and understanding of the previous scheme

to their own funds or to cheap funding. Additionally, some

has been key in understanding the 180-degree change

companies might not be fully aware of the complexities

created by the Energy Reform. Other firms believe that

and challenges that the projects they proposed will

because of the novelty of the Reform, understanding past

present. The impression from the first auction was that

legislation is not necessary, as if it is starting from scratch.

the requirements were not set properly. They lacked

But it is impossible to have an adequate grasp of the new

stronger technical requirements for participants, which

framework without knowledge of the role of the authorities

was surprising because it meant ideas could be submitted

in the previous system. Even the legal interpretation of the

as projects and that will be a problem. To pay the costs

new guidelines depends on the technical understanding

of transition from an idea to a fully developed project is

of the previous regime. That is the technical legal role that

costly and complex.


Q: What is your perspective on the restructuring of CFE?

first focused on wind projects, winning a wind and a PV

A: The strictly legal separation of CFE is a decree but in the

project. We have clients that have developed different

market the idea prevails that CFE as a company will have

technologies because they all offer different advantages

access to information other companies will not, which

and disadvantages, so a combination of all of them creates

will give them an advantage in a supposedly competitive

a more competitive energy matrix. All energy companies

market. However, the competition rules in the Electricity

will have to consolidate as power companies instead of

Industry Law are well structured to protect the market

focusing on a single technology. Renewable energies are

players from anticompetitive practices. It will be the right

just starting but will be developed even more, not only

of the players to start an investigation through COFECE if

in Mexico but globally as well. Cogeneration still has a

any monopolistic situation arises in the future.

very important role due to dispatchability and capacity. Nuclear is not a feasible option in Mexico because it is still

CFE has already taken the right steps in appointing

an area reserved for the Mexican state. Geothermal will

very experienced general directors within CFE instead

have an important role soon but it will need incentives for

of politicians. Historically in Mexico important positions

funding and exploration, otherwise it will be too expensive

were awarded to politicians without experience in the

to consider.

sector. The legal separation should be a priority for CFE, with strict rules, sanctions and requirements to ensure

Q: How will Mexican companies participate in the sector

compliance. People need to start looking at CFE as a new

given the presence of international businesses?

player driven by the market, competitiveness, excellence

A: Mexican companies were very active in the first

and professionalism just as much as any other company.

auctions, both in PEMEX’s bidding rounds and CFE’s

This is a cultural change and it will be a complex process

power auctions. Opportunities in the generation market

but actions such as hiring capable and open-minded

had not been as clearly foreseen as those in the oil and

people as directors definitely accelerates the process.

gas industry but several Mexican companies are already positioned as qualified suppliers.

Q: What are the energy sources of the future? A: Companies are changing their energy matrix. For

Thomson & Knight has over a century of experience as a law firm in

instance, ACCIONA winning with PV projects in the

energy finance, taxation, business and litigation, with a deep knowledge

second auction, Électricité de France, which was at

of the energy and oil and gas sectors.

49


VIEW FROM THE TOP

LEGAL EXPERTISE BREAKS LOCAL, INTERNATIONAL BARRIERS JIMENA ELIZONDO Senior Consultant of Rodríguez Dávalos Abogados 50

Q: You were involved in the Energía del Caribe project.

are related to electricity. Our firm has three divisions:

What made it unique and how do you face the challenges?

regulatory, contracts and land acquisition and rights of way.

A: There are several reasons but the first is that it involves

We offer turnkey projects, which means we help our clients

three different jurisdictions. The natural gas supply

develop business plans, navigate regulatory constraints and

comes from the US, the power generation facility – a

support contract negotiations. If needed, we also deal with

combined cycle power plant – is located in Monterrey and

land acquisition for duct-laying projects and all litigation

the electricity is exported to Guatemala. Even though it

regarding the energy sector. We are 45 professionals,

might look odd to have a plant in Monterrey to export to

including lawyers, engineers and economists, which allows

Guatemala, the fact is that the location is for strategical

us to have the global vision and holistic understanding to

reasons: it is located near Monterrey’s main highways, is

carry out energy projects successfully.

close to the airport and has access to several transmission lines and a substation. More importantly, it is located

Q: What is the typical issue you deal with and how does

near one of the largest and most competitive natural gas

your expertise make a difference in these cases?

producers in the world. These characteristics forced a

A: We are mostly helping our clients with the procedures

series of technical adjustments to the project and the need

needed to become a participant in the Wholesale

to obtain several permits from the authorities to operate.

Electricity Market (MEM). Many companies believe that

In Mexico, it required an interconnection agreement that

registering and requesting the necessary permits from

did not exist at the time. But because the project was

CRE is all it takes. But it is not that simple. The entire

developed under the Independent Power Producer (IPP)

procedure is complex and requires the advice of legal

scheme, it had no legal constraints to generate and export

experts. To obtain the permits, companies need to work

electricity and we finally managed to obtain the required

hand in hand with CENACE and demonstrate compliance

permits and agreements. Our experience and in-depth

with requirements and infrastructure specifications.

knowledge about this sector were crucial in this case and are two of the reasons why Energía del Caribe chose us as

At Rodríguez Dávalos Abogados, we accompany our

their legal firm.

clients throughout the entire process, helping them with other aspects as well, such as business plan development.

We expect that the open market introduced by the Energy

We also provide consulting services as well as legal and

Reform will increase business opportunities for these kinds

technical assistance to carry out CENACE’s processes

of projects. The fact that authorities are now permitting

regarding contracts and permits. It is important for

the participation of national and international capital will

us that our clients understand what they are agreeing

likely allow more cross-border cooperation.

to when signing these contracts, what would be their responsibilities and obligations and the guarantees that

Q: How important is the electricity sector in your portfolio

might be required. It is all about helping them understand

of clients?

the role they are going to play in this new market.

A: Our firm focuses on the development of infrastructure projects for the energy sector, which means that we work

Mexico still needs to clarify more information about the

daily with projects related to the oil and gas and electricity

electricity market. But we expect the operational rules

industries. Around 50 percent of the projects we take

to be adjusted over time to better suit the needs of the country and market participants. The government is doing

Rodríguez Dávalos Abogados is one of the fastest growing law firms

its part to increase the industry’s knowledge by providing

in the energy segment, providing integral services for the energy and

seminars and courses, which will be beneficial to the

infrastructure sectors.

market’s improvement.


INSIGHT

SORTING THROUGH MEXICO’S LEGAL LANDSCAPE

Andreas Voss Attorney at Rödl & Partner

Rafael Torres Attorney at Rödl & Partner 51

Investing in a new country can be an exciting opportunity

tax rate from 17.5 to 30 percent for companies outside the

but also a daunting challenge for a company that is not

IMMEX program has decreased Mexico’s competitiveness.

familiar with how business is done in that specific region.

Meanwhile, Torres highlights the difficulties for applying to

Particularly in Mexico, even though there are established

VAT certification. “It is simple for manufacturing companies

regulations and laws, managing the bureaucracy and

to get an IMMEX authorization but they also need a VAT

small details in deal-making can be a complex task. An

certification. This usually takes around six months,” he says.

experienced local partner is vital for a smooth transition,

“The law states that the process should last only 40 days

offering legal and consulting firms an opportunity to

but that is the time it takes for the government to even

expand their presence in the market.

start reviewing a company’s documents and if it requires additional documents it starts the 40-day term again.”

“The energy sector is not that different from other industries and companies, it just needs someone who

Both Rödl & Partner and KPMG identify the need to

knows how to do business in Mexico,” says Rafael Torres,

improve the tax code to keep attracting investors. “Tax

Attorney at Rödl & Partner. Although oil and gas projects

reforms must consider that businesspeople want to invest

are in the spotlight, the Energy Reform has spurred new

in Mexico but they lack the proper incentives,” says Torres.

clients interested in electricity and renewables to diversify

“Most companies have import and export operations and

their portfolio. “Industry players are now looking for new

we have enough experience to support them,” Voss adds.

alternatives in terms of energy sourcing and generation,”

Other areas are more complex to understand. Certain

he adds. “However, there is still a lack of regulation and

regulations are strange concepts for foreign investors

experience, so we must take the first steps.”

such as the fact that companies need a legal address in Mexico to get a tax ID or the Statutory Profit Sharing

According to the World Bank Group, Mexico currently

scheme. According to Torres, Mexico is the only country

holds the 47th position in its 2017 Doing Business global

in the world where it is mandatory for companies to share

ranking, the first Latin American country on the list,

10 percent of their revenue with their employees, which

followed by Colombia. While Mexico shows considerable

companies generally compute as a tax.

advantages in areas like financing with a rank of five out of 190, the country still has significant opportunities in tax payment and international commerce with 114 and 61 out of 190 respectively. Rödl and Partner has developed the skills to help clients maneuver these challenges. Regarding financing solutions, the company has created a platform to help investors analyze their options. “In some

Mexico has over 40 doubletaxation agreements and has free-trade agreements with 45 countries

projects, it is much more viable to get financing through private equity arrangements than debt,” says Andreas

Bureaucracy and long procedures are not uncommon

Voss, Attorney at Rödl & Partner. “We created our NLX

in other markets either but Torres is confident that

platform to help companies know the projects and make

investors can make the most of it. “Mexico has good legal

informed decisions on their investments.” There are similar

foundations but sometimes not good people to enforce

opportunities in the manufacturing sector according to

them. Even so, the system works and most companies have

Torres, specifically for companies wanting to participate in

a good experience in Mexico and take advantage of the

the Ministry of Economy IMMEX program for manufacturing

long list of Free Trade and Double Taxation Agreements

and Maquiladora export services and apply for tax

signed by our country. They just need to be well advised

exemptions. According to KPMG Mexico, increasing the

to take advantage of the legal environment.”


8MW Trojes hydropower plant, Michoacan, Enel Green Power México

52


INSIGHT

REGULATORY INTEGRATION FOR CROSS-BORDER ENERGY TRADE PEDRO RESÉNDEZ Counsel of Greenberg Traurig 53

The Energy Reform can be considered the constitutional

the transition period, Reséndez believes another hurdle

development with the most impact on Mexico in recent

ahead will involve cross-border communications. “One of

years, creating a new economic paradigm by opening the

the Mexico’s objectives is to communicate effectively with

sector to private participation. Contracts are being drawn

receiving countries for energy to be transferred effectively.

up to allow new players to enter the industry. CFE has

Interstate markets in the US work under the Federal Energy

sparked more speculation with the announcement of the

Regulatory Commission (FERC), which is similar to CRE

first open transmission project, the Oaxaca line. This also

but it also divides regulation of energy by state, as large

will be the first CFE and private investor joint venture to

economies have complicated regulations,” he says.

develop grid projects, so many are eagerly awaiting the reaction of the industry and investors.

The motivation to encourage Mexico’s energy buyers to cooperate is price. While cost is the main reason why

Pedro Reséndez, Counsel of Greenberg Traurig, one

companies would import electricity instead of buying it

of “America’s Best Corporate Law Firms” according to

locally, according to Reséndez, cost is also what would

Annual Law and the Boardroom Study, has overseen

encourage Mexico-based companies to source locally.

several companies’ moves during the Reform and the

“Electricity is being treated as a commodity following the

transition period. From the point of view of a company

Reform,” says Reséndez. It is subject to fluctuations in

that has seen this process from both sides of the border,

price, influenced by external forces and while privatization

he says “the US saw this transition through over several

of an industry is generally met with wariness it lets

years, while in Mexico it was a swift process.” Reséndez

economic factors rule the market, which could result in

sees some potential stumbling blocks along the road

perfect competition.

because the way energy supply is managed has changed drastically. “Previously, energy commercialization was

Now that companies can sell to CFE as traders, without even

permitted under very specific circumstances. Today

owning a plant as in the past, companies can also import

companies can import energy and resell it,” he says. Now

energy and are no longer required to offer energy contracts

that most regulations are in place, with tender conditions

to public bidding. This facilitates fair competition and new

and rates being internationally competitive, Reséndez

entrants to the market. “Companies are freer to negotiate the

says the company has “a short list of retailers, qualified

terms of the contract,” says Reséndez. If private companies

users and new companies wanting to supply electricity, so

enter the industry, with government support and expertise,

the change has been positive.”

energy subsidies that totalled up to US$5 billion in 2013, according to a Senate report, would no longer be needed

The firm advises companies in energy generation, retail

going forward. Financing structures have remained largely

and off-takers by explaining the new regulations, preparing

unchanged but adjustments to land availability and permit

new contracts and creating subsidiaries and cross-border

requirements have been made, which Reséndez says makes

transactions for businesses that import electricity and gas.

securing project financing easier. CFE was required to have

Reséndez lists securing financing for private companies

the gas, permits and real estate ready when negotiating but

and the state’s challenge to achieve integration between

now that this is not the case, another obstacle could block

US and Mexican regulations, as well as integration and

the industry from advancing, as not all awarded projects

interconnectivity, as some of the potential challenges in

are being developed. Doubts surrounding the completion

the market. “We are no longer in a transition year and we

of certain projects hang on whether project developers

are starting to see some results, maybe not in the tariffs

can secure private financing or PPAs. Lenders may finance

but definitely in the projects and tender participation,”

projects that do not meet the old stipulations but they may

he says. While positive results have eased Mexico out of

charge more or only offer a portion of the funds requested.


VIEW FROM THE TOP

QUALIFIED USERS TO SET THE MARKET’S PACE LOÏC LE GALL Executive Director, Power & Utilities of EY 54

Q: What tendencies are shaping the energy market after

are not willing to pay US$80 per MW/h now that they know

the implementation of the Energy Reform?

companies can do better.

A: Before the Energy Reform, power generation was the only activity in the electricity sector open to private

We used to see around 10 and 14 percent return on

investment, up to a certain extent. Now we see new

investment (ROI) in power generation projects but with the

opportunities in the supply, commercialization and power

drop in prices we expect to see even lower figures. For this

generation sectors. We have identified a need to increase

reason, we believe energy supply and commercialization

the country’s installed capacity by 50 percent in the

will become more attractive investments. We are seeing

upcoming 15 years, which is expected to attract significant

a strong tendency toward sophistication among qualified

investment through short and long-term power auctions.

users so we expect these market players to set the pace

We see a particular demand for technologies offering firm

for energy purchasing, forcing suppliers and generators to

capacity such as combined-cycle and cogeneration power

adapt to the new requirements.

plants. We also expect more private developments to take place with a greater emphasis on bilateral contracts, which

Q: How does EY collaborate with market participants to

are similar to the PPAs used before in the sector.

make the most out of the energy market? A: We advise large corporations to better understand

The wholesale electricity market is becoming increasingly

the evolution of their energy consumption so they can

more complex, driving market participants to become

define their profile in the new market. We then perform

more sophisticated and adopt efficient IT tools that help

a market screening, comparing all the options available

them analyze and consider all important indicators for their

given the company’s profile, including a risk analysis for

strategies. It would be prudent, for instance, to forecast

each possibility. These processes allow us to understand

and consider the future of natural gas prices. We estimate

what the companies’ needs are and advise them about

that natural gas prices could increase 2.5 percent annually

the most attractive options, which include staying under

during the next 10 years, having a significant impact on

the old regulations or migrating to the new law, as well

Mexico’s electricity tariffs due to the large presence of

as purchasing energy from a generator or a supplier or

gas-based technologies in the system. Forecasting the

establishing a bilateral contract. It is also possible to create

behavior of the spot market and regulated and unregulated

a mixed portfolio, having only certain loads under the new

tariffs will be one of the greatest challenges for companies

regulations. It all depends on what the opportunity costs

operating in the sector.

and the company’s business plans. For generators we focus on M&A transactions, which have become popular under

Q: How have the market changes impacted EY’s TAS

the new conditions. These transactions involve conducting

Practice and what is your clients’ main concern?

due diligence on the financial, technical and legal aspects.

A: The power auctions were the major events impacting

We ensure that all projects under development will be

the industry in 2016. The low prices offered by CFE drove

viable for both parties. For companies in the electricity

companies to optimize their operations and reduce their

transmission and distribution sectors we provide advice on

projects’ CAPEX, sending low-price signals to the market.

how to optimize their financial models and be competitive

This had a profound impact on qualified users’ expectations

in CFE’s tenders, including the tender for the highly

about energy prices. We are now receiving numerous

anticipated US$1.2 billion transmission line that will join

calls from qualified users saying they want to get fixed-

Ixtepec, Oaxaca with Yautepec, Morelos.

price deals similar to that of the auctions, looking below US$60 per MW/h. Qualified users are aware that they do

Q: How attractive is Fibra E for energy companies and

not present the same economics of scale as CFE but they

what assets do you expect this vehicle to finance?


A: Fibra E is a financial vehicle designed to monetize assets

Being a supplier consists of purchasing energy from

in the stock market and can be considered the Mexican

generators, usually using long-term agreements, or directly

version of the Master Limited Partnerships (MLPs) used

from the spot market and offering it to qualified users at

in the US. MLPs are usually used for oil and gas assets

a higher price but shorter terms. In the past, generators

while power assets tend to be monetized through yield

needed to establish long-term agreements with off-takers,

cos, a financial vehicle designed to produce returning cash

which limited flexibility. Qualified suppliers do not need to

flows from operating assets. Under the Mexican scheme,

be technical experts in electricity but they need to know the

only assets with at least one year of operation can be

market’s products perfectly and be knowledgeable in risk

monetized using Fibra E, a requirement offering certainty

management strategies and brokering. Energy supply can

to investors that the project is profitable. Along the same

be compared to other retail businesses where the objective

line, companies need to prove their assets can provide

is to optimize the inventory and increase the client portfolio.

recurrent cash flows during a 10-year period at least. We

The novelty of the market limits the data available, which

therefore consider transmission lines, natural gas pipelines

can complicate supply activities. To overcome this we

and storage stations as well as power plants with long-

compare the Mexican market with the Pennsylvania-New

term PPAs as the most suitable assets in the power sector

Jersey-Maryland Interconnection (PJM) and the Electric

to participate in Fibra E. Mexico has two financial vehicles

Reliability Council of Texas (ERCOT) markets operating in

besides Fibra E that can be used to monetize assets, Fibra

the US, which have similar participants and rules to their

and CKDs, and all offer different conditions, particularly

Mexican counterpart. What we observed in both cases

regarding fiscal benefits. In the case of Fibra E, investors

is that the number of suppliers decreased over time as

can be exempted from certain taxes regarding yields. We

stronger companies bought smaller participants.

have developed an extensive report on this issue that can be consulted freely at our website.

Q: What are the expectations for products like financial transmission rights and ancillary services?

Q: What is delaying the launch of investments under the

A: We are still evaluating what the behavior of these

Fibra E vehicle?

products will be. We expect the auctions for financial

A: We need to consider that Fibra E is directed at large-

transmission rights to take place in the next months, so

scale companies with operating assets, so the preparation

we hope to have more clarity about this particular product

period is long. Participants need to consider the integration

soon. Ancillary services are still uncertain. We do not know

of this mechanism into their current financial models

how much volume will be traded yet and at what prices.

and analyze what the impact will be. They also need to

What we have observed in other markets is that specialized

forecast how investors will react to their offer in the stock

companies have been created for managing these services

market before making any big move. We are helping three

and, in fact, some are looking at Mexico with great interest.

companies prepare to enter Fibra E. We cannot share their

The challenge these companies face now is the same as

names due to confidentiality reasons but we expect them

other market participants: the lack of technical data from

to be ready soon. In all cases, we recommend starting with

the market.

a conservative model before moving into more aggressive strategies.

Q: What major events will take place in the Mexican energy industry in 2017?

Q: What are the risks of investing in Fibra E and how does

A: The evolution of CFE as a competitive enterprise of

EY help companies to mitigate them?

the state will be one of the major events. Competitors

A: We have advised companies preparing for Fibra E

are waiting for the state-owned utility to define its role in

mostly from a fiscal perspective. MLPs and yield cos have

the industry’s different segments so they can plan their

experienced challenging times in the US, with several

strategies better. Another major event will be the tender

factors impacting their performance that were not initially

of the 600km transmission line project joining Oaxaca

considered, such as a company’s corporate image. We

and Morelos, which will be the first big tender of 2017. The

are not offering advice about Fibra E risks and we do

auctions for financial transmission rights are also highly

not know of any company able to do it now. However, we

anticipated by the industry and we will see in the first

expect Mexican pension funds (AFORES) to be actively

quarter of the year how demand for this product behaves.

participating in Fibra E as has happened in other markets.

We also expect the capacity market to become more important in 2017.

Q: What is the largest investment opportunity now in the Mexican energy industry?

EY’s Transaction Advisory Services (TAS) provides strategic advice on

A: We have identified great interest from the private sector

the procurement, investment, optimization and preservation of capital

in entering the electricity market as qualified suppliers.

for companies such as those in the energy sector.

55


VIEW FROM THE TOP

ESTIMATING CONDITIONS, FINES TO CALCULATE RISK NICOLAS MELISSAS Director General of Athena Consulting 56

Q: What is the purpose of the risk measurement program

offer and take the risk to win, this might not convince the

developed by Athena Consulting?

bank to lend them money. Through the risk measurement

A:

With

the

Reform,

renewable-energy

generating

companies that participate in auctions must commit to

program the bank can have an idea if a company will be able to cover the loan or not.

producing a certain number of CELs each year. If they do not reach this number because the energy generation

Q: What benefits can banks get from applying this

conditions were not ideal, the wind was not strong enough

program?

or the sunlight was poor, they may end up paying high

A: We handle the fines from the missing CELs but when

fines. These fines depend, in a nonlinear way, on the

companies do not reach their required energy, they must

number of missing CELs and on how many times in the past

buy it from the spot market, which is the source of yet

the company has failed to reach its committed production

another loss that we included in the program. With this

target. Among other things, our program enables those

calculation we can give banks a very precise estimation

companies to estimate the distribution of those fines. The

of the profitability of the projects. We can also help banks

yearly production of electricity is estimated by specialized

establish the right amount for the security deposit they

consultants who measure the wind in the area and give

need from the company. Banks always ask for this to

an estimate to the company. They evaluate wind force

cover any potential losses but companies, understandably,

and consider the probabilities of a change in conditions

always want to leave less money in the bank. With our

in the area through scientific techniques. Those estimates,

program, we can also calculate the appropriate deposit

combined with the existing structure of fines, form the

the bank should ask for to have its required security and

basis of Athena Consulting’s risk model. We can calculate

make it affordable for the company.

the fines a company will have to pay according to the conditions of the area and its number of committed CELs.

Q: Who are your main clients? Do you prefer advising

We estimate the distribution of fines during the 20-year

banks, governments or auction participants?

life span of the project. In the first years, typically firms

A: Banks are one of our main targets but it is very difficult

will have to pay no fine at all, while the fine paid in the final

to reach them. We have contacted several banks interested

year can be quite considerable. This information is useful

in financing renewable energy projects and we hope to

both for banks as for the individual firms.

secure a contract with at least one of them. Also, we have worked with both sides in the auctions, the institutions that

Q: How can this program help upcoming participants

hold them and the companies that participate in them. It

establish a more precise bid?

is very interesting to work with the government but the

A: It could help them decide what is the most convenient

experience is not always positive. Ministries open a tender

bid to make. For example, if there is a company offering

for consultants to apply for the design of an auction but it

a wind park of 1GW per year and offering 700 CELs, they

is very difficult to win those contracts. That is why I prefer

are making a conservative offer and it is very possible

to work with private companies to help them optimize

they will not have to pay any fines. If the bid is reasonable

their offers.

the number of fines will be too, therefore there is no reason why a bank should reject the project. However, if a

Q: Where do you see Athena Consulting in five years?

company wants to go into the auction with an aggressive

A: In five years, we expect to have enough clients and ambitious contracts to make the business stable and a

Athena Consulting, based in Mexico City, is an econometrics and

bigger staff to reach more projects. We are very aware of

economic theory consulting firm that has developed a model to quantify

the downside risk: if the new US government renegotiates

the risk of investing in the wind and solar power industry in the country.

NAFTA, it could push Mexico into a recession.


VIEW FROM THE TOP

THE HIDDEN GEMS OF THE MARKET

Ruth Guevara Founding Partner of Zumma rg+c

Jonathan PinzĂłn Senior Energy Consultant of Zumma rg+c

Q: How does Mexico compare with other emerging energy

scheme. In this area, we are advising clients about the pros

markets and where are the greatest opportunities?

and cons of migrating to the new regime and entering the

JP: We believe that Mexico is the most attractive market in

wholesale market, helping them to select the most profitable

Latin America and one of the most interesting worldwide.

option while diminishing its related risks. We already know

Mexico expects to double its power capacity in the next

of some players that are seriously looking at this option. For

15 years, meaning that it will add 60GW to its energy

instance, Iberdrola, which sells most of its energy to CFE

infrastructure. This new capacity will also involve new

through the IPP scheme, has opened a new division focused

investments in electricity transmission lines and natural gas

on qualified users to participate in the market. In Mexico,

pipelines, creating a wide range of opportunities through

many of the large off-takers are also energy producers,

the entire value chain. A lot of investors are now focusing

which also confuses new market entrants. We help them to

on the power generation sector but we advise them not

identify when a player should be considered a competitor or

to overlook other areas of opportunity. In the same way,

potential client. In this area we also see electricity trading as

CFE’s electricity auctions have been in the spotlight lately

an interesting business opportunity. We can support clients

but we advise investors not to ignore the possibilities

in this endeavor by providing networking opportunities and

offered by the opening of the wholesale electricity market.

business matchmaking, connecting power producers with

Power generation and the electricity auctions are the tip

traders and off-takers.

of the iceberg. For us, the greatest opportunities are still in the shadows, whether it is participating as a qualified user

Q: What new challenges and opportunities has the reform

or investing in electricity transmission and distribution

brought for renewable energies?

infrastructure.

JP: Many project developers that are not manufacturers were terrified by the low prices resulting from the first power

RG: Mexico has the advantage of offering macroeconomic

auction, especially small and medium-sized developers.

and political stability, opening the door to great business

Therefore, we are now working to spread awareness about

opportunities beyond the energy sector. The fact that Mexico

the market opportunities that Mexico offers beyond the

is the last country in Latin America to liberalize its energy

electricity auctions. The distributed generation market

market puts the country in a privileged position, especially

is often overlooked by renewable energy companies,

considering its large scale and geographical location.

even though it also represents an attractive and dynamic market niche in Mexico, particularly for medium and small-

Q: What are the hidden gems of the Mexican electricity

scale solar energy companies.

market? JP: Most of the large generators in Mexico are focusing

Understanding the market trends behind the record low

their efforts on the power auctions but that represents

prices at the auctions and the parts of the regulatory

just a tiny share of the opportunities provided by a

framework that are relevant to their business are the

liberalized market. We expect qualified suppliers to

biggest challenges for most of our clients. Some of the

become important players, particularly as the bilateral

international companies entering Mexico are looking

contracts market became nearly saturated with the self-

to expand their business to the US or Central America,

supply scheme, which currently represents about 18.5GW

which also highlights the importance of understanding

of authorized capacity.

international interconnection agreements and regulations.

Legacy projects are also holding back generators from

Zumma rg+c is a consultancy founded in 2010 and specialized in

moving into the new framework because they do not want

government and corporate relations in strategic industries such as

to lose the benefits that their projects have under the old

energy, security and health.

57


VIEW FROM THE TOP

A COMPETITIVE ENERGY MARKET TAKES SHAPE EDUARDO REYES Partner Power & Utilities at PwC | Strategy& 58

Q: What would you say are the major advances in

new entrants. Outside of the newly established auctions,

electricity this year?

we will see a mix of ways in which companies sign

A: The past 12 months have been the most dynamic in the

contracts. Some could sign a power purchase agreement

power sector this decade. Driven by the Energy Reform

(PPA) with other generators beforehand. Auctions tend

and resulting regulations, the market has changed but

to result in more competitive prices but contracts are less

not in line with our expectations. Auction developments

negotiable. They may stipulate 15-year contracts or strict

resulted in 26 companies winning projects amounting

requirements. If buyers wish to only contract part of the

to 6GW. This is primarily wind and solar power but also

energy or for a shorter period, they would benefit from

includes geothermal and fossil fuels, representing more

negotiating directly with the generator.

than a US$10 billion investment. Q: What are your clients’ main concerns regarding the Prior to the Energy Reform only a couple of projects in

auctions?

this sector stood out. Too few projects existed to assess

A: Going forward we expect concerns to emerge

how competitive the market in Mexico was and many

regarding the sheer size of the auctions and whether

thought renewable energies were expensive. But resulting

continued growth will be sustainable in the long term. All

opportunities in renewables were surprising. The auctions

developments are driven by Mexico’s target to reach 35

communicated the real price to the market and now many

percent clean energy by 2024. To comply, the auctions are

are aware of Mexico’s competitive advantages in wind and

crucial. We expect clients to mostly ask us how big the

solar generation.

market will be long-term and how much their competitors will contribute to price drops. Prices are already low and

We work closely with the National Solar Energy Association

some may fear that they will fall even further, affecting

(ASOLMEX), through which we have managed projects,

their return on investment (ROI). The winners of the bids

moving them from Europe where solar potential is half

are mostly concerned with securing the financing to go

that of Mexico. Solar panels are also less expensive in

ahead with their projects. They are keen to comprehend

Mexico, making the industry more competitive thanks to

the certifications necessary and have them in place to

the Reform’s scheme. The new availability of attractive

comply with their side of the commercial operations, as

bankable contracts with CFE reduced the risk for investors.

decided at the auctions.

In the five years leading to the Reform many developers from Europe, the US and Mexico were trying to develop

Q: How does PwC support its clients in the energy

projects here but we lacked the schemes to support them.

industry?

Now, every project auction has plenty of interested parties

A: In the last year, we have focused on supporting our

bidding, which also drives prices down.

clients with their bidding strategies. We have advised more than half the auction winners, an illustration of

Q: What will motivate companies to participate in the

the tremendous success on our part. The auctions are

industry as purchasers and not as generators?

complex, well-defined and efficient for the buyer, so these

A: The nature of the business is distinct. Some companies

rules can be difficult to understand. We can advise them

build power plants and sell electricity and others trade it.

in terms of who they are bidding against, clean energy

This latter group of companies need not invest in the same

certifications and the price they set to maximize their

way, rather purchasing electricity as a commodity and

returns within the rules.

selling it. The Energy Reform allows other companies to enter as purchasers and sell it to final customers with a retail

Q: What other investment opportunities do you perceive

margin, as in any other business. This is the motivation for

in the Mexican power sector?


A: The industry can grow a lot in generation but we will

is requesting in the auctions precisely matches their

ultimately need transmission lines to connect the plants.

requirements so we predict these negotiations will go

The transmission grid in cities and industrial regions can

smoothly. The parties experiencing challenges in this

benefit from investment, the most recent example of

area will be the industrial companies that use electricity

which is in the high-voltage direct current transmission

from fossil fuel power plants. They will be required to

line from Oaxaca to Mexico City. That project also came

use CELs by 2018. These companies are evaluating the

to fruition within a new contracting scheme and once

most efficient way to purchase those CELs from auction

developed, CFE and the government can replicate the

surplus or other schemes, and have one year to reach

model in many other areas. This leads me to believe that

a solution.

the next big opportunities for investment in hard assets will be in transmission lines. CFE will be relieved of the

Q: To what extent are companies approaching PwC asking

obligation to put its own money into these lines, opening

to capitalize on the distributed generation market?

the possibility for the private sector to share in the

A: We are working with companies that are developing

investment. Not being restricted to the federal budget is

business cases for solar distributed generation (DG) in

the main advantage. Perhaps in the short-term companies

their factories, for example. I expect this to become a big

must try to understand the new dynamics of these

market but regulation developments are pending, such

schemes but I see more advantages than disadvantages

as clarifying who will pay for net metering. While this

to this process.

business case will crop up in many conversations because it is working elsewhere, it will not be clear how the process

Q: From PwC and its clients’ perspective, how is CFE’s

will work until the legal side is finalized.

separation process expected to affect the industry? A: This is a concern in the sense that, as in any market, the unpredictability of competitors’ actions makes us wary. But the sector has seen enough positive results recently to feel confident. The Ministry of Energy and the regulatory authorities call the shots, which is good for the private sector. CENACE is playing a major role now that CFE is being unbundled. Having well-defined regulations assures us of market transparency. The nature of CFE being so large may mean the process takes longer than we expect.

With the Energy Reform, DG is becoming a feasible alternative to dependence on the grid

But now that all subsidiaries are in place, they can start operations in January.

Q: What developments will stand out in the industry in 2017? A: The first auction with private companies purchasing

Q: How could lower participation in the spot market

electricity will be a major event in the industry, for which

be boosted to match private participation in long-term

we need a clearing house. Suppliers will soon start selling

auctions?

electricity to final consumers, not only CFE, so many

A: Few projects are intended for the spot market and

companies are preparing their business cases to present

banks will always ask for long-term contracts to finance

to the regulator and CENACE to request development

projects of this type. Long-term contracts simply are

permits. To date few companies are selling energy and

not a reality in the spot market. When the auction's

this will remain static until the regulations are finalized.

winners come into play in 2018, we will see these

They are due to be published in the first quarter of 2017

projects’ energy surplus being sold into the market in

and approximately 10 players will enter the competition

the short term. This will strengthen the market but I see

to sell energy to industrial clients. The electricity market

few projects going merchant because banks tend not to

is new so we must enhance our services every month. We

finance those types of structures. This could change in

now assess the capacity market for clients, branching out

time as price visibility increases and banks can draw on

from energy spot prices. The need for advice on financial

the historical data of price developments. Therefore, we

transmission rights will increase in the future and we are

predict a few large projects.

developing the tools to support our clients with ancillary services to help them move within this increasingly

Q: How do you expect the CELs market to behave in the

complicated market.

near future? A: The CELs sold in recent auctions will probably be

Strategy& is a PwC consulting group that is dedicated to practical

produced from 2018 onward but the biggest player

strategy advisory services to help its clients deliver on project

will be CFE. The volume of energy and CELs that CFE

execution.

59


VIEW FROM THE TOP

REFORM OPENS CONSULTANCY OPPORTUNITIES RUBÉN CRUZ Energy & Natural Resources | Industries Lead Partner of KPMG 60

Q: How have the changes in the electric industry impacted

technology prices, particularly regarding the generation

KPMG’s energy practice?

of solar energy.

A: The Energy Reform opens an opportunity in the electricity sector to provide new services to the market.

Q: What incentives exist for companies to move to a new

We are seeing more companies looking for consultancy

system that tries to optimize energy costs?

services. It is a historic event for the country’s consulting

A: Mainly, it is the fact that you can satisfy part of your

firms because it allows us to expand our service offering.

electric-energy consumption needs for the medium-

For example, private companies with projects in different

term and the rest with the spot market. The danger of

development stages, looking for resources to finance their

participating in these schemes today is related to a lack of

projects, ask for due diligence services during both the

information rather than actual market risk. These markets

commercial and the regulatory phases. This service helps

are in place in several parts of the world and they are very

investors determine the actual stage of their project and

efficient. In Mexico, since it is something new, there is still a

its needs. This way they can correctly assess investment

lack of information, which generates uncertainty regarding

opportunities. Also, with the wholesale electricity market

the process. We expect that early adopters of the wholesale

starting operations we can launch new services such as

electricity market will be Mexican subsidiaries of foreign

analyzing new financial models for presenting an offer on

companies that operate in countries where the electricity

the wholesale market.

market was opened several years ago. Companies aware of the benefits of this mechanism are expected to be the first

An additional service for which we have seen interest is

to adopt it.

the analysis of the tax base of an existing financial model. We have international tax experts who help companies

The challenge is to increase the number of market

determine how to reduce the cost of capital when financing

participants. With long-term bidding processes there

renewable projects by using the country’s international

is only one buyer, CFE, and several suppliers of green

treaties to avoid double-taxation for foreign direct

energy. We need to work on having important energy-

investment, so their return rates are optimized and that

consumption players participating in the market, such as

eventually translates into lower prices to compete in the

cement plants, automotive plants and mining companies.

bidding processes. Avoiding double taxation is a function

The market’s success depends mostly on large and

of how the capital enters the country and how over time

important energy-consumption players participating to

it is repatriated. This last condition also contributes to a

meet their energy needs through medium and long-term

project’s competitiveness.

contracts and through the spot market.

We also started providing an energy-efficiency service

Q: Is there a particular energy-generating technology

for companies that want to be qualified users. Our firm

that is being favored for energy investment projects?

offers a diagnosis that considers geographic location and

A: So far, authorities such as the Ministry of Energy and the

specific energy supply and demand to establish a strategy

guidelines of the National Electric System Development

for reducing costs in the energy supply. We customize the

Program (PRODESEN) have been trumpeting the use of

strategy so companies can reduce electric energy costs.

renewable energy. For example, the Energy Transition Law

We believe that efficiency in the electric energy supply

targets increased energy production from sustainable

will be an important differentiator in the future. Two key

resources with regulations that force companies to

elements responsible for the competitiveness and the

use renewable energy sources as a percentage of their

low prices that we have seen in the long-term bidding

energy consumption and through mechanisms such as

processes have been low capital costs and reduced

CELs, which transfer liquidity to the development of


61 Tamuin power plant, San Luis Potosi, AES México

sustainable projects. These two mechanisms will foster the

contribution of geothermal to the total amount of energy

development of the renewable energy market in the next

that is needed is very low and regardless of how much we

few years. However, the development will be limited. We

could develop, it would still yield a very low contribution.

cannot expect renewable sources to replace continuous

It contributes to the solution but does not solve the

energy-generation sources such as fossil fuels. The great

problem. Until we find a solution for the problem of

challenge for renewable energy will be intermittency,

renewable energy storage, we will have to continue using

particularly when it comes to solar and wind energy.

fossil fuels. Even though we can develop technology that

Hydroelectric energy is more constant but its growth

makes storage of renewable energy from intermittent

potential is limited because we are already using the

sources economically viable, the big problem ahead is

country’s largest water bodies.

sustainability. When you store green energy you remove the green part of it. If we do not want to be dependent

We can expect renewable energy to be a complement and

on natural gas from abroad, we need to develop our own

to help reduce the total cost of electric generation. But

natural gas industry, a task that is CNH’s responsibility.

energy for industrial purposes will have to be supplied by constant power generation sources, of which we will use

Q: Are all the efforts of the government and private

the least polluting one. We will substitute oil and coal with

companies enough to meet the natural gas demand?

natural gas. This creates the challenge of determining the

A: The development of a national natural gas industry will

price of natural gas in the long run. The changing political

take a considerable amount of time and we will continue

landscape in the US, our biggest natural gas supplier,

importing natural gas for at least another 10 years. We can

might lead to an increase in prices. PRODESEN also states

develop a national industry and be independent but it will

that the government intends to almost double its current

depend on the success we have developing the deepwater

power-generation capacity, going from 65GW installed

oil industry. This would allow us to have an interesting

capacity up to 100GW, while also reducing 15 carbo-

combination of natural gas and oil. For this to happen we

electric gigawatts. This leads to a high dependency on

need to have the necessary infrastructure.

natural gas. The risk of more expensive natural gas leads to the maximization of the existing gasification terminals, of

Q: What projects does KPMG have lined up for 2017?

which those in Altamira and Manzanillo are interconnected.

A: We will continue promoting services that help

The problem is that that is not enough to supply the entire

companies and developers complete their projects, using

country. We have an additional gasification terminal

an integral perspective that includes the commercial,

in the north, owned by a private individual, but is not

regulatory and financial aspects of the project. Also,

interconnected. Given the dependence we have and will

through our international network we can provide the

continue having on natural gas, it would be advisable to

needed experience for new projects that have not been

have more gasification terminals. It is almost a matter of

developed in Mexico. We can offer a multidisciplinary

national security.

team, with local knowledge and global reach, which allows us to provide an integral service.

Q: Is the use of geothermal energy viable for reducing Mexico’s dependence on natural gas?

KPMG is among the world’s largest advisory and auditing firms. In

A: The challenge of geothermal energy generation

Mexico, it helps companies sort through the complexities of the changing

is the amount of energy that can be generated. The

energy environment with legal, tax and technological expertise.


VIEW FROM THE TOP

FOREIGN COMPANIES SEE UNTAPPED POTENTIAL JIM HEIDELL Director Global Energy & Utilities of PA Consulting 62

Q: How has PA Consulting helped private and state-owned

A: Our focus is on identifying our clients’ main competitors

companies during the transition to an open market?

and forecasting what their next move will be, for instance,

A: PA Consulting has been working with CFE and

which region they are targeting for their project’s next

PEMEX to restructure several aspects of their former

location to participate in the power auctions. Price

business divisions. Our work with the government has

forecasting is the main concern for clients that are not

mostly focused on tariffs, product pricing systems and

interested in the tenders but prefer selling electricity to

the transition from a vertically integrated monopoly to

large industrial customers through PPAs. They want to know

an open system, developing strategies to thrive in this

what prices they can get in the wholesale market as well

competitive environment. In the private sector we have

as the potential transmission congestion costs so they can

collaborated mostly with international power companies,

design an optimal business strategy. We help these clients

most of which already have generation projects in Mexico

understand market issues, providing future pricing forecasts

through CFE contracts and want to understand the

as well as mapping potential customers. We also support

attractiveness of participating in the new competitive

companies developing financial models to determine if they

market. PA Consulting also works with industrial off-

can see an economic return on their investments.

takers, mainly manufacturers, to improve their processes and become more competitive. We have done some work

Q: What strategies should companies consider if they

for the government on domestic content issues, which is

want to succeed in the power auctions?

a new requirement established by the Energy Reform for

A: It is important to understand the tendering process

foreign companies.

if you want to build a successful proposal. The prices tendered in CFE’s power auction were low on average but

Q: What are the positive and negative aspects of the

US$45 per MW/h is not the final price that the company

Reform that international companies are looking at?

will get. If a tender’s winner produces power in peak

A: Energy companies experience highly competitive

hours it will receive higher prices per megawatt-hour. It

situations in the US and Europe and face difficulties

is important to keep in mind that the companies’ returns

putting capital to work for good economic returns,

will be influenced by different factors. Other elements

partly because of the low-interest rate environment

also have the power to tip the balance toward a specific

globally.

provided

proposal besides price. Location is a critical aspect that

untapped opportunities for these companies, which see

can make the difference between a winning and losing

in the country a large investment potential. The Reform’s

proposal. Companies might not get a higher price for

novelty has brought uncertainties but international

locating in a region with constraints but their proposal

companies are working hard to understand the market,

could be treated more favorably. Another component of

which is not always an easy task. The main priority for

a successful proposal is a diversified revenue stream. A

them is to determine whether or not it is worth it to make

company building a 100MW wind farm might only need

large capital investments in Mexico’s energy sector. In

to sell 80MW to CFE and the rest on the open market

the past five years, the competition to win long-term

or to private off-takers. We can help companies define

contracts with CFE had become fiercer but offered

these strategies and look for potential purchasers that fit

low returns on investment (ROI). Companies are now

their projects’ characteristics.

Mexico’s

market

liberalization

analyzing if the conditions have changed under the new legal framework.

Q: To what extent do your clients consider transmission and distribution investment attractive?

Q: How can you help private companies successfully

A: Many of our clients have expressed interest in

enter the electricity market here?

investing in transmission infrastructure because they


perceive fewer risks than in power generation but they

by selling electricity, so we expect companies in Mexico

have a hard time understanding CFE’s process for

to soon start including other types of services and

establishing investment partnerships in transmission

process improvements to complement their businesses’

and distribution. We support our clients to access CFE’s

competitive advantages.

investment opportunities, whether it is by participating in a competitive tender or by establishing business

Q: Which market schemes are most attractive to

relations with the state-owned company. We also help

international companies?

companies understand how transmission tariffs will work

A: Private companies willing to enter the Mexican

so they can determine if they will see an attractive ROI

market are mostly looking to sign PPAs with CFE. As

within a certain period. In the US there are two business

long as CFE is interested in establishing long-term

models, which can take up to 20 years to materialize, for

contracts for 15-20 years, there will be a lot of interest

companies investing in transmission infrastructure that

from foreign renewable energy companies, particularly

are not electric utilities. The big question for Mexico is

as these ease financing. Without long-term contracting

how long it will take private companies to participate in

conditions, investors and financial institutions would be

these projects and recover their initial investments.

hard-pressed to finance renewable energy projects.

Q: How do you deal with the uncertainties in Mexican

Q: What do you think will be your most popular service

markets when building your clients’ business models?

for clients in the energy sector?

A: We have a model of Mexico’s market based on the

A: Forecasting energy prices and defining the market

52 transmission regions defined by CENACE. This model

potential will be our primary services in the coming

dispatches generation on an hourly basis to meet the

years. We also have clients looking at opportunities in

hourly forecasted load. We analyze the power flows

natural gas pipeline investment but the big question

through Mexico’s different regions, identifying where the

is whether a market exists for projects outside CFE’s

demand is and the loads are, which allow us to forecast

power

in which nodes there will be congestion. The other side

make it difficult to forecast the potential of the retail

is the transmission costs, which we can also forecast to

electricity market. We know that CRE is working hard to

analyze their impact on estimated production rates.

clarify these processes. Once this barrier is overcome we

auctions.

Uncertainties

in

electricity

tariffs

expect to see increasing participation in the wholesale Q:

Should

companies

prepare

for

disruptive

electricity market. In the US the majority of qualified

technologies such as increased distributed generation

users shifted to the open market instead of buying

and energy storage?

directly from a utility and we expect to see a similar

A: We have already included disruptive technologies

pattern in Mexico.

in our forecasting models. We expect to see an increasing number of distributed generation projects

It is difficult to say when the market will consolidate

from commercial customers like Walmart, which has

but it will depend on CRE and the Ministry of Energy’s

plenty of capital and rooftop space for solar panels.

decisions regarding legacy CFE generation projects.

Having more distributed generation will definitely

CFE holds projects of around 50GW in the country,

impact the market’s functioning, bringing negative and

which makes it difficult for other companies to compete.

positive elements such as mitigating congestion. We

Once there is more transparency about CFE’s new

do not expect to see similar growth in energy storage

role, it will be easier to measure the market potential

technologies in the short term. As long as net metering

for others. We hope this process takes no more than

can be done and energy rates are relatively low, energy

another year or two. Some clients are frustrated by

storage for distributed projects is not economically

the market uncertainty and the perceived slow pace

viable. As a utility resource, however, it will become

of development but Mexico has done an incredible job

increasingly important in Mexico, especially considering

when compared with other countries, which took much

the country’s ambitious clean energy generation goals.

longer to set up a functioning market. We are amazed

Nonetheless, energy storage is still expensive even in

by Mexico’s achievements during the past two years,

the US and Europe, which makes it a questionable use

and we foresee it will take only a couple of years more

of resources for Mexico.

to have a mature market in place.

Energy efficiency will become more important in the

PA Consulting is a London-based consulting, technology and innovation

coming years. Energy companies will start to see the

company offering tech solutions and product development as well as

same kind of competition that now exists in the US,

helping clients navigate issues of regulation, asset management and

where it is hard to maintain healthy balance sheets just

performance.

63


VIEW FROM THE TOP

THE FUTURE OF ENERGY: EXCITING BUT UNCERTAIN SEVERO LÓPEZ Partner at Galo Energy 64

Q: What must Mexico do to provide more certainty to

participate in the market besides the national champions

international investors?

opened up but there are many factors to consider when

A: Certainty for international investors is directly related to

evaluating those. For example, Mexico’s deregulation

the pace at which Mexico can make its institutions and the

process came at a complicated worldwide historical

people inside those institutions work according to the vast

time, where firstly, the traditional power market utility

regulatory reforms. Most deregulation programs around

business model is being challenged and questioned by

the world have taken at least 10 years to take effect. Mexico

distributed generation technologies as we speak. Second,

is in the early stages and the new organizations need to be

the whole reform process is happening when Mexico does

staffed and people’s mindsets and thinking need to change

not have any policy or operational experience beyond

to understand a deregulated energy market. The spirit of

the Independent Power Producer (IPP) or the limited

the Energy Reform was mostly drafted and modeled after

self-supply model. Third, after almost all countries have

the market ideas of a renowned Harvard professor named

deregulated their power sectors there is a new surge of

William Hogan, along with the basic structural elements of

renewable energy and sustainable solutions in response to

other working markets like the PJM in the US. Therefore,

climate change. All these trends are taking place in Mexico

Mexico’s model contains novel economic regulatory

simultaneously and in a very short time span.

mechanisms and is characterized by a very aggressive and short time frame for implementation. This combination

Q: How has the zero-corruption policy affected Galo

has not been seen in other countries and that makes us a

Energy’s networking and business?

world laboratory for deregulation.

A: In addition to the ethical reasons that sustain the essence of the consulting model at Galo Energy, we believe that a

Q: What risks are prospective clients worried about?

zero-corruption policy and transparency help the system

A: There are risks such as corruption that are aggravated

work and make it more valuable. Strong ethical business

by the weak anticorruption control systems in Mexico.

performance has been a great business proposal for Galo

There can also be problems with the acquisition of land

because once our clients begin working with us in Mexico

for projects and rights of way for linear infrastructure

they create a long-term and reliable relationship. This

layouts. This situation puts a very high burden on investors

transparency is also important because we participate in

because they can see their profitable business scenarios

other forums with even stricter regulations, such as those

drift away very quickly.

in the US. Our strategic partners also abide by these codes of conduct.

Q: Are companies losing opportunities to invest in the energy sector in Mexico?

The energy industry is a high-stakes, high-returns industry

A: Go-getter companies are definitely obtaining the lead.

that cannot be examined without involving complex political

They are paying a “first-move price” but they will do very

issues. It is no surprise it has become part of the anticorruption

well in the long run. On the opposite side, those companies

agenda of citizen organizations that are pushing for a more

that work their business by remote-control, hesitate and

transparent and ethical business and political model in

are slow to get interested in Mexico will not advance as

Mexico. The new regulatory structure gives enough space for

quickly as others. Once the sector became deregulated,

any financial model but Mexico still needs to tap into a huge

opportunities

amount of resources from national and foreign investors that

for

other

utilities

and

companies

to

had not considered energy before because of the restrictive Galo Energy is a Mexico City-based energy consulting firm with

nature of the prior model. Important benefits of deregulating

experience in business development, regulation and government

the market are that the risk portfolios can now be tailored for

relations as well as policy analysis.

debt or equity and investors can come from wherever.


INSIGHT

FINANCING STILL DIFFICULT FOR GREEN DEVELOPMENTS SOFFIA ALARCON-DIAZ Director General of The Carbon Trust 65

Affordable financing remains one of the main obstacles

says. “We support companies, state governments such as

for the development of energy-efficiency and carbon-

Jalisco, Tabasco, Yucatan, Baja California and Morelos to

reduction projects in Mexico even as renewable electricity

create energy-efficient business models. We engage with

generation sees a boom in terms of both private and

the Ministry of Finance to explain the potential financial

awarded projects, with potential financiers still not fully

savings resulting from such a project. We understand that

aware of the benefits of these initiatives. That is something

low-carbon projects, in the end, make sense financially.”

the UK-based nonprofit Carbon Trust is looking to leave in the rear-view mirror by working with the Mexican

The Carbon Trust uses a methodology called Technology

government and local authorities to improve upon the

Innovation Needs Assessment (TINA), which explores

Energy Reform’s initial steps toward a cleaner future,

innovation for clean technologies to help governments

according to Soffia Alarcón-Díaz, Carbon Trust Mexico’s

establish their priorities. Technologies like wind, solar and

Director General.

thermal energy should be among the authorities’ priorities, she says. “We support the government in climate change

“We help both the government and the private sector

and clean energy-related policies. In climate change we

transition to a low-carbon economy. The main challenge

are supporting the roadmap to develop the carbon market

to achieve that is financing. Some projects are great ideas

in Colombia and we hope to do the same here in Mexico.

but remain as such due to a lack of understanding between

With the states, we are helping them develop a climate

the funders and the developers. Carbon Trust supports the

change program. We are also working on the TINAs and

translation of great ideas into investment opportunities,”

the low-carbon states project and soon we would like

Alarcón-Díaz says. Mexico’s new look electricity market

to start a TINA project to prioritize technology in the

has been partly designed around the country’s ambitious

public and private transportation sector. Smart grids,

target of obtaining 35 percent of its energy from clean

transmission cables and energy storage are also areas

sources by 2024, as well as the government’s commitment

that need a lot of development and we have the vision of

to the UN’s Conference of the Parties (COP) on climate

aiding them in any way we can.”

change to reduce carbon black emissions by 51 percent by 2030. The Carbon Trust, Alarcón-Díaz adds, fits into

The Trust also works with private companies by helping

this framework as a facilitator and mediator with Mexico’s

them with the process of carrying out their mandatory

Ministry of Finance for funding low-carbon programs in

carbon footprints, which have to be logged onto Mexico’s

states like Jalisco and Tabasco.

National Emissions Register (RENE). On the subject of finance, the Trust is a supporter of green bond initiatives.

“Our

process

management

begins plans.

with We

the lay

design out

of

carbon-

activities

Mexico, Alarcón-Díaz says, needs a “real” carbon market

and

that promotes and mandates companies to reduce

recommendations to achieve a desired goal, then we

emissions and invest in low-carbon solutions. “China, for

prioritize them for investment considering the timeline we

instance, is doing it and boosting its competitiveness

wish to follow, and finally we select five or six projects that

because they are including more efficient industrial

could be supported. We then encourage the Ministry of

processes that pollute less. Private companies everywhere

Finance to invest money earned through energy savings to

should follow that example to contribute to the global

develop the selected projects. We also help the states to

mitigation goal.” The Energy Reform is a good first step,

identify funding from international and commercial banks,

“but we need to create more opportunities, which come

donors or national funds,” Alarcón-Díaz says. Energy-

from the economic and financial sectors. Right now we are

efficiency projects should be designed to include both

developing a project to identify the amount of investment

GHG emission-reduction goals and financial savings, she

needed in Mexico to catalyze green investment."


Wind turbine testing under intense conditions, Oaxaca, INEEL


POWER AUCTIONS

3

The crowning achievements of the Energy Reform regarding the electricity market were, without a doubt, 2016’s power auctions. Those two processes not only achieved some of the world’s lowest energy prices for long-term energy contracts but proved that the authorities of a country with deep state-monopoly credentials in energy could leave all that baggage behind and launch a new and flexible market from scratch. And surprisingly for many a skeptic, succeed at it.

Those auctions, as well as the prospect of more to come in 2017 and beyond, attracted some of the most respected international names from Italy, China and Spain as well as hungry home-bred upstarts looking to notch victories. This chapter offers the point of view of some of those winners that now have the task of completing energy generation projects – most of them based on green technologies such as solar and wind power – under very competitive terms and short deadlines. It also showcases the position of regional authorities and technology suppliers involved in the process.

67


CHAPTER 3: POWER AUCTIONS 69

70

ANALYSIS: Power Auctions: Icons of Reform

71

VIEW FROM THE TOP: Eduardo Meraz, CENACE

72

EXPERT OPINION: Paolo Romanacci, Enel Green Power Mexico

74

VIEW FROM THE TOP: Miguel Alonso, ACCIONA Energía

75

INSIGHT: Asier Aya, Jinko Solar

77

VIEW FROM THE TOP: Eduardo Batllori, Government of Yucatan

78

VIEW FROM THE TOP: Philippe Delmotte, Engie Mexico

79

VIEW FROM THE TOP: Felipe Salazar, Alten Renewable Energy

80

VIEW FROM THE TOP: Alberto Haito, Clifford Chance

Martin Menski, Clifford Chance

82

ROUNDTABLE: What Was Your Reaction to the Power Auctions?

84

VIEW FROM THE TOP: David Fatzinger, InterGen

85

VIEW FROM THE TOP: Rafael Valdéz, Envision Energy

86

VIEW FROM THE TOP: Martín Esparza, SME

88

INSIGHT: Hugo Galindo, Grenergy Renovables

89

INSIGHT: Borja Guinea, Fotowatio Renewable Ventures

90

MAP: Power Auctions


ANALYSIS

POWER AUCTIONS: ICONS OF REFORM As a direct result of the Mexican Energy Reform, the

The second auction also surprised observers as the low-

world watched the country carry out its first two long-

price tendency marked since the first process continued.

term auctions to assign PPAs for the sale of power,

“The second power auction’s results can be qualified

capacity and CELs in 2016. The processes touched

as a major success for the country,” says Jaime de La

off a steep learning curve as authorities, developers

Rosa, President of the Mexican Energy Association

and companies are all still new to the scheme, but the

(AME). “The industry already expected competitive

outcomes were hailed by players and regulators alike.

prices based on the first auction’s results, which was internationally recognized as a successful exercise. But

70

“The outcome of the power auctions was qualified as

the second auction managed to surpass the high bar set

a success by several international media, including The

by CENACE during the first round.”

Economist, Forbes and Bloomberg, and this successful experience has given Mexican authorities the confidence

TECH IN THE MIX

to strengthen and enhance upcoming editions,” says

Bids got more complex and competitive as more

Guillermo García Alcocer, Chairman of CRE.

technologies entered the mix. This was also a result of the change in the capacity purchase offers, where

The first auction was a pilot, creating a starting point

the MW/year unitary price offered by CFE went from

from which the process could be improved. CENACE

MX$10,000 to MX$1.69 million from the first to the

received 226 sale offers and designed a mechanism to

second auction, attracting winning bids from combined-

adjust the selling price to reflect the real value for the

cycle, geothermal and hydroelectric energy projects.

buyer. This price adjustment mechanism considered the location, the price indexation depending on whether it

The two processes awarded 34 companies that are

was in US dollars or Mexican pesos and a tie-breaking

expected to invest US$6.6 billion and install 5GW of

criteria for identical offers in quantity and price. The

new clean energy capacity. Solar power surprised both

power plant’s distance from the interconnection point

national and international observers by sweeping the

was the most determinant variant in the algorithm.

floor and becoming the source of 54 percent of the

This variant resulted in Merida’s projects being highly

energy awarded in the first bidding round. It followed

competitive as the state’s price zone caused a drop in

with over 40 percent in the second.

the unit price by US$21.98 per MW/h, increasing the total economic surplus of the offers from that location.

The

third

and

fourth

long-term

power

auctions

are expected to be held in 2017. The third will be

“In a fast-changing energy world,

administered by the Ministry of Energy and CENACE, after which the fourth power auction will be the purview

Mexico is a leading proponent of

of CRE. One of the most anticipated characteristics

change”

companies as power purchasers, a role so far reserved

Mexico Energy Outlook, IEA.

of Electricity, the authorities are adjusting the process to

of the future auctions is the participation of private for CFE. According to César Hernández, Deputy Minister incentivize a larger participation from private companies

During the first auction, an error in the algorithm resulted

in the bids as buyers, although the final regulation is yet

in some projects being awarded when they should not

to be published.

have been. The Ministry of Energy repeated the process, raising some concerns and pushing the authorities to

“The major challenge for 2017 is to continue operating

prevent further skepticism by allowing open access

under these new regulations as they imply a paradigm

to the program used to determine the winners. This

change. The Mexican electricity industry operated

call for transparency extended to the second power

under a monopolistic model for more than 70 years and

auction, prompting several key players to praise the

it now has to get used to a brand-new model focused

process. “We are very satisfied with the transparency

on competitiveness and structural separation. We must

and coordination with which the government held both

not forget that many of the market mechanisms did not

auctions,” says Héctor Olea, CEO of Gauss Energía and

exist in Mexico before. It is a new field for all of us. The

Chairman of Asolmex, a Mexican association for PV

results have been positive so far but it is not an easy

energy.

process,” he says.


VIEW FROM THE TOP

AUCTIONS RETAIN THE SPOTLIGHT EDUARDO MERAZ Director General of the National Center For Energy Control (CENACE)

71

Q: What were CENACE’s major contributions to the

in the upcoming long-term power auctions. We look

electricity industry in 2016?

forward to leveraging our previous experiences to ensure

A: Two years after its creation in 2014, CENACE significantly

these auctions are successful. Regarding the medium-

contributed to the accomplishment of key milestones in the

term auctions, which will be held for the first time ever

implementation of the Energy Reform, such as the opening

in 2017, we expect their guidelines to be ready during the

of the short-term market for Baja California, the National

first months of the year. The participants’ interest in these

Interconnected System and Baja California Sur. The two

auctions will be mainly driven by the volumes required

long-term power auctions in 2016 were among the highlights

for capacity and energy, which will be established and

of the year. In the first event carried out in March 2016, the

published by CRE. We expect the first medium-term

unitary price per CEL and energy (MWh) reached US$41.8, 40

auction to take place in the last quarter of 2017.

percent below CFE’s forecasts of over US$70. The expected investment inflow from this auction was estimated at US$2.6

Q: What role do human resources play in the center’s

billion. The second auction held in September allocated 80

development and what challenges have you faced?

percent of CFE’s capacity demand, 84 percent of energy and

A: CENACE’s strategy leverages the talent, experience

87 percent of CELs, attracting investments of around US$4

and professionalism of its collaborators, which have been

billion. Other milestones included the preparation of the two

crucial to the accomplishments of the past two years.

last PRODESEN, a document whereby CENACE proposes

In addition, as many young Mexican professionals have

the infrastructure needed for the correct development of

joined CENACE in recent years, we have strengthened

the National Electricity System over the following 15 years. A

our workforce to successfully accomplish our tasks. We

project which stands out in PRODESEN 2016-2030 is the first

support the federal government’s initiatives to develop

HVDC line to be built in Mexico, connecting Oaxaca with the

young professionals with the capabilities demanded by

country’s central region, which will improve the transmission

the new energy industry.

of outstanding wind resources to high-demand zones. Q: How do you envision the development of the electricity Q: How would you describe the process of conducting

industry in the short and medium term?

Mexico’s first two long-term power auctions?

A: The long-term power auctions will stay in the spotlight in

A: The first power auction was a historic event in the

2017 because they provide certainty for new investments in

development of Mexico’s electricity industry and the lessons

the market. We will work on strengthening the power grid,

learned helped us raise the performance bar for the second

preventing bottlenecks that preclude the participation of

edition. We improved our IT systems and strengthened the

new market entities and promoting competitive clean-

review process for the offers received, which helped us

energy technologies in those regions with the best

achieve higher efficiency levels. We are also very proud of

development potential. We expect the short and medium-

CENACE’s involvement in both auctions as they showed the

term markets to optimize the use of energy infrastructure

ethics, experience and professionalism of our collaborators.

and to drive down electricity prices to competitive levels.

These events also revealed the growing competitiveness of

The expansion of the interconnection capacity with the US

the new market emerging in Mexico.

is likely to be an interesting alternative to trade energy in larger volumes while making the most of renewable

Q: What can be expected from the long and medium-

energy resources.

term power auctions that will take place in 2017? A: We are analyzing the possibility of including a bureau

The National Center for Energy Control (CENACE) is a decentralized

of contract administration so that other load-serving

public entity that was founded in 2014 to act as the country’s

entities besides CFE Suministro Básico can participate

independent grid operator.


EXPERT OPINION

SOWING SEEDS AND REAPING SUCCESS PAOLO ROMANACCI Director General of Enel Green Power Mexico

72

We have bet on Mexico for many years now. Currently,

Private off-takers are key to our local business strategy,

we operate 729MW of installed capacity through wind,

as we are leaders in energy self-supply. We had great

hydro and solar power plants. The Energy Reform

success in Mexico’s long-term power auctions in 2016 and

has been a complete success because it has brought

we are working to enter the short-term energy market in

stability and many benefits to the country’s renewables

the near future. All three business models are extremely

market. We are now the largest player in the sector by

exciting for us and we are already planning the feasibility

installed capacity and project portfolio and our business

of other projects for the coming years. The latest auctions

will continue to grow at the same speed as the Mexican

showed that the system works and we expect the other

energy market, as long as the rules continue to be clear

two models (self-supply and short-term market) will

and transparent as they have been and as long as the

share the same success to have an adequately liquid

level of competitiveness remains.

market. This is only going to be achievable as long as the country pushes for more renewables, clear rules and the

Given the price levels in the last two long-term power

lowest prices possible. We are a global operator with a

auctions and an upward trend in the cost of gas, our

well-balanced and diversified portfolio. As far as Mexico

expectation is that the government will create a higher

is concerned, the latest auctions demonstrated that

penetration of renewables, which makes Mexico an even

the most promising renewable technologies are mainly

more important market for our global business strategy.

solar and wind. Our goal is to continue developing our

The Enel Group entered the Mexican renewables market

business in those areas.

in 2007, when it acquired three hydropower plants with a total installed capacity of 53MW in the country’s

During the last 10 years, energy auctions with clear and

western states of Guerrero, Michoacan and Jalisco. In

transparent rules have been globally demonstrated to

addition to these plants, today we operate 675MW of

be the most efficient system with which to achieve a

wind power. Overall, we have invested around US$1.5

diversified energy mix and ensure competitive prices.

billion since our arrival in the country.

In Mexico, the implementation of the Energy Reform and the success of the latest long-term power auctions

During the first long-term power auction in March 2016,

are boosting the development of the country’s energy

the Group’s Mexican renewables subsidiary, Enel Green

sector and have quickly established Mexico’s energy

Power México, was awarded three PV solar power

regulatory system as a best practice worldwide. For

projects with an overall installed capacity of around 1GW,

auctions to work and contribute to the creation of a

more capacity than any other participant. Each project is

healthy and competitive energy industry, they have

supported by a contract providing for the sale to Mexico’s

to be backed by robust and strong planning to avoid

CFE of both specified volumes of energy for a period of

price distortions that could occur due to limitations

15 years as well as the related clean energy certificates

on the grid, reserve conditions and energy congestion.

over a 20-year period. We will invest approximately

Regulatory authorities have to take into account that

US$900 million in the construction of the three plants,

renewables are capital intensive and require long-term

located in Coahuila (Villanueva and Villanueva 3) and

policy and price stability.

Guanajuato (Don José), all of which are expected to enter into operation in 2018. Additionally, at the country’s

One of the major improvements that took place between

second long-term auction in September, Enel Green

Mexico’s first and second long-term auctions was the

Power México was awarded the 93MW Salitrillos wind

decrease in tariffs produced by the adjustment factors

project in Tamaulipas, whose construction will require an

of generation zones. The prequalification and bid

investment of nearly US$120 million.

process evaluation was faster and linear, which clearly


showed the experience acquired between the tenders.

all stakeholders, starting with Business Development,

Another positive aspect is that the general rules of

Engineering & Construction and Procurement right up to

participation remained, proving the overall scheme

Operation and Maintenance. As a major power producer,

is extremely successful. Some improvements can still

we have a unique responsibility to our employees, the

be made with regards to participation criteria, such

communities around our facilities and the environment.

as assessment of the development status of projects

This responsibility offers a great opportunity to improve

prior to their participation in the auction. We have been

the quality of life in communities, as well as giving

able to position ourselves as leaders in the country’s

our company the opportunity to be more competitive

auctions above all thanks to Enel Group’s lengthy and

in the current energy environment. Over one-third

global experience in the renewable sector. We know

of our electricity generation already comes from

how auction processes work. We participate with solid

renewable sources and we are constantly working with

and technically well-developed projects that are at an

our partners to develop new, environmentally friendly

advanced stage for acquiring permits, reducing risks

technologies with the aim of achieving decarbonization

in construction and creating an environment of trust

by 2050. In Mexico, we have encouraged a range of CSV

among suppliers.

local initiatives. Through a Research and Technology Transfer agreement between Enel Green Power México

Of course, there are challenges we expect during

and Fundación Produce San Luis Potosí, we add to the

construction of the awarded projects. First, Mexico

knowledge and experience gained in technical and

could experience a congestion of permit processing that

operational agribusiness and food chains, driving local

could cause delays or difficulties to the finalization of

social and economic growth. Recently, we signed two

the plants. To mitigate this risk, we entered the auctions

agreements with Autonomous University of Chapingo

with projects that are already in an advanced stage of

to collaborate in research and technology transfer to

permitting. Secondly, social factors have to be taken into

promote community development and sustainability

account given the quantity and geographical distribution

projects.

of the projects. We do not foresee problems in this area for us because one of the key pillars of our philosophy and business strategy is based on sustainability, which forms part of the creating shared value (CSV) approach. Enel’s 200MW Dominica wind farm in San Luis Potosi was awarded the Infrastructure 360º Award in the “Climate and Environment” category, due to its contribution to the diversification of Mexico’s energy mix, as well as its annual emissions reduction of around 300,000 tons of CO2. The Inter-American Development Bank (IADB) also praised Dominica’s activities in ensuring its harmonious integration with surrounding ecosystems, such as the construction of greenhouses to preserve

Enel Green Power Mexico signed a deal in October 2016 with HSBC Mexico to provide the bank with 50GWh a year from wind power sources

local cactus species, production of sustainable cattle forage from maguey and the donation of two 3KW solar

We will continue to work to keep growing in the

facilities to local schools to help them meet their energy

renewables generation sector. As a consequence of the

consumption needs.

Energy Reform, we expect the market to open up even more and present new opportunities which we will be

For some years now, as a group we have been developing

ready to take advantage of. As more participants appear

an environmental and social sustainability strategy that

in the energy sector with an increase in competition,

goes beyond the legal requirements of each country

we can expect a decrease in costs related to energy

and refers to the standards of the World Bank and other

management and growing liquidity in the market in

global best practices. Our philosophy builds upon the

terms of suppliers and users, not just generators. This

CSV model, which combines the business perspective of

is why we think that one of the key points for the future

the company with the needs of communities in

are services to end users, in particular commercial

the areas where it operates, by pursuing decisions

and industrial qualified users. Likewise, as a result of

that create value for both sides. This model makes

the Energy Reform the market trend will move toward

sustainability a key factor across the whole value chain,

energy-efficiency services, user digitization, distributed

implementing procedures and tools that add value for

generation, demand control and electric mobility.

73


VIEW FROM THE TOP

LOCATION, LOCATION, LOCATION MIGUEL ALONSO Country Manager of ACCIONA Energía

74

Q: How was ACCIONA Energía able to compete in the

first auction because it was considered a strategical

market given such low prices?

move for us.

A: This phenomenon did not start in Mexico but in other international markets, for example Peru, where some

In the second auction we decided to build a solar energy

companies implemented risky strategies to establish a

proposal because we wanted to enter the PV solar sector.

presence. including lowering their prices to record low

ACCIONA Energía has been involved in the construction of

levels. In this aggressive competition for positioning, there

all types of projects globally – wind, biomass, solar – but

were players, including ourselves, who could not reach

in Mexico we are mainly considered wind farm developers.

these prices. We then realized we needed to rethink our

We then wanted to broaden our presence in the Mexican

approach and look at what these companies were doing.

renewable energy sector by entering the solar market

We were one of the few large names in the industry to

with a profitable offer. Our solar project in Sonora will be

read the signals and adjust its generation prices to be

offering 478MWh and a 29MW capacity per year as part of

more competitive.

the agreement with CFE but we are also about to close a bilateral contract with a private off-taker to sell the surplus

Suppliers and manufacturers in the industry have also

energy produced at this facility.

stepped up their game to meet the demands of project developers. These prices were the result of efforts across

Q: What drove ACCIONA Energía to select Biofields as its

the entire industry. It is important to note that the reduction

partner for the solar project in Sonora?

in price also means less profitability, it has remained the

A: ACCIONA Energía has enjoyed having Mexican partners

same. We have fixed inefficiencies and optimized our

since it arrived in Mexico 32 years ago. We consider

costs without compromising quality. In 2010 the average

ourselves a Mexican company after that many years in the

price per megawatt of installed wind energy capacity was

market but few others see us that way. Having Mexican

US$2 million. Now the cost is much cheaper because the

partners adds a lot of value at the national level. We

installation and component costs are lower.

have had extensive experience in the past working with companies like CEMEX. It was like having a big brother

Q: What was the difference in strategy going into the first

in the schoolyard, helping us to be more accepted.

and second auctions?

Working with Biofields is also going great. They have

A: Our strategy was all about location. In the first auction

strong experience in agricultural management because

there were some advantages given to projects located in

they started as a biofuels company, making them the best

the Yucatan peninsula. We were then able to prepare a

partner for our PV solar project in Sonora.

highly attractive proposal for a wind energy project there, offering a great number of equivalent full-load hours. For

Q: What other opportunities do you see for ACCIONA

the auction process we used a differentiation strategy,

Energía besides the power auctions?

presenting two offers for the same project, one for CELs

A: The auctions were the first incentive the market

and one for energy (annual megawatt-hours). We won

needed to start moving forward. The projects and the

by a tight margin but with a project that is profitable and

needs were there but nothing happened until CENACE

able to provide CELs and energy at competitive prices.

organized the first auction in March. The Mexican

ACCIONA Energía really wanted to be a winner at this

government is making a strong push on this front that we as a renewable energy company are supporting by

ACCIONA Energía is a global operator of renewable energies and a

enhancing trust in the market. ACCIONA Energía is not

division of ACCIONA Group, a leader in the promotion and management

just some random name selling energy, it has 32 years of

of infrastructure projects with over 100 projects in Mexico.

experience in this market.


INSIGHT

THE RIGHT BET ON MEXICO SOLAR ASIER AYA Managing Director Latin America at the International Power Division of Jinko Solar

75

Looking for attractive and competitive projects overseas

handle the project. We finally found a suitable substation

for the first time, Jinko Solar arrived in Mexico just a few

with more than 250MW of available capacity, more than

months before CFE’s first power auction took place in

enough to support our project,” Aya adds.

March 2016. The company put its proposals together in record time and won three ventures, totaling 188MW.

Jinko Solar’s projects in Mexico represent a total investment of around US$300 million. The company

“Jinko Solar has several years of experience working as

will provide equity and fund the rest from commercial

an Independent Power Producer (IPP) in China, where we

banks. Aya says the 15-year tenure established in the PPA

manage around 1.2GW,” says Asier Aya, Managing Director

“impacts on project financing processes because when

of Latin America at the International Power Division

structuring the debt, banks only take into account the

of Jinko Solar. “Last year, the company’s headquarters

contracted period. The rest represents a market risk that

decided to internationalize its IPP business, creating

banks prefer to avoid.”

an international power division. We started to look at opportunities in different regions, mainly through power

The novelty of the Mexican spot market also elevates the

auctions, and Mexico was the first in which we succeeded.”

risk for the period after the PPA term because there are no historical records for reference. But Aya says that has not

Aya considers the Mexican auctions to be “the most

been an impediment to financing. “Some banks were not

complex in which we have participated so far.” He

showing much interest to finance the projects before the

attributes the company’s success to its flexibility as well

results of the power auctions were published but now we

as having a highly professional and experienced team

have more banks interested in financing our projects than

that has strong capabilities in tenders and developing and

we actually need,” he says.

selecting the right projects. Mexico’s first power auction saw record low prices for solar To fulfill the contract conditions, Jinko Solar will build three

energy, raising doubts about the projects’ profitability.

new solar parks that should start commercial operations

Aya, however, is not concerned. “We offer electricity

by mid-2018. The 100MW Viborillas park in Jalisco and

prices according to the projects’ real costs, including EPC

the 70MW Cuncunul project in Yucatan will be developed

and O&M. Our detailed financial model defines our tariffs

by Jinko Solar’s partner, Solarcentury. An additional solar

so we can make tangible and successful projects,” he says.

park in Yucatan that Jinko Solar acquired from another company will generate the remaining 18MW. In all cases,

Around 95 percent of the projects’ power production

Jinko Solar’s International Power Division participates as

will be sold to CFE in line with the PPA’s established

investor and owner.

conditions. The rest will be traded on the spot market. “We are analyzing the best strategy for selling energy.

“The Jalisco project was already advanced in its permit

We have received a number of proposals from qualified

processes. In Yucatan, we decided to take the risk and

suppliers and are evaluating different options,” Aya says.

develop new projects from scratch motivated by the

The company is now focusing on having the projects

positive US$22 per MW/h regional factor in place there.

ready to roll out in 2018 and foresees a good future for

Judging by the auction’s results, we made the right bet,”

the solar industry in the country. “Mexico will continue to

Aya says. With little time left before the auctions, Jinko

be one of the world’s most attractive markets in the next

Solar’s team rushed to find the right locations in Yucatan

five years. The next power auctions will provide certainty

for building large-scale projects. “The main constraint was

about growth. Mexico has demonstrated it has a bankable

to find a site close to a substation with enough capacity to

energy market,” Aya says.


76

La Venta wind farm, Oaxaca, CFE


VIEW FROM THE TOP

VISIONARY GOVERNMENTS BET ON RENEWABLES EDUARDO BATLLORI Minister of Environment and Urban Development of Yucatan

77

Q: What are the potential effects of climate change in

A: We expect socioeconomic and environmental effects

Yucatan given its geographical location?

from the different stages of the renewable energy

A: The Yucatan State Special Program of Climate Change

projects, including planning, manufacturing, installation,

recognizes the increased vulnerability of the state due

grid connection, operation and maintenance. We believe,

to its geographical location in a high-risk zone where

however, that there will be a positive impact on local

increasingly erratic and more extreme weather events are

communities, creating further opportunities in terms of

occurring. The peninsula’s historical record of hurricanes

employment, the distribution of benefits and the reduction

and tropical storms over the past 100 years reveals the

of energy poverty.

changes of frequency and intensity of these phenomena and the considerable economic losses and associated

Q: What are the recommendations for projects that must

impacts on the social and environmental sectors. Among

be constructed in areas with indigenous settlements?

the potential impacts identified in the local economy are a

A: We have been working with the Ministry of Energy,

reduction in investment from foreign and local companies

SEMARNAT and SEDATU to design an action plan that

related to the increased vulnerability of the region, the

should be considered according to the Energy Transition

devaluation of real estate properties, increased costs of

Law and the Electricity Industry Law. For example, the

production in sectors such as agriculture and livestock

evaluations of potential energy projects in the territory,

related to higher costs for basic services such as water

the strategic environmental evaluations and the contact

supply and a reduction in the volume of sales related to

models with the communities. Right now we are working

the scarcity of raw materials. Additionally, the impact

to elaborate the consultation model projects should

of extreme meteorological events would continuously

follow with communities. We have met with different

generate damage in diverse sectors such as transportation

federal, state and local authorities as well as with

and communication, energy, industry, commerce, tourism

consultants and entrepreneurs. We also will meet with

and services.

the social and academic sectors. This is a federal task but we are concerned because the tenders are already done

Q: What will be the role of renewables in Yucatan’s

and the process is moving forward.

energy offer? A: Although Yucatan is a regional energy producer,

Q: How do you ensure that all archeological and natural

production is based on natural gas and fossil fuels with

resources are protected during construction?

five energy plants and a total generation capacity of

A: To safeguard archeological and natural resources

1,532MW. Through the Strategy of Sustainable Energy,

all renewable energy projects need to meet the legal

the Yucatan government seeks to promote the transition

dispositions and requirements set out by the National

to clean energy production, supporting wind, solar and

Institute of Anthropology and History (INAH) and

biogas energy and setting specific lines of action to

SEMARNAT.

promote investment in renewable energy, build capacity and strengthen competition in the local economy through

Through SEDUMA, assistance is provided to minimize the

sustainable energy management, among others. The

risk of social and environmental problems derived from

government has ambitious targets for clean energy

the development of renewable energy projects.

generation of 52 percent by 2018, 79 percent by 2024 and 82 percent by 2030.

The Environment and Urban Development Ministry (SEDUMA) is part of the Government of Yucatan and promotes sustainable urban

Q: How will the nine projects that were awarded in

development and environmental care. Eduardo Batllori was appointed

Yucatan at the auctions impact the state?

Minister of this institution in 2007.


VIEW FROM THE TOP

A 3-D STRATEGY: DECARBONIZATION, DECENTRALIZATION, DIGITALIZATION PHILIPPE DELMOTTE CEO of Engie Mexico

78

Q: What factors drove ENGIE to transform its business

opportunities will come in the near future, for example

strategy at the global and local levels?

with the third auction in 2017. We also consider the

A: The energy landscape has changed profoundly in

implementation process followed so far by the Reform

recent years. The transition is a global phenomenon that is

as a success. We see great potential for us in the natural

revolutionizing the industry and ENGIE as a global energy

gas and the electricity market liberalization. Regarding

company wants to lead it, which implies placing the

natural gas, the Ministry of Energy and CRE have already

environment at the core of our business. We also consider

announced 2017 as the year when an open market will

it crucial to include the digital revolution and technological

become a reality. ENGIE, a leader in transportation and

breakthroughs into our corporate strategy. This led

distribution of natural gas, is in a privileged position

us to reshape our strategy and diversify our portfolio,

to take advantage of this by entering the natural gas

placing greater importance on alternative sources of

commercialization business and importing from the US.

energy. As such, the three axes of our new strategy are decarbonization, decentralization and digitalization.

Q: Given the recent dynamics, where do you see energy markets moving in the local and global contexts?

In Mexico we are implementing a strategy in line with

A: We expect future energy markets to develop mostly

the company’s global vision. Three key points drive our

through renewables as a consequence of the global

vision and operations. The first is an increase in our

energy transition. Renewable energy prices have evolved

renewable energy assets. In this respect we achieved

considerably in the past few years and solar and wind energy

an important feat by winning two renewable projects in

projects are now as competitive as traditional fuels, as was

CENACE’s second power auction, which followed our

witnessed in CENACE’s first and second power auctions. We

success with Sol de Insurgentes in the first power auction.

also expect a wave of new services to accompany the growth

The awarded projects were Trompezon Solar Park, with a

in renewable energies, particularly those that mitigate the

power production capacity of 157MW in Aguascalientes,

sector’s intermittent nature such as batteries, alternative

and Tres Mesas III, in Tamaulipas, with 51.8MW of capacity.

storage or demand management solutions.

Both assets will supply 209MW of clean energy to the national grid. The second goal is to offer integral services

Q: What are the main challenges to complying with the

to our current and potential clients. We are already

contracting conditions?

serving almost half a million customers in Mexico and we

A: The main challenge ahead is to implement the projects

are looking to expand our reach in both client numbers

that were awarded. The first milestone is to finish the

and services. Finally, we are looking to offer support to

permit phase, specifically the local ones that are needed

sustainable city development.

to start construction. We expect the support of the authorities in these processes because it is in the interest

Q: How has the Energy Reform opened new opportunities

of the country to supply energy with efficient projects.

for ENGIE’s operations in Mexico? A: ENGIE perceives the Energy Reform as a fantastic

Q: How does ENGIE match its ambitions in clean energy

opportunity to strengthen its business in Mexico. ENGIE

production to its natural gas business?

won three projects in the power auctions. We are sure new

A: We have three business lines in Mexico, one of which is power production. Cogeneration plants have been the core

ENGIE is one of the largest private gas pipeline operators and the

of our power generation business up to now because they

number two natural gas distributor in Mexico. The France-based

are already efficient processes. ENGIE has around 311MW of

company also has three steam-electricity plants in operation and is

cogeneration capacity installed. Besides electricity we offer

building 149MW of PV solar capacity.

steam to our clients and inject the surplus power to the grid.


VIEW FROM THE TOP

CHALLENGES AHEAD FOR AUCTION WINNERS FELIPE SALAZAR Country Manager at Alten Renewable Energy

79

Q: How has your perspective of the Mexican power market

Alten also presented a smaller-scale project of 150MW in

changed since the enactment of the Energy Reform?

the first power auction and was even chosen among the

A: It has been a painful yet rewarding process. It is painful

finalists but it did not win. For the second power auction

because of all the confusion that results from the changes

we boosted our processes’ efficiency. We increased the

in any reform. During 2015, after the publication of all the

volume to 340MW, got new supplier agreements and

guidelines and secondary laws, our initial perspective from

looked for better technical solutions, such as reducing

2013 started evolving. There is still secondary legislation

domestic transmission losses, which was challenging

pending that can create some uncertainty but Alten’s view

given the size of the project.

is positive and has grown more positive since the results of the power auctions. It is a growing market and not easy

Q: Why did Alten choose to develop the project in

to enter but the prospects have been so encouraging that

Aguascalientes?

from the first to the second power auction the number of

A: The main elements that influenced the decision on

awarded companies went from 11 to 26. There is a global

the project’s location were feed-in infrastructure, the

hunger for development. The process has been extremely

generation performance ratio and increasing demand.

transparent with plenty of opportunities that will allow

We are convinced of the competitiveness of the projects

Mexico to become power-competitive and very open. The

outside the power auctions and that is why we also

power market has always been dominated by the large

develop in regions like Sonora. In the power auctions the

companies, such as Gas Natural Fenosa, Iberdrola, Enel

competitiveness level is too high given the participants’

Green Power, AES and others, and in the power auctions

expertise, resources and capabilities.

the field has been much more diverse and supportive of medium-sized companies.

Q: What challenges do you foresee in completing auction projects?

Q: What elements boosted your success in the second

A: There are two main stages that will present challenges

power auction with the 340MW project?

for Alten. The first is the signing of the contract. To get

A: Unlike the first auction, in the second one the purchase bid

to that point we need to have everything in place, from

was divided into three products: power, CELs and capacity.

the permits to the legal requirements. Another challenge

Our Aguascalientes project was highly competitive because

for awarded projects will be for the banks to understand

of the time spent on its development prior to presenting

the schemes included in the power auctions. They need

it at the auction. Some projects presented at the power

to understand concepts such as CELs, capacity and

auction were incomplete, they lacked land ownership

so on. We have succeeded in developing competitive,

or building permits. One of the dangers of the Energy

bankable projects but creating the best conditions to

Reform are the low requisites it establishes. That can lead

present a final offer has been a journey. We had to meet

to highly competitive companies with a fully developed

with many banks to negotiate financing terms and it

plan competing against companies that just present an

was hard because banks sometimes lack the technical

idea but with no prior research on the land, permits, social

knowledge to analyze the implications of the project.

assessment and building costs. The preparation spent

We have everything in place to start building the park in

developing the project set us apart from other companies

May/June 2017 so by June/July 2018 the output will be

that did not take such careful consideration before

delivered, on time.

presenting their project. Since we understand the costs implied in the project we have a clearer idea of the offer we

Alten is a large, independent power producer (IPP) with expertise in

can present, contrary to other projects that calculated but

international development, financing and exploitation of PV power

did not properly define their costs.

plants.


VIEW FROM THE TOP

BENCHMARKING THE NEW PPA

Alberto Haito Senior Associate at Clifford Chance

80

Martin Menski Senior Associate at Clifford Chance

Q: How do Clifford Chance clients view the new

takers eases project financing because it makes lenders

contracting system?

more comfortable with the company’s revenue streams.

MM: Our clients inevitably compare the new PPA with the old PPA, which is still in operation. The new PPA

Another factor to consider is that most companies

is, broadly speaking, bankable but there are several

winning the first power auction are probably capable of

aspects that concern our clients, such as the risks

financing their projects on a balance-sheet basis. They are

private companies must now take on, some of which

big international market players. We are not aware of any

were previously managed by CFE. One of the most

winning company requiring external nonrecourse project

concerning issues is the uncertainty around the credit

financing to develop its project. That will not be the case

risk of off-takers. CFE is expected to be involved in

for all companies willing to enter the Mexican market.

most of the PPA transactions in the short-term, acting either as off-taker or as jointly liable with the off-taker.

Q: What will be the key challenges to financing energy

Doubts remain about how to manage the credit risk of

projects in Mexico besides off-taker credit risk?

other companies seeking to participate in the market

MM: Merchant risk will be one of the major issues for

as buyers and to what extent banks will consider the

financing energy projects in Mexico because the uncertainty

off-taker’s credit-worthiness, since the PPA does not

in this aspect hinders the development of a simple legal or

directly tackle this issue.

commercial solution. Energy assets last up to 25 years but the PPA establishes only 15 years of contracted revenues,

AH: As long as CFE acts as off-taker or assumes any

so banks have no certainty about the rest of the period.

payment obligations under the PPA, financiers will place

This situation will make it harder for energy companies to

special consideration on their overall credit risk. Let us

obtain long-term financing, especially as the current global

not forget that most of these banks are probably already

macroeconomic conditions also add to bank reluctance.

lending to CFE in some capacity, which increases their

We are nonetheless observing a proactive approach from

overall exposure vis-a-vis CFE and consequently the

multilateral lenders that are betting strongly on Mexico.

overall risk involved in the transaction.

We see a special commitment from those multilateral banks in which Mexico is a stakeholder. US export credit

Q: How did companies participating in CFE’s first power

agencies also are looking south of the border and already

auction overcome these risks?

have mentioned their interest in ramping up their ability to

MM: That CFE is still in the picture gives confidence

finance deals in Mexico.

to the market because it presents a similar structure to what was done previously. Once private companies start

AH: We also see a number of European credit agencies

participating in the auctions as purchasers, we expect

willing to invest in the country’s nascent energy industry.

to see a shift to portfolio financing structures similar to

The old self-supply PPA worked as a platform to attract

what happened in Chile, which has one of Latin America’s

foreign investment to Mexico’s power sector and to build

most developed spot markets. This approach mitigates

large financing deals. Because of that, non-American

the “single off-taker credit risk” because companies have

institutions now have the confidence to invest in new

diversified portfolios with several off-takers instead of just

energy projects in Mexico. The interest of multilateral banks

one. Grouping a number of projects with different off-

and export credit agencies in financing these types of projects will probably help to close the gap that merchant

Clifford Chance is an international law firm with expertise in capital

risk creates for other institutions. Commercial banks are

markets, corporate, finance, risk management, real estate and labor

working to structure solutions to deal with merchant

issues, with a particular expertise in the energy sector.

risk but there is no consensus on the best approach to


take. Larger debt service reserves, cash sweeps or other

financing offers coming soon from international bankers.

similar pre-payment mechanisms and even mini-perm

They still are cautious about the Mexican market,

financing structures are some of the options. In fact, we

particularly as the new contracting schemes have never

would not be surprised to see mini-perm financing with

been tested.

the option to refinance without penalty as the mostused structure in the first PPAs backed by international

Q:

project financing. Project bonds may also come into

comparison with similar Latin American countries?

How

would

you

benchmark

Mexican

PPAs

in

play as a viable option, depending on what the market’s

AH: The termination regime set forth under the Mexican

appetite is for this type of risk. In general terms, project

PPA differs from what we have seen in other parts of the

developers will have to get used to structuring more

region. For instance, the PPAs launched by Uruguay’s

complex financing deals, including different financing

government when it decided to implement its aggressive

schemes to fund one single project.

renewable energies program a few years ago provided for a termination payment even in the case of force majeure

Q: What are the main concerns for developers looking for

or a default. Peru’s PPAs, on the other hand, typically

the best financing plan for their projects?

provide for low termination payments because it has

MM: The main concern for project developers is deciding

a spot market already in place. In the case of Mexico,

the amount of equity they want to bring into the deal and

investors are curious to see how the termination payment

when. Companies need to be clear about their ambitions

under this new PPA will work. Under the financed public

regarding their desired internal rate of return (IRR). Project

works (PIDIREGAS) regime, CFE took responsibility

developers looking for short-term IRRs and to cash out

and agreed to pay a lump sum to the contracted party

soon may be shooting themselves in the foot because

in the event of a termination. The new regime provides

banks want to see equity supporting the risk as long as the

a different structure: in the case of termination due to

debt is outstanding. Developers looking for international

the off-taker’s default, the off-taker is required to pay on

financing need to use a conservative approach. Another

a monthly basis the difference between the spot market

solution might be to not use international financing

price and the estimated revenues that could have been

alone but to look for a combination of different financing

obtained during the contracting period. The new structure

sources. In any case, our key message to developers is to

could add uncertainty to potential financiers because it is

remain conservative. We do not expect to see exceptional

novel and untested.

81


ROUNDTABLE

WHAT WAS YOUR REACTION TO THE POWER AUCTIONS?

On March 31, 2016, the first long-term auction in Mexico for purchase of energy, CELs and capacity by CFE took place. Sixteen companies emerged winners in the final process with a major participation for PV power generation, an unforeseen and to most observers a surprising turn of events. Despite an early technical glitch, participants across the sector hailed the first process a success, even as the low prices obtained and the low requirements requested from the sponsors in terms of permits and land rights have raised concerns about the feasibility of some of the projects. Here, players from different segments react to the results.

82

The first power auction acted as a pilot, in a similar manner to phase one of Round One in the hydrocarbons industry. CFE was playing it safe to see how the market reacted before making any major bids. It was the first time that the Ministry of Energy, CENACE and CFE conducted such a process, so they wanted to learn. The outcome of the first power auction was qualified as a success by several international media, including The Economist, Forbes and Bloomberg, and this successful experience has given Mexican

GUILLERMO GARCÍA ALCOCER Chairman of CRE

authorities the confidence to strengthen upcoming editions. Even though renewable energies are not as sensitive to resource limitations as traditional technologies, they are still based on natural resources that are a constraint to a certain extent. We want to avoid having critical situations as happened in Spain where more solar energy capacity was installed than the country could handle.

When I first read about the auction’s results, I had the impression that the bidding prices were too aggressive. However, once I understood the breakdown of those surprising numbers, I discovered that they were in fact aggressive but realistic and achievable. From a manufacturer’s standpoint, we have understood that we need to offer developers product quality and costs to make their projects as profitable as possible. As a leading PV module company with one of the lowest manufacturing

LOU MARRERO Director Latin America & the Caribbean of Trina Solar

costs in the industry, Trina Solar can compete under the conditions required by the Mexican market. We are not afraid of the record low prices. In fact, we are enthusiastic to hear that some of our clients were awarded projects by CENACE and we will not be surprised to see a large share of the new solar parks being built using Trina Solar’s panels. Solar energy is a highly competitive industry.

We followed the power auctions closely because we were interested in Enel Green Power’s proposal. We knew that Enel Green Power wanted to build the largest wind farm in Latin America and provide record-low energy prices, so we expected an aggressive approach from them. To offer such low prices Enel Green Power established agreements with suppliers and contractors before the bidding process, ensuring the future costs of its energy production. The company’s strategy was

DAVID FLORES Managing Director of Ormazabal Mexico

proven successful as it obtained 41 percent of the total energy bid. Several doubts remain about the completion of the winning projects, given the low prices that were bid and the uncertainty over land rights and other important aspects. But we expect the majority of the projects to be finished on time considering they are supported by major global companies.


The auctions brought many positive aspects to the industry but they also reinforced the idea that CFE is the only relevant client. The true market liberalization will come when more qualified suppliers and marketers start participating. The purpose of the reform was to enable competition and provide options to electricity consumers, and this will not be achieved if all the electricity is sold through CFE. We, therefore, considered the auction’s results as a positive event for the renewable energy industry but prefer to explore other options to contribute to the market’s development. On the upside, the prices reached by solar energy in the auctions

OSCAR BERNAL Director General of Eosol

surprised the industry globally and were qualified as a great success for the Energy Reform. These prices set a new standard for the industry, forcing renewable energy companies to increase their competitiveness.

83

The results of the first bidding round were extremely surprising for solar energy companies, including Jinko Solar, which expected wind energy to get most of the megawatts tendered. In the past, the LCOE of wind farms used to be lower than solar parks, making the first tender’s results a turning point for the industry. The use of innovative business models was crucial for lowering the costs of solar energy and we feel proud to have helped our clients with the development of competitive proposals for the tender by providing high-quality technology at accessible prices. In the long-term electricity tender, Jinko Solar’s investment division presented three proposals to build two solar parks in Yucatan and one

ALBERTO CUTER General Manager Latin America & Italy of Jinko Solar

in Jalisco, which were selected by the algorithm used by CENACE.

We were pleasantly surprised by the results achieved in the first tender carried out under the new regulatory scheme. The immediate impact of solar energy and the low prices for tendered contracts are positive for the renewable energy industry and in line with the goals of the Energy Reform. We were not expecting solar to surpass wind energy in the number of megawatt-hours awarded so quickly, particularly at the tendered prices, although falling renewable energy prices are a trend that the industry has been observing in different regions, such as Peru or the southern US. This is a result of improvements in efficiency, a decrease in manufacturing costs and the use of innovative financing mechanisms. However, we remain somewhat

DAVID BARRIE Business Development Coordinator at SgurrEnergy

cautious about the potential reaction that record-low energy prices may cause among investors and project developers.

For the first power auction, the fact that CFE is still in the picture gave confidence to the market as it presented a similar structure to what was done previously. Once private companies start participating in the auctions as purchasers, we expect to see a shift to portfolio financing structures as happened in Chile, which has one of Latin America’s most developed spot markets. This approach mitigates the “single off-taker credit risk” as companies have diversified portfolios with several off-takers instead of just one. Grouping a number of projects with different off-takers eases project financing because it makes lenders more comfortable with the company’s revenue streams. Another factor to consider is that most companies winning the first power auction are probably capable of financing their projects on a balancesheet basis. They are big international market players.

MARTIN MENSKI Senior Associate at Clifford Chance


VIEW FROM THE TOP

ADAPTING TO AN EVOLVING MARKET DAVID FATZINGER Vice President and General Manager Latin America of InterGen

84

Q: How is InterGen adapting its business to the evolving

A: Yes. InterGen looks for partnerships where both

market?

parties bring additional value to the table. In the case of

A: We have experienced two major changes this year: the

electricity trading, we can develop solutions and market

implementation of the Energy Reform and the opening of

our own energy production. One of InterGen’s competitive

the Wholesale Electricity Market. We were prepared for

advantages is that we are comfortable operating in the

the market’s evolution so it did not take us by surprise. For

wholesale market, developing supply solutions and trading

instance, we included some of the wholesale electricity

energy products in the commercial and industrial sectors.

market products into our strategy. For many years, InterGen

Generally, we do not collaborate with external energy

has developed power solutions, mostly under the self-supply

brokers or retailers but we will consider it if a company

scheme, for industrial clients. Now we are moving into the

proposes a mutually beneficial alliance.

qualified supplier scheme, adapting our old strategy to the new energy sector.

Q: What potential do you see for developing cross-border energy projects between the US and Mexico?

Most of the projects we developed in the past were awarded

A: Energía Sierra Juárez, a wind farm developed by InterGen,

to us through CFE’s bidding processes. Those projects were

was the first cross-border renewable energy project

designed with overcapacity so we could sell the additional

developed between the US and Mexico. InterGen has

energy to private industrial clients. The new power plant we

experience in other cross-border energy projects, including

constructed in Guanajuato was our first project developed

La Rosita, a gas-fired power plant we built in Mexicali,

under the new regulatory framework and was built as a

Baja California, 17 years ago. La Rosita supplies energy to

dedicated solution to meet only industrial needs. In that case

customers in Mexico and Southern California. It was our first

we established a bilateral contract directly with the plant’s

project to be regulated under two jurisdictions and built on

main user but we also built it so we could sell energy to

Mexican land. Handling the regulatory framework of two

other industrial customers through the wholesale electricity

countries is not as challenging for us because of this prior

market. In the future, we expect to migrate most of our

experience. The complexity is similar to building projects

bilateral and self-supply contracts to the qualified supplier

across two states, something InterGen has done for more

scheme, using it as our main supply channel.

than 20 years. We expect to see more cross-border projects. At the moment US gas-based power plants exporting energy

In 2018, CELs will be a mandatory requirement, so we

to Mexico are the most common but we do not discount

have adapted our solutions to meet the new clean-energy

cross-border renewable plants in the future.

guidelines. We are employing clean-energy technologies so we can offer CELs to clients that need them. Energy solutions

Q: Which of the lessons learned from your experience in the

will become more sophisticated over time, driving project

US could be applied to Mexico’s liberalized market?

developers to use a mix of technologies instead of relying on

A: One of the biggest lessons we learned is the need for

only one. Renewable energies and distributed generation are

transparency on the brokerage side of the market. Industrial

two trends that we expect to grow in Mexico.

clients need to trust their energy suppliers to feel comfortable participating in the market. We fully understand the need to

Q: Will the company partner with suppliers or energy

create strong and trusting relationships with our customers

brokers for the wholesale electricity market?

so we are opening new communication channels and sharing our market knowledge with them. Another important lesson

InterGen is a Massachusetts-based global power-generation firm

we learned is the need to diversify. Industrial energy needs

with 11 power plants in operation, representing a total generation

change over time so we have to be ready to offer the proper

capacity of 7.7GW.

solution based on our clients’ requirements.


VIEW FROM THE TOP

MAKING WIND ENERGY ‘SMART’ RAFAEL VALDÉZ Managing Director Latin America & the Caribbean of Envision Energy

85

Q: What makes Envision’s products “smart” and how

be sold to CFE through a long-term bilateral agreement.

do they differ from other wind turbines in the market?

We will sell the rest on the spot market.

A: The world is at a crucial crossroad where the energy and digital revolutions are converging. Envision

Envision Energy sees great potential in the wholesale

understands the significance of this moment and offers

electricity market but we need to move cautiously.

comprehensive energy solutions that combine state of

There is some uncertainty because the price is not

the art technology with software. We are constantly

fixed so we are taking a gradual approach, learning by

adapting our products and services to the challenging

doing before making a significant investment or taking

environments and needs of different markets. We do not

on greater risk and exposure. As the market evolves it

see ourselves as a pure technology supplier. We have

will become increasingly difficult to establish attractive

developed special turbines for ultra-low wind speed

bilateral contracts or win projects through tenders, so

sites, high-altitude areas about 3,000m above sea

we are already preparing for the market’s next stages.

level, as well as extremely cold locations that can reach -50°C. We have also worked in high-humidity regions

Q: How are the company’s projects usually financed

with high incidences of hurricanes, as is the case for

and how do you gain investors’ trust?

some Mexican states. We have over 8GW of turbines in

A: We do not limit ourselves to traditional financing

operation or under construction, primarily in China, but

institutions such as Mexican banks or lenders. We are in

also in Chile, Sweden, Mexico and other countries. We

talks with multilateral agencies in Washington as well as

are also working on energy storage, smart distribution

development banks in America and China. The company

systems and smart cities, such as a pilot project we

is also dealing with commercial banks to diversify our

are developing in New Zealand. Our software solutions

financing portfolio. Envision provides certainty to financial

help us and our clients optimize the monitoring and

institutions because we have a proven technology, with DNV

performance assessment of a given turbine, wind farm or

GL certification in some of our turbine models that have been

portfolio of renewable energy assets. We are the world’s

subject to strict technical due diligence in diverse regions.

largest asset manager from a software/IT perspective,

We initially encountered some reluctance from Mexican

managing more than 50GW in wind and solar projects

financial institutions because they had little experience

globally, largely operated by third parties.

dealing with Chinese companies but now we are working with two of them.

Q: Why did the company locate its new projects in Yucatan?

Q: What does Envision want to achieve in Mexico in the

A: Yucatan is consistent with our business strategy. We

next two years?

avoid following the crowd and are always looking for

A: Mexico is committed to producing 35 percent of its

unexplored opportunities. The company always tries

electricity from renewable energy by 2024 and we plan to

to make the most of the given conditions and daring to

stay in Mexico for at least five to 10 years, allowing us to

explore new areas drives us to innovate. In Yucatan we

accompany the country in this transition. Envision has made

take advantage of the region’s attractive wind speeds,

a commitment to be the largest Chinese investor in Mexico’s

nascent development and increasing demand for energy.

renewable energy sector and we are doing that already.

We have two projects under construction in Yucatan and a few more under development. One is a 70MW wind farm.

Envision Energy is a global smart energy solutions provider offering

Its electricity will be sold only to private off-takers. The

smart wind turbines, smart energy management software and

second was one of the winners of CFE’s first long-term

technology services, with facilities worldwide, including a Global

electricity tender, a 90MW wind farm, 85MW of which will

Innovation Center in Denmark.


VIEW FROM THE TOP

A POWERFUL COMEBACK FOR LAID-OFF WORKERS MARTÍN ESPARZA Secretary General of the Mexican Electrical Workers’ Union (SME)

86

Q: Generadora Fénix has a different story from other

already obtained the permits from CRE to become a

companies. Can you share this experience?

generator in the new electricity market so we can sell

A: Generadora Fénix is the result of SME’s close to seven-

energy to the spot market as well as to suppliers and

year fight to avoid the forced dissolution of Mexico’s

qualified users. We are also in charge of the plant’s

oldest labor union after the liquidation of the state-owned

operation and maintenance. As part of its business

company Luz y Fuerza del Centro (LyFC). As part of the

strategy, Generadora Fénix plans to invest US$500

legal settlement over the government’s liabilities in the

million in revamping all our hydroelectric power plants.

wake of the liquidation, the government awarded in early 2016 a group of 14 abandoned hydropower plants to SME,

The company is also planning to invest US$1.2 billion

which represented the LyFC workers. We then created

in combined-cycle power plants that will be built on

Generadora Fénix as an investment promotion society

the land we received as part of the work termination

and looked for a partner with the financial capabilities

agreement. Even though the projects are not done

to help us renovate the assets and become competitive.

yet, we already have a 25-year PPA with the federal

Mota-Engil,

our

government, which will buy the energy produced by

capital partner in this venture, holding 51 percent of

a

Portuguese

company,

became

our plants at a fixed rate. All the employees required

the company’s shares, while SME contributed with

to operate these power plants will be SME members.

power assets and an experienced workforce. The resolutions made by Mexico’s labor board to end the

Q: What was the experience of Generadora Fénix as a

work relationship between SME and LyFC mandated

winning company in the second power auction?

the government to compensate SME individually and

A: Four of our proposals won a share of the CELs

collectively.

auctioned in the second round. We did not offer energy or capacity but only CELs because we already have requests

To offer job prospects to the union’s members, who

from private clients that are looking to purchase power

were highly skilled electrical workers, the company

and energy. Part of our commercial strategy is to establish

received the use and exploitation rights of the

long and short-term contracts with private customers,

hydropower plants for 30 years, along with the rights

so we chose not to offer those elements in the auction.

to build a 1.7GW combined cycle plant and a PPA

We observed in the power auctions a high number of

contract with the federal government for energy

speculative offers. Many companies offered energy

purchases during the next 25 years.

and capacity from projects that are not yet built, some in more advanced stages than others. We have even

Q: What investment plans does the company have for

received proposals from some companies to help

the near future?

them with their projects’ construction but we are still

A: The most important assets in our portfolio include

analyzing that possibility. We think that in some cases

the Necaxa plant in Puebla and Lerma, in Michoacan.

completion of projects will be challenging.

Both plants belonged to LyFC but were not performing at their maximum potential. We took control of the

Q: What do you say to those who suggest Generadora

assets in November 2015 and now all the employees

Fénix cannot be competitive due to SME’s history in

working at these plants belong to SME. We have

a public utility? A: A qualified workforce is our main competitive

The Mexican Electrical Workers’ Union (SME) represents the workforce

advantage. Generadora Fénix already has experienced

belonging to the extinct company Luz y Fuerza del Centro, including

engineers operating power plants and we have 14,000

retired workers and new employees.

more skilled workers ready to enter into action. We


CAPACITY AWARDED IN 2016 MEXICO POWER AUCTIONS PER TYPE OF TECHNOLOGY

WIND 1,522MW Capacity 11 Projects

PV 3,479MW Capacity 27 Projects

COMBINED CYCLE 899MW Capacity 2 Projects HYDROELECTRIC 68MW Capacity 2 Projects GEOTHERMAL 25MW Capacity 1 Project

0

87

0.5 First auction

1.0

1.5

2.0

Second auction

Source: CENACE

proved our skills during the revamping of the Alameda

(PIDIREGAS). Generadora FĂŠnix is making a new start

hydropower plant, which had flooding problems when

in the black, with working facilities, generation permits,

it was handed over to us. It took us less than 10 months

long-term PPAs and skilled and experienced engineers.

to renovate the plant completely and put it to work,

We have everything to be a competitive and profitable

becoming our flagship project.

company. In the next five years we expect to have a 2.7GW capacity coming from a diversified portfolio

We also have the advantage of not having any pending

of generation, including solar, hydroelectric, wind and

labor liabilities, which is not the case for CFE. The

natural gas. The country is expected to have a growing

state-owned utility has MX$3.2 billion in labor liabilities

demand in the next 25 years, so we know energy

and MX$7.6 billion in financed public works contracts

generation will be a profitable business.


INSIGHT

LOOKING FOR A NICHE IN POWER GENERATION HUGO GALINDO Director General of Grenergy Renovables

88

Finding a niche within the newly liberalized Mexican

The company focuses on three stages of development,

energy market will be Spain-based Grenergy Renovables’

from the initial development, which can take from 12

objective during 2017. The company, one of the winners

to 36 months, to what it calls the R2B (Ready to Build)

of CENACE’s second power auction in 2016, plans to look

stage, following the period of construction and financial

at the opportunities for development in areas like private

structuring to the last stage, operation. “Once the project

PPAs to cover the large energy necessities of Mexico’s

is in the operating phase we are also involved during its

industrial economy, says Hugo Galindo, the company’s

first part, which means we operate them from between

Director General.

one to four years. Then we can sell the project to a final investor who is looking for a more fixed profitability and

“We participated in the first and second tender and

to avoid development or construction risks. There are

in the last one the company was awarded a 30MW

investment funds devoted to infrastructure and renewables

project. Grenergy has more than 300MW in photovoltaic

that are our eligible investors for this type of projects,”

developments and more than 100MW in wind energy

Galindo says. Grenergy’s business model, which allows the

projects but we have to redefine our strategy to adapt

company to sell the project at any of those three stages,

the projects to the new conditions of the market,” the

has given it access to larger profitability margins, he adds.

executive for the solar and wind power project developer says. The company, which specializes in developing,

Galindo says that the advent of the Reform and the power

building and launching operations for power plants, with

auctions speeded the learning curve and increased quality

the objective of selling them to long-term operations, had

for energy generation projects in the country and that the

close to 60 projects in different stages of development

competitiveness achieved specifically in the solar PV sector

by mid-2016, of which around 18 were located in Mexico,

has given a strong impulse to that particular technology.

according to their website.

But size remains important in terms of cost, he adds. The project awarded to the company in the second auction

“We want to focus our development on other value offers, maybe private PPAs” Hugo Galindo, Director General of Grenergy Renovables

“was among the smallest awarded, and unfortunately we see that the bigger the project, the better because they have fixed costs and 100MW projects are more profitable than 30MW projects.” Financing is still difficult to obtain since the market is very new and both banks and investors are waiting for more information to become available. But Grenergy’s international experience helps. “In Chile we developed

Grenergy, Galindo says, “is currently working on 15 to 17

the first project to achieve financing from a local bank,

developments. We have 10 PV projects of 30MW each

which opened a door for us to look for opportunities

and a couple of smaller projects around 10MW each.

with multinational and local banks. International banks

With wind energy, we have some projects of 30MW.” The

like the ones from Germany and Spain are interested in

company, founded in Spain in 2007 at the height of the

these projects but they have to carefully go through each

energy boom there, entered Latin America via Chile in

proposal to see the type of financing they can provide and

2011 and decided to follow up in Mexico in 2012-13 under

settle the best conditions. Even though we have equity,

the small producer scheme prior to the Reform. But it was

if these projects do not have bank financing they are not

able to adapt its projects to the new conditions set by the

feasible. As for Grenergy, once we have the PPA with CFE

constitutional changes.

we will be able to negotiate with banks.”


INSIGHT

MARKET STABILITY ATTRACTS GLOBAL SOLAR CHAMPION BORJA GUINEA COO America of Fotowatio Renewable Ventures

89

December 2013 was a historic month for Mexico’s energy

bidding process. Spain-based FRV’s success at the auction,

industry. The sanctioning and publication of the constitutional

where it won the rights to sell to CFE 779MW/h from a

Energy Reform opened the door to national and foreign

300MW solar PV plant, can be partly attributed to its

investment in a sector that was in need of revitalization.

expertise. “We know the technology as well as the auction’s

While some doubted the success of the Reform, others like

typology. We like the Mexican market and we feel very

Fotowatio Renewable Ventures (FRV) decided to dive into

comfortable participating here.”

the opportunities offered by the nascent market. The auction had a total of 23 winners that are expected to “The regulatory particularities of the Mexican market have

generate 3.8GW while investing US$4 billion, representing

been defined in the past years. Regardless, Mexico is a

about 3 percent of the total clean energy generated in

market that offers two key things: macroeconomic and

Mexico annually. According to Guinea, competition in the

regulatory long-term stability,” says Borja Guinea, COO for

market spurred FRV to present an innovative proposal. But

the Americas of FRV.

he points out that it would not have been possible without a stable regulatory framework. “The more stable the regulation

If there is a characteristic that every energy-related project

and with the assurance of long-term sales, the more benefits

shares it is that all are long-term. That is why legal and

final users will perceive and at lower prices.”

regulatory certainty as well as enforcement of the rule of law play such an important role for companies when deciding

According to information from the US Energy Information

to invest in the country. Guinea believes that the Energy

Administration, during 2016’s first six months average

Reform and the subsequent rules for the electricity market

prices in most Mexican locations were between US$48/

provide enough certainty. “The Energy Reform ends the

MWh and US$60/MWh. CENACE’s auctions are expected

old market and lays the foundation for a new dynamic. It

to lower these prices. The first long-term auction projects

also gives us visibility regarding the long-term functioning

presented contract prices averaging US$45/MWh, while the

of the regulatory framework and stability in the expected

second auction resulted in prices that averaged US$33.47/

remuneration for the generation.”

MWh, which is among the lowest at an international level. FRV is expected to compete in the Mexican market with a

Part of the government’s long-term vision was embodied

US$26.99/MWh rate, one of the most competitive.

in the country’s goals for the use of renewable generated energy. By 2024, 35 percent of the total electricity

The ability to offer a competitive rate is the result of several

generated in the country is expected to come from clean

factors, including the decreasing costs of solar technology.

sources. According to information from the National

“Solar technology has experienced a vertiginous decrease in

Inventory on Renewable Energy (INER), Mexico has a

prices,” says Guinea. “In Mexico, constructing a photovoltaic

proven potential for generating up to 13.2TWh/year of

asset costs a seventh or eighth of what it would have cost for

electricity but that still needs to be developed. In 2015

the same asset eight or nine years ago in Europe.”

alone, CRE registered a total of 9.5MW in projects in the construction stage. While it is unclear if the country will

FRV will offer its rate from its production site in San Luis

reach the 35 percent mark, CENACE’s auction processes

Potosi, where the company will begin operations in the near

bring the country closer to that goal.

future. “Our site in San Luis Potosi complies with all the characteristics a solar project must have: good and constant

It is in this context that FRV becomes a key piece in the

solar irradiation, capacity to effectively evacuate the energy

development of Mexico’s solar energy industry. The

that will be generated and the capacity to interconnect the

company was one of the winners of CENACE’s second

energy with the overall electric system.”


POWER AUCTIONS

1

5

6

2 90 7

3

4

8 17

10

PV Wind Geothermal Hydroelectric Combined Cycle

18

19

20 21 22

Source: CENACE

23

24

25

9

11


42

13

14

91

15

12

16

28 26

27

35

34 36 30

40

31

29

32

33

37

38

39 41


POWER AUCTIONS

92

Auction

Winner Legal Name

Power Plant

Company

1

Second

Energía Sierra Juárez Holding

Rumorosa Solar

Ienova - Intergen

2

Second

AT Solar

AT Solar

ACCIONA Energía BioFields

3

Second

Kamet Energía México

Orejana

Fisterra Energy

4

Second

Bluemex Power 1

Bluemex Power

Bluemex Power

5

Second

CFE

Agua Prieta II

CFE

6

Second

X-Elio Energy

Parque Solar FV Conejo

X-Elio

7

Second

Quetzal Energía México

Santa María

Fisterra Energy

8

Second

HQ Mexico Holdings

Torreón-HQ 100

Hanwha Q-Cells

9

First

Enel Green Power México

Parque Solar Villanueva III

Enel Group

10

First

Enel Green Power México

Parque Solar Villanueva

Enel Group

11

Second

OPDE

Andalucía II

OPDE

12

Second

Parque Eólico el Mezquite

Parque Eólico el Mezquite

Cúbico

13

Second

Parque Eólico Reynosa III

Parque Eólico Reynosa

Intaván México

14

Second

Enel Green Power México

Salitrillos

Enel Group

15

First

Energía Renovable del Itsmo II

PE El Cortijo

ACCIONA Energía

16

Second

Tractebel Energía de Altamira

Tres Mesas III

Oak Creek Energy

17

First

Consorcio Sol de Insurgentes

Sol de Insurgentes

Engie

18

Second

Consorcio Fotowatio

Potosí Solar

Fotowatio Renewable Ventures

19

Second

Consorcio SMX

Tepezalá II

Ienova

20

First

Recurrent Energy Mexico Development

Aguascalientes Potencia I

Canadian Solar

21

Second

OPDE

PS Aguascalientes Sur I

OPDE

22

Second

Consrocio ENGIE Solar Trompezon

Trompezon

Engie

23

Second

Alten Energías Renovables

Proyecto Planta Fotovoltáica 140 MW AGS Alten

Alten

24

Second

Alten Energías Renovables

Alten Aguascalientes

Alten

25

First

Jinkosolar Investment

Las Viborillas

Jinko Solar

26

Second

Consorcio Guanajuato

Parque Solar FV Mexsolar

Grenergy

27

First

Enel Green Power México

Parque Solar Don José

Enel Group

28

First

SunPower Systems Mexico

Guajiro II

SunPower

29

Second

CFE

CG Azufres III

CFE

30

Second

Generadora Fénix

Necaxa

SME - Mota-Engil

31

Second

Generadora Fénix

Patla II

SME - Mota-Engil

32

Second

X-Elio Energy

Parque Solar FV Xoxocotla

X-Elio

33

Second

Eólica de Oaxaca

Gunaa Sicarú

EDF Energies Nouvelle

34

First

Energía Renovable de la Península

Energía Renovable de la Península

Envision - Vive Energía

35

Second

Energía Renovable de la Península

Energía Renovable de la Península

Envision - Vive Energía

36

First

Jinkosolar Investment

San Ignacio

Jinko Solar

37

First

Photoemeris Sustentable

Kambul

Alter Enersun Renovables

38

First

Aldesa Energías Renovables

Parque Eólico Chacabal

Aldesa

39

First

Consorcio Energía Limpia 2010

Parque Eólico Tizimín

Alarde

40

First

Vega Solar I

Ticul I

Vega Solar Energy

41

First

Jinkosolar Investment

Concunul

Jinko Solar

42

Second

Frontera México Generación

Planta Frontera 06 PFT-PTA

Fisterra Energy


Technology

State

PV

Baja California

PV

Plant Size (MW)

Capacity (MW/y)

Energy (GW/h per year)

CELS

41

0

114.116

117064

Sonora

180

29

478.261

478260

PV

Sonora

125

0

353.466

353466

PV

Sonora

90

0

249.982

249982

Combined Cycle

Sonora

394.1

374.98

0

0

PV

Chihuahua

80

16

193.771

193771

PV

Chihuahua

143

0

393.611

393611

PV

Coahuila

101.08

18.3

252.445

252444

PV

Coahuila

250

0

737.998

737998

PV

Coahuila

330

0

972.915

972915

PV

Coahuila

82.5

0

213.655

213655

Wind

Nuevo Leon

249

76.74

820.636

774938

Wind

Tamaulipas

387.5

0

1613.42

1613416

Wind

Tamaulipas

100.05

0

399.129

399129

Wind

Tamaulipas

168

0

585.731

585731

Wind

Tamaulipas

49.5

21.62

223.011

223010

PV

Baja California Sur

23

0

60.965

60518

PV

San Luis Potosi

300

0

779.162

779161

PV

Aguascalientes

100

10

278.358

283606

PV

Aguascalientes

63

0

140.97

140970

PV

Aguascalientes

29.67

0

75.854

75853

PV

Aguascalientes

126

0

342.63

338851

PV

Aguascalientes

140

36

348.466

392032

PV

Aguascalientes

150

38.59

373.577

420335

PV

Jalisco

100

0

277.49

277490

PV

Guanajuato

30

12

146.958

146957

PV

Guanajuato

207

0

539.034

539034

PV

Guanajuato

100

0

269.155

263815

Geothermal

Michoacan

25

25

198.764

198764

Hydroelectric

Puebla

53

0

0

250245

Hydroelectric

Puebla

15

0

0

64386

PV

Morelos

70

14

169.375

169365

Wind

Oaxaca

252

0

818.265

818264

Wind

Yucatan

90

0

275.502

275502

Wind

Yucatan

90

30

0

0

PV

Yucatan

18

0

48.748

48748

PV

Yucatan

30

0

54.975

53477

Wind

Yucatan

30

0

230.888

230888

Wind

Yucatan

76

0

291.9

291900

PV

Yucatan

500

0

740.135

725450

PV

Yucatan

70

0

176.475

176475

Combined Cycle

Texas

505

479.93

0

0

93


Control room of Mexico's independent grid operator, Mexico City, CENACE


ELECTRICITY MARKET

4

If someone wanted to turn on a dishwasher, a streetlight or even a car assembly line in Mexico as recently as 2015, there was precious little choice on the matter: arrange to build a power generation plant with the sole purpose of supplying all or part of the electricity needs, as many companies did, or call the stateowned CFE to connect them. Since last year, however, the number of choices has multiplied. Off-takers and even residential consumers are looking at several options for getting the electricity they need, from energy traders to the still untested spot market.

It does not end there. There are still parts of the Wholesale Electricity Market (MEM) waiting to unfold, such as the Clean Energy Certificates (CELs) that will help industrial users comply with sustainability and clean energy goals to the financial transmission rights to ensure electricity reaches its intended destination. This chapter takes a look at some of the developments to come, as well as some of the players already probing the financial depths of the industry.

95


CHAPTER 4: ELECTRICITY MARKET 98

ANALYSIS: The More Options, The Better

99

VIEW FROM THE TOP: Eduardo Meraz, CENACE

100

VIEW FROM THE TOP: Sebastián Leal, SUMEX

Joaquín Leal, SUMEX

Javier Garza, SUMEX

102

VIEW FROM THE TOP: Rodrigo Juárez, Ammper

103

INSIGHT: Hans Kohlsdorf, E2M

105

INSIGHT: Justin Bryon, Thermion Energy

106

VIEW FROM THE TOP: Jorge Angarita, B2E

107

VIEW FROM THE TOP: Toralf Hey, Biosolventus

109

VIEW FROM THE TOP: Salvador Alarcón, Trade On

110

INSIGHT: Jorge Gutiérrez, Energía Eléctrica Bal

111

INSIGHT: Juan Rubiolo, AES Mexico and EnerAB

113

INSIGHT: Adolfo Velasco, Grupo México

114

VIEW FROM THE TOP: Ramón Moreno, Mitsui & Co. Power Americas

115

VIEW FROM THE TOP: José Fernández, INEEL

116

ROUNDTABLE: How Much Has The New Market Lived Up To Expectations?

97


ANALYSIS

THE MORE OPTIONS, THE BETTER A few decades ago Mexicans wanting to call a friend had

legacy contracts under the previous legal regime to hold

only one option to do so: TELMEX, the former state-owned

their status for the project’s life span, maintaining the same

monopoly privatized in 1990. The appearance of cellphones

limitations but also the benefits available in the pre-Reform

and the arrival of new telecommunication companies

framework.

widened the portfolio of options for Mexican clients, driving prices down and customer services up. The Energy Reform

“In legacy projects, we only need to consider costs of power

now expects to do the same for the electricity sector, spicing

production, regulated ancillary services, wheeling (the same

up the market with new participants and business models.

cost for delivery anywhere in the country and for the entire life span of the project) and capacity, which we can deliver

98

The options that off-takers now have to purchase electricity

with more certainty than in the new market. These costs are

include long-term PPAs with generators holding projects

already defined. In the case of renewables, legacy projects

under the new or the previous law, qualified suppliers, both

also have the advantage of the Energy Bank so we do not

private and CFE Calificados, secondary market traders or

have to worry about balancing our power production as

even directly in the short-term spot market. Each of these

much as new generators must,” says Justin Bryon, Managing

options has its own risks and benefits but the choice falls

Director of Thermion Energy.

now on the client. In the case of companies willing to try their luck directly Advocates of intermediaries – qualified suppliers and traders

in the market, there are also new companies and software

– highlight diversification and quicker response to changing

ready to accompany them on this adventure, reducing the

market conditions as the major advantages, also giving end

risks and maximizing their opportunities. Everyone can also

users more power over their desired energy mix. “We want

enter CENACE’s website and check for weekly updates over

to avoid more horror stories about long-term contracts

the market behavior and average marginal prices in the

tying companies to one technology just before the prices of

different nodes of the country.

other technologies drop dramatically,” says Rodrigo Juárez, While the new regulations have forced PEMEX to give up

Commercial Director of Ammper.

70 percent of its contracts to private natural gas trading On the other hand, advocates of long-term contracts

companies, there is no such dictate in the case of electricity.

between generators and end-users defend certainty and

Private companies need to raise the bar regarding services

simplicity as the biggest values for clients. The market offer

and prices to gain ground on both CFE and other businesses

is further divided into two segments because the law allows

or be left behind by more competitive players.

MEXICO’S WHOLESALE ELECTRICITY MARKET OPERATIONS STARTED:

• Baja California System

• National Interconnected System

January 27, 2016

January 29, 2016

WHOLESALE ELECTRICITY MARKET STRUCTURE

Short-Term Market

Capacity Balancing Market

CELs Market

Financial Transmission Rights Market

Medium and LongTerm Auctions

Medium-Term

Long-Term

BY DECEMBER 2016, CRE HAD AWARDED:

1366

Generation Permits

1

Basic Supply Permit

15

Qualified Supply Permits

19

Qualified Users Registered

MARKET PRODUCTS

Energy

Capacity

Ancillary Services

CELs

Source: CRE

Financial Transmission Rights Markets Currently in Operation

1

Secondary Market Traders Registered


VIEW FROM THE TOP

PRIVATE PARTICIPATION SLOW BUT STEADILY GROWING EDUARDO MERAZ Director General of the National Center for Energy Control (CENACE)

Q: What major challenge did CENACE face during the

improving the Market Information System and responding

electricity market’s creation and how did it cope?

to all the industry’s queries, providing explanations to all

A: Time. The strong commitment of our staff and our close

the players who require them.

collaboration with the National Center of Electricity and Clean Energies (INEEL) were strategic actions taken to

Q: How will legacy projects impact the market’s development,

overcome our main challenges and underpin our success.

for instance with financial transmission rights?

Because the Mexican electricity market was designed

A: Financial transmission rights were applied by the end of

using the experience of other markets, we could start our

2016 for legacy projects. The payment behavior associated

operations with previous knowledge of what were the

with these rights will determine whether or not it is the

best possible choices available thus reducing the chance

right moment to launch the first financial transmission

of errors. We greatly benefited from the experience and

rights auction, as they must be attractive enough to

knowledge of other grid operators such as ERCOT from

ensure adequate levels of participation. All legacy

Texas, PJM from the US Eastern market and CAISO from

projects migrating to the new scheme can participate in

California, with whom we collaborate closely. I would also

these auctions, which could have an important impact

highlight the coordination efforts with key stakeholders

depending on the scale of this migration and the actual

in the implementation of the Energy Reform such as the

congestions in the grid. The first financial transmission

Ministry of Energy, CRE, CFE, industry associations and

rights auction is expected to take place in late 2017 or

private companies.

early 2018 but it will largely depend on the date in which the manual is published.

Q: How has private participation evolved in the electricity market and how did CENACE help to enhance trust?

Q: How does CENACE support private entities interested

A: We have witnessed a growing interest from the private

in entering the MEM?

sector in the electricity market as seen from the results

A: The structure of the MEM offers an exceptional opportunity

of the two long-term power auctions conducted by

for its participants to enter a competitive environment within

CENACE. This confidence in the market is largely based

the evolving Mexican electricity industry. CENACE’s role is

on the same principles and values we follow in our role

to ensure that potential participants have the requisite

as a public decentralized organism, which acknowledges

knowledge about the procedures needed to enter the

transparency and access to information as crucial to

market. We offered training courses in 2016 to all companies

enhancing competitiveness. Trust is particularly strategic

interested in becoming market participants. CENACE also

because the relevance and scale of the Energy Reform

held constant meetings with industry associations and public

generate

uncertainty

and private companies to dispel doubts and review specific

among potential and incumbent market participants.

cases. Every week we conduct an online meeting with market

The short-term market started operations with only

participants to analyze market behavior and results. Key

three participants: CFE in different roles and two private

among our activities is our official website in which we offer

generators. Now, four more private participants are

useful information for interested companies. To complement

operating in the spot market, including two qualified

our virtual tools we are also working on the development

suppliers and two generators. There are other participants

of new technological applications to help participants with

that have already signed the required contracts but have

their decision-making with real-time information.

expectations

accompanied

by

not started operations and some others have not obtained their permits. This evolution is natural and will continue as

The National Center for Energy Control (CENACE) is a decentralized

companies assess the benefits of entering the new market

public entity founded in 2014 to act as the country’s independent grid

model. This is the main reason for CENACE to continue

operator.

99


VIEW FROM THE TOP

100

Sebastián and Joaquín Leal and Javier Garza, founding partners of SUMEX

BREAKING GROUND IN THE ELECTRICITY MARKET Q: What was the motivation to launch SUMEX before

A: We have an ongoing collaboration with the National

market regulations were fully defined?

Institute of Electricity and Clean Energies (INEEL), which

A: Limitations in the previous regulatory framework had

was the entity in charge of developing the electricity

driven companies to establish long-term agreements with

market platform. INEEL has strong expertise in the energy

generators without considering technological evolution,

market and the modeling of physical networks and energy

which is a constraint for the industry’s development. We

flows, which is beneficial for our company’s ambitions.

believe that portfolio diversification is where the real

We are also collaborating with the former Mexican

business opportunities are as it allows us to satisfy the

Electrical Workers’ Union (SME), which was awarded

energy demand of our clients while offering short-term

several assets and land from the extinct Luz y Fuerza

hedging contracts. SUMEX was created to bring these

del Centro and formed a new energy company together

solutions to the Mexican energy market. The power industry

with a Portuguese firm. Our plan is to establish long-

is complex but we have found that qualified suppliers have

term contracts with them, selling the power from SME’s

the most attractive business opportunities in the recently

facilities that correspond to clean energy technologies.

created market. Qualified suppliers can put the most

We also have an agreement with SME to modernize their

advanced technologies into a customer’s hands contrary

electric meters, which will be performed in partnership

to generators, which tie off-takers to a single technology.

with different technological suppliers.

The Mexican power market has risks but it also offers great

We realized that we needed to form strategic alliances and

business opportunities. We first wanted to invest in power

partnerships to compete with a company the size of CFE,

generation projects but we decided to become a qualified

which has around 100,000 employees. Our main partners

supplier after analyzing the advantages and disadvantages

at the moment are SME and INEEL, which have knowledge

of the existent market figures. The main factor driving us

and long-time experience in the Mexican energy industry.

to create a private qualified supplier was the possibility to

We have also established strategic alliances with different

offer short-term contracts, which are best suited to the

commercial partners that have brought over 200 sales

needs of Mexican off-takers.

agents to the project, which we expect will rise to 500. Qualified users account for 70 percent of the electricity

Q: What kind of partnerships has SUMEX established to

sold in the market, so we need to have enough specialized

push its business in Mexico?

people to cover this large market. For this reason, we


place great importance on training our staff, offering five-

NAEAM brings its commercial experience to the table

day courses on the functioning of the electricity market.

while we bring our knowledge of the Mexican framework.

We are also working to educate our customers about new

We have established other strategic partnerships with

market features. Education is now the most important

international companies. Most were eager to enter the

aspect for moving the industry forward.

market but needed a partner that had all the permits and operational structure already in place.

Q: What strategies is SUMEX using to mitigate market risks?

Qualified users account for 70 percent of the electricity sold in the market

A: SUMEX’s strength comes from our analytical team that has a deep market understanding and sound mathematical models for forecasting the behavior of local marginal prices (PML). It is nearly impossible to predict how PMLs will behave in the long term but we can analyze several factors to do an accurate enough forecast, by looking at CFE’s decommissioning plans or expected demand growth, for instance. Our analytics team looks at these external variables and includes them our model to give us the information we need to prepare adequate offers to our clients. This team also benefits from the alliances we have with experts in energy markets and forecasting,

Q: How do you see the business expanding in the next

such as INEEL or Woodhouse Lorente Ludlow, the law

few years?

firm in charge of shaping the market regulations. Our

A: We have commercial offices in Jalisco, San Luis

expert partners provide a second opinion to all our

Potosi, the State of Mexico and Mexico City and we are

business decisions, ensuring they translate into benefits

in the process of opening offices in Yucatan, Michoacan,

for our clients.

Chihuahua and Baja California. We are expanding our business based on the number of contracts we have and

Q: Which other market participants can benefit from

adapting our services to local conditions. We see great

partnering with SUMEX?

interest from private companies to enter the market. The

A: Our status as a qualified supplier allows us to represent

power industry offers countless business opportunities

generators in the market, an added value we also bring

and the scale of Mexico’s market, valued at around US$1

to the industry. Generators can take up to one year to

billion, increases its attractiveness. But most companies

register to represent themselves in the market. Completing

need to learn about the market before they can capitalize

transactions through a qualified user can reduce this time

on these opportunities. We are the only private company

and increase the profitability of their projects. Generators

able to operate in the market, which is one of our major

also benefit from contracting our services because we

competitive advantages.

handle all the regulatory processes and provide customer services, which tend to be complex for non-specialized

Q: Which indicators will measure SUMEX’s success in the

companies. This is a separate business line we created to

short term?

simplify the participation of generators in the market.

A: The amount of megawatts/hour supplied and the cost per megawatt-hour. The first is an indicator of the

We have seen an inflow of US energy traders, many of

company’s market penetration while the cost reflects

which have over 15 years’ experience in the US market.

the success of our power purchasing strategies and the

Their core business is to attract clients for electrical

efficiency of our analytics team. Both aspects are enough

utilities. Some have approached us to join efforts in

to measure our company’s advances in the commercial

the Mexican market and we have selected the North

(MW/h) and operational sides (MX$/MWh). We expect

American Energy Associates Mexico (NAEAM) as our

to supply up to 2GW by the end of 2017, following our

strategic partner for Mexico City and the State of Mexico.

commercial strategy in which our partners play a strategic

NAEAM has around 7,000 clients in the US but we expect

role. We have grown at a faster pace than expected, going

to serve many more customers in the metropolitan

from 20 to 200 employees in three months, and we hope

Mexico City area, which is particularly important due to

to continue a similar trend in the future.

our agreement with SME and its high incidence of energy losses. NAEAM has great ambitions for Mexico and it

SUMEX is the first private qualified supplier in Mexico to obtain both

already has around 80 sales agents operating in this

CRE and CENACE permits to operate in the Wholesale Electricity

region. This partnership is mutually beneficial because

Market (MEM).

101


VIEW FROM THE TOP

MULTIDISCIPLINARY APPROACH TO QUALIFIED SUPPLYING RODRIGO JUÁREZ Commercial Director of Ammper

102

Q: What added value each of Ammper's partners bring

A: Ammper is entitled to sign bilateral contracts as a

to the table?

qualified supplier. We can establish long-term agreements

A: Invex is our local partner and has over 25 years

with generators but still offer short-term contracts to

of experience in Mexico. We finance structures and

our clients. The company also works as a representative

participate in risk capital and project management. One

for qualified users that have generation assets to supply

of the largest sectors served by Invex Infraestructura is

themselves and want to sell surplus production in the

energy. Invex Infraestructura brings business relationships

spot market, as the law requires a qualified supplier to

and knowledge of the Mexican market to the table, both

perform these activities. We act as middlemen in these

important for a new company like us. Bester Energy is our

cases, handling all the costs and transaction processes for

technical partner. It is a renewable energy developer with

a service fee.

international experience in over 20 different markets. As our partner, they evaluate all our proposals and clients,

Q: What qualified user profiles are beign targeted at this

verifying if the electrical infrastructure is in line with the

stage and what is your market offer?

project’s requirements. InfraRed Capital Partners is a US$12

A: Energy has not been a competitive industry in

billion fund with long experience in renewable projects.

Mexico for the last 80 years. Companies are just starting

Legal and financing knowledge are the added values

to

Infrared Capital Partners bring to the table in addition to

departments and that is precisely what Ammper wants to

power generation assets, which allow us to offer flexibility

do for its clients. We want to become our clients’ energy

to our clients.

departments. We can handle all energy-related matters,

acknowledge

the

need

for

specialized

energy

including energy-efficiency programs, so companies can Q: What kind of power generation assets are part of

focus on their core business and still receive cost-efficient

Ammper’s portfolio and why?

energy services. At this point, we are targeting large energy

A: We started building our power generation portfolio

consumers such as mining, steel, automotive or cement

four years ago and now have a diversified set of

manufacturers. One of the reasons is that they tend to

technologies, including hydroelectric power plants in

have energy departments already in place, or at least one

Chiapas, a wind farm in Puebla and several solar parks,

person in charge of the company’s energy management,

adding 700MW, in central and northern Mexico. We bet

which eases the negotiation process. The other reason

strongly on solar energy because we consider it the most

is the scale of their energy consumption. We now prefer

competitive technology. The fact that solar irradiation

to have a few big clients rather than several small-sized

is free and predictable allows setting a fixed price for

companies because it is more efficient in terms of time

solar generation, unlike gas-based technologies. But

and resources.

we also have traditional technologies in our portfolio to complement our renewable energy assets. We believe

Q: When do you expect Ammper to start operating fully

diversification is the key to a successful portfolio because

in the market?

it allows us to offer flexible solutions.

A: Ammper is in a similar position to most of the qualified suppliers entering the market. We are all investing time and

Q: To what extent are you collaborating with other

resources preparing our companies to start operations.

generators given your own power generation capacity?

We have just completed CRE’s permitting processes and are focused on CENACE’s registration process so we can

Ammper is a qualified supplier for the Mexican wholesale market. They

start doing transactions in the market. We already have

have a diverse portfolio in energy generation projects with a particular

some clients ready to go, most of them corresponding to

focus in renewables.

companies that are willing to learn the process with us.


INSIGHT

BROKERS BRIDGE GAP BETWEEN USERS, GENERATORS HANS KOHLSDORF CEO of Energy to Market (E2M)

The qualified supplier is one of the new market roles

But the new scheme also brings financial uncertainty

created by the Energy Reform, a merchant and broker

because it is not made of clear-cut, bilateral deals. The

bridging the gap between heavy users and generators,

PPA in particular is one piece of the system that Kohlsdorf

purchasing energy in the MEM to cover the demand of

believes could soon become a thing of the past, at least

qualified users with which it has a supply contract. The

in the private sector, to be replaced by hedging tools

system, says Energy to Market (E2M) CEO Hans Kohlsdorf,

common in commodities and financial markets. “Market

brings Mexico’s newly liberalized energy market closer to

participants face several risks, ranging from pricing to

the way other industries work, where traders and brokers

currency risks. Power producers are particularly vulnerable

serve as intermediaries, increasing efficiencies because

to commodity-related risks, such as rising natural gas

their role permits both generators and energy users to

prices, and climate-related factors such as lack of wind.

concentrate on their core activities.

Hedging products are what the market needs, not bilateral agreements.”

“Even the largest companies such as CFE need distribution channels,” Kohlsdorf says. “We do the job of working

For these reasons, E2M is creating hedging contracts

individually and building a relationship with the end user,

for small and large-sized generators and qualified users,

giving all the large established generators the opportunity

relating the electric market to their intrinsic business

to bring better services to their customers. We also offer

models. “We analyze the risk inherent to the business and

complementary services to electricity users, providing a

buy or structure the necessary hedge so that companies’

complete market experience.”

costs are aligned with their income. By creating these we take the financial risk out of the operation’s overall risk

While a generation company will likely specialize in one

structure,” Kohlsdorf says.

or two technologies such as gas-fired cogeneration and solar, each with its own advantages and drawbacks such

A difference that makes Mexico a potentially more

as price volatility in the case of gas and intermittency in

attractive market than those of more mature regions

the case of solar PV, a qualified supplier is not bound by

such as Europe and the rest of North America is that in

any particular restriction and can help an energy user

the Latin American nation everything, from demographic

locate the “perfect portfolio” of energy options, he adds.

indicators such as the growth of the middle class to a

“We are not limited to one source and we can also sell

younger population entering the workforce, as well as the

electricity from other power producers or co-generation

country’s industrial drive, points to a prolonged increase

plants with excess production. Through us, end customers

in demand. “Mexico still needs more energy and it expects

can buy excess energy in the market to complete their

to have an increasing electricity demand for the next 10

requirements and generators can use the market’s

to 15 years. Energy-efficiency programs will mitigate the

flexibility to trade excess energy.”

need for additional energy but the electricity market will continue growing,” the CEO says.

The added value of the qualified supplier might be in plain sight but the market still needs to continue developing and

E2M is looking to improve on the quality of services it

adding participants on both sides of the energy equation,

offers by investing heavily in IT platforms to provide

thus increasing its efficiency. The more participants, the

transparency and additional services. “We want to create

more competition and the more cost-effective it will

a system allowing independent power generators to reach

become, miles away from the “highly inefficient” system

thousands of potential customers without having to make

of PPAs and self-supply agreements under the previous

large commercial investments. Our intermediation services

legal framework.

create value on both sides of the market."

103


INSIGHT

LEGACY CONTRACTS KEEP THINGS SIMPLE JUSTIN BRYON Managing Director of Thermion Energy

The coexistence of legacy generation permits and those

to worry about balancing our power production as much

under the new regulations is a key differentiator in the

as new generators must,” he says.

Mexican electricity industry, which has resulted in a business line that is running parallel with the opening

The typical profile of a Thermion Energy client would be “a

of the wholesale electricity market. The government

medium intensive user of electricity whose consumption is

originally decided to maintain these “grandfather” rights

important financially but not strategically. Ideally it would

to protect former investments but some companies

be a creditworthy transnational company from a country

see them as a haven of certainty and simplicity in these

belonging to the Organization for Economic Cooperation

changing and complex times. Thermion Energy is a

and Development (OECD) that has set clear targets in

Mexican independent power producer that has decided to

terms of sustainability and usage of renewable energies.”

put legacy projects at the heart of its strategy, offering off-takers a simpler alternative to other market options.

To serve this market Thermion Energy has the goal of

“We know that customers will only accept changes that

rolling out at least 1GW over the next six to eight years

make their lives easier. Becoming a market participant is

in legacy projects, for which it has identified enough

not particularly easy at the moment,” says Justin Bryon, a

grandfathered permits to achieve its ambitions. “We are

Managing Director at Thermion Energy. “Thermion Energy

advanced in contracting enough legacy projects to meet

decided to acquire and offer legacy contracts as a more

our expansion plans. We have some projects that were

hassle-free and cheaper alternative to CFE’s supply. We

assigned transmission capacity as part of an open season

think our strongest advantages are that we do not ask

organized by CRE prior to the implementation of the

for extra guarantees, offer predictable electricity prices

Electricity Industry Law, which means they are eligible to

and structure our supply contracts in line with our clients’

receive a legacy interconnection contract with up to 20-

specific risk profiles and business cycles.”

year duration as per the law’s transitory provisions. The law states that all other projects must be operational by

Bryon explains that “the problem with any wholesale

December 2019 at the latest while open season projects

electricity market is inherent volatility. There are four

are not subject to this limitation, allowing us more

major products or components that are volatile in the

flexibility in rolling out our commercial operations. We are

Mexican market: financial transmission rights, capacity,

well covered in this sense,” Bryon says.

ancillary services and CELs. These components impact the cost of power delivered to the final user in addition to

The company has decided to focus mostly on wind

generation and other costs. The major issue that qualified

energy projects, which allow the offering of capacity in

suppliers are facing in the new market is the difficulty to

addition to energy under the previous rules. “All our wind

obtain hedges for these four components and this results

energy projects are already in a late stage of development

in uncertainty for the supplier and/or end user.”

but we are waiting to see the results of the Reform’s implementation before moving forward. It is a prudent

Providing certainty is a key factor for legacy projects. “We

investment strategy. We expect to start investing in the

only need to consider costs of power production, regulated

first quarter of 2017, once we have our investment fund

ancillary services, wheeling (the same cost for delivery

closed. We then have five years to commit our investments

anywhere in the country, and for the entire life span of

and another five years to complete them. We are looking

the project) and capacity, which we can deliver with more

at investing in eight to 10 legacy projects that will focus on

certainty than in the new market. These costs are already

supplying the corporate market,” he says. Grandfathered

defined. In the case of renewables, legacy projects also

projects will always have an advantage even as the market

have the advantage of the Energy Bank so we do not have

matures: they are much simpler and therefore cheaper.

105


VIEW FROM THE TOP

INFORMATION, LIQUIDITY NEEDED AS MARKET EVOLVES JORGE ANGARITA CEO of B2E

106

Q: What has been the greatest challenge the company

can compare by themselves and decide what is best for

has encountered as a qualified supplier?

them. It is important to clarify that I do not sell projects.

A: We have encountered several challenges but they are

I have a group of 17 partners that generate energy and a

all part of the natural process of opening a new market.

large group of off-takers. What I offer my clients is the

The rules are not entirely defined, which is natural.

best possible option from this portfolio. We do not work

Particularly with off-takers, there seems to be a lack of

on point-to-point product placement. It is a solution

knowledge regarding risks and options, which hampers

tailored to each client.

operations. What we need is more information, to have the model completely explained so we can make decisions.

Q: Why do you include services such as natural gas supply

Even though it does not affect us directly, there is also a

and energy-efficiency solutions instead of just electricity?

problem regarding loan procurement. The Mexican market

A: Integration of electricity and natural gas forms part of

does not have the level of liquidity that it needs, which is

the well-known concept of an Energy Service Company or

also understandable because financial companies do not

ESCO. The service of energy efficiency is the result of our

have the level of understanding required for the market.

experience in other markets so we wanted to include it in

We are all participating with a lot of caution, trying to see

Mexico. Including energy efficiency is part of the business

how the market will evolve.

model of a modern energy company that offers integral solutions. Regarding the natural gas offering, many of our

Q: What actions is B2E taking to remain competitive amid

shareholders have experience in the natural gas market so

the changing regulations?

we also wanted to be a participant in this.

A: Sometimes not all the regulatory pieces are in place but that is part of the process. I think that one of the

Q: What constitutes good customer service for an energy

company’s strengths is that our team has experience in

company?

other markets such as Colombia, Chile, Argentina, the

A: There are two important elements to consider when

US and Spain. This experience puts us ahead of other

we talk about service quality. The first is related to the

players. It has also helped us in the development of our

quality of the power and the second to the quality of the

systems’ platforms. For example, we have a system that

commercial service. Power quality does not depend on the

allows us to predict congestion prices. That is something

supplier but on the distribution company, currently CFE.

we are very proud of since we know that few players have

Any failure in this part is not the supplier’s fault but the

developed such a system. Our goal is not to be a massive

fault of the distribution company. Commercial service is

company. We have focused our efforts on a few clients

the supplier’s responsibility but the off-takers are not fully

with large consumption, providing them with an added-

aware of this. This is the kind of information that needs to

value product offering.

be understood.

Q: How do you convince off-takers to use your new

Q: How do you expect the Mexican market to evolve in

product offering?

the next two years?

A: Our job is to explain to an off-taker everything that

A: The future will depend on what we do today. If we do

exists in the market. This means explaining tariffs, buying

things right they will get better eventually. It will take a lot

energy and so on. We deliver a portfolio of options so they

of work from the parties involved, including the regulator. So far, the regulator has done a good job but I believe that

B2E is a Mexico City-based qualified supplier of energy looking to

it needs to keep up that good work. It needs to send very

bridge the gap between consumers and generators of electricity in the

clear signals regarding what participants can expect in the

country’s new energy market.

long run. You cannot change the rules of the game.


VIEW FROM THE TOP

FORECASTING THE EVOLUTION OF THE ELECTRICITY MARKET TORALF HEY Commercial Director of Biosolventus

Q: What opportunities did the electricity market’s

Qualified suppliers would also benefit from having access

opening create and how does this translate into demand?

to their off-takers’ consumption data as it would permit

A: One of the advantages provided by the deregulation

them to plan their energy portfolios more efficiently. Our

of the market is that consumers may now take ownership

software also allows qualified suppliers to adapt their

of their consumption data. An open market also enables

forecasts and portfolios as energy consumption changes

companies to decide the amount and time at which they

over the contracting period. This can be done as often as

want to buy energy and who they prefer to be their supplier.

required. Most users prefer to update their forecast on a

Companies must now define different strategies, expanding

daily basis but this will change as the market grows more

their portfolio by purchasing electricity from different

complex and volatile.

sources, including PPAs, suppliers and the spot market. Q: What challenges will generators face in the new market Energy forecasting and analysis will become more relevant

and how can Biosolventus address them?

under this scenario. Companies need to analyze their past

A: Production forecasting in renewables tends to be more

consumption and forecast their future demand to design

complex than in traditional technologies because they

the most suitable strategies for acquiring electricity at

involve a higher number of external variables. In a spot

competitive prices. The advantage of buying electricity

market, renewable energy companies must deal with short-

directly from the wholesale market is that consumers can

term forecasts for the day-ahead and real-time markets,

avoid paying margins to qualified suppliers. This does not

seeking to minimize forecasting errors. Wind energy

mean that consumers should not buy from suppliers at

forecasting is a peculiar case because its margin of error

all but that it is not always the most affordable option to

increases at longer forecasting horizons. It is not possible

procure 100 percent of the energy needs from them.

to narrow the margin of error down to zero, but our tools can provide pretty accurate results. Our wind forecasting

Q: How does monitoring and forecasting software help

products are already useful for self-supply projects but

suppliers and off-takers make better decisions?

they will become crucial for wind farms participating in

A: Our energy management software and services help off-

the wholesale electricity market. Combined-cycle power

takers capture all their information and take control of it,

plants in Mexico are not yet experiencing a problem that is

which has not been the case up to now. By enabling clients

common to markets with higher penetration of renewables,

to control their information, we give them the power of

such as Texas or Germany. In these markets, prices and

negotiation. Without knowing their present consumption

volatility are determined by the generation of wind and

and trends, companies cannot forecast their future energy

solar that impacts strongly on traditional power plants.

usage, which is necessary to establish cost-competitive

Gas-fired plants do not have zero marginal production

deals with suppliers. Our software captures real-time

costs as renewables do, which might drive them out of the

data from client operations and presents it in a visual

market in times of high renewables production. Because

display according to the customers’ preferences. This

of this, we have seen cases in Germany in which traditional

way company decision-makers can identify their price-

technologies offer negative electricity prices so they do

driving factors, putting themselves in a better position to

not have to shut down their production, which would be

negotiate with qualified suppliers. It can help companies

costlier. We expect to see this situation in Mexico, first in

identify their consumption peaks, which tend to increase

those nodes with a high penetration of renewables.

electricity costs, so they can design strategies to reduce them. The software also has useful tools for off-takers

Biosolventus provides market training, data analysis and tailor-made

owning self-supply facilities because it can forecast their

optimization solutions for electricity consumers and generators, with

production and match it to their consumption profiles.

over 40 years of experience in the sector.

107


VIEW FROM THE TOP

CLEAR GUIDELINES WILL SEE MARKET TAKE OFF SALVADOR ALARCÓN Founding Partner of Trade On

Q: What opportunities has Trade On identified in Mexico

Q: What kinds of companies are you targeting and how

and what are the company’s goals in this market?

can your services increase their competitiveness?

A: Like any new market, Mexico offers a wide range of

A: As an energy broker, we are targeting all market

possibilities for companies with experience in similar

players participating in the wholesale electricity market,

settings. Trade On spotted a window of opportunity to

particularly generators, suppliers, marketers and off-

become a key player by contributing to the development,

takers. Our role will be similar to that of the electricity

liquidity and transparency of the market. Our objectives

marketer, being a middleman in all energy transactions.

are in line with those of the Energy Reform, positioning the

So far, our strategy is to expose Trade On to the market

end user as the ultimate beneficiary of our services. As has

following a selective approach. Once the first contact is

happened in other countries, Mexico’s electricity market

established, we analyze the clients’ individual situation to

has been developing slowly but we expect it to take off as

define what services are most suitable for them. We can

soon as the legal guidelines are clarified. We are trading

offer legal and technical advice to prepare for CENACE’s

bilateral contracts and expect the number of transactions

electricity auctions, making use of internal tools that we

to increase significantly. Our tools and services are well

have developed specifically for the Mexican landscape.

designed for local conditions and our goal is to become a leading energy broker in the near future. Our setup borrows

Companies using our electronic trading tool will benefit

the best features from other international platforms but it

from having the market in a single platform, as well as a

is 100 percent Mexican designed.

summarized visual version showing the best electricity prices in the market. Trading platforms save users the

Q: What challenges have you faced to position Trade On

effort of having to recollect market data on their own,

in Mexico?

providing a user-friendly environment for performing

A: The novelty of the regulations is a challenge for many

transactions. Our job is to maintain constant contact with

market participants, including off-takers and generators

market participants to deliver top-quality services, getting

who have many doubts about how the market will operate.

first-hand information and adapting our focus to the

Particularly, the role of the energy trader is surrounded by

changing market conditions.

an aura of mystery, even though most companies have either an excess or lack of electricity they would like to

Q: What are the key features of Trade On’s platform and

trade in the market. For these reasons, we are working to

what operations do you expect to be carried out on it?

contact and educate market players, becoming their first

A: Our trading tool is based on the electronic platform

point of reference in the new playing field.

used in most European markets but it has been adapted to Mexican conditions, such as the country’s nodal

In the coming months, we expect the Mexican market to

scheme that makes the system more complex. To solve

follow a natural evolution, starting with bilateral transactions

this issue, we designed a method to divide the market into

to increment trust until the players feel confident enough

tradable zones, facilitating the visualization of energy

to trade energy in a semi-standardized market. For this

transactions. Our project has received strong support

stage, we have established a legal division and a trading

from Mexico’s regulatory entities because they consider

platform that will speed price discovery. Particularly, we

energy brokers as crucial to boosting transparency and

expect our online trade platform to become a decisive

liquidity.

tool as has happened in other markets. So far, we have identified a strong interest from private companies to take

Trade On is an energy broker with over 50 years of experience in

advantage of our services but a learning process will be

the global electricity market, covering trading, legal counseling and

needed to attract a larger number of participants.

consulting.

109


INSIGHT

US-MEXICO PARTNERS TO CHASE GAS-BASED TECH JORGE GUTIÉRREZ Director General of Energía Eléctrica Bal

110

Mexico’s push for a cleaner, more renewable energy

Mexico plans to produce 35 percent of its energy from

matrix and the growing power needs of several industries

clean sources by 2024 and both solar and wind will

in the country has created opportunities where two

become increasingly important in the industry, particularly

heads are better than one. Mexican industrial and retail

after 2016’s long-term electricity auctions showed a

conglomerate Grupo Bal saw such an opportunity in the

competitive landscape where solar PV plants averaged

wake of the sweeping Energy Reform and partnered with

prices of US$31/MWh and wind reached US$48/MWh,

the local unit of US generation giant AES to create EnerAB.

rates competitive with the US$45/MWh offered by even

Jorge Gutiérrez, Director General of Energía Eléctrica

the most efficient combined-cycle plants, Gutiérrez adds.

Bal, AES’ partner in EnerAB, says the venture with the

“These prices brought down the arguments of those

Arlington-based company, sealed in early 2016, has been

who opposed the Energy Transition Law by claiming

exploring opportunities in gas-based technologies such

that increasing the share of renewables would increase

as cogeneration for various sectors, including the oil and

manufacturing prices.”

gas and paper industries, that have high energy and steam requirements.

EnerAB will invest up to US$2.5 billion in the country in the next five years. Most of the resources, Gutiérrez says, will

EnerAB, he says, will be an equal-investment venture

be allocated to combined-cycle and cogeneration plants,

between the two companies. “The Energy Reform was the

some of which the company is already proposing to

main driver behind Grupo Bal’s decision to open Energía

PEMEX’s cogeneration unit and to CFE’s generation unit.

Eléctrica Bal, a company focused on power generation

Around US$500 million would be devoted to renewable

activities,” Gutiérrez says. “We have been analyzing

energy, including storage solutions, while a smaller portion

the possibilities of establishing projects with CFE and

of the funds will go toward projects like liquefied natural

other private players, as well as participating in the next

gas stations to reduce diesel consumption from mining

electricity tenders, tendering a proposal involving wind

trucks, one of Grupo Bal’s main areas of expertise. The

and solar power in combination with energy-storage

company owns mining giants Peñoles and Fresnillo, as well

technologies, an area where AES Mexico holds great

as seawater desalination projects designed to alleviate

expertise.”

the frequent droughts and water demands in Mexico’s northern region.

Energy storage is seen as the solution to the main problem for both solar PV and wind power: intermittency. Since

The company is no stranger to the energy-generation

both technologies depend on variable input from the sun

business. Peñoles owns an 80MW wind farm in Oaxaca,

or wind, they do not produce a constant flow of energy,

Fuerza Eólica del Istmo, which provides power to several

which has been an argument for the development of

of Grupo Bal’s units. It also owns a 500MW petroleum

gas-based generation technologies, especially given the

coke-fired thermoelectric plant in San Luis Potosi,

low prices of imported gas from the US in the last few

Termoeléctrica del Golfo, which provides 50 percent of

years. AES, Gutiérrez says, is one of the leading companies

its energy production to Peñoles and Fresnillo. Another

working on storage technologies to solve the intermittency

potential avenue of business is to become CFE’s

problem. “All our renewable energy-generation projects

client for natural gas, taking advantage of the state-

will be backed by our energy-storage solutions, which

owned company’s push to increase the size and reach

are necessary to mitigate intermittency. Energy storage

of its distribution and storage infrastructure. “We are

is one of the strongest assets of AES, a world leader in

aware of CFE’s great interest in investing in natural gas

these solutions, which was one of the factors driving us to

transportation infrastructure, which was initially motivated

establish an alliance with them.”

by environmental concerns,” Gutiérrez says.


INSIGHT

STORAGE SEEN AS MISSING LINK FOR CLEAN COMPLIANCE JUAN RUBIOLO General Manager of AES Mexico and EnerAB

From India to Alaska to Europe, AES is one of the names

the interest in energy-storage solutions, particularly from

that comes to mind when discussing the global power

system operators like CENACE. Energy storage is seen as

generation industry, with operations in 18 countries

the missing link to help countries comply with their clean

and over 36GW in operation. Since 2014 it has been

energy targets,” Rubiolo says.

preparing for the huge challenges brought by Mexico's Energy Reform, closely working with the public sector to

Storage solutions, he adds, have been crucial to the

suggest ideas for a more attractive regulatory framework,

introduction of renewables in countries like India or Chile

according to its Mexico General Manager, Juan Rubiolo.

and helped promote assimilation. Storing energy can help add flexibility and help incorporate larger shares of

The company, which partnered in 2016 with local

renewables to the grid, an important point considering

industry, retail and financial conglomerate Grupo Bal,

Mexico has a legal objective to reach 35 percent of

operates three plants in Mexico. EnerAB, AES Mexico’s

clean energy generation by 2024. In Mexico, all new

joint Venture with Grupo Bal, is the platform from which

developments will take place through EnerAB. Beyond

both companies are looking to promote generation

traditional gas-powered generation and renewable energy

projects ranging from gas-based technologies such as

and storage, the company’s third focus will be innovative

combined-cycle and cogeneration plants to solar PV

solutions like seawater desalinization for drought-prone

and wind generation. These will take advantage of AES’

states in northern Mexico. EnerAB will keep an eye on

leadership in the field of energy storage to solve investors’

the private sector but Rubiolo believes that in the short

main gripe with those renewable technologies, namely

term, business opportunities will still come mainly from

intermittency as they depend on weather conditions

the state-owned industry giants PEMEX and CFE. “Usually,

and even the planet’s rotation. The company says it has

the private sector is the last to adapt to the regulatory

over 110MW of storage units already installed around the

changes because the regulatory and market aspects are

world. “The rise of renewable energy generation, whose

not quickly assimilated by all companies. CFE and PEMEX

intermittency is the cause of several technical problems

will continue offering the greatest opportunities in the

related to the grid’s instability, has contributed to boosting

immediate period.”

111


112

La Caridad power plant, Sonora, Grupo MĂŠxico


INSIGHT

MINING FOR GOLD IN THE POWER MARKET ADOLFO VELASCO Power Division Director of Grupo México

Large energy consumers saw an opportunity to reduce

The power auction results have placed renewables in an

electricity costs when the 1992 reform of the Public

advantageous position in the company’s vision for the

Electricity Service Law finally allowed private parties to

future. “Renewable energies are becoming increasingly

invest in power generation projects under limited schemes.

important due to falling generation costs that have

Self-supply quickly became the favorite figure used by

increased their competitiveness in open markets,” he says.

large energy consumers, introducing companies from different backgrounds into the power generation world.

“We are evaluating the feasibility of installing efficient co-

The Energy Reform has opened up new opportunities to

generation projects powered by natural gas and large solar

capitalize on these assets.

parks in our facilities in Sonora, a state that offers high solar irradiation. We are also analyzing the possibility of acquiring

Grupo México, one of the world’s more profitable mining

additional wind facilities and investing in mini-hydro

groups, decided in 2010 to build two 250MW combined-

installations and geothermal energy, which have shown

cycle plants to power two of the company’s mines and

great potential in Mexico,” Velasco adds.In addition to cost

a metallurgical complex in Sonora. It also invested in a

competitiveness, renewables are attractive to Grupo México

74MW wind farm, which was developed by Spain-based

because they contribute to its sustainable development.

Gamesa in Oaxaca and has Cinemex and Ferromex also

According to the company’s 2015 Sustainable Development

as off-takers. These projects all were developed under the

Report, Grupo México’s power generation assets avoided the

self-supply scheme. The enactment and implementation

emission of 237,379 tons of CO2 because they are cleaner

of the Energy Reform happened as Grupo México was in

than the average power generation facilities in the country.

the middle of developing these projects, changing the

Velasco says that Grupo México’s main goal is to become

company’s perspective over its power generation assets.

self-sufficient regarding energy usage. As such, part of the

“While we were developing these projects, the Energy

company’s new power generation assets, renewables or not,

Reform was approved in the country, opening up new

will be dedicated to meeting the demand of the group’s

possibilities to profit from electricity production, including

divisions. Velasco adds that, “in the current environment,

selling the surplus to third parties,” says Adolfo Velasco,

however, the division has also looked for external clients to

Power Division Director of Grupo México.

sell its energy as a strategy to increase its competitiveness and keep the business growing.”

According to Velasco, the strategy of the company had been to establish bilateral contracts and sell energy

Grupo México has alliances to ensure the correct O&M of its

directly to off-takers. The opening of the wholesale

power plants and strategic partnerships will remain crucial

market, however, is reshaping Grupo México’s approach.

in the company’s new strategy. “Energy generation has

“In the short term, we will be entering the market as

never been the core business of Grupo México, which means

generators with the help of new power plants,” Velasco

that we have had to learn from scratch,” says Velasco. “We

says. “But we are also analyzing the possibility of getting

are now looking to capitalize on the opportunities brought

involved in the commercial side and entering the market

by the Energy Reform by keeping ourselves updated and

as electricity suppliers or traders, gradually expanding

establishing partnerships with key players with broad

our presence along the whole value chain.” Grupo México

experience in the sector.”

has not yet acquired new power generation assets, as it is working on the best strategy to grow in this market. “Our

Adolfo Velasco, Grupo México’s Power Division Director, passed

main objectives are to identify who are the key market

away in July 2016 shortly after giving this interview to MER. He was

players and find what added value we can bring to the

a chemical engineer with an MBA from IPADE and took over the

market, whether it is capacity or CELs,” says Velasco.

mining giant’s power generating unit in January 2013

113


VIEW FROM THE TOP

JAPANESE GIANT TAKES LONG-TERM VIEW RAMÓN MORENO Chief Technical Officer at Mitsui & Co. Power Americas

114

Q: How has the Energy Reform and the wholesale

advantage of the new regulations. Selling surplus energy

electricity market changed Mitsui & Co. Power Americas’

in the market is one of the options. The spot market works

strategy?

as a balancing system and more importantly ensures the

A: Our overall business strategy has not been greatly

most efficient technologies are dispatched first, which

impacted by the country’s energy sector transformation.

is an incentive to invest in efficiency. For instance, if a

The

long-term

company has a 250MW contract with an off-taker but is

investment opportunities, optimizing our assets and

objective

continues

to

be

finding

producing an additional 100MW, it can sell the surplus

establishing new projects that offer profitable returns on

energy on the market, which will be dispatched if it is

investment (ROI).

offered at a competitive price.

Before the Energy Reform, we were focusing on

Q: Where are the greatest business opportunities, in

establishing self-supply plans with large industrial

long-term PPAs or the MEM?

energy consumers. CFE was our main client. Now almost

Even though the MEM has been in the limelight during

all the same actors are participating in the market but

the past months, the Energy Reform has set a framework

playing different roles. The new regulations have not

in which most business opportunities rely on long-term

changed our strategy dramatically but it has opened

contracts. This will be the area that presents the fiercest

a wider range of opportunities, particularly with the

competition because the nature of power generation

inclusion of the CELs and the mandatory percentage

is building infrastructure, which can only be price

of clean energies. Mexico’s goal to reach 35 percent

competitive with a long-term view. We are analyzing

of electricity generated from clean energy sources by

the results of the most recent auction while looking

2024 also is a great incentive to invest in clean power

to establish long-term agreements with potential off-

generation technologies.

takers. The company sees a great business opportunity in establishing partnerships with qualified suppliers,

Q: How will the company capitalize on the new market

one of the most important features introduced by the

opportunities given the legacy status of its assets?

reform. From our point of view the Mexican government

A: The new regulations give us the option to change our

has done an excellent job shaping the rules of the new

contract conditions to fit the new regulatory framework

electricity market, learning from international experience

or to remain under the old plan. We think the flexibility

and avoiding the mistakes made by other markets.

legacy projects have to maintain their old rights and obligations is one of the Energy Reform’s great successes

Q: To what extent is the company planning to expand

because it is not always easy to break previously

its renewable energy portfolio given growing demand?

stipulated agreements. By making this decision, the

A: All clients want to buy electricity from a reliable source

Mexican government is sending a signal of stability to

at a competitive cost, even though some businesses

stakeholders, fostering trust for investing in the country.

prefer a specific technology or energy source, such as

At Mitsui & Co. Power Americas we have decided to

companies interested in acquiring renewable energy

make use of this opportunity and maintain our legacy

as a strategy for projecting a cleaner image. So far, we

contracts under the old plans but we also will take

have not established objectives regarding the share of renewables we should have in our portfolio. Our strategy

Mitsui & Co. Power Americas is the second-largest private operator

is to invest in projects that are economically feasible and

of power generation assets in Mexico. It has an installed capacity of

low risk. We are definitely interested in solar and wind

2,23GW distributed in five combined-cycle power plants: Saltillo,

projects due to the attractive returns these technologies

Altamira, Rio Bravo II, III and IV.

offer but we are still analyzing the possibilities.


VIEW FROM THE TOP

NARROWER FOCUS WILL HELP ENERGY INDUSTRY JOSÉ FERNà NDEZ Director General of The National Institute of Electricity and Clean Energies (INEEL)

Q: On which research areas is the Institute most focused?

needs of generation are measured in electrical substations

A: We have narrowed our interests to three main areas,

where electricity is brought down in voltage from remote

which we believe are going to be the basis for future

generators and conditioned for distribution. That is where

negotiations with our customers. The first is electricity,

you see the need for electricity in specific moments of the

which must become greener and mindful of new

day and times of the year and where the markets reveal

technological developments. The second is related to

the requirements for more energy availability. Distributed

clean energy and the preservation of natural resources

generation is the technology that is changing the scene

such as water and agriculture. Agriculture consumes a lot

for transmission, distribution and generation.

of energy so energy consumption must be very efficient. The present emphasis is on distributed energy so the

Q: Is the Mexican electricity system ready to receive

proximity of where the energy is produced and where it

the large amount of renewable energies planned in the

is consumed enhances the possibilities for clean energy

Energy Transition Law?

use. The third is on enabling technologies, which refers to

A: The electrical grid system is not prepared at all to cope

the professional capacity to cope with technical problems

with the intermittency of clean energy producers such as

and social and technological impacts. It is a combination

solar and wind farms. These technologies are suffering

of artificial intelligence, mechatronics and numerical data

because transmission in Mexico is only accustomed to

analysis on one side and sociology, history and society on

deal with energy generation that is easy to dispatch,

the other. This will allow us in the near future to cope with

which renewables are not. We have to solve the issue of

the needs of the country.

where to store energy from clean energy producers when it is produced. There are different possible scenarios, for

Q: What role do clean energies have in the Institute’s new

instance the use of wind and solar energy to pump water

structure?

or re-pumping, which is a model studied by electricity

A: The electrical division of the Institute remains the

institutions in Mexico. We need to create a new culture

same, with the same clean-energy focus. The generation

of clean energy, which addresses a new way of supplying

of electricity may come from different sources, of which

customers.

some are cleaner than others, and what we should do in the future is pursue the cleaner technologies. If power

Q: What is the most important contribution from the

generation comes from burning fossil fuels we have to

Institute to the Mexican power industry?

make sure that is as clean as possible. We are also actively

A: The most important contribution has been the majority

working on carbon capture and storage so it is not

of the technology and innovation assets capitalized first and

released into the atmosphere. Another important issue is

foremost by CFE but also by the national and international

the economic side. It was difficult during the early years

network of suppliers that operate in Mexico. This includes

of the Institute to finance wind or solar projects, but now

the capability of the professionals that work in the electrical

we are capitalizing on our investment and have a more

industry. Forty years of capacity building are properly

diversified portfolio.

measured by the amount of money that our customers have spent and the work they have provided to our endeavor,

Q: How do you expect distributed generation to impact

which allows us to foresee an attractive future.

the electricity market in Mexico? A: It is already impacting the Mexican market. The electricity

The National Institute of Electricity and Clean Energies (INEEL) is a

market is keen on developing distributed generation and

research center whose mission is to support the power system through

not only solar and wind energy. This technology has been

innovation and technological developments. INEEL offers solutions of

anticipated for the last decade because the most pressing

modernization and energy-efficiency projects for companies.

115


ROUNDTABLE

HOW MUCH HAS THE NEW MARKET LIVED UP TO EXPECTATIONS?

As a direct result of the Energy Reform, the Mexican electricity market experienced a transformation that has caused uncertainty among market participants. The new market is expected to create competition in power production as the sector pulls away from being a monopolistic industry. The intention is to reduce costs and develop new capacity to benefit end users. Still, the unclear regulation has made participants hesitant. With the introduction of new processes, schemes and players, companies such as offtakers, generators and qualified suppliers are striving to understand and adapt to the market.

116

The electricity market was expected to grow gradually since its inception and it will become increasingly open as it matures. The market is designed to stimulate competition so it operates under a model where cheaper energy is sold first, favoring models and technologies that generate energy at lower costs. In the long term we believe that these models will bring electricity costs down through the incorporation of new technologies and the displacement of older plants.

CÉSAR HERNÁNDEZ OCHOA Deputy Minister of Electricity

Competitivity will generate incentives to improve services or to lower costs, but this is a market process and thus the determination of costs is not under control of any regulatory entity. It will also cause electricity prices to fluctuate depending on demand during the year. In periods when there is significant demand, prices will rise and vice versa.

The spot market is one of the new components that is developing slowly, which is normal. Most of the market participants are waiting to see how it develops before investing. We expect the level of participation to increase as the market matures. This dynamic will not only benefit generators and suppliers but also CENACE and the grid’s stability. Mexico’s new regulations offer important business opportunities in the spot market, the electricity tenders and bilateral contracts, all in the short, medium and

JAIME DE LA ROSA President of AME

long term, while maintaining some of the old schemes through legacy projects. The new mechanisms will contribute to increasing Mexico’s competitiveness on the global scene and enhance the internal energy security of the country while bringing new players to the market. There is still a long road ahead to arrive at this ideal scenario but the regulations are clearly marking the route we need to follow.

The wholesale electricity market is increasingly more complex, driving market participants to become more sophisticated and adopt efficient IT tools that help them analyze and consider all important indicators for their strategies. It would be prudent, for instance, to forecast and consider the future of natural gas prices. We estimate that natural gas prices could increase 2.5 percent annually during the next 10 years, having a significant impact on Mexico’s electricity tariffs due to the

LOÏC LE GALL Executive Director Power & Utilities of EY

large presence of gas-based technologies in the system. Forecasting the behavior of the spot market and regulated and unregulated tariffs will be one of the greatest challenges for companies operating in the sector.


We expect to see a linear correlation between spot market prices and gas prices. Every energy company has its own gas price forecast but we believe all these forecasts lean toward higher prices. We expect efficient renewable projects will begin to balance spot market prices in the medium and long run. In the short run, former tariffs did not reflect the real generation costs but we expect the spot market to do it better. We also expect a change in the price balance. There was a huge difference before between base and peak tariffs that we expect will diminish as the spot market grows. Industrial users will benefit greatly from this

RODRIGO JUĂ REZ Commercial Director of Ammper

change because they can then avoid the need to stop production at peak hours by having the ability to plan their production according to their logistics needs and not energy prices. 117

The novelty of the regulations is a challenge for many market participants, including off-takers and generators who have many doubts about how the market will operate. Particularly, the role of the energy trader is surrounded by an aura of mystery, even though most companies have either an excess or lack of electricity they would like to trade in the market. In the coming months, we expect the Mexican market to follow a natural evolution, starting with bilateral transactions to increment trust until the players feel confident enough to trade energy in a semistandardized market. Particularly, we expect our online trading platform to become

SALVADOR ALARCON Founding Partner of Trade On

a decisive tool as has happened in other markets. So far, we have identified strong interest from private companies to take advantage of our services but a learning process will be needed to attract a larger number of participants.

The law now permits users with aggregated demand over 1MW to enter the market as qualified users so we expect more industrial customers to join soon. Companies with experience in self-supply power production will be the typical offtakers participating in the market at first. As there is not yet a futures market, we expect more bilateral financial contracts to be used as a hedging tool and we also expect qualified suppliers to increase their market share, even though they will be constrained by the presence of CFE in the market. Negative prices will not be present in the market in the short to medium term but we do expect grid instability to become an issue as renewable energy capacity increases. It will not, however,

TORALF HEY Commercial Director of Biosolventus

directly impact customers. In the long term, speculative bidding will become increasingly important, adding interesting dynamics to the market.

We must keep in mind that Mexico is deregulating a growing market. Mexico has a distinctive structure that does not fit with North America or Europe, where energy consumption is shrinking. Mexico still needs more energy and it expects to have a growing electricity demand for the next 10 to 15 years. Energy-efficiency programs will mitigate the need for additional energy but the electricity market will continue growing due to the development of the middle class and the population pyramid, which has mostly young people that will soon become active members of society. Mexico’s panorama is a huge opportunity for attracting new investment to the energy industry and E2M has the potential to ease the process for new companies.

HANS KOHLSDORF CEO of Energy to Market (E2M)


McCormick production plant, State of Mexico, Grupo Herdez


OFF-TAKERS

5

Consumers are the end game of every market. In Mexico, a heavily industrialized country with dozens of trade deals and an export-oriented economy, that usually means car assembly lines churning out millions of gleaming new vehicles every year or energy-intensive mining operations producing ton after ton of minerals and cement that feed production lines or highways near and far. The new rules for energy commercialization are starting to offer those off-takers the opportunity to reduce costs and increase competitiveness while also reaching increasingly demanding sustainability objectives.

In this chapter, some of the largest energy consumers in the country present their views on the new rules and the opportunities they bring to improve energy consumption, as well as the strategies they have developed to gain cheaper and more efficient access to the power they require. It also showcases some of the agreements reached and the role local authorities are playing both as stakeholders and as deal-brokers.

119


CHAPTER 5: OFF-TAKERS 122

ANALYSIS: Paradigm Shift Introduces New Possibilities

123

INSIGHT: Luis Nava, Government of Queretaro

124

VIEW FROM THE TOP: Magdalena Ruiz, Government of Jalisco

125

INSIGHT: Luis Soliz, Government of Baja California Sur

127

INSIGHT: Alejandra Vázquez, Grupo Bimbo

128

VIEW FROM THE TOP: Marco Ribera, Nissan Mexicana

129

VIEW FROM THE TOP: Jorge Salas, Volkswagen de México

131

ROUNDTABLE: How has the Energy Reform impacted the Mexican mining industry?

132

VIEW FROM THE TOP: Francis Pérez, Nestlé México

134

VIEW FROM THE TOP: Víctor Treviño, FEMSA

135

PROFILE: Alfredo Román, Tetra Pak

137

INSIGHT: Julio Santos, Grupo Herdez

138

VIEW FROM THE TOP: Monte Mickle, Enerlogix Solutions

121

René Ochoa, Enerlogix Solutions

139

ROUNDTABLE: What Advice Would You Give to Other Off-takers?

140

PROJECT SPOTLIGHT: New Mexico City International Airport

142

VIEW FROM THE TOP: Estanislao de la Torre, HSBC Mexico

143

INSIGHT: Salomon Amkie, Citibanamex


ANALYSIS

PARADIGM SHIFT INTRODUCES NEW POSSIBILITIES

122

The Energy Reform gave qualified users (those with

the wholesale market and then transfer their offerings

a consumption greater than 1MW) the opportunity

to qualified users. But for off-takers that choose not to

to purchase electricity from a diverse portfolio of

engage in business with this figure, the next challenge

suppliers. Before, large energy consumers were limited

in the decision-making process is to select the power

to energy supplied through cogeneration or self-supply

supplier that best fits their characteristics, needs and

schemes or had to purchase it directly from CFE. Now,

daily operations. As companies pioneer in this area, the

the numerous possibilities require that they step up

most repeated advice for off-takers is to analyze every

their analysis game to acquire in-depth information on

aspect of their decision. As most companies are not

their energy consumption patterns and needs to select

used to this type of extensive analysis because of the

the most suitable option.

previous monopolistic regime, this task has proved a challenge for off-takers.

Government institutions are playing a pivotal role in helping companies understand the new framework, the

THE ART OF OPTIMIZATION

market’s operations and the various elements created

Some companies have already mastered the art of

as a result of the Reform. “The Ministry of Energy has

optimizing their energy supply. Nestlé Mexico for

shown a willingness to help private companies navigate

instance, gets 80 percent of their electricity through

the new energy landscape. We found it highly useful to

wind power thanks to a contract with Enel Green

be part of the National Program for Energy Management

Power established under the self-supply element of the

Systems (PRONASGEn) because it allowed us to greatly

previous regulatory framework.

improve our energy management, reducing our energy costs considerably at our pasta manufacturing plant,”

But with an explosion of opportunities resulting from

says Julio Santos, General Manager of Energía para

the Energy Reform, the process of analysis begins again

Conservas, whose parent company Grupo Herdez is a

and all new options are put under the magnifying glass.

leader in the processed food sector and a major producer

Francis Pérez, Shared Value Creation & Sustainability

of Mexican food for the US market. “By participating

Director at Nestlé México, comments that “with the

in PRONASGEn, companies can get free consultancy

Energy Reform, we have new and better options to

services and bring experts into their plants to help them

become more competitive, establishing contracts with

improve their energy management.”

different companies. Today we are analyzing all our options with the goal of achieving 100 percent from

The decision-making process for off-takers begins

renewable sources.”

with the choice to purchase electricity on their own or through a qualified supplier. Qualified suppliers are

The cleanness of an energy source also influences off-

electricity services providers that can buy electricity

takers when selecting their suppliers. As sustainability

in the MEM to provide electricity services to qualified

becomes a more pressing issue around the world,

users, with whom they have supply contracts and that

companies seek to supply their power consumption

they represent before CENACE.

through clean energy sources, preferably renewable resources.

Qualified suppliers require a CRE permit to operate, the first of which was awarded this year to Suministro

"We are looking at two options: investing in our own

Sustentable de Energía en México (SUMEX).

Joaquín

generation facilities or purchasing clean energy from

Leal, one of SUMEX’s founders, explains the difficult

a third party. We are exploring the possibility to install

process of innovating in an evolving market: “Breaking

solar PV panels in our manufacturing plant in Queretaro,

ground in the industry has been challenging. The process

a

of becoming qualified suppliers has taken longer than

locations, we are also looking at wind energy options.

expected mainly due to a lack of communication

We are not tied to any technology in particular,” says

between the different regulatory bodies involved.”

Alfredo Román, Environmental Manager at Tetra Pak.

state

with

significant

solar

potential.

In

other

As renewables sources become more important, the Qualified suppliers can facilitate the commercialization

element of sustainability will continue to play a lead role

of energy because they represent several generators in

in any analysis of optimal power alternatives.


INSIGHT

AUTO HUB DRIVES TOWARD SOLAR LUIS NAVA Chief of Staff for the Government of Queretaro

The automotive industry produced 3 percent of the

the government to look at other options to enhance the

national GDP and 18 percent of the manufacturing GDP

state’s energy security.

in 2015, making it one of the most important sectors in the economy. By 2020, 13 brands in more than 30

“We see a great opportunity in solar energy, especially as

manufacturing facilities are expected to produce around 5

Queretaro has high solar irradiation levels. We consider

million light vehicles, 1.6 million more than in 2015.

that having the secondary laws and regulations needed to promote the use of distributed generation in the country

Much of this success is centered in one region, the

will lead to an important number of small and medium-

Bajio. Queretaro is among the states that form part of

scale solar systems being built in Queretaro. At a state

this buoyant manufacturing area and the industry’s key

level, we need to work on aligning the local norms to the

players have top-billing here. “Queretaro’s manufacturing

new regulations so we can support the development of

industry produced around MX$190 billion from January

these types of projects in the near future,” Nava says.

to September 2016, with the automotive industry making the greatest contribution at around MX$48.72 billion, 26.4

The state would like to become an energy hub but there

percent of all manufacturing revenues,” says Luis Nava,

are several considerations that need to be addressed.

Chief of Staff for the Government of Queretaro.

“We need to balance the needs of the energy sector with that of our manufacturing industry, avoiding as much as

To explain Queretaro’s success as an epicenter of

possible the use of land for energy production that could

manufacturing, Nava says that “some of the main drivers

be developed for manufacturing. But there are certain

of this development have been our industrial strategy that

areas that have potential to host energy developments,

focuses on developing a local supply chain and sectorial

especially areas with near desert qualities. Solar energy

clusters. Queretaro also offers an attractive industrial

requires large areas of territory and strong irradiation and

and business environment as well as qualified employees

these areas offer both,” he adds.

for different industries. Queretaro’s economically active population is around 806,000 and more than 770,000

To spark Queretaro’s energy transition, the government

are employed. The manufacturing industry employs

is developing a Climate Change Law, which considers

179,845 people.”

the promotion of clean energy technologies and energy efficiency as the main strategies to mitigate local GHG

Often overlooked but also playing a key role in the state’s

emissions, and a Strategic Plan for the Energy Industry

manufacturing success is energy supply. “The energy

Development that is expected to be ready in 2017.

sector is a crucial element for the state’s development at all levels, particularly the manufacturing and mining

“This plan involves mapping the state’s potential to

sectors, which need large amounts of thermal and

deploy its renewable and nonrenewable resources, taking

electric energy to produce,” Nava says. The state is

into account its strategic position and local energy

equipped with six power plants that provide energy to its

consumption and production. We will implement some

population and different industries. “The most important

specific projects according to this plan with the purpose

facility in the state is El Sauz, a combined-cycle power

of transforming Queretaro into an energy self-sufficient

plant located in Pedro Escobedo municipality with an

state in the medium to long term. We expect the first

installed capacity of 617MW. The plant also supplies

of these projects to launch in 2017,” Nava says. With

energy to the states of Hidalgo and Guanajuato,” says

these new initiatives in place it will not surprise anyone if

Nava. But even with this energy infrastructure in place,

solar power helps produce some of those 5 million cars

Queretaro continues to be a net energy importer, driving

expected in 2020.

123


VIEW FROM THE TOP

NEW AGENCY SHOOTS FOR ENERGY INDEPENDENCE MAGDALENA RUIZ Minister of Environment and Territorial Development for the Government of Jalisco

124

Q: What drove Jalisco to create its own Energy Agency?

Q: What will be the main initiatives resulting from the

A: While planning the state’s energy strategy the

agency’s work?

government supported the proposal of the Environment

A: The main highlights will be the construction of a

Ministry, the Innovation, Science and Technology Ministry

technological

and the Economic Development Ministry to have a

investment portfolio, a metropolitan energy-efficiency

multidimensional Energy Agency to address Jalisco’s

program and the creation of an energy cluster in Jalisco.

energy consumption. The state is the fourth largest

We have emphasized the need to have baselines for

electricity consumer in the country but it does not produce

greenhouse gas emissions so we can track the changes.

all the energy it consumes. We decided to research and

We are working on a project for the rational and efficient

analyze international energy policies, especially from

use of energy, a carbon management plan and promotion

California, and eventually agreed to create the Energy

of clean energies within the public administration. We have

Agency as a decentralized public organization. This

already partnered with Grupo Dragón for a project that

agency will promote a transition to higher levels of power

is supplying clean energy to the government’s facilities,

production so we can generate between 35 and 50 percent

reducing our greenhouse gas emissions by 63 percent.

innovation

center,

our

clean

energy

of the energy we consume. We are also investing in energy efficiency through PPP agreements where the main focus

Q: How does Jalisco support private companies willing to

will be to develop and boost local business. The last

invest in clean energy projects in the state?

significant objective for the agency will be technological

A: Next month we will have a workshop with the German

innovation. Strategic alliances will be another main element

Cooperation Agency (GIZ), the Mexican Center for

of the agency’s brief, beyond the state’s business players

Environmental Law (CEMDA) and ETHOS, a public-policy

such as Jalisco’s Industrial Chambers Council (CCIJ)

thinktank, where the main focus will be how to promote

and business clusters. We are carefully crafting alliances

PPPs. We already have the research to help us make the

with international institutions, such as memorandums of

best decisions about which projects to support and which

understanding between California’s Energy Commission

are the most competitive. We see the highest potential

and some Canadian provinces, and agreements with the

in PV solar and cogeneration, followed by wind and

governments of Israel, Germany and Catalonia.

geothermal energy.

Q: How is the Energy Reform contributing to Jalisco’s

Q: What are the main goals for Jalisco’s Energy Agency

energy ambitions?

in 2017?

A: The Energy Reform represents an important opportunity

A: We will publish our goals once the Energy Agency starts

to boost clean and renewable energy production. Jalisco

operations next year. The three agencies involved in this

has been dependent on power from other states because

endeavor are working relentlessly to conclude the agenda

it has neither oil resources nor large water bodies to

with the support of specialized consulting firms. We seek

facilitate hydropower production. But the state has vast

to consolidate the opportunities resulting from the Energy

solar resources, offering 297 days per year of optimal sun

Reform, including strengthening communication at the

irradiation, as well as wind and geothermal potential in

state, local and federal levels, bringing the private sector

areas such as Jalisco’s highlands, the coast and the north

and society on board. The main challenge for Jalisco at

of the state.

this point is to start its energy transition process. We only produce around 8 percent of the energy we consume and

The Ministry of the Environment and Territorial Development of Jalisco

increasing that percentage will be complicated, particularly

promotes sustainable development in the state through programs

as we are working to ensure that local communities are

designed to reduce pollution and preserve and protect the environment.

respected during the development of all energy projects.


INSIGHT

A RAY OF SUNLIGHT AFTER THE STORM LUIS SOLIZ Energy Director at the Government of Baja California Sur

Baja California Sur’s interest in solar energy dates back

country as well as great solar irradiation, both attractive

to the 1970s, when the first solar-powered seawater

features when investing in solar power.

desalination plants were installed on the peninsula. The state is also the region where Aura Solar I, the first utility-

Besides preparing for potential natural disasters, the

scale solar park in Mexico and the largest in Latin America

department must think ahead in case solar production

at the time of its construction in 2014, is located. But solar

increases considerably in the state. “The peninsula’s grid

energy development in the region has not followed a

is not connected to the National Interconnected System,

straight path, something the state’s government expects

which complicates the incorporation of higher shares of

to tackle through its newly created Energy Department.

renewables into the power network because we do not have the ability to send surplus energy to other regions.

“We used to have a department for rural electrification

CENACE has imposed a 60MW limit on the amount of

before the reform but the new energy landscape

renewable generation capacity we can connect to the grid,

motivated the current administration to create an

which limits the expansion of renewable energy capacity,”

energy department in January 2016. We take care of

Soliz says.

all the processes and analyses needed to capitalize on the opportunities in renewables and energy efficiency,

To prove that Baja California Sur’s power network can,

enhancing Baja California Sur’s energy security,” says state

in fact, stand higher shares of renewables, Soliz says his

Energy Director Luis Soliz.

department is working on analyzing different scenarios with the support of the Latin American Regional Climate

The task assigned to his department is no piece of cake.

Initiative (LARCI), the Mario Molina Center and the

Baja California Sur must overcome several challenges to

Mexican Institute for Competitiveness (IMCO), among

take advantage of its great solar resources, including local

others. According to Soliz, the increase of renewable

conditions such as climate and the peculiarity of being

energy capacity should couple with a reliable baseload

isolated from the National Interconnected System and the

capacity, which is why his department is also focusing

National Pipeline System. “The climate conditions of the

on analyzing the best technologies to ensure Baja

state are challenging for renewable project developers,

California Sur’s baseload supply. Most of CFE’s plants

particularly as we are frequently in the path of hurricanes.

in the state run on fuel oil, an expensive and polluting

This was a huge problem for Aura Solar I, the 30MW solar

fuel that impacts negatively on the region’s air quality.

park in La Paz, when Hurricane Odile severely damaged

Shifting to natural gas, however, is complicated because

the plant in September 2014, just six months after it

the region does not have the necessary access to the

started operations. It has not been active since,” Soliz says.

National Pipeline System.

The experience put an exclamation point on the need

“Improving the air quality of our cities is the main driver for

to prepare for contingencies. The government wants to

CFE and the state’s government to support the transition

install PV solar systems on public rooftops, all covered

to cleaner energy. CFE has already defined a plan to

by an annual insurance policy protecting the investment

increase the availability of natural gas in the peninsula.

from climate-related events. The policy was selected on

The guideline for the first tender says that natural gas

the advice of the IADB and offers attractive terms that are

transportation services to power plants in Baja California

not at odds with the project’s profitability, according to

Sur must start in September 2019 at the latest,” he says.

Soliz. Even with the climate risks, the Director says solar

Soliz expects to raise the amount of renewable energy

energy continues to be profitable in Baja California Sur.

capacity in the state’s energy mix from two to 60MW in

The state has one of the highest electricity tariffs in the

the medium term.

125


INSIGHT

THE ESSENCE OF FRESH-BAKED SUSTAINABILITY ALEJANDRA VÁZQUEZ Environmental Sustainability Manager at Grupo Bimbo

Grupo Bimbo started back in 1945 as a small bread-making

The Group’s sustainable initiatives reach beyond its plants to

factory in Mexico City with 34 employees. Seventy years later

the streets of Mexico City. “In 2012 we launched an ambitious

it has over 127,000 employees and 163 plants in 22 countries.

project to develop electric vehicles to suit the needs of a

Reducing GHG emissions for a company with such a massive

company like ours, which we are implementing through

scale is a challenge, to say the least, but the company is on

Moldex, a subsidiary of Grupo Bimbo. In the first phase of

track to do just that.

this project, we hired young Mexican talent to transform existent vehicles into electric models. They later analyzed the

At its 37 Mexican production plants, Grupo Bimbo has

possibility of opening a small electric-vehicles manufacturing

reduced its environmental impact by introducing energy-

line, which we started doing in 2013,” says Vásquez.

efficient solutions and renewables, among other initiatives. “Piedra Larga wind farm, located in the state of Oaxaca, was

“With this initiative in place we inaugurated our first

inaugurated in November 2012 and now supplies around 90

Ecological Distribution Center in 2013, located in the

percent of the total electricity used in our Mexican plants as

historic center of Mexico City, with 73 electric vehicles. This

well as some of our distribution centers and headquarters

distribution center incorporates all kinds of environmental

in Mexico City,” says Alejandra Vázquez, Environmental

initiatives, including the electric vehicles. Now we have

Sustainability Manager at Grupo Bimbo, which registered

four Ecological Distribution Centers and over 320 electric

sales of US$13.82 billion in 2015, making it the largest

vehicles on the streets,” she adds.

bakery company in the world. “As part of the evolution and maturing of the plan, another 180 installations will be

In 2015 Grupo Bimbo developed a new electric vehicle

supplied by wind energy, mainly our distribution centers

with a load capacity of one ton and the possibility to drive

and our El Globo bakeries.”

100km without recharging. “We launched this new vehicle, the model VDT2, in 2016, which was also made available for

According to Vásquez, the energy produced by Piedra Larga

purchasing to other companies that transport goods. In this

wind farm has helped the company reduce 139,000 tons of

way we have taken another step in becoming a sustainable

CO2 emissions from November 2014 to October 2015. “This

company, highly productive and fully human.”

initiative was also special in the sense that it permitted us to include our distribution centers and not only our production

Grupo Bimbo’s initiatives come at a time when the Mexican

plants.” Even with a larger share of renewable energies in its

government has announced national efficiency goals

mix, Grupo Bimbo continues to implement different actions

that include reducing the country’s energy intensity by 1.9

to reduce electricity consumption in its processes. This is in

percent from 2016 to 2030 and identifying transportation as

line with the idea that it is better to save a kilowatt than to

the sector with the most opportunities to upgrade its energy

use it, even if that kilowatt comes from renewable sources.

efficiency. The government has also announced plans to

“In 2015 we introduced several initiatives but I would like to

electrify the country’s vehicle fleet by 2050. On a global

highlight the use of Programmable Logic Controllers (PLCs)

scale, Grupo Bimbo is demonstrating strong leadership

in our heavy equipment, usage of electric condensers to

in sustainability. In the last Conferences of the Parties

improve the power factor, substitution of old motors for

(COP21), it raised its voice to urge international leaders to set

more efficient models and centrifugal compressors for screw

ambitious targets in terms of emissions reductions. To show

compressors with frequency variation control, introduction

its commitment, the Mexican company signed an Action

of LED lights and magnetic induction,” Vásquez says. “We

Commitment Plan to implement environmental actions

also put inverters into our belt conveyors, replaced the

before 2020. With the initiatives already implemented at its

electric panels of our compressed air system with airflow

Mexico operations, Grupo Bimbo is showing that it has the

mechanisms and implemented automatic lighting controls."

potential to put Mexico at the forefront of sustainability.

127


VIEW FROM THE TOP

SMART ENERGY USE BURNISHES BRAND MARCO RIBERA Senior Corporate Manager Environment & Safety of Nissan Mexicana

128

Q: What role does energy play in increasing the

US. Regarding renewable energies, we have a wind farm

competitiveness of Mexico’s automotive industry?

and a biogas plant producing energy from urban waste,

A: Nissan Mexicana has experienced significant growth

which also distinguishes us from our global peers.

in the past few years and energy and sustainability are among the main factors that have contributed to our

Q: What has been Nissan Mexicana’s experience using

success. Our energy and sustainability strategies have

renewable energies?

impacted positively on competitiveness, reducing our

A: Nissan Mexicana owns three manufacturing plants in

operational costs and adding value to our corporate

Mexico. Our Aguascalientes A1 plant sources 68 percent

image in the national and international markets. We also

of its energy from renewable sources but considering our

expect the Energy Reform to contribute positively to

total consumption, renewables represent between 30 and

our competitiveness and that of the Mexican automotive

32 percent. Since we started using renewable energies

industry in general but we believe we will see its effects

in 2013, we have manufactured more than 700,000

in the medium to long term. We are in a transition period,

vehicles using wind energy. That means that of all Nissan’s

with many regulations still to be defined so the market can

subsidiaries, we are the one that has manufactured

be fully operational, but we are already considering the

the most vehicles with lower CO2 emissions. Biogas

new market conditions to ensure we remain competitive

represents 4.1 percent of the energy consumption at our

in energy usage and operational costs, always with

Aguascalientes A1 plant, the largest biogas usage in any of

sustainability in mind. We are analyzing access to different

Nissan’s plants globally.

clean energy sources and new technologies in Mexico, both in line with the new regulatory framework.

Q: What is the main challenge large energy consumers such as Nissan Mexicana face in the new market?

Q: What is behind the company’s heavy investment in

A: The major challenge is to understand the new market

sustainability?

rules and the transition period. Companies also need

A: Sustainability is included in different aspects of Nissan’s

to align their strategies to the legal requirements and

global business plan called Nissan Power 88. The fourth

understand the new time frames and the contracting

pillar of our strategy is being a leader in emissions

schemes for energy projects. One concern is the impact

reduction. The sustainability part of our strategy is

that exchange rates and fossil fuel prices will have on

included in Nissan Green Program, which we are also

energy tariffs, especially given that the Mexican energy

implementing in Mexico. We have a global goal of reducing

system is strongly reliant on fossil fuel.

our CO2 emissions 21 percent by 2020 in comparison with our 2005 levels. Nissan Mexicana has already doubled

We are operating under the former regulatory framework

this goal, reducing its CO2 emissions by 54 percent from

but we are not inexperienced using alternative energy

2005. Our emissions reduction strategy was based on two

sources to CFE’s supply. In fact, we have over 10 years’

main pillars, reducing the amount of energy consumed per

experience using different energy supply schemes. We are

manufactured vehicle and integrating renewable energies

analyzing different supply options, including PV solar and

into our energy supply mix. We are the most efficient

cogeneration, but we have not made any decisions yet.

overseas manufacturing subsidiary of Nissan regarding

The fact that we have been pioneers in using alternative

energy usage, even compared with plants in Japan and the

energy sources to CFE’s supply make us less vulnerable to market changes. We have a multidisciplinary team with

Nissan is one of the largest car manufacturers worldwide with a 56-year

expertise in different areas such as financing, technology,

presence in Mexico. It has been the country’s leader in car sales for the

manufacturing, investment and supply chain, which comes

last six years.

in handy when coping with new industry challenges.


VIEW FROM THE TOP

THINKING BLUE TO ACT GREEN JORGE SALAS Energy Management Manager at Volkswagen de México

Q: How will lower electricity prices for industrial users

consumption

affect the competitiveness of Mexico’s auto industry?

weekends and public holidays.

during

nonproductive

days,

namely

A: Lower energy prices are a key factor in the industry’s long-term competitiveness. Investing in renewable energies

We have also incorporated energy diagnoses that identify

is part of Volkswagen’s environmental responsibility

our greediest processes and act to reduce their energy

strategy. This is also a market-driven decision now that

consumption. The company also ensures the equipment

renewable energies are much more cost competitive,

for new processes operates with the latest, most efficient

which is essential to our company’s sustainability strategy.

technology and retains the concept of optimization over

The importance of renewables continuously increases and

the course of a project. This has led to excellent results for

technology improvements boost the viability of including

the company. Reducing the plant’s natural gas consumption

them throughout the supply chain, without depending on

will be the hardest challenge, since processes that require

state subsidies.

natural gas consume energy even during nonproductive days. We are looking for alternative local solutions that

Q: How has Think Blue. Factory. impacted Volkswagen’s

could improve our installations and supply the required

manufacturing facilities in Mexico?

thermal energy, as well as revising painting processes to

A: Our Think Blue. Factory. strategy promotes positive

optimize the setting-point in heat treatments and lowering

actions for environmental protection, establishing an

factory temperatures.

objective to reduce energy consumption 25 percent by

the issue among our partners.

By September 2016 Volkswagen de México had reduced 37 percent of its energy consumption in comparison with 2010 levels

Think Blue. Factory. has definitive goals that must be

Q: Volkswagen pioneered a PPA with a wind farm in

finalized by 2018. In 2017, we will consolidate our efforts

Mexico. How has that helped its green initiatives?

to ensure we achieve the desired results, with some

A: One of the principle challenges presented by Think Blue.

2018, compared to energy indicators in 2010. By September 2016, we had reached a 37 percent reduction, reflecting the significance Volkswagen attaches to this goal. We achieved reductions in consumption of electricity, natural gas, water and both CO2 and Volatile Organic Compound emissions. This is visible in our processes and awareness of

planned measures that will optimize energy consumption.

Factory is reducing CO2 emissions. This prompted us to

The strategy will continue in the future with even more

search for alternatives to supply our plants with renewable

ambitious goals, which we will achieve through the

energy. Although aspects of the project’s PPA had to be

involvement of all our teams.

adapted, it is in the construction phase and we expect to start receiving energy by 2017. Given the new conditions

Q: What strategies are employed to reach the 25 percent

set by the Energy Reform, we have definite interest in

reduction by 2018?

developing renewable energies. But this does not mean

A: Our strategies involve every company division

that Volkswagen will necessarily invest directly in projects

having Think Blue. Factory. ambassadors. They are

because the company’s focus is automobile production.

trained specifically to implement organizational and technical energy-saving methods, such as modifying

Volkswagen is the world’s second-largest automobile manufacturer

critical operations that consume large amounts of

and its Puebla plant is its second largest outside Germany. It also has

energy, optimizing processes and minimizing energy

divisions in financing, electric vehicles and wind and solar parks.

129


ROUNDTABLE Despite the fluctuation in metals prices, mining continues to be a top contributor to the Mexican economy. In 2014, the industry produced US$17.3 billion, 1.5 percent of the country’s GDP, representing a total consumption of 9.54TWh a year of electricity and 6.15 billion cubic feet of natural gas. The industry’s high energy intensity and electricity-related operational costs are the main reasons miners are interested in the Energy Reform, even pushing some into the power generation business.

HOW HAS THE ENERGY REFORM IMPACTED THE MEXICAN MINING INDUSTRY?

Mexico Energy Review asked relevant players from the mining industry to share their thoughts about the role of energy in the industry as well as the main opportunities the Energy Reform has created for this sector. To learn

131

more about the mining industry in Mexico get your copy of Mexico Mining Review 2017.

The vast majority of companies are well aware of the potential benefits the reform brings. Energy consumption can represent up to 30 percent of all operational costs for many mines. Since the Energy Reform there are a number of new opportunities available to mining companies, which can now generate their own energy through cogeneration plants and other renewable programs. Our role is to educate the community about these opportunities and to provide them with the tools to maximize their potential. Several of the larger market players, including Industrias Peñoles, Fresnillo, Grupo México, and Minera Autlán are beginning to invest in energy generation because it raises competition domestically and internationally.

SERGIO ALMAZÁN Director General of the Mexican Mining Chamber (CAMIMEX)

Indeed, there are a total of 35 mining projects in Mexico with valid permits for internal energy creation. It represents a total installed capacity of 1,799MW, and a projected investment of US$2.7 billion, a reflection of a growing consciousness directed toward energy-saving opportunities.

In terms of energy, we are not only examining the sourcing of the energy at competitive rates but also the power source itself and we are looking into clean energy sources. An important component for Fresnillo is diesel that is consumed in open-pit mines. At the moment, we are testing ways to replace this source with natural gas. The pilot program will involve running two of our trucks in Herradura with natural gas. Depending on our results we can subsequently change the fuel used by our entire fleet to natural gas. This would have an impact on costs, as we consume 150 million liters of diesel per year at the moment.

OCTAVIO ALVÍDREZ CEO of Fresnillo

We anticipated the Energy Reform and we began preparing for it 15 years ago. We are one of the major consumers of electricity in the country, using close to 330MW, and we generate 84 percent of that energy in-house. We have a 25-year contract with a thermal plant in San Luis Potosi, as well as two wind power generators in Oaxaca and a third generator currently in the development phase in Coahuila. These projects complement our belief in environmental protection and the use of renewable energy where possible. With the development of new technology, wind power is now more competitive than gas.

FERNANDO ALANÍS Director General of Industrias Peñoles


VIEW FROM THE TOP

INTEGRATE CLIMATE CHANGE INTO RISK MANAGEMENT FRANCIS PÉREZ Shared Value Creation & Sustainability Director of Nestlé México

132

Q: What is behind Nestlé’s strong climate change

electricity markets well beyond our own needs. This

position and what is its strategy to reduce its emissions

ultimately helps lead the global transition to a low-

globally?

carbon, climate-resilient economy in line with COP21’s

A: With the highest carbon dioxide levels since the

Paris Agreement.

Industrial Revolution, the resulting changes in climate may threaten global food security in general, and our

Since 2013, Nestlé México has sourced 80 percent of its

business in particular. The long-term supply of safe,

electricity from wind power and expects that in 2017 we

high-quality ingredients may be affected as yields fall

will supply all electricity from renewable energy sources.

and production areas shift. Manufacturing or distribution

We agreed this under the previous law that considered

of food products may be hampered because of extreme

the existence of self-supply societies. We established a

weather events. That is why reducing air emissions and

contract with Enel Green Power and it has become our

adapting to climate change are integrated into our risk

supply partner.

management processes and why our response is a holistic one. Given our global footprint, we use many different

Q: To what extent has the Energy Reform contributed to

mixes of fuels and energies throughout the world, which

making Nestlé’s clean energy goals easier to achieve?

depend on local supply and market conditions. Our

A: With the Energy Reform, we have new and better

overall strategy focuses on improving energy efficiency

options for competition, establishing contracts with

and switching to cleaner fuels and energies. Procuring

different companies. We are analyzing all our options

renewable electricity is a key element of that strategy.

to achieve 100 percent supply from renewable sources. In the past we decided to go for wind energy because

Q: What route is Nestlé taking to become 100 percent

a study showed it was the best solution at the time in

renewable and how is Nestlé Mexico contributing?

terms of the cost/benefit ratio.

A: In August 2014, Nestlé endorsed the Carbon Disclosure Project (CDP) initiative to procure 100

Q: How big is the Mexican market for Nestlé’s operations

percent of electricity supply from renewable sources

globally?

within the shortest practical timescale, which is fully

A: Mexico is the sixth largest country for Nestlé

aligned with our own explicit commitments. Importantly,

worldwide. We participate in more than 10 categories,

the endorsement of this initiative by Nestlé and other

and our position in the market is different in each one.

large companies sends a strong signal to the market

For example, we lead the coffee segment with our

and contributes to accelerating the growth of renewable

Nescafé® brand, and the dairy culinary segment with Carnation® and La Lechera®, or baby food with Gerber®.

Nestlé reduced its energy usage by 37 percent and CO2 emissions 61 percent compared to 2005 levels

The company has 17 factories in Mexico. Q: Your Coffee-Mate® factory has invested US$250,000 to reduce carbon emissions. How was the money used and what were the results? A: Our Coffee-Mate® factory was the first in Mexico to use solar power to produce thermal energy, having the first LEED platinum building in a production facility. Since 2010, Nestlé México has invested over US$60 million to implement different technologies, including efficient and clean energies, to reduce its usage and


carbon footprint. For instance, we have a biomass

A: We use different types of energy due to the nature of

boiler in our coffee factory in Toluca that was converted

our operation and electricity is one of the most important

from fossil fuels to natural gas and also uses hot water

inputs for our processes. The commitment to use 100

from concentrated solar technologies. All these efforts

percent renewable energies refers only to electricity and

have helped us achieve our commitments in terms of

this will happen in 2017. We are evaluating different offers

energy and sustainability. We reduced our energy usage

from the market and we will accept the one we consider

37 percent and CO2 emissions 61 percent, compared

the best for our business and our clean energy targets.

to 2005 levels. Considering the carbon footprint per produced ton, the reduction of CO2 we achieved was

Q: What advice do you have for companies that would

147,000 tons in absolute numbers.

like to incorporate renewables but are wary of a negative impact on competitiveness?

Q: Can you tell us more about your renewable energy

A:

initiatives?

including society, governments, the private sector,

A: We have made an effort to reduce carbon emissions

NGOs and academia. It is necessary for all companies to

in all our facilities, not only in the one that produces

understand that we, as humanity and as a business, are

Coffee-Mate®. We use several sources of green energy in

vulnerable to climate change effects. Food production

our plants: wind and PV solar for electricity and biomass

depends on the health of the environment. If we do not

and solar concentrators for thermal energy. We have

start doing different things, we cannot have different

reduced CO2 emissions in more than 61 percent of our

outcomes. Renewable energy technologies are becoming

direct operations not only because of the large share of

more attractive every year and competitiveness is

renewables we have in our energy supply but also from

not compromised. We can take advantage of those

the energy-efficiency levels we have achieved through

technologies and realize savings in energy costs while

different initiatives. More than 2 percent of our total

supporting climate change mitigation. Certainly, this is a

energy consumption, not only electricity, comes from

business continuity decision for long-term success.

Climate

change

requires

everyone’s

attention,

renewable sources. Nestlé México, part of the global nutrition and wellness group Nestlé,

Q: What are Nestlé México’s plans regarding energy

sources 80 percent of its electricity from wind energy and expects that

and sustainability in 2017?

to rise to 100 percent in 2017.

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VIEW FROM THE TOP

SUSTAINABILITY PILLARS: PEOPLE, COMMUNITY, ENVIRONMENT VÍCTOR TREVIÑO Director, Energy & Environment at FEMSA

134

Q: What is FEMSA’s energy demand and what drove you

A: We will meet our goals with the PPAs we have already

to invest in four wind farms in Mexico?

signed, including those belonging to the four wind farms.

A: FEMSA operates in 12 countries where we have a clear

Some of the contracts we have signed recently correspond

understanding of the company’s total energy requirements.

to projects under construction, which is why they are still not

Electricity is our main energy source, followed by gasoline

reflected in our energy mix. But we expect them to be up

and diesel to power our logistics and distribution fleet.

and running by 2018. With the opportunities presented by

FEMSA’s global operations consume around 2.4TWh of

the Energy Reform, we are now evaluating the best company

electricity per year and Mexico is a major share of that

to supply the remaining 15 percent of electricity, around

demand, with a consumption of 2TWh per year. FEMSA’s

300MWh annually, whether it is CFE or another qualified

aggregate electricity consumption results from adding the

supplier. We are not certain that CFE will continue being our

demand of our different business units, including FEMSA

qualified supplier because we are open to different options

Comercio, which controls our OXXO convenience store

available in the market. Nonetheless, we expect the state-

chain, Coca Cola FEMSA, FEMSA Logistics and FEMSA

owned company to remain as a leading qualified supplier in

Strategic Businesses, which owns Imbera and PTM.

the coming years, so it still represents a strong future bet.

Our efforts to incorporate renewable energy in our

Q: How is FEMSA complying with the law requiring all

operations are connected to our Strategic Sustainability

emitters over 25,000 tons of CO2e be included in the

Framework, which focuses on three pillars: Our People,

National Emissions Registry?

Our Community and Our Environment. Regarding the

A: FEMSA has been voluntarily participating since 2006

environment, FEMSA works toward improving its water

in the Greenhouse Gases Program (Programa GEI),

and energy management practices as well as promoting

designed by SEMARNAT to encourage private companies

recycling and reusing of materials. We have worked

to monitor and reduce carbon emissions. All our business

strongly in the past few years to improve our operational

units have a long history in accounting and reporting

efficiency,

supporting

their GHG emissions annually, including FEMSA Comercio

the inclusion of larger shares of renewables into our

and Logistics. We are also accustomed to making our

company’s energy mix. We are now pursuing the goal of

emissions accounting public because we publish our

supplying 85 percent of our electricity from renewable

sustainability reports online. We are comfortable with the

energy sources by 2018. We established strategic alliances

idea of having an official GHG emissions registry because

with wind farm developers and operators because we

we have already implemented the mechanisms for this. We

found wind energy to be the most competitive electricity

established our first PPA with a renewable energy project

supply option at that time. We receive electricity from

in 2007. At that time renewable energies were not as

four wind farms: Bii Nee Stipa and Stipa Nayaa in Oaxaca,

popular. Most companies used to think that lowering their

Dominica in San Luis Potosi and Ventika in Nuevo Leon,

carbon emissions would be important in the future but

all under the self-supply framework of the previous

few were taking action at that time. FEMSA was a pioneer

Electricity Industry Law.

because it wanted to learn and gain experience in the

reducing

energy

usage

and

field to prepare for the future. Now, the Energy Transition Q: How will the company reach its 85 percent target and

Law requires that 5 percent of the electricity supplied to

where do you plan to source the remaining 15 percent?

qualified users must come from renewable energy sources by 2018. We will be ready to meet this target. The law also

FEMSA is a Mexican-based multinational beverage and retail company

establishes a gradual increment in the share of renewable

headquartered in Monterrey. It also operates the largest independent

energies up to 35 percent by 2024, a goal that we also will

Coca-Cola bottling group in the world.

be in a position to meet and exceed.


PROFILE

SUSTAINABLE ENERGY OUTSIDE THE BOX ALFREDO ROMÁN Environmental Manager at Tetra Pak

Mexico was Tetra Pak’s first overseas operation for the

Román believes the Energy Reform has eased the path

Swiss-based company. It opened its first manufacturing

for Tetra Pak in Mexico to accomplish these objectives,

facility outside Sweden here in 1960, supplying around

making it possible for the company to reach its clean

1 billion containers annually for the food and beverages

energy targets before the established deadline. “We

industry. The company has grown significantly since then,

expect to reach our renewable energy targets before the

now producing around 8 billion pieces per year and making

established deadline. We could feasibly reach 100 percent

Mexico one of Tetra Pak’s main markets globally. Two

renewables before 2025. Not all of Tetra Pak’s operations

secrets behind Tetra Pak’s successful expansion have been

might say this but Mexico’s conditions allow us to be

the company’s focus on resources optimization, including

optimistic,” he says.

energy savings, and sustainability, a vision it implements for its own products and manufacturing plants as well

“The main challenge for us is to change our energy

as at client facilities. Tetra Pak’s manufacturing plant in

matrix without compromising energy security. We simply

Queretaro is one of the group’s most efficient facilities but

cannot stop production due to energy-related failures.

there is still room for improvement, according to Alfredo

We are a product supplier and we have to meet our

Román, the company’s Environmental Manager. “Our

clients’ expectations regarding deadlines for deliveries.

main area of opportunity to reduce our carbon impact is

For that reason we look for suppliers that can guarantee

electricity consumption, an aspect we are addressing by

us nonstop supply for our manufacturing operations.

developing and using energy-efficient technologies for

Cost is another important factor but energy security

our own process and our clients.”

is our number one priority,” Román adds. Given that electricity is not Tetra Pak’s core activity, the company

In 2009, the plant began substituting its old light bulbs

gets support from a specialized firm to navigate Mexico’s

with efficient lamps, achieving 68 percent reduction in

new energy market. “We do not want to rush and make

electricity usage in that area. The main contribution to

long-lasting decisions before being sure about all the

energy efficiency, however, comes from Tetra Pak’s own

market options,” he says. Sustainability and resources

technological innovations, which are also shared with

optimization will continue to be at the core of the

the company’s clients. “Tetra Pak is involved in the entire

company’s future strategy in Mexico as both have been

packaging process, always looking to raise the bar in terms

present in the company’s vision since its foundation in

of energy and water efficiency. We are about to implement a

1951. According to the executive, the design of Tetra Pak’s

new department in our company to advise clients on how to

containers is the best tangible proof of the importance

optimize these two aspects in their processes,” Román says.

the company places on these aspects.

Besides reducing its electricity consumption, Tetra Pak is

“Tetra Pak is one of the most efficient containers in the

also looking to implement a higher share of renewables in

market regarding space optimization, which also impacts

its energy matrix, in line with the company’s global goal

positively on the energy consumption and the carbon

of supplying 100 percent of its electricity from renewable

footprint required to transport and store food and

sources by 2030. “We are looking at two options: investing

beverages products,” he says. “One truck can transport

in our own generation facilities or purchasing clean energy

946,000 liters using Tetra Pak containers while 29-39

from a third party. We are exploring the possibility of

trucks would be needed to transport the same amount

installing solar PV panels in our manufacturing plant in

using glass bottles. Moreover, Tetra Pak eliminates the

Queretaro, a state with significant solar potential. In other

need to refrigerate the products during transportation and

locations, we are also looking at wind energy options. We

shelf life, which is also an advantage in terms of energy

are not tied to any technology in particular,” he says.

savings,” he adds.

135


PV system in San Martín dairy farm, Veracruz, Nestlé México

136


INSIGHT

FEEDING ENERGY TO A FOOD GIANT JULIO SANTOS General Manager of Energía para Conservas at Grupo Herdez

Along with spicy food, the average Mexican cupboard is

To tackle its energy challenges the company created an

likely to hold pasta, mayonnaise or canned tuna made by

energy division in 2015, later deciding to open Energía

Grupo Herdez, a Mexican company founded in 1914 and

para Conservas, a new subsidiary managing all these

listed on the Mexican stock exchange (BMV) since 1991.

aspects. The subsidiary now focuses only on Grupo

The company has 13 production plants in the country plus

Herdez’s needs but Santos does not rule out selling

two abroad, as well as 500 Nutrisa stores that sell frozen

energy to third parties in the future. “Energía para

yoghurt products across the country.

Conservas is working on a co-generation power plant for one of Grupo Herdez’s factories in San Luis Potosi. The

For Grupo Herdez’s products to reach consumers

production process at this plant requires high amounts

the company employs large amounts of thermal and

of thermal energy, which makes it suitable for installing

electric energy to operate its plants. In an era of growing

co-generation

sustainable awareness, the group adds its name to those

registered as self-supply, was delayed because of the

seeking energy efficiency and looking to capitalize on the

Energy Reform but we expect it to start functioning in

Energy Reform opportunities.

early 2017,” he says.

Julio Santos, General Manager of Energía para Conservas, a

Energía para Conservas could also participate as a

Grupo Herdez subsidiary that focuses on providing energy

qualified supplier in the new market but the company is

solutions for the food industry, says that reducing costs is

still working to define an appropriate strategy. “Grupo

not the only motive for pursuing these objectives. “Grupo

Herdez is not an expert in energy trading so we are

Herdez is listed in the IPC Sustentable index of the BMV,

relying on specialized consultancies to define the best

which requires companies to establish and comply with

strategy for us to cover our energy needs and participate

certain sustainability goals. This, however, is not the main

in the wholesale electricity market,” Santos says.

equipment.

This

project,

currently

reason for Grupo Herdez to invest in sustainability. We are committed to being environmentally friendly because we

Through Energía para Conservas, Grupo Herdez is also

want to protect our planet and its future,” Santos says.

analyzing how best to raise the share of renewables in its energy mix, considering different options such as

The company already supplies 32 percent of its electricity

investing in its own power plants or purchasing energy

needs from a wind farm. Its goal is to increment its clean

from legacy projects or the wholesale market. Santos

energy consumption to 50 percent by 2018. Raising

says the complexity of the new market has brought new

renewable energy consumption, however, is not always an

challenges for the company but it has also opened the

easy task. “The drop in electricity tariffs taking place this

door for many new possibilities. In parallel to its clean

year represented a challenge for us as we paid 32 percent

energy targets, the company has been working constantly

more in electricity costs than if all our energy came

to improve its efficiency, achieving a 10 percent reduction

from CFE (due to previous agreements),” Santos says.

in its energy consumption since 2009. “We joined the

“Grupo Herdez maintains its commitment to renewable

National Program for Energy Management Systems

energies due to its sustainability value but we are still a

(PRONASGEn) as a strategy to reduce our facilities’

business. We therefore looked for a new agreement with

energy consumption,” says Santos. “Our main goal at the

our supplier, finally agreeing to be compensated for the

moment is to implement real-time monitoring and energy

money we did not save due to the drop in CFE’s tariffs.

audits in all our production facilities. We have already

Our final negotiation states that our supplier will provide

invested US$400,000 to implement these devices and

extra energy to us after a 15-year period according to the

we expect to have energy goals in all our production

percentage we did not save due to the tariffs.”

plants by 2018.”

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VIEW FROM THE TOP

TIME NEEDED TO ACHIEVE SOPHISTICATION

Monte Mickle President of Enerlogix Solutions

138

RenĂŠ Ochoa Vice President of Operations at Enerlogix Solutions

Q: What drove Enerlogix Solutions to focus its business

Q: What are the main challenges the company identified

on qualified users?

when entering Mexico?

A: The Energy Reform provides the opportunity for more

A: Our main challenge is the lack of information and

transparency and better costs for large energy users but

understanding on how a deregulated market works and

to participate and secure the advantages of a deregulated

how it can benefit energy consumers. Most Mexican

market companies need to register with CRE as a qualified

companies lack experience operating in a deregulated

user. The value we bring as consultants is somewhat

energy market. Many of our clients are American

limited for those who want to stay under the current CFE

businesses with Mexican facilities that have experience in

tariff rate or basic service structure. These companies can

US deregulated markets but do not understand Mexico’s

only lower their costs by implementing energy-efficiency

new energy paradigm. Since our arrival in April 2014

measures, which many Mexican companies have already

we have focused on educating and helping companies

done admirably. As consultants we help companies take

understand how the wholesale energy market (MEM)

advantage of the financial benefits of the Energy Reform.

operates and doing financial analysis as to if and when

Our main objective is to help companies understand

an organization would benefit by transitioning from basic

how the newly deregulated market works, guide them

service to qualified user.

on assessing financial opportunities and risks, negotiate favorable contracts as well as determining how they can

Q: Why are companies apprehensive about becoming

benefit from alternative energy providers.

qualified users and how can you help them to feel comfortable?

Our job is to know the retailers, to analyze and evaluate

A: It has been two years since the approval of the Energy

each company and to determine if their business and

Reform but there is still a void of understanding about

operational plans match our clients’ needs. There are more

how the market works. Right now, the majority of large

than 20 retailers already registered with CRE or in the

industrial companies are in a holding pattern. Electricity

process of getting their certification. Most companies are

rates are going up again and the new basic service rates

already overwhelmed with their own business operations

soon to be published will be strongly linked to the US

and do not have the time to analyze the offers from

dollar exchange rate, Henry Hub natural gas prices and

the many different providers. We can filter and narrow

CFE operational costs. The market is designed to provide

the list of suitable suppliers down to a handful of viable

savings and reduce long-term price volatility risks for

options. Most of the retailers working in the market are

qualified users. We do not recommend large industrial

Mexican companies or Mexican entities that are owned

users to stay in basic service. Once companies understand

by international corporations from countries that already

the MEM fundamentals, they will see the benefits of

have a deregulated market. We have not yet seen American

proactively managing their energy portfolio as a MEM

suppliers coming to Mexico because they are waiting for

participant. We saw similarities in the US but in the end

the pending market regulations and business-practice

it is understanding how the MEM operates and how it

manuals to be published in 2017. After that we expect to

can benefit a qualified user that will motivate businesses

see a wave of American companies entering Mexico and

to make the change. Most companies are still waiting

bringing new options for Mexican off-takers.

for financial transmission rights and pending business practice manuals. CENACE also needs to publish real-time

Enerlogix Solutions is an energy-efficiency and administration

market data. We see a real interest from US companies to

consultancy for commercial and industrial users, focused on risk

enter the MEM but they want all the rules to be defined.

management for both commercial and industrial energy demand and

Large retailers need transparent data so that will be a key

supply.

factor them deciding whether to participate in the MEM.


ROUNDTABLE CFE had an energy monopoly for almost 80 years, meaning companies gave little thought to energy supply because there was effectively only one choice. The market’s liberalization has increased the number of options for off-takers, a development received with open arms by the industry but also with some confusion as the

WHAT ADVICE WOULD YOU GIVE TO OTHER OFF-TAKERS?

number of previously unheard-of options grows. Inexperienced SMEs and local companies tend to be the most cautious, waiting until other companies jump into the complex waters of energy purchasing before following with their own strategies. Here, three Mexican companies share their advice for other off-takers that are currently analyzing the best strategies to decrease their

139

energy costs.

We recommend other off-takers use a multidisciplinary team with the ability to analyze the energy market from different angles, including financial, legal and operational issues. We also recommend being open to all the possibilities offered by the market so they can analyze and find the most suitable option. Most companies are not used to comparing when they select alternative energy supplies because we had a monopolistic market before. But companies should not be afraid of seeking advice on energy matters from professionals in the area so they can expand their possibilities. Benchmarking other companies’ strategies is also a useful activity, even if they belong to a different sector. For us, the most useful strategy at the moment is to stay updated about the market’s evolution and the new options available.

MARCO RIBERA Senior Corporate Manager Environment & Safety of Nissan Mexicana

Consumers today are facing more supply options than ever. My advice to those entering the market would be to first reflect on the nature of their goods and services and how that translates to their electric costs. Secondly, identify the benchmarks against which they will compare their alternatives and finally, access the market and reach a decision. This is not an easy task because shortterm price signals rarely are meaningful for decisions with a longer-term impact. It is also essential to look for proven, competent counterparts that can deliver on their promises.

FRANCISCO CON Business Development Director of CEMEX Energía

The Ministry of Energy has shown willingness to help private companies navigate the new energy landscape. We found it highly useful to be part of PRONASGEn because it allowed us to improve our energy management greatly and reducing our energy costs considerably in our pasta manufacturing plant. This program is supported by German and Danish agencies and it also addresses SMEs, not only large companies like Grupo Herdez. By participating in PRONASGEn, companies can get free consultancy services and bring experts into their plants to help them improve their energy management. Mexico is currently receiving a lot of international attention and support regarding its energy sector so it is the perfect time for private companies to grab these opportunities and improve their energy usage.

JULIO SANTOS General Manager of Energía para Conservas at Grupo Herdez


PROJECT SPOTLIGHT

140


NEW MEXICO CITY INTERNATIONAL AIRPORT Mexico City’s International Airport is like a city unto itself. It provides jobs to over 35,000 people and receives more than 38 million passengers a year. The second largest airport in Latin America, it has been operating at overcapacity for the last few years and the exponential demand shows no sign of abating. The obvious solution is now well on its way to fruition: The New Mexico City International Airport (NAICM) is designed to meet the country’s aviation demand, including the capacity to receive over 120 million passengers a year. 141

But like a city, airports are one of the largest consumers of energy. According to CASCADE, about half the energy consumed at an airport is associated with the heating, ventilation and air conditioning systems. The architecture of the Terminal 1 building is designed to take advantage of its environment and to operate with 100 percent renewable energy. Fresh air will travel through the infrastructure, serving as a natural cooling system, lowering consumption levels, and natural daylight will keep lighting costs to a minimum. The airport, located just 5km from the existing facility, will be equipped with two electrical substations that will create enough power for the terminal building, control tower, support buildings, visual aids and navigational systems. These substations will contain two feeders of 20MVA to 23kV, each with a proposed receiving substation (230kV to 23kV). The 23kV receiving substations will each have a capacity of 20MVA and will operate through underground duct banks lined with concrete, which will lead to the main distribution cells within the central service plant. At a minimum, an electric pass-through box, made of precast concrete, will be constructed every 165m along the feed run and wherever the total deviation of the pipeline bank rises to 180 degrees. The Mexico City Airport Group (GACM) awarded the project in July 2016, to a consortium of Urisa, Isolux Corsán and Avanzia at a price of MX$1.1 billion. The group must finish it by December 2018. The consortium won due to its extensive experience constructing substations and transmission lines for CFE in the past. The project requires the construction and installation of high-voltage equipment, a fire-extinguishing system, three-phase transformers and a back-up power plant for the airport and control room. In addition to the outdoor and indoor lighting, it will power the air conditioning and power cable systems, energy metering, fiber-optic installation and grounding systems.


VIEW FROM THE TOP

CLIMATE CHANGE A FACT NOT A POSSIBILITY ESTANISLAO DE LA TORRE Chief Operating Officer of HSBC Mexico

142

Q: What role does sustainability play in the company’s

street retailers and oil and gas companies are among those

strategy?

studying the sector and assessing the opportunities. Some

A: Sustainability is a priority for us globally, with our

have made such substantial investments in renewables that

efforts in sustainable financing at the forefront, especially

they have more energy than they can use themselves and

over the last few years. Inside HSBC, we call our global

want to sell the surplus to consumers, subject to permission

sustainability strategy, REDUCE. It is part of our wider

from regulators.

operational strategy and it helps to streamline the business, as well as drive efficiencies that reduce our overall impact

Q: What made you decide on a 10-year PPA with Enel

on the environment. The energy HSBC consumes releases

Green Power and what are the terms of this agreement?

carbon emissions into the atmosphere, which are a major

A:

contributor to climate change, something the scientific

technologies considering reliability and risks, we concluded

community and the UN agree is measurable and happening

that wind power was the best option for HSBC in the

today. In 2013 the UN’s Intergovernmental Panel on

Mexican market. HSBC then signed a 10-year agreement

Climate Change (IPCC) stated that global warming was

to buy power generated by a new 200MW wind farm in

“unequivocal,” and caused by human activity.

the northeast state of San Luis Potosi, which will provide

After

performing

a

deep

analysis

of

different

50 percent of our energy needs in the country starting As a global company, becoming more efficient helps

mid-2017. By signing this long-term deal we are helping

reduce HSBC’s contribution to climate change and over

bring new clean energy onto the market, cutting carbon

the last three years we have cut our average CO2 emissions

emissions produced by our operations in Mexico by 22.9kt

per employee from 3.5 to less than 3 tons. HSBC has the

annually. That is the same amount of CO2 generated by

responsibility to manage its contribution to climate change

around 3,600 cars each year.

and find ways to operate more sustainably. Our goal is to have 75 percent of the electricity we Q: What global trends are driving companies to establish

consume in Mexico come from new renewable sources by

PPAs with renewable energy producers?

2018. In this first phase, we are going to use a wind source

A: The broad direction of future legislation is clear.

to supply the energy consumption of our branch network.

Governments

major

We are also planning to replace the energy supply of our

commitments to reduce carbon emissions over the long

corporate buildings for a clean energy source in a second

term. Technology has also improved, with some forms of

phase in 2018.

around

the

world

have

made

renewable energy competing on price with fossil fuels. Today, renewables are a growing part of the energy mix in dozens

Q: What advice would you give to other off-takers that

of countries. For example, Portugal met its electricity needs

might not have the same expertise as HSBC?

using renewables alone for four consecutive days in 2016.

A: It is important to keep in mind and analyze the size

While on a windy day, Germany can meet more than 100

and characteristics of their real estate portfolio and their

percent of its national electricity needs from renewables.

growth/reduction strategy to define the amount of energy to be introduced. On the other hand, clients often ask

Thinking about renewable energy has become “business as

about emerging technologies, new policies and changing

usual” for most major companies. Technology firms, high-

legal requirements. Given the pace of change over the past decade, it would be unwise to make categorical claims

HSBC, one of the largest banking and financial services institutions

about the future. Not all new technologies will succeed:

in the world, serves millions of customers through its four global

some investors will see the products they have backed

businesses. The bank has a particular expertise in trading operations.

become obsolete before they even reach the market.


INSIGHT

BANKING SECTOR EMBRACES CLEAN POWER SALOMON AMKIE Vice President Head of Power & Alternative Energy at Citibanamex

A few decades ago investing in renewable energies was

The main challenge for Citibanamex and other off-takers

seen as an extravagant decision more suited to so-called

is not likely to be related to technical issues but to the

tree-huggers or technology fans. But the global landscape

changing environment and the wide portfolio of options

has changed dramatically since then and investing in

to choose from in the wake of Mexico’s Energy Reform.

renewable energies is now viewed as sound business

Companies operating here and willing to purchase clean

sense. And with commercial banks participating as clean

energy now have the option of signing PPAs with legacy

energy purchasers, more businesses are expected to join

projects or private power producers, buying electricity

the movement.

from qualified suppliers, which include CFE Calificados, marketers or directly from the wholesale electricity

Citibanamex, the Mexican subsidiary of Citigroup, is among

market, which launched operations in January 2016.

the financial institutions that are entering the renewable energy world as a purchaser and not only as a sponsor.

“The wholesale electricity market is really just starting. We have these great PPAs at an incredibly competitive pricing

“Citibanamex has been increasing its participation as

that might not reflect the reality of the spot price. I think

an off-taker because we have targets we would like to

the biggest challenge is trying to determine what the

meet regarding sustainability,” says Salomon Amkie,

actual prices are to define whether or not it is beneficial

Vice President Head of Power & Alternative Energy at

for Citibanamex as an off-taker to close a PPA for the

Citibanamex. “We are following a strategy launched a

long term or purchase energy directly in the market. As a

couple of years ago. While we have lagged other banks in

suggestion for other off-takers, it is very important to see

terms of financing renewable energy projects, we are now

the sponsor and the asset that you are signing the PPA

aggressively seeking to finance the new PPAs that have

with and to think about the tenor of the PPA. I do not think

been awarded.”

it is the time to close anything beyond seven or eight years, due to the current dynamics of the industry,” says Amkie.

He adds that the bank's experience is a key advantage. “We are leveraging Citi’s expertise as a large and global

Besides its plans to buy clean energy and finance renewable

renewable energy project-financing player and trying to

energy projects, Citibanamex is helping off-takers improve

bring that to Mexico. Obviously, we already have a great

their efficiency as part of the group’s Citi Global Climate

footprint in the country with Banamex and we are trying

Change Initiative. Citigroup has made a strong commitment

to make the most of this as well.”

to climate financing, starting in 2007 when it announced a US$50 billion investment in activities that mitigate climate

In addition to its financial expertise, Amkie believes

change. Its latest initiative announced in early 2015 involves

Citibanamex is prepared to handle the technical challenges

US$100 billion to be released over the next 10 years.“We

that imply selecting the best energy technologies, whether

discuss with SMEs how they can best save energy to help

for financing or covering its own energy needs. “We

them find the optimum solution, be that energy efficiency,

are very well equipped to understand how technology

distributed generation or whatever it might be. We then offer

impacts a project. We deal with a lot of these technology

to finance it. So far, it has been a very successful program.

providers worldwide so we know them well. There is an

We intend this to be cost-efficient for the companies. I also

alternative energy financing team in New York that is

think the risks are really minimal. What we have done is filter

very well-versed on the subject of technology and how it

the suppliers that we recommend, so we know that these

impacts a project. We also rely on independent engineers

are great companies to work with and we seek to finance

who are experienced and knowledgeable and can advise

against those cost savings. It represents a net improvement

us when we are considering financing these projects.”

for companies with barely any risk,” he says.

143


Combined cycle power plant and substation, Morelos, INEEL


TRANSMISSION & DISTRIBUTION

6

The transmission and distribution businesses in Mexico represent the final frontier for CFE’s old monopoly as these areas remained under state control after the Reform. This does not mean, however, that those industries have stayed the same. New lines such as the upcoming HVDC project from Oaxaca to the center of the country can benefit from private investment while, at the same time, the increasing participation of clean, renewable power sources in the energy matrix creates new challenges for the country’s electric infrastructure. The high incidence of energy theft and other technical and nontechnical losses are also on the agenda for companies and authorities alike.

In this chapter, technology solution companies discuss the opportunities to help both CFE and private players optimize their electric networks. They also analyze the different approaches to the concept of the “smart grid” resulting from the need to improve measurement and efficiency from the source to the final consumer, taking into account emerging technologies such as energy storage to maximize the potential of renewables.

145


146


CHAPTER 6: TRANSMISSION & DISTRIBUTION 148

ANALYSIS: PPA Debuts, Creates Buzz 147

149

VIEW FROM THE TOP: Óscar Miranda, Smart Grid México

150

VIEW FROM THE TOP: José Fernández, Grupo Dragón

151

PROJECT SPOTLIGHT: Oaxaca-Valley of Mexico HVDC Transmission Line

152

TECHNOLOGY SPOTLIGHT: Smart Grid Mexico Eyes Collaborative Development

154

VIEW FROM THE TOP: Armando de la Torre, ho1a

155

VIEW FROM THE TOP: Dario Labattaglia, Itron

156

PROJECT SPOTLIGHT: OpenWay Riva: a Powerful IOT Solution

158

VIEW FROM THE TOP: Daniel Martínez, ABB México

159

INSIGHT: Kevin Gutiérrez, Ingeteam

160

MAP: Inter-regional Transmission Limits 2016-2021

162

INSIGHT: Vicente García, Isolux Corsán

163

INSIGHT: David Flores, Ormazabal Mexico

164

PROJECT SPOTLIGHT: SEL’s PowerCore Substation Control Enclosures

166

VIEW FROM THE TOP: Rigoberto Castañón, S&C Electric Mexicana

167

INSIGHT: Norberto Gómez, Conductores del Norte


ANALYSIS

PPA DEBUTS, CREATES BUZZ By the end of 2015, Mexico had over 100,000km of

CODE COMPLIANCE

transmission lines and almost 800,000km of distribution

Complying with the new grid code will be among the

lines, serving over 39 million users. All these kilometers

challenges the power auction’s winners will face as they

were constructed using public resources. That changed

develop their new projects, particularly considering that

with the government’s guidelines for the first Public

most are solar and wind power facilities. But challenges

Private Partnership (PPP) in the electricity transmission

also bring new opportunities and electrical equipment

sector, released in the last quarter of 2016.

suppliers with specialized technologies to control voltage fluctuations and reactive power will likely see

The US$1.2 billion project will connect Oaxaca’s outstanding

demand for their products broadening in the market.

wind energy resources with the Valley of Mexico, a region

148

having one of the highest levels of electricity demand in

CFE also continues investing in smart meters and other

the country. It will also use High Voltage Direct Current

equipment to optimize its collection methods and

(HVDC) technology, a first for Mexico. Pedro Joaquín

avoid technical and nontechnical losses during power

Coldwell, Minister of Energy, says this technology will

transmission and distribution. The productive enterprise

allow the movement of more power over long distances,

of the state has already reached significant results through

easing the transmission of power from renewable sources

the introduction of these technologies but it plans to

while decreasing transmission and capacity losses. The

continue working to reach international standards. “CFE

minister also says the project is expected to promote

expects nontechnical losses to drop to 10 or 11 percent

the installation of more power generation in Mexico’s

in 2017, from 16 percent in 2012, thanks to smart meters.

southeast region.

Nontechnical losses cost CFE nearly MX$27.5 billion in 2015,” says Armando de la Torre from ho1a.

Although the tendering process will take place in 2017, the relevance of the project created a buzz across the industry

According to Oscar Miranda, co-founder of Smart

at the end of the year. This was not only related to the line

Grid México, the next big opportunity in this area

in Oaxaca but also to two other similar projects that are

will be Advanced Metering Infrastructure (AMI), an

among the government’s plans to connect Baja California’s

integrated system of technologies that permit two-way

isolated network to the National Interconnected System.

communication between smart meters and the utility company. The real-time data provided by AMI allow

In 2017 Mexico will launch the first open bidding process to build a 630km High Voltage Direct Current line from Oaxaca to the Valley of Mexico, a project worth US$1.2 billion

utilities to better plan power production while giving users information to make decisions about energy usage, such as performing high energy-consumption activities in periods with low prices. Given that the market liberalization has introduced hourly prices and fluctuation, the timing is right for AMI technologies to spread through Mexico, especially for qualified users. With the projects already tendered and those in the pipeline for 2030 – defined in the last available

In addition to new transmission and distribution assets,

PRODESEN – Mexico has made clear it plans to continue

Mexico is also modernizing the existing infrastructure to

expanding and modernizing its grid. This need for

provide higher power quality and to optimize the network.

stronger and smarter infrastructure to support Mexico’s

This included the publication of a new and stricter grid

growing capacity has awakened the interest of private

code that will apply to all companies willing to connect

companies to get further involved in the development

their facilities to the Mexican grid. The revision and update

of the country’s power network. In the past two

of the grid code were included in the Electricity Industry

years, many companies have diversified their business

Law as a way to ensure all technical and operational

portfolio beyond CFE because the Energy Reform had

requirements were in place to lead the development of

reduced the number of available opportunities with the

the National Electricity System in the most efficient and

state company. It now appears, however, that prospects

economical way. Companies must now get used to the

for collaboration with the productive enterprise of the

new rules and adapt their electrical equipment to fit the

state are on the horizon, creating new opportunities for

new requirements.

the private sector.


VIEW FROM THE TOP

SMART GRIDS A GREAT MARKET OPPORTUNITY ÓSCAR MIRANDA Co-founder of Smart Grid México

Q: How can smart grids revolutionize the power industry

because energy supply is a matter of national security.

in Mexico?

CENACE is doing an admirable job as the grid operator

A: Smart grids have the potential to innovate the power

but it needs to adapt to the new market conditions and

industry’s processes at any level, bringing financial and

develop research labs and think tanks to address the

environmental benefits such as reducing the country’s

network’s issues.

carbon footprint. Smart grids are mostly used in Mexico at the distribution level, mainly on metering systems. CFE

Q: What challenges is CENACE facing and how can smart

started investing in this technology in 2014 by launching a

technologies help optimize grid operation?

call for bids to establish Advanced Metering Infrastructure

A: One of CENACE’s main challenges will be the

(AMI) contracts. Other efforts followed to implement smart

integration of larger portions of renewable energies into

meters with information and communications systems.

the grid. It must decide when and how this integration will

Between 2014 and 2015, a bid package totaling US$1.3

take place and develop new fast-track metering systems

billion was launched, with another in 2016 bringing a total

to accompany this transition. Other challenges will be

US$530 million investment in smart metering solutions

the grid’s modernization and improving decision-making

to decrease technical and nontechnical losses. Thanks to

processes. Building a smart grid is an evolving process that

these measures, CFE’s energy losses have decreased from

requires multiple technologies and innovations such as the

17 percent to 13 percent in a couple of years. Smart grids

recent developments made in wide-area measurement

are a specific solution to macro-level energy problems.

systems compiling real-time Phasor Measurement Unit

In addition to incorporating a larger share of renewables

(PMU) information, which can be used to operate the grid

into the grid, it has the potential to boost the residential

more efficiently. Integrating smart grids and modernizing

market for renewables and to optimize the national

the power network is a global challenge facing all grid

electricity system to avoid having more energy reserves

operators at different levels, not only in Mexico.

than it actually needs. Q: How are regulations promoting smart grid technologies Q: What are the main business opportunities the Mexican

in Mexico and what is needed to boost this sector?

market offers smart grid companies?

A: The secondary regulations arising from the Electricity

A: Companies bidding for AMI contracts will have the

Industry Law and the Energy Transition Law already define

greatest market opportunity in the short term, which

a particular framework for smart grid development in

will create a need for research institutes and specialized

Mexico. Both regulations assign responsibilities and have

companies to analyze how AMI should be integrated into

led to the creation of a smart grid consultative council

the grid. We also must increase the market’s knowledge

presided by the Ministry of Energy and comprised of

about how to integrate more renewables into the grid,

government representatives as well as members from

especially as DG will become the most interesting sector

CFE Distribución and private industry. Smart Grid México

in the coming years. But the most relevant business

collaborates in this with the Transformation Industry’s

opportunities will come in the longer run, when we

Chamber of Commerce (CANACINTRA) as the private

expect to see higher demand for data and grid stability

sector’s representatives. This council is important because

analysis software as well as simulation and integration

it promotes dialogue between the parties, contributing to

systems. There are no Mexican companies providing

the industry’s development.

these services yet and we need to start developing the market to avoid future dependency on imported

Smart Grid México is a nonprofit organization with the purpose of

talent and technologies. Operators need to ensure

promoting the development and implementation of technological

that the power grid is safe and functioning optimally

solutions for enhancing efficiency in the Mexican energy sector.

149


VIEW FROM THE TOP

DREAMING OF A SMARTER ENERGY INFRASTRUCTURE JOSÉ FERNÁNDEZ CEO of Grupo Dragón

150

Q: What new areas of opportunity has Grupo Dragón

Q: What investments has Grupo Dragón already made in

identified in Mexico’s power sector?

electricity transmission and distribution?

A: We see great potential in energy forecasting and the use

A: We have allocated US$216 million to a smart grid

of thermography for energy applications. The evaluation

project. This project focuses on advanced metering

of market dynamics and the identification of energy

devices and is one of the largest initiatives in Mexico in

usage in different industries will differentiate successful

this area. We are working with CFE as stated by Mexican

companies from the rest. All electric utilities sell the same

law, which says that private players must establish joint

product, a flow of moving electrons, so differentiating

ventures with the state-owned company for transmission

factors will be related to aspects such as quality customer

and distribution initiatives. We have identified a number

service. In this new landscape customer data regarding

of business opportunities to improve the Mexican

electricity usage will be crucial for companies wanting

electricity network and we consider advanced energy

to have a competitive advantage. We have the software

metering a suitable starting point. Efficient and accurate

and hardware needed to perform these tasks as our group

interpretation of energy data is one of Grupo Dragón’s

is among the companies in Mexico investing the most in

strengths. We are ahead of our competitors in this area

data storage devices. We also see a barrier in this sector

by six years.

because most Mexican companies do not have real-time metering devices. The Law of the Electricity Industry says

Q: What are the advantages and challenges of being

that private investment in electricity transmission and

a fully Mexican company in a sector dominated by

distribution infrastructure is only allowed under certain

international players?

conditions with CFE or their subsidiaries.

A: An increasing number of Mexican professionals gain experience

working

with

international

companies.

Q: What projects would you develop if the transmission

Mexicans are exceptionally creative, which is important

and distribution segments were fully liberalized?

for engineering-related activities and is something not

A: Distribution represents the largest business opportunities

all nationalities share. Mexico’s young professionals

from our standpoint because there is a need to educate

are hungry for success, an aspect that companies with

large electricity consumers about best energy practices.

ambitious initiatives such as Grupo Dragón appreciate.

Electric utilities could offer service packages, selling

Being a Mexican company allows us to understand the

electricity supply with a demand management approach.

country’s idiosyncrasies, which is needed to design

Utilities could advise customers on the most suitable times

the best solutions according to the national context. I

to carry out energy-intensive processes, rewarding them

have mostly found advantages in employing Mexican

for following the suggested guidelines. We would also like

professionals. Grupo Dragón was founded years ago and

to invest in the modernization of the power distribution

we are now a reference in the sector. We are pioneers in

network, a sector that could benefit enormously from

geothermal and smart grid development in Mexico and

private investment. Having more efficient grid lines would

this success has been mainly thanks to our committed

reduce technical losses, bringing economic savings to the

Mexican workforce.

country and avoiding power blackouts. Also, it would avoid the presence of voltage voids in the network, which can

Q: What is Grupo Dragón’s direction for the upcominhg

seriously damage sensitive equipment.

two years? A: The main challenge for us will be to adapt to the new

Grupo Dragón is a Mexico City-based electricity solutions company with

market conditions. Power generation from geothermal

operations in the generation, operation and maintenance of renewable

and wind energy sources will remain our focus but we

energy, as well as efficiency consulting services, among others.

are also exploring combined-cycle power plants.


PROJECT SPOTLIGHT

OAXACA-VALLEY OF MEXICO HVDC TRANSMISSION LINE Oaxaca’s majestic hills are adorned with hundreds of

and Transfer (BOT) contract, done through conditioned

windmills, producing more than 2,360 installed MW.

payments that will be given to the winner of the bid at a

This accounts for more than 81 percent of the country’s

minimum price for each of the works constructed.

installed wind capacity. But what good is it to have so much wind power if it cannot be transferred to cities that

The second is the construction of the alternating current

really need it?

lines, which will have an average voltage of less than 69kV because it will pass through different transformers,

A highly-anticipated project will address that dilemma

through a Build, Lease and Transfer (BLS) contract. These

after CFE sets the rules for the construction of its first

lines are expected to add an additional investment of

“electric highway,” the High Voltage DIrect Current

US$500 million. The details of the tender were released

(HVDC) transmission line to be tendered in early 2017.

in November 2016, with a deadline to submit proposals by

This direct high-voltage line will be 630km long, running

February 2017 to have the results by April 2017.

from Isthmus of Tehuantepec, Oaxaca to the Valley of Mexico. It will have a tension of 500kV, a capacity of

Siemens has expressed its interest in building the line. With

3GW, two converter stations of 3GW each and 332km of

experience developing various HVDC projects around the

alternative currents.

world, it has projected that it could significantly boost the number of industrial developments in that area by 25

With an estimated required investment of US$1.2 billion

percent. The project will also help CFE keep more money

and a deadline for 2020, the private sector was wary

in its pockets. HVDC transmission lines can decrease

about bidding for the project. Due to the high risk and

technical energy losses by up to 8 percent compared

level of necessary investment, the Ministry of Energy

with alternating current technology, drastically reducing

decided to allow the private sector to form a PPP with CFE

expenses and saving approximately 82MW. The stakes

to accomplish the task under the new schemes introduced

are high but so are the rewards and companies are ready

by the Energy Reform. This partnership will be split into

to take on the challenge. So far there are 24 businesses

two sections, the first being a 25-year-long Build, Operate

interested in constructing the line.

151


TECHNOLOGY SPOTLIGHT

152

Static VAR compensators installation, Viklandet (Norway), ABB


SMART GRID MÉXICO EYES COLLABORATIVE DEVELOPMENT Along with the Energy Reform came the guidelines for the development of the smart grid in Mexico. The Electricity Industry Law defines the smart grid as an “electric power grid that integrates advanced technologies of measuring, monitoring, communications and operation, among others, to improve efficiency, reliability, quality and security of the national electric system.” The Energy Transition Law, Electricity Market Rules, Network Code and National Electric System Development Program (PRODESEN) address the concept and provide definitions regarding its application in the national context. The best document resulting from the Energy Reform to explain this subject and the way it will transform the electric sector is the Smart Grid Program, published in May 2016. The importance of the smart grid lies in implementing “smart” operation of the electric grids through the use of new technologies, which will make it feasible to integrate renewable intermittent energies to the electric grid among diverse generation resources to the distribution grid, such as distributed generation from conventional and clean sources and energy storage systems. Additionally, it will allow the implementation of demand control mechanisms and automatic measurement. The concept of the smart grid is not new. The US and Europe have been developing and implementing the system since 2005. More recently countries such as Japan, China and South Korea have also come onboard. There are several success stories of implemented projects that prove the effectiveness of different smart grid technologies around the world. For instance, the implementation of “synchrophasor-phasor measurement systems” in the US transmission grid, the mass implementation of renewable energies into several European countries’ grids or the mass penetration of smart measurement devices to control the demand and reduce losses in several countries including Mexico. In Mexico, the foundations have already been established and the challenge now is to prove the country’s capacity for collaboration. We are certain of our ability to overcome any challenge through collaboration, which is why the civil organization Smart Grid México is working to integrate, link and strengthen the relationship between the business community, opinion leaders and academics interested in the harmonic development of the smart grid sector in Mexico, by coordinating and aligning our activities to the dispositions, projects and programs of the Ministry of Energy.

153


VIEW FROM THE TOP

SMART SOLUTIONS GO AFTER NONTECHNICAL LOSSES ARMANDO DE LA TORRE Director General of ho1a

154

Q: What opportunities do you see for integrating IT

Q: What has been the main challenge you have faced to

solutions into Mexico’s energy sector and what is your

promote smart devices in Mexico?

major contribution in this area?

A: The lack of consumer awareness in the energy sector

A: We have seen many opportunities to incorporate our

has been a tough hurdle. The Energy Reform has helped

technology into energy generation, distribution and

us overcome the challenge, especially increasing interest

commercialization, covering both electricity and the oil

in clean energy sectors such as solar and wind. More and

and gas industries. Our meter solutions can help control

more clients are seeing an opportunity to study their

energy fluctuations in a variety of industries and help

consumption patterns and find realistic solutions. But

understand consumption patterns. Smart Grid is a term

to do this, we need investment in projects that help the

frequently associated with the power grid but it can also

public sector as much as the private. Still, the main barrier

be used for gas and water networks.

is insufficient understanding. With CFE’s project, our goal is to recover 113GWh/year in total. We have achieved 40

All these systems use IT to monitor consumption and

percent of that objective, making this a perfectly viable

detect and prevent leaks with a platform that can

project financially for investors.

provide information for rapid decision-making. Private companies such as Vitro are innovating in Mexico. They are

Q: How is technology and innovation evolving in Mexico?

beginning to apply initiatives that capture and measure

A: Although governmental reforms intend to promote

this information holistically, rather than monitoring every

R&D in our country and the area has advanced in recent

machine or operation. Our company is helping them

years, there is still plenty to be done. The World Bank

improve their connectivity infrastructure and develop a

says that Mexico only invests 0.5 percent of GDP in

platform that can collect, display and analyze information

science and technology, while other countries channel

to improve decision-making.

between 1.5 percent and 3.8 percent into innovation. Mexico is at a decisive point for R&D wherein industries

Q: What technological advantages do ho1a’s smart meters

including the energy sector are choosing to invest more

offer over the competition?

in IT to strengthen operations, improve productivity and

A: CFE expects nontechnical losses to drop to 10 or 11

their service offering and to minimize overheads. Our

percent in 2017, from 16 percent in 2012, thanks to smart

responsibility as leaders and businessmen is to promote

meters. Nontechnical losses cost CFE nearly MX$27,500

innovation

million in 2015. We secured four contracts for US$127.6

company growth.

in

developing

industries

to

encourage

million to install 340,000 meters in different regions including Mexico City, the northeast, northwest and

Q: What new projects do you hope to develop in 2017?

the Gulf of Mexico between 2014 and 2015, which led

A: We will continue to work with CFE to keep adding

to CFE invoicing 10-16 percent more. We won these

value for its users, measuring its consumption patterns

tenders by presenting highly technical offers at a price

to help them control their own energy use. We also

that is below CFE’s maximum budget. Moreover, our

intend to continue working with natural gas and water

experience and relationship with committed and skilled

companies to improve their measurement systems and

suppliers positively influenced our participation in that

their customer service with accurate consumption

project.

records. Through these actions, we hope to reduce waste and maximize their operations. A priority is encouraging

ho1a is a Mexican company specializing in IT and telecommunications

any solution that helps Mexico become more competitive

and is a leader in the implementation of technological solutions for

in technology by using Big Data and data analysis

different business segments, including energy companies.

integrated into the IoT.


VIEW FROM THE TOP

POWER LOSSES IN TIMES OF PLC DARIO LABATTAGLIA Electricity Sales Manager Mexico & Central America of Itron

Q: What major challenges does CFE face as it modernizes

theft is a social problem and technology can help reduce

Mexico’s power grid?

its incidence. Our technologies have the potential to help

A: CFE is advancing quickly along the learning curve

CFE understand the nature of its losses and optimize the

for power grid technologies. The state-owned company

person-hours required to solve them.

did not previously have the need to understand how information technology could optimize and improve

Q: What makes Itron’s solutions better than the

its business but now it is starting to analyze how these

competition?

technologies can impact its different business areas. We

A: We have a product consisting of a sensor-based

had the opportunity to meet with some of CFE’s executives

device with characteristics that place intelligence at

and discussed how Itron’s solutions could help them

the cutting edge of the system’s physical frontiers. It

accelerate technology adoption coupled with attractive

offers the possibility to synchronize data in the field and

returns on investment (ROI). Itron promotes efficiency

has a computing capacity near to that of the iPhone 3,

in energy businesses so our objectives are aligned with

which is considerably high for a meter. It can process

CFE’s in its new role as a productive company of the state.

a significant amount of information, which companies require to become more efficient. By offering cutting-

Nontechnical losses are one of CFE’s major challenges.

edge intelligence, our solution optimizes field work using

Those represent a loss of about 15 percent of annual

additional applications. Besides this feature, our product

revenue, a huge problem for CFE. Another related problem

has the same back-office intelligence as the rest of our

is bad debt and delinquent customers, which result in the

competitors.

company losing another 15 percent of its revenue per year.

can become significantly smarter by adopting this

But CFE has already started to take action to address

tool as it can easily connect with other technological

these problems, an effort supported by the industry’s new

devices without overloading the network’s capabilities.

regulatory framework. CFE has been investing in this sector

The product uses two communication channels, radio

since 2014 through financed public works (PIDIREGAS)

frequency (RF) and Advanced Power Line Carrier (PLC),

schemes. The company has mostly focused its efforts on

which is another advantage. This characteristic avoids

illegal connections, which are the most common type of

physical interference with the communication between

electricity theft in the Valley of Mexico. Now it is looking

devices as PLC can send signals through electric cables if

for new technological solutions to identify the source of

something is blocking RF signals.

Communication

network

infrastructure

nontechnical losses. Q: What complicates the implementation of PLC devices? Q: How can Itron’s technological solutions help CFE in

A: Technology adoption and infrastructure are the main

this enterprise?

barriers. The use of PLC communication is common in

A: Our solutions offer CFE the possibility to identify where

Europe because the electric grid is high quality, which is

illegal connections are located, besides other technical and

not the case in most Latin American countries. Most of the

nontechnical losses. We do it by identifying abnormalities

electrical infrastructure in Latin America is old and must

in the electric current and the system’s behavior. Our

be modernized to implement PLC technologies, so they

smart devices have a communication board that can

use RF instead. However, RF technologies are not always

locate electricity losses and communicate with other

the most suitable solution.

technological devices distributed along the electric power network. We can monitor the correct operation of the

Itron is a US-based technology and services company dedicated to

system and quickly identify if something is distorting the

measurement, management and analysis of energy and water usage for

network while mapping its location accurately. Electricity

the industrial sector.

155


PROJECT SPOTLIGHT

156


OPENWAY RIVA: A POWERFUL IOT SOLUTION Itron Riva is the innovative developer of OpenWay Riva, a distributed intelligence platform designed to tackle the communications challenges in the energy industry. This solution integrates a cutting-edge computing platform, distributed applications and dynamic communication technologies to optimize infrastructure control, data analysis and decision-making processes. There are three pillars on which the technology rests. The first is unprecedented processing capabilities, equivalent to the computing power of a smartphone or desktop, inside metering or electricity-grid devices, expanding the possibilities for high-resolution data analysis and problem solving. The second pillar is locational awareness, since the technology allows measuring and grid devices to know where they are in relation to other assets on the grid, improving analytical accuracy. The third pillar refers to the interoperability of the system. This technology supports multiple

application

protocols

and

communication

between devices, not just with each other but also with other systems such as distribution automation, load control/demand response and home area networks. The applications for OpenWay Riva in the energy industry are vast, especially in a challenging environment such as Mexico. One of the most daunting problems for the Mexican electricity industry are non-technical power losses, commonly a result of electricity theft. Information provided by Itron’s technology can be used to identify, stop and deter theft in real time. The system can also be used for systematic and continued monitoring of metering and grid devices to optimize their usage and detect abnormalities. Another challenge for the energy industry worldwide is the overload of distribution transformers. The OpenWay Riva system can analyze the loads of individual distribution transformers and manage them in real time. Based on the total load and capacity of the transformer, the technology can detect overload before it occurs and manage energy flows automatically, thus preventing damage to the equipment and infrastructure and improving the performance of the devices. The implementation of the OpenWay Riva solution in energy projects and energy infrastructure not only helps comply with the smartmetering requirements of the current administration but it can optimize power production and usage to help companies become as cost-competitive as possible.

157


VIEW FROM THE TOP

NEW GRID CODE TIGHTENS INTERCONNECTION REQUIREMENTS DANIEL MARTÍNEZ FACTS & HVDC Manager of ABB México

158

Q: What are the main differences between the old and

and series capacitors (SCs). This means that around 80

new Grid Codes?

percent of the total FACTS base installed in the country

A: The main difference compared with the old version is that

belongs to ABB, with around 85 percent of this installed

the new one is more stringent regarding interconnection

for CFE. Most of our FACTS technologies are used for the

requirements. The new Grid Code’s objective is the

national transmission system and just a few for industrial

preservation of the electricity transmission network and

installations, mainly in the steel manufacturing industry

whoever connects to this network must comply with

where arc-furnaces are commonly used. Arc-furnaces are

certain criteria. This Grid Code is so restraining in many

electrical equipment used to melt scrap using short-circuit

technical aspects that some industry players are actually

electrodes that produce a lot of heat, which in turn melts

questioning whether it is needed for the Mexican grid.

the metal. In the transmission grid, most of our FACTS

Some companies think the network is too robust as CFE

systems in Mexico are found at the 400 and 230kV levels.

has done a lot of work in the past 35 years to place enough reactive power compensation along the entire network

Q: Which of your products might be used to ease the

to avoid problems. For every particular case or region, a

integration of renewables to the grid?

deeper and serious study is required to state if the code is

A: SVCs could be used for this purpose but we mainly

needed or not but we support the general thinking behind

suggest using our Statcom product instead, which is a

this new code. We did an analysis to compare the new

more sophisticated and powerful technology. Statcom

Mexican Grid Code against international examples, such

uses a different semiconductor and has higher capacities

as the code applicable in Europe by the Electrical Network

than SVCs. This is the product we are suggesting to our

of Transmission System Operators (ENTSO), which is

clients in the renewable energy industry introduce to

used in 35 European countries and by 43 utilities, and

comply with the new Grid Code. ABB can offer Statcoms

that applied in the UK. Our findings show that there are

for transmission network applications together with its

many similarities between them. All transmission system

MACH technology, as well as its PCS6000 technology for

operators around the globe seem to be going in the same

renewable interconnection applications with convenient

direction. If the Energy Transition Law expects a larger

features such as a containerized production. We consider

percentage of the power mix to be renewable by 2035,

our products to be among the most attractive solutions

we do need a robust network and ABB has the Flexible

to comply with the new Grid Code in terms of renewable

Alternating

energy integration.

Current

Transmission

Systems

(FACTS)

technologies to help its customers and business partners comply with this Grid Code.

Q: What are the benefits of using HVDC technologies such as that for the Oaxaca transmission line?

Q: What has been your experience regarding the adoption

A: HVDC offers the big advantage of enhancing grid

of ABB’s FACTS technology?

management and stability while increasing its capacity,

A: The negotiations to install the first FACTS system in

being able to transmit large amounts of energy. The

Mexico were done in the late 1970s and the first Static

capacity of Oaxaca’s HVDC line is 3GW. HVDC lines

VAr Compensators (SVCs) were finally shipped and

transmit electricity through a couple of conductors, which

installed in the Mexican grid in the early 1980s. We have

are known as a bipole, making it possible to handle more

38 ABB FACTS installed in Mexico, including both (SVCs)

energy than traditional lines and with less energy loss. The fact that HVDC permits the transmission of more energy

ABB is a pioneering technology firm that works closely with utility,

with shorter lengths also means there is less social and

industry, transportation and infrastructure customers to write the future

environmental impact. Moreover, HVDC can interconnect

of industrial digitalization and realize value.

power networks with different characteristics and sizes.


INSIGHT

SOLAR TO REACH HIGHER LIMITS KEVIN GUTIÉRREZ General Manager of Ingeteam

PV solar modules are cheaper than ever, which helped

Ingeteam has another two business areas in Mexico, O&M

drive solar energy prices in 2016 to record lows. Balance

services and smart grid systems. The growing amount of

of Plant (BoP) components could be the next major area

renewable energy capacity that is expected to be built in

of opportunity for solar companies to reduce production

the next couple of years is also expected to bring further

costs thanks to the introduction of 1,500V designs, a

opportunities, particularly for O&M services.

major breakthrough because higher voltages enable more power to pass through the same BoP components,

“We are expecting to see a boom in demand for

lowering CAPEX.

renewable products and services in the country. We even think it might start in 2017 as there are a lot of

Ingeteam, a leading company in power and control

potential projects in sight and the first two long-term

electronics, sees 1,500V architecture as the next frontier

auctions have already taken place. We are certain there

for Mexico’s solar power to become one of the most

will be a significant number of business opportunities

competitive available energy sources. “Regarding utility

for companies like us, not only in terms of product sales

scale, the next step will be to work on plant capacity,”

but also in O&M services,” says Gutiérrez.

says Kevin Gutiérrez, General Manager of Ingeteam. “Currently, most solar plants are designed for a 1,000V

High-quality products, he adds, should be accompanied

DC limit, meaning that the cables, panels, inverters and all

by high-quality aftersales services to guarantee success.

the plant’s components are designed for that threshold.

“We need to provide our clients with proper training

We therefore think the next big step in this sector will

to correctly operate our equipment. To this end, we

be to migrate from 1,000 to a 1,500V DC limit as it will

have a complete business unit that is dedicated to

make the installations more cost-competitive. At the

providing O&M services for the products that we sell in

moment, all the suppliers are making changes to adapt

photovoltaics, wind and several other sectors. Aftersales

their technology to this new limit.”

services are important because it is the means by which we support and help our clients. Any manufacturer will

The company delivered its first product to serve the new

provide assurances that its product will never fail but we

limit in Mexico in late 2016 but the speed of adoption for

need to be able to help our clients in case it does.”

these new products will depend entirely on the needs of the market and customer strategies. “However, this technological shift is underway and we estimate that 2017 will be the breakout point,” he says. Gutiérrez sees great potential in bringing added value to the solar energy industry because the sector is experiencing a great period

Ingeteam devotes 11 percent of its personnel and 7 percent of turnover globally to R&D

in Mexico. “We certainly believe there will be a boom in the Mexican solar sector. On a global scale, we can

To maintain its leadership position in the market,

already see an increase in the number of solar projects,

Gutiérrez considers R&D one of the ingredients for

especially in Central and South America. Mexico offers

success. “One of Ingeteam’s most important advantages

greater potential than many of these countries because

is that we have always emphasized the importance of

of the huge energy demand and strong solar resources.”

R&D in our strategy and we have invested heavily in

Ingeteam, he says, has observed the steady growth of the

this area. We dedicate 7 percent of our revenues to our

solar market over the past few years and in 2015 it sold

R&D department and as a result we have managed to

around 50MW of solar power projects, while expecting

become a more competitive company that offers better

a higher number for 2016. Besides its PV solar division,

quality equipment to clients.”

159


INTER-REGIONAL TRANSMISSION LIMITS 2016-2021

46

48 49

∆ 1,500 7

47

2 1

8

∆ 950 640

∆ 850 160 3

53

9

∆ 850 ∆ Growth MW Capacity by 2021 Capacity in 2016

4

∆ 1,750

50

Transmission Areas 1

Hermosillo

2

Cananea

3

Obregon

4

Los Mochis

5

Culiacan

6

Mazatlan

7

Juarez

8

Moctezuma

9

Chihuahua

10

Durango

11

Laguna

12

Rio Escondido

13

Nuevo Laredo

14

Reynosa

15

Matamoros

16

Monterrey

17

Saltillo

18

Valles

19

Huasteca

20

Tamazunchale

21

Guemez

22

Tepic

23

Guadalajara

24

Aguascalientes

25

San Luis Potosi

26

Salamanca

27

Manzanillo

Source: Ministry of Energy

11

620

5

17

51 10

∆ 1,900 1,200

52 6

24

∆ 1,800 1,350

22

23

27


Transmission Areas

12

13

∆ 2,500 1,600

16 14

21

15

∆ 1,800 1,500

19 25

18

28

Carapan

29

Lazaro Cardenas

30

Queretaro

31

Central

32

Poza Rica

33

Veracruz

34

Puebla

35

Acapulco

36

Temascal

37

Coatzacoalcos

38

Tabasco

39

Grijalva

40

Ixtepec

41

Lerma

42

Merida

43

Cancun

44

Chetumal

45

Cozumel

46

Tijuana

47

Ensenada

48

Mexicali

49

San Luis Rio Colorado

50

Villa Constitucion

51

La Paz

52

Los Cabos

53

Mulege

20 42 30

26

45

32

∆ 1,900

∆ 1,150 800

1,500

28

43

31

41

33

34

29

∆ 6,000

37

3,000

38

36 35 40

39

∆ 400 200

44

161


INSIGHT

EXPERIENCED EPC GOES FOR TRANSMISSION LINES VICENTE GARCÍA Director of Business Development at Isolux Corsán

162

Businesses that previously worked with CFE at the heart of

including Mexico, is eyeing power transmission projects

their strategies suddenly have a new target in the wake of

in particular. García says it is already in discussions

the Energy Reform. Private companies are the new fertile

with some companies but is waiting for the tender

ground for EPC firms such as Spain-based Isolux Corsán,

documents before making any decisions. “There are

which sees the private sector playing a bigger role in the

two big projects that are grabbing the attention of the

emerging energy landscape.

private sector, including a US$1.21 billion transmission line that will connect Sonora to Baja California,” he says.

“CFE will continue to be important in the power generation

“Private companies, however, are worried about the legal

sector but we believe private clients will become more

framework, tender requirements and payback schemes,

relevant in the future,” says Vicente García, Director of

among other details that are not yet clear.”

Business Development at Isolux Corsán, which specializes in energy, construction and large infrastructure concessions.

The tender for the HVDC transmission line connecting Oaxaca to the Valley of Mexico takes place in the first

Renewable power, he adds, also is becoming increasingly

quarter of 2017 and is expected to shed some light over

important. “We focused mostly on traditional power

private participation in transmission assets. The event

plants in the past but we are planning to include much

is highly anticipated by private industry and Isolux

more renewable energy projects in the future. We have

Corsán and its clients will be among those following the

strong experience in the renewable energy sector outside

development of this project.

of Mexico and we have already been involved in the construction of wind farms here. Solar energy is booming

Isolux Corsán sees an opportunity to support transmission

in the country so we plan to also work in the construction

projects built with private capital because those companies

of related facilities.”

can now invest in the construction and operation of transmission lines under certain schemes. “We are trying

García points out, however, that despite the changes raining

to put the spotlight on private participation in transmission

down on the sector, traditional power plants remain essential.

lines. We are highly familiar with these projects in Mexico so

Isolux Corsán, with an EPC portfolio worth EUR6.8 billion,

we can help companies willing to invest in this sector.”

will continue to be heavily involved in the construction of natural gas-based facilities, in line with the government’s

He points out the company has 5,000km of high-voltage

plans to increase the country’s natural gas infrastructure.

transmission lines in Brazil as well as concessions for transmission lines in Peru, the US and in India. “We

In all cases, the key difference will be the involvement of

have had conversations with CFE about our experience

private players in addition to CFE. García says one of the

in other markets and provided them with advice about

challenges for private investment to take off in the sector

how other similar countries have handled these same

is convincing companies to invest in projects still seen

projects,” he adds.

as a novelty in the country. “We are confident that it will happen, as many companies have shown interest in coming

García says the company has been very successful for the

here. We contribute by providing reliability to investors

past two years, especially in the power sector. “We were

as a firm that has been successful for many years in the

awarded part of the construction of the Toluca-Mexico

Mexican power industry.”

railway, meaning the catenary, traction substations and the energy system. We are also building three transmission lines

Isolux Corsán, which has been in business for over 80

for CFE and are doing a US$400 million revamping of an

years and has operations in more than 40 countries,

existing power plant in Tamaulipas.”


INSIGHT

THE PROMISED LAND FOR ENERGY COMPANIES DAVID FLORES Managing Director of Ormazabal Mexico

The strength of Spanish companies in Mexico’s power

investment reduction. The second and most attractive

sector is undeniable. Spanish expertise can be found along

area is power distribution, including equipment to detect

the entire power value chain, including power generation,

technical and nontechnical losses and improve supply

transmission,

specialized

continuity. We have proven experience in this area as we

consultancy services. For some of these companies,

have worked on major projects with large-scale utilities

launching operations in Mexico has been the start of a

such as Iberdrola, Vattenfall and EDF. CFE has suffered

fruitful business driven by growing demand and abundant

million-dollar losses related to technical and nontechnical

energy resources. This was at least the case for Ormazabal,

elements, so there is a real need to correct the problem.

a company that designs, manufactures and provides

The solution to this goes beyond installing new meters

solutions for electricity transmission and distribution.

and we have the skills and capabilities to help CFE in this

project

development

and

matter,” he says. “Ormazabal Mexico, which opened a local office in 2012, has been the group’s fastest-growing affiliate worldwide.

In the renewable energy arena, wind energy projects stand

We have increased our turnover five times since we arrived

out as an interesting segment for Ormazabal. “We hope

and we still expect to grow further. In 2015 we contributed

the next three to four years are highly promising as we

with around 15 percent of the group’s total revenue in

perceive strong stability in the wind market. The industry

Mexico. The Mexican market presents challenges as in

has become less dependent on Oaxaca in the past few

any other country but we are optimistic about our future

years and is in the process of developing wind farms

here,” says David Flores, Managing Director of Ormazabal

all over the country. The first power auction was not as

Mexico.

favorable as expected for wind energy developers but they achieved better results in the second event.”

“Mexico offers a great environment to develop new ideas, to establish synergies between different business units

The company also sees potential in the solar energy market

and to innovate. Mexico has given us the opportunity to

after the outstanding results for solar projects in the first

create projects in areas beyond our typical reach, such as

two auctions. In both segments Flores sees an attractive

a solar park in Acapulco when we had little experience in

market niche for its Gas-insulated Switchgear (GIS)

project construction. Mexico is an interesting field to try

technologies. “Together with ABB, Schneider Electric and

new things, allowing us to move outside the manufacturing

Siemens, we are the top manufacturers of GIS panels. This

bubble,” he adds.

product enjoys great demand in Mexico, being present in around 90 percent of the wind farms installed in the

Renewable energies, construction, infrastructure and

country and 80 percent of the solar parks. GIS panels are

transportation are the strongest market segments for

also present in around 65 percent of CFE’s new substations

Ormazabal Mexico. CFE used to be the company’s top

and this is expected to grow. In the industrial segment GIS

customer but the slowdown in the number of projects

panels enjoy a 55 percent market share, mostly in hotels

developed by the state-owned company as a result of the

and transportation,” he says. To maintain growth in Mexico,

Energy Reform drove the company to diversify its portfolio,

Ormazabal will focus mostly on enhancing its team’s

which was crucial for navigating the transition. Now,

leadership and capabilities. But Flores does not discard

however, there might be new opportunities for Ormazabal

the possibility of expanding its physical assets. “The final

to collaborate with CFE to improve the power network.

implementation of a manufacturing facility will depend on

“We have identified two major areas of opportunity to

the evolution of our business in Mexico. We have positive

collaborate with CFE. The first one is substations, an

expectations but we want to see how the market evolves

area in which CFE is investing heavily despite its general

before making any significant investment,” he says.

163


PROJECT SPOTLIGHT

164


SEL’S POWERCORE SUBSTATION CONTROL ENCLOSURES SEL’s PowerCore solution steps into the challenging environment of the Mexican transmission and distribution infrastructure as a leading technology for substation control enclosures. The turnkey technology has rapid processing that includes everything from design to installation. This in

solution

protection,

integrates

state-of-the-art

automation,

control,

technology

communications,

measurement and information management. PowerCore’s main competitive advantage lies in its innovative manufacturing method, based on standard designs for wall and ceiling panels through a repeatable process that allows for constant upgrades and maximum quality. The quality-controlled industrial environment in which SEL, the company behind this innovative solution, manufactures its control enclosures ensures waiting periods and engineering costs are kept to a minimum, as well as allowing flexibility for size, design and materials. The manufacturing and integration of the enclosures take place at the installation location, reducing logistics requirements and providing a testing period. The unique design of the steel columns and panel frames provide a resilient structure for the enclosure, giving clients flexibility to select wall and panel fillings. SEL is compliant with the international construction code (IBC) and the highest technical norms for the development of this product, such as the ASTM E331 certification for water penetration. The company also provides extensive testing according to the customer’s needs and the installation of the solution is performed by SEL’s highly trained engineers. With SEL’s expertise and the uniqueness of the PowerCore solution, it comes as no surprise the company was selected to revamp the infrastructure of CFE’s largest substations in Mexico: Remedios and Santa Cruz. The updating and upgrading of both substations required the installation of 10 PowerCore enclosures with over 150 protection and control panels and over 50 outdoor control cabinets equipped with 350 devices. The final product was a system fully designed by SEL that used Distributed Network Protocol, version 3, (DNP3) to collect Supervisory Control and Data Acquisition (SCADA) information, as well as utilizing Generic Object Oriented Substation Event (GOOSE) messages to offer processing information. The flexibility of the system will allow CFE to update the tension levels of the substations, use standard data implementation methods for the grid and upgrade the substations’ operations.

165


VIEW FROM THE TOP

OPPORTUNITY ON THE HORIZON AS CFE TRANSFORMS RIGOBERTO CASTAÑÓN General Manager of S&C Electric Mexicana

166

Q: How has the company’s relationship with CFE changed

a continuous supply. The process can take up to four hours

since the implementation of the Energy Reform?

but advanced, automated technologies can do this in

A: Our business relationship with CFE goes back to 1956,

minutes. Smart technologies also can pinpoint the failure’s

when we started working as a service provider for the

exact location, optimizing the time needed to repair the

state-owned utility. Our equipment and services enjoy a

problem. These systems collect an incredible amount of

good reputation within CFE, which views us as a reliable

data, which can be used to analyze the overall functioning

supplier because we would rather provide added value at

of the grid, allowing the operator to design strategies to

a reasonable price than low-cost products. Even though

mitigate and control potential failures. Once CFE starts

there are more affordable products in the market, CFE

upgrading its systems we expect business opportunities

has preferred our solutions due to the extended lifetime

to open up in this area. To increase our visibility and

and optimal functionality they offer, which create long-

show CFE the advantages of our products, we are now

term savings. The transformation of CFE into a productive

developing a number of pilot projects in different Mexican

enterprise of the state has halted our business activities

regions. These consist of small-scale distribution grids

with this client but that is true for many CFE suppliers. Some

with five or six connection points where we can test our

of these companies are facing the risk of bankruptcy but

products’ performance. The tests allow us to identify

S&C is financially equipped to overcome this challenging

potential failures in the grid and ensure our products

period and is prepared for the moment when business

can properly solve them. We have carried out two pilot

takes off again. In the meantime, we are analyzing how we

projects in Cozumel and Tijuana over the past two years

will adapt our offer to fit CFE’s new role. The company is

and we are now promoting a new one in Monterrey.

confident it will maintain a positive relationship with CFE as it strengthens its focus on productivity.

Q: Which of your smart grid technologies are most relevant for the Mexican market and why?

Q: How is S&C Electric Mexicana helping Mexico’s

A: Our protection and sectioning devices could be

implementation of smart grid technologies?

particularly

A: Our company supplies cutting-edge technologies for

technologies

smart grid development but due to the transformation

throughout the entire network, making them an important

that CFE is undergoing we have not realized any

component in preserving the grid’s infrastructure. These

important projects. So far CFE has only installed smart

devices are equipped with special sensors and controllers

meters to quantify the amount of energy consumed by

as well as mechanical systems consisting of a safe lock that

end users but it has not yet invested in smart management

can block the circuits in case of an emergency. Protection

of the electricity transmission and distribution networks,

technologies are not new but they have evolved to provide

which we expect it to do at some point because smart

the same service automatically and in a more efficient way.

useful

for

Mexican

avoid

the

spreading

grids. of

Protection

local

failures

technologies are needed to ensure the optimal functioning of the grid. In the case of Mexico City’s grid, which has

Q: What are S&C Electric Mexicana’s priority business

several inflow points, a failure of one of the energy supply

opportunities in the short term?

sources could affect the entire network. To avoid this, the

A: We expect to get involved in projects related to the

operator needs to isolate the area located close to the

design and construction of renewable energy facilities.

problem while using the remaining inflow points to ensure

The company also is working on identifying opportunities with private market segments, such as hospitals. This is

S&C Electric Mexicana is a Chicago-based global specialist in electric

expected to compensate for the slowdown of projects

power switching and protection products and services for transmission

resulting from CFE’s restructuring. We also expect CFE to

and distribution.

start investing again soon.


INSIGHT

EVOLVE WITH THE INDUSTRY TO SUCCEED NORBERTO GÓMEZ Commercial Director of Conductores del Norte

As the industry evolves and new players enter the power

out from its competitors, especially those with electrical

market, the needs of the sector change. Companies that

material distributors that offer integral services. “The

have the ability to adapt quickly to the new conditions

goal of our partnerships is to provide customers with a

will reap the biggest benefits, says Norberto Gómez,

complete service and not just cable products. Through

Commercial Director of Conductores del Norte.

our partners we can complement our offer with auxiliary equipment such as transformers or pipes, covering all the

“Conductores del Norte was founded to cover CFE's needs

requirements of a typical electricity project.”

in the north and now has 40 years of experience in the sector. As the market changed we adapted our offer to

Such strategies are crucial as new construction companies

attract new clients from the private sector, particularly

enter the electricity sector, especially with the growing

after companies were allowed to enter the electricity

interest in renewable energy projects. Conductores del

sector under different schemes.” Its rapid adaptation

Norte believes participation in associations can help build

to the new market conditions allowed the company to

the necessary ties, citing groups such as the Chamber of

diversify its client portfolio and stay one step ahead of the

Commerce, Services and Tourism (CANACO), the Chamber

competition, he says.

of the National Processing Industry (CANACINTRA) and the National Association of Electromechanical Contractors

The Energy Reform has reshaped the market’s dynamics,

(UNCE), which groups a large share of the contracting

with small and medium-sized contractors winning tenders

companies in Mexico. “As an active member of these

for large installations and opening windows of opportunity

organizations we get first-hand information about relevant

for fast-response companies such as Conductores del Norte

upcoming projects and can establish business relations with

while increasing the number of foreign manufacturers

important players from across the industry,” says Gómez.

in the country. The rise in competition in this sector is good for the industry. “We see fiercer competition as an

To continue adapting to the Mexican power industry the

incentive to increase our competitiveness and we are

company is planning to focus on improving its electricity

already investing in new equipment and developing new

distribution projects. “Electricity distribution is attracting

business models,” Gómez says.

most of the sector’s attention, representing a great opportunity for our company due to the leadership

PRODESEN

represents

another

opportunity.

The

government’s plan to expand the National Electricity

position we play in this area,” says Gómez. “We expect electricity distribution to remain our core business."

System allowed Conductores del Norte to develop pilot projects in the Bajio region. The Bajio projects faced

Given the increased competition in the distribution sector,

specific technical and economic challenges due to their

companies cannot stand still. Conductores del Norte is

development by small-sized contractors but they were all

looking to expand to other areas with high potential for

successfully completed thanks to the company’s strategic

power generation growth. “In the next two to three years

alliances and close collaboration between the parties

we will focus on strengthening our commercial operations,”

involved. “Our previous experience with these contractors

says Gómez. “We also have plans to continue optimizing

opened the door to participate in the Bajio projects. We

our production processes, improving our response time.

are proud to have our customers’ trust and we are now

We foresee several challenges in the coming months,

working on strengthening our electricity transmission

particularly as the number of projects in the sector

services and products and particularly distribution, where

has been lower than expected. For this reason, we see

we already have a strong offer of services.” Alliances are

great value in increasing our manufacturing efficiency,

at the heart of Conductores del Norte’s strategy to stand

diminishing our costs and improving our quality.”

167


Francisco PĂŠrez RĂ­os thermoelectric power plant, Hidalgo, CFE


PROJECT FINANCING

7

Financing can be difficult to access especially in new and untested environments such as the newly liberalized electricity market. But as more and more success stories emerge from both the electricity auction processes and business ventures in the country, the outlook is increasingly clear. Private financing is starting to take its place beside multilateral and state development institutions as the potential for revenues becomes evident. New instruments such as Clean Energy Certificates (CELs) are also in the spotlight for their potential financial interest.

This chapter brings together financing entities such as private banks and both national and international development banks and lending institutions to discuss their approach toward the energy sector, what their foreign experience brings to the table and the potential to offer increased access to resources for companies to take advantage of the openings provided by the Energy Reform. It also examines the emergent “green financing� strategies influencing the availability of funds for energy projects in the country.

169


CHAPTER 7: PROJECT FINANCING 172

ANALYSIS: Diversification Drives Green Bond Demand

173

VIEW FROM THE TOP: Enrique Lara, Banobras

174

VIEW FROM THE TOP: Marian Aguirre, Bancomext

175

VIEW FROM THE TOP: Jacques Rogozinski, NAFINSA

176

INSIGHT: Ariel Yépez, IADB

179

VIEW FROM THE TOP: Eduardo Piquero, MÉXICO2

180

VIEW FROM THE TOP: Alfredo Santillán, SMBC Mexico

183

INSIGHT: Takeshi Tada, JBIC

184

VIEW FROM THE TOP: Salomon Amkie, Citibanamex

185

INSIGHT: Estanislao de la Torre, HSBC Mexico

186

VIEW FROM THE TOP: Héctor Pérez, Scotiabank Mexico

187

PROJECT SPOTLIGHT: Los Santos I Solar PV Plant

188

VIEW FROM THE TOP: José Sifuentes, Nader, Hayaux & Goebel (NHG)

189

VIEW FROM THE TOP: Carlos Albarracín, Milbank

191

INSIGHT: Bernardita Díaz, Sustrend

171


ANALYSIS

DIVERSIFICATION DRIVES GREEN BOND DEMAND How do you convince investors and lenders to pour money

these auctions are awarded there is little consideration for

into costly, long-term projects involving a new kind of

permits. Companies can win the auction without much

technology in an also new and untested market? That

permitting in place so a good sponsor with a track record

particular question was on the mind of every renewable

and proven development skills is critical. The second is

energy generation developer and CENACE auction winner

the merchant risk the PPA carries beyond 15 years, as well

over 2016 and, despite lingering doubts about the contract

as the risk of underproduction for any given year before

lengths and the rules that govern the wholesale electricity

that,” says Salomon Amkie, Vice President of Power &

market, commercial banks and institutional investors are

Alternative Energy at CitiBanamex.

starting to notice a sector that until recently seemed the

172

almost exclusive domain of national development banks

Some instruments have already taken hold. In 2015, state-

and multilateral lenders.

owned Mexican development bank NAFINSA issued the first green bond in Latin America. The US$500 billion

A global push toward country-sponsored and corporate

bond was five times oversubscribed, leaving national and

sustainability strategies, which is also reaching Mexican

international investors anticipating further prospects for

industrial players, is stimulating interest in financing

diversifying their business portfolios. The opportunity

instruments like green bonds. “World leaders have made

finally arrived in September 2016, when NAFINSA placed

clear that they expect the society of the future to be low-

the first green bond in the Mexican Stock Exchange

carbon. This means changing the way we do business,

(BMV) issued in Mexican pesos. This green bond was

manage natural resources and use energy,” says Estanislao

almost three times oversubscribed, showing investor

de la Torre, HSBC Mexico’s Chief Operations Officer. The

commitment and trust in this new sustainable financing

bank’s Mexican unit signed a 10-year off-taker agreement

mechanism. The future of these new financing tools looks

in 2016 with Enel Green Power Mexico to supply half its

promising as demand continues to rise. Eduardo Piquero,

local energy needs from wind power.

director of MÉXICO2 says, “the main factor driving green bond’s demand is diversification. There is a greater risk

“We offer direct investment for projects awarded at the first power auction and we are developing a payment guarantee procedure. This is expected to address risks

associated with having oil and gas-based portfolios, so diversification through green assets has become a priority for global investors.”

NEW OPPORTUNITIES Despite the several challenges arising in the energy industry, financing institutions are stepping up their game and developing new solutions to support the sector. Several banks, both commercial and development, have

identified by the banking sector”

created new schemes to ensure companies can comply

Enrique Lara, Director of Energy at Banobras

projects. New guarantee procedures that address risks

with the financial requirements needed for successful identified in the market have been developed to provide

What are the worries? In Mexico, the liberalization of

income security for developers and banks, as a result

the electricity market following the Energy Reform

of

launched a slew of energy-generation developments,

to participate in the new power market. Several key

mostly promoted by CENACE’s power auctions. But

players have pointed to transmission, distribution and

the companies that won those auctions signed 15-year

power generation as the sectors with the most growth

contracts to supply electricity to CFE, at very low prices,

potential in the coming years. When choosing projects

while the length of financing deals for large infrastructure

to finance, banks are no longer staying in the dark

projects is usually longer than that. Also, the 2016 auctions

regarding the functioning of the technologies they

set a low bar for project requirements in terms of permits

intend to fund. Instead, lenders are arming themselves

and rights of way, a complex subject in the country. “At

with teams of experts in different areas to get specific

Citibanamex, we are being cautious of two things, with the

technical assessments that will allow them to optimize

first being the quality of the sponsor. Because of the way

their processes.

opportunities

identified

by

financial

institutions


VIEW FROM THE TOP

FINANCING THE FUTURE ENRIQUE LARA Director of Energy at Banobras

Q: How has the new regulatory framework impacted the

individual analysis where we research the project’s income

bank’s plans for financing renewable energy projects?

flows, the rate awarded in the auction and the type of

A: Most of the winning companies from the first two power

technology it employs to mitigate other risks so the banks

auctions have specific concerns regarding the regulatory

can offer higher leverage rates and give a longer financial

framework. The contracts from the first power auction, in

timeframe. There are plenty of regulatory advantages to

which CFE is the off-taker, provide certainty regarding the

using this plan since having development bank guarantees

selling price in energy and the capacity for 15 years and 20

allows banks to have lower capital requirements.

years for CELs. The first concern for these companies has been the criteria the banking sector will use to evaluate

Q: What are the most promising sectors for investing in

generation when those contractual prices end after 15

the Mexican energy market?

or 20 years, especially since most financing schemes go

A: Commercial banks and developers have expressed

beyond that time frame. The second concern is the value

difficulties finding a financing period because some

of the energy sold under merchant risk, which is a financial

commercial banks are not willing to provide financing for

imbalance that happens when the offered price is not the

the length of the contracts. Banobras, as a development

same as the market price during the first 15 years. The

bank, can go a little beyond that and provide financing

third concern is regarding general financing conditions,

for longer periods. We have focused on wind, hydraulic

such as gearing ratio and financial terms.

and pipeline projects but the Energy Reform has opened the market to new opportunities, such as upstream,

Q: How will Banobras adapt to a new risk scheme where

platform construction and refineries that we had not

CFE is no longer the only off-taker?

considered before.

A: There are two types of companies: large companies with a corporate plan that do not need financing because

Previously, Banobras’ largest investments were made in

they have resources of their own and smaller companies

road and highway infrastructure projects. Now it will be

that are looking for project finance. Large companies are

the energy sector, which speaks to the changes in the

not focused on a specific project but rather are focused

market's trend that will continue in the future. Banobras

on the power segment to compete with CFE in the next

has changed its internal structure, creating an energy

10 or 15 years. Small companies do focus on a specific

department to respond to the needs of the new market.

project such as wind or solar energy. Banobras focuses on small companies that need project financing because

The main business opportunity for Banobras in the energy

we can take on riskier projects as a complement to

sector is investing in natural gas pipelines because they

commercial banks. We develop plans to make companies

are large projects that require plenty of investment. Due

feel comfortable while complementing the project’s

to the magnitude of these projects it has become more

financing requirements. We offer direct investment for

common to use syndicated financing where development

awarded projects from the first power auction and we

and commercial banks work together. Banobras is the

are developing a payment guarantee procedure. This new

largest development bank and the number five in the

procedure is expected to address risks identified by the

Mexican banking system by assets, which allows us

banking sector. The guarantee scheme we are promoting

to have the highest spending and provide the longest

provides income security amid merchant risk. It secures

financing plans.

maximum and minimum values within an income range to give commercial banks certainty. Merchant risk will still

Banobras is Mexico's state-owned public works development bank,

be present for commercial banks but our plan alleviates

helping finance infrastructure works in the country through outright

it to a certain extent because it implies a specific and

financing and guarantee schemes.

173


VIEW FROM THE TOP

PORTFOLIO GROWTH ILLUSTRATES SECTOR STRENGTH MARIAN AGUIRRE Energy Financing Deputy Director of Bancomext

174

Q: To what extent is renewable energy more attractive

Bancomext as a way of obtaining access to Mexican pesos,

now and what are the factors driving this trend?

which is a requirement for projects including some of CFE’s

A: Bancomext decided to open its energy division in 2009,

tenders. In these cases, international companies need to

launching a financial scheme for a wind energy project

establish a financing or co-financing agreement with a local

as a trial. The bank has steadily increased its energy

bank working with Mexican currency, such as Bancomext.

investments since then. Now, our energy portfolio is worth

Considering its role as a foreign trade bank, Bancomext

MX$24 billion (US$1.2 billion), which is an indicator of the

can also invest in energy projects abroad, as long as they

strong growth the energy sector has experienced lately.

have a certain percentage of local content. In this context,

In comparison with traditional technologies, renewable

local content can be understood as having Mexican capital,

energy projects have had a challenging path. The

investors, EPCs, technology, or suppliers. In this segment,

enactment of the Energy Reform was a temporary setback

we have already financed a 60MW solar park in Honduras

for the sector because it stopped the development of new

with 50 percent Mexican capital, as well as projects in Chile

projects during the time needed to make the regulations

and other Latin American countries. We have identified a

public. Additionally, the regulatory transition discouraged

growing presence for Mexican companies in the sector, a

off-takers from establishing long-term power purchase

positive sign for the industry’s diversification. In the past,

agreements (PPAs) as most companies were waiting

the energy sector was completely dominated by foreign

for a clearer picture. But in 2015 we started to see an

enterprises, particularly from Spain and the US, but now

increasing number of large corporations and major off-

we have a diversified matrix of participant companies,

takers signing new PPAs, which impacted positively on the

including players from Mexico, Germany, China, Japan and

sector’s growth, even though it was not as strong as we

the Netherlands. Due to a lack of human resources, SMEs

expected. In early 2016, the results of the first electricity

are the only type of company that we are not targeting

tender surprised many, including us, contributing to the

individually but we can work with them through a group

increased interest in the sector. The major surprise was

portfolio scheme. So far, project finance continues to be

the amount of megawatt-hours awarded to solar energy

the most used strategy in the energy sector. It consists of

projects, which raised expectations about Mexico’s solar

isolating the project, building a financial structure around

potential. Compared with last year, our energy investment

the project’s revenues and physical assets. Generally,

portfolio has grown 64 percent, which is an indicator of

project finance is complemented by a corporate loan or

the momentum the energy sector is experiencing.

public works scheme.

Q: What is the profile of the companies in Bancomext’s

Q: How will Bancomext adapt its services to fit the future

renewables financing program and what schemes apply?

needs of the sector amid continued growth?

A: Due to the commitment of developing energy

A: In the coming years, we expect to continue our special

infrastructure in Mexico, the federal government has

financing lines for sustainable projects and incorporate

instructed all development banks in the country, including

the group portfolio schemes that we are developing

Banobras and Bancomext, to open special energy

for SMEs. In this way, we could promote distributed

financing lines. We have a large number of international

generation (DG) in addition to the utility-scale projects

companies willing to invest in Mexico due to the country’s

that we already are supporting, further contributing

attractiveness.

to the deployment of clean energy in Mexico. Each

Foreign

entities

tend

to

approach

group portfolio will have 150-200 companies with a Bancomext is a Mexican state-owned development bank that operates

group value defined using an actuarial method. In the

through granting credits and guarantees, either directly or through

close future, we expect group portfolios to gain more

commercial banks.

importance in the industry.


VIEW FROM THE TOP

MULTIPRONGED APPROACH ADVANCES GREEN FINANCING JACQUES ROGOZINSKI Director General of NAFINSA

Q: How does the bank decide where to allocate resources

the construction and operation of 11 wind farms, one mini-

and what is NAFINSA’s strategy in the energy area?

hydro plant, one co-generation plant and one solar farm.

A: The objective of our sustainable projects unit is

Since 2009, our funding of renewable energy projects

to finance national and international companies and

has totaled about US$550 million of the US$5 billion

financial intermediaries from both the private and public

invested overall and a total installed capacity of 1.6GW.

sectors that promote projects in Mexico, oriented toward

These projects are calculated to reduce CO2 emissions

ecological, economic and social development. The unit

by almost 2.9 million tons per year. This portfolio has

focuses on either wind, cogeneration, solar or mini-hydro

been funded with resources from various multilateral and

projects and within each area of focus either on financial

bilateral agencies such as IADB, World Bank and KfW

structuring or credit management and monitoring. It also

Development Bank. Additionally, in October 2015, we

looks at long-term debt for project development, partial

raised US$500 million in an international debt offering

credit guarantees, tailor-made financial structures, credit

of our 3.375 percent green notes due in 2020, which we

offers to cover construction tax payments on projects and

used to refinance eight wind farm projects. Finally, on

potential local currency funding for foreign banks to fund

Aug. 31, 2016, we issued a MX$2 billion seven-year green

their participation in Mexican projects. We have advanced

bond yielding a 6.05 percent coupon as part of NAFINSA’s

our green strategy through four principal initiatives: being

mandate to develop domestic capital markets.

the trustee of the Mexican government’s Climate Change Trust Fund (CCTF), participating in international forums,

Q: Why did NAFINSA launch the first international

providing financing for green projects’ renewable energy,

Mexican green bond?

cogeneration and energy efficiency and promoting

A: NAFINSA wanted to achieve two objectives. The

technical assistance and training to financial institutions

first and most important was to raise enough resources

and micro, small and medium enterprises (MSMEs) on the

to fund our increasing renewable energy portfolio, and

importance of efficient technology and the efficient use of

second, return to the international debt markets after 18

energy for economic and environmental benefits.

years of absence. These objectives are aligned with the commitment of Mexico to being active in the development

Q: What role does NAFINSA play in the development of

of climate change-related financial instruments and

utility-scale energy projects?

the transition to a low-carbon economy. Mexico plays

A: In 2009, our sustainable projects unit was created to

an important role on different environmental issues,

participate in the financing of environmentally friendly

including climate change and the use of renewable

ventures, with a focus on the strategic development of

energies. Since 2009 with the Climate Change Law,

renewable energy generation and related infrastructure.

Mexico has supported and shown leadership. In March

In 2010, we became the first Mexican bank to provide

2015, we became the first developing country to formally

financing for a wind farm project in Mexico. In recent

submit its 2020 Climate Change Plans to the UN,

years, we have intensified the implementation of our

following the EU, Switzerland and Norway in laying out

green financing strategy, in line with the objectives of the

their commitments to reduce greenhouse gas emissions.

National Development Plan. We developed a program

Also, the Energy Reform promotes investment in clean

for the financing of sustainable projects that promotes

energy technology. Green bonds are one of the most

economic

important vehicles for achieving these goals.

growth,

allowing

companies

to

preserve

Mexico’s natural resources while generating wealth. NAFINSA is a development bank that financially supports small and

As of Sept. 30, 2016, our portfolio of sustainable project

medium companies with the federal government, mostly through

loans reached MX$10.7 billion and included financing for

guarantee programs with commercial banks.

175


INSIGHT

IADB IN STEP WITH MEXICO’S ENERGY AGENDA ARIEL YÉPEZ Energy Division Chief of the Inter-American Development Bank (IADB)

176

Mexico’s national energy plans have helped shape the

Caribbean, we have placed investments ranging from

IADB’s priorities in the country, turning its focus to clean

US$5 million to almost US$1 billion for the rehabilitation of

and energy-efficient technologies with the potential to

hydro generators we are currently financing in Venezuela.”

reduce GHG emissions. “The IADB follows the country’s agenda to decide on which sectors it should focus. We

Yépez says the core of the bank’s energy division in

aim to have an integral portfolio supporting the country’s

Latin America is the support given for renewable energy

development goals. We are highly respectful of the

development, with a strong focus on PV solar, wind and

national agenda,” says Ariel Yépez, Energy Division Chief

geothermal power plants. “There is great potential to

at the bank. “The implementation of the Energy Reform

develop these technologies in Mexico and we are already

has shifted the bank’s focus to the energy sector, not

seeing important advances in the diversification of the

because it is more attractive to us but because it is key for

country’s energy matrix through the adoption of new

the Mexican government.”

energy sources.”

The IADB has set the ambitious goal of doubling climate

“The liberalization of the energy market has opened new

finance to 30 percent of approvals by 2020, an average

windows of opportunity to invest in energy projects in the

of US$4 billion annually destined for mitigation and

private sector and it has also boosted the bank’s interest

adaptation initiatives in Latin America and the Caribbean,

in investing in renewable technologies. The Energy

according to a joint 2016 report published by the bank and

Transition Law is one of the Reform’s policy tools that is

six other multilateral institutions. IADB has granted around

driving renewable energy growth in Mexico, also providing

US$94.9 million in loans directly to the Mexican energy

incentives to multilateral banks such as the IADB to

sector and over US$311 million indirectly through financial

invest,” he adds.

markets. This complements the 50 energy operations the bank has in over 20 countries of Latin America and

IADB is no stranger to financing renewable energies in

the Caribbean, altogether valued at over US$4 billion,

Mexico. In 2011, the bank approved a US$70 million loan to

according to its website.

local development bank NAFINSA, coming from the Clean Technology Fund it administers. The financial resources were

The bank’s sectorial framework for the Mexican energy

intended to be used over a 20-year period to co-finance

industry is currently based on three pillars: universal

the construction of renewable energy projects, support

access to electricity and clean cooking fuels, renewable

the projects’ life financing and fund contingency lines in

energies and energy efficiency. “In all cases, the bank

these kinds of projects. The multilateral institution was also

supports Mexico’s energy development by providing direct

involved in the creation of a program to mitigate the risks

loans to the government to implement energy projects or

associated with the exploration phase of geothermal energy

initiatives through public institutions or third parties, or by

sources, one of the main barriers to developing the country’s

financing local development banks that are supporting the

high geothermal potential. The bank provided US$54.3

country’s energy agenda,” says Yépez.

million of the US$120.1 million required for the program in 2014, expected to support the construction of 300MW in

“Mexico’s scale calls for large investments. In our

geothermal energy capacity during a six-year period. The

electricity access and clean cooking fuels agenda the

Washington, DC-based institution has also provided direct

investment required to implement a social policy program

financing to project developers willing to build renewable

is not lower than US$300 million. In the case of renewable

and cogeneration power plants in Mexico. Its support was

energy projects, the investment required is dependent

particularly crucial in the early stages of wind development in

on the project’s characteristics. In Latin America and the

the southern state of Oaxaca by making long-term financing


IADB has 640 projects completed in Mexico

schemes available in the country. The bank continues to be key in mobilizing resources for the construction of clean power plants in Mexico. IADB has also collaborated closely with NAFINSA regarding energy-efficiency programs. “Supporting the adoption of clean-energy technologies in the industry is one of our flagship projects in Mexico. We provide financing to NAFINSA, which in turn provides loans to SMEs willing to implement modern and efficient technologies in their facilities,” Yépez says. Another important contribution in the energy-efficiency arena was the US$125 million mobilized by the bank in 2015 for financing projects using green bonds issued in the local capital markets. The program looks to eliminate

US$406.4 million

Invested in Mexico in the past five years RENEWABLE ENERGY EMPLOYMENT BY TECHNOLOGY LOANS BY SECTOR (US$ MILLION) (MILES)

Private Firms & SME Development Urban Development & Housing

companies (ESCOs) to develop energy-efficient projects up to 5MW, mostly used to optimize energy consumption in Mexican industrial plants. Financial viability and the

Energy Agriculture & Rural Development Environmental & Natural Disasters Health

potential impact on the country’s development agenda

Education

are two of the crucial factors the bank considers before

Reform/Modernization of the State

investing in a particular project. In addition, the project’s

Water & Sanitation

sustainability and its positive impact on local communities

Social Investment

have also become decisive factors closely monitored by

Financial Markets

the bank’s officials.

0

“We have implemented tools to ensure that all the projects financed by the bank are sustainable from an integral perspective, including environmental, social

177

Transport

the financial barrier faced by Mexican energy-services

0.5

1.0

1.5

ENERGY PROJECTS DIRECTLY FINANCED BY IADB IN MEXICO

and economic aspects. The added value of having a development bank involved in the project financing process is precisely the attention given to its positive impact at local and national levels. We are careful to support only projects that have more positive than negative impacts on the selected location, ensuring that

companies

fairly

compensate

affected

local

communities,” he says.

Eurus Wind Farm

Private Portfolio of 2,000

(250.5 MW)

Small-Scale PV Projects

25,000 LED Street Lights in

Energy Efficiency Green

Ensenada Baja California

Bond Facility

La Ventosa Wind Farm

Risk Mitigation Program for

The bank also recognizes the private sector’s interest in investing in Mexico’s energy sector. “We see great interest from international companies to invest in power generation, not only for selling energy to CFE but to grab opportunities with private off-takers,” Yépez says. For 2017, Yépez says the bank will continue to support the Mexican government’s energy agenda. “We want to have a comprehensive strategy of initiatives and programs that could be implemented to reduce Mexico’s energy intensity. We are also in talks with private companies in the electricity and natural gas sectors to see what the best ways are to support private-driven projects with the highest potential to contribute to Mexico’s development agenda.”

(67.5MW) Source: IADB

Geothermal Energy

2.0


VIEW FROM THE TOP

GREEN BONDS AN UNSTOPPABLE TREND EDUARDO PIQUERO Director of MÉXICO2

Q: What is driving the demand for green bonds in the

That study does not consider the resources needed for clean

private sector at the global and local levels?

transportation or climate change adaptation policies so, in

A: Green bonds provide a distinct approach to investment.

reality, it is a modest sum as well. We believe the market

Climate change has forced institutional investors to consider

potential is larger, considering the different needs and the

the associated risks when making an investment. These

investors present in Mexico.

bonds have become a tool to guarantee that proceeds issued by corporate investors or governments are directed

Q: What advantages do green bonds offer in comparison

into the climate economy, meaning mitigation or adaptation

with regular bonds?

projects.

A: Renewable energy assets tend to incur higher interest rates than regular assets due to the banks’ lack of

The main factor driving demand for green bonds is

understanding of these technologies. Therefore, green

diversification. There is greater risk associated with having

bonds will likely be used first for project refinancing. When

oil and gas-based portfolios, so diversification through green

companies refinance their assets through green bonds, they

assets has become a priority for global investors. According

can get lower interest rates, which is a major advantage

to the Climate Bonds Initiative (CBI), green bonds will be

for issuers. Green bonds are usually oversubscribed

selected first between two bonds with similar yield and risk

because investors are highly interested in going green and

evaluation because they can provide the same profit with

diversifying their portfolios, which effectively translates to

the advantage of helping the environment. We witnessed

a bigger pool of investors. This was the case for NAFINSA.

that trend when Mexican development bank NAFINSA

The successful results achieved by NAFINSA’s green bonds

issued the country’s first green bond in the US market in

made us positive about the launching of Mexico’s green

2015. The bond was five times oversubscribed and garnered

bond market as over 40 percent of the bonds were acquired

a lot of attention from foreign investors, mainly European,

by Mexican investors even though they were issued in the

which had not considered NAFINSA for investment before.

US. The rest were taken by foreign investors, including a large percentage of European companies. Through these

Q: What requirements make bonds “green”?

bonds, NAFINSA managed to expand its investor base,

A: Every asset related to a green project can be financed

which is a desirable outcome for any issuer.

through green bonds. The “green” label has been misused in the past as a marketing strategy, diminishing the public’s trust

Q: What types of investors do you expect will participate in

in the actual sustainability of green assets. The main factor

the country’s green bonds market?

to consider is a third-party assessment or a certification

A: The main drivers will be development banks at first,

ensuring the bond will be directed to green projects such as

followed by the government. Later, we expect to see

renewable energy, energy efficiency, clean transportation or

mostly institutional investors, like pension funds (AFOREs),

sustainable infrastructure. We are working on a certification

insurance

process backed by a third party for all green bonds issued

funds. Insurance companies in particular will represent an

by companies or banks in the stock market.

important pool of investment as they are willing to diversify

companies

and

some

private

investment

their portfolios out of brown assets. Corporate green bonds Q: CBI’s goal is to issue over US$2 billion in green bonds.

would be the final stage of the green bond market and will

How ambitious is this compared with other economies?

take longer to develop but it is an unstoppable trend.

A: US$2 billion is not ambitious. It is actually the minimum requirement Mexico should be considering. An independent

MÉXICO2 is a platform designed specifically to promote environmentally-

study by PwC calculated that Mexico needs a US$5 billion

concious financial instruments in the country, such as Green Bonds, and

annual investment to comply with its clean energy targets.

also to help companies structure financial options.

179


VIEW FROM THE TOP

FULL REFORM BENEFITS TO MATERIALIZE IN COMING YEARS ALFREDO SANTILLÁN Chief Representative of SMBC Mexico

180

Q: How will the Energy Reform impact Mexico’s growth

A: We see a big opportunity in infrastructure and energy.

and that of the energy sector?

Specifically in energy, during the first electricity auction

A: The reform will be very important for Mexico’s

the government invited international companies to

development and growth. It had been necessary for

present bids and we saw a great deal of interest. Over 100

over 20 years. It is also important to understand the

companies entered into the prequalification process and

complexity of its implementation. The Energy Reform

69 were approved, submitting some 227 offers. Finally, 18

required constitutional changes and the creation of

offers were assigned to 11 companies. For the first auction

many secondary laws and regulatory institutions. We

SMBC submitted around 20 indicative term sheets to

will see the full benefits in the years to come.

interested companies, indicating how the bank would be willing to finance projects. The awarded projects

To date, one-third of the power produced in Mexico

represent 2.1GW of additional capacity and an investment

comes from private IPPs that sell energy to CFE under

of US$2.6 billion, although around 50 percent of the

long-term PPAs. Mexico has around 68GW capacity and

energy auctioned was awarded to Enel Green Power and

the long-term plan is to have around 110GW by 2030.

ACCIONA Energía, which normally do not require project

This increase considers the full implementation of the

financing. There is still a large amount that will require

Energy Reform.

financing from development and commercial banks.

Q: What are the key areas of participation for SMBC in

In the second auction, 23 companies presented 56

the energy industry?

proposals and 18 companies got their projects awarded.

A: Over the last few years SMBC has been actively

The investment expected in the second auction is about

financing projects in different sectors in Mexico. Our

US$4 billion and the majority of the projects will require

participation in the energy industry involves mainly

project financing. We submitted indicative term sheets

advisory, structuring and financing of projects through

to most of the bidders for the second electricity auction.

various plans. We are the second-largest bank in Japan by market capitalization and our presence spans

Q: What are the most common financing structures

approximately 45 countries. The bank has extensive

used in Mexico and how does the bank mitigate risk?

experience in project finance all over the world and we

A: There are several structures that can be used for

leverage this expertise when we participate in energy

these projects but the most common so far are long-

projects here.

term project financing, dual tranche structures with long-term

lending

from

development

banks

and

SMBC has been named global bank of the year for project

medium-term lending from commercial banks along

finance in recent years, not only for the number of deals

with maxi-perm/mini-perm structures that incorporate

closed but also for their complexity and innovation. In

a refinancing risk.

Mexico we have been one of the most active banks in this area, working closely with development lenders

Risks are mitigated with proper due diligence and

such as Banobras, NAFINSA and Bancomext, as well as

sound financing structures. We also retain independent

commercial banks that are active here. SMBC recognizes

engineers to assess and verify independently the

the opportunity the Energy Reform presents and will

technical specifications of a project and its feasibility to

continue to support energy projects resulting from it.

achieve the desired power-generation output. Extensive studies on the potential locations are also required to

Q: Where do you see the greatest opportunities for

minimize any social risk. Also, reputable and well-known

financing in Mexico?

law firms are needed to structure the projects and the


financing mechanisms required. For a project to succeed

In the past, transmission projects were tendered to private

there has to be a high level of confidence in the sponsors

companies through public works contracts (turn-key

because project finance involves a high construction

projects), where the companies were responsible for the

risk, which can be reduced by the experience of the

financing and construction and then the projects were paid

company developing similar projects.

by CFE at completion (in a lump-sum payment). With the Energy Reform CFE is looking to tender large transmission-

Q: How does the bank’s international experience come

line projects for over US$1 billion under a new Build-

into play when dealing with risk?

Operate-Transfer (BOT) scheme, with a 25-year contract.

A: The risks involved in financing these projects resulting

Mexico is offering great opportunities for investment.

from the Energy Reform are similar to other projects we have financed in other latitudes where electricity markets have opened. In Chile we were one of the first banks to finance projects when the electricity market opened, financing US$366 million for a wind farm project called San Juan, with a capacity of 185MW. We are bringing this expertise to our projects in Mexico.

181

We always have to conduct a proper analysis and due diligence to develop financial structures that adequately mitigate identified risks. In Mexico, SMBC has been quite active in the power sector, financing several projects under the IPP scheme and we have a mandate to finance renewable projects that were awarded during the electricity auctions. The opening of the electricity market has followed best practices from other markets that have experienced similar processes over the last few years such as Chile.

Sumitomo Mitsui Banking Corporation reopened its representative office in Mexico in March 2009 to foster client relationships and offer comprehensive financial solutions

SMBC is also part of the infrastructure committee of the Mexican Banking Association (ABM), which

Q: What are SMBC’s ambitions in the power sector?

has allowed us to discuss and analyze in great detail

A: We are looking to maintain an active participation

financing alternatives to participate in the opening of

in Mexico, trying to enter projects in their early stages

the electricity market. With Mexico’s need to increase

of development and acting as financial advisers where

its megawatt capacity around 61 percent over the next

appropriate. We also seek to collaborate with other

few years, there will be significant demand for project

financial institutions, since energy projects require large

finance, not only for power projects but also to develop

investments and different funding sources. SMBC has

and strengthen the natural gas pipeline system to supply

the advantage of being recognized worldwide as one

fuel for some of the plants expected to be built. SMBC

of the top project finance banks and we can really bring

has successfully participated in most of the pipeline

value to all participants in the market in Mexico. We

projects in Mexico and the US (with CFE off-taker risk)

need to be vigilant over the market’s evolution but we

during the last few years.

trust SMBC’s role will remain highly significant.

Q: What investment opportunities do you see in

In Mexico there are few banks as active as SMBC in financing

transmission and distribution?

projects because not everyone understands the market or is

A: The average growth of Mexico’s GDP for the last 10

comfortable with the risks. In the future, however, we expect

years has been around 2.5 percent but the growth rate

to see a combination of commercial and development

of the electricity market as a percentage of GDP over

banks and export trading agencies supporting energy

the same period is around 5 percent. The power industry

projects here. We also believe the capital market will play a

represents 1.8 percent of GDP, which makes it extremely

financing role under the Energy Reform.

important for the country’s economic development. All the northern and central parts of Mexico will continue

Sumitomo Mitsui Banking Corporation (SMBC) was established in April

to see this industry growth but to succeed there has to

2001 through the merger of two leading banks: The Sakura Bank, Limited,

be a coordinated effort from all segments of the sector.

and The Sumitomo Bank, Limited. SMBC and its group companies offer

Everything has to go hand in hand.

a broad range of financial services centered on banking.


INSIGHT

TIES THAT BIND: REFORM REIGNITES JAPAN INTEREST TAKESHI TADA Chief Representative of the Mexico City’s Office of Japan Bank for International Cooperation (JBIC)

The friendly ties between Japan and Mexico date back

Co. Power Americas, now the second largest operator of

to 1888 when the countries signed the Treaty of Amity,

power generation assets in the country.

Commerce and Navigation, the first equal treaty Japan signed with a non-Asian country. The economic and cultural

“We provide overseas investment loans in these cases,

relations between the two have become stronger over the

supporting the overseas operations of Japanese firms as well

years leading to positive collaborations in different sectors,

as the establishment of merger & acquisition (M&A) deals

including energy. Takeshi Tada, Chief Representative of

with foreign companies. This type of loan is very common

the Mexico City’s Office of Japan Bank for International

in the automotive sector but is also used in the energy

Cooperation (JBIC), says Japan continues to play a role in

industry. Moreover, we offer special conditions in the case

the construction of Mexico’s energy infrastructure through

of energy-related projects, such as lower interest rates and

its development bank, financially supporting Japanese

longer repayment periods with the purpose of increasing the

companies to export power technologies to Mexico and

competitiveness of Japanese companies in this sector.”

investing in the construction of landmark projects in the national power system. “We have been supporting

He goes on to describe an overseas investment loan used

Japanese investment across different economic sectors

to build the Electricidad Sol de Tuxpan project, a joint

in Mexico, with energy being one of our strategic

venture between Japan’s Mitsubishi Corporation and

segments,” he says. “In the past, we mostly supported

Kyushu Electric Power. The loan was co-financed with

Japanese electric equipment manufacturers willing to

Mizuho Corporate Bank with political risk guarantees also

export their products to Mexico, such as Mitsubishi Heavy

provided by JBIC. “In general, the financial conditions of

Industries, Hitachi and Toshiba. As a result, most of the

an overseas investment loan are better that an export

power generation sector in Mexico was using Japanese

loan, making them the preferred option for Japanese

technology in the 1980s. Now, competition is fiercer but

companies in the energy industry,” Tada says. “We also

Japanese companies continue to hold an important share

provided finance for the Cerro Prieto geothermal power

in this market.”

plant through a build-own-lease transfer scheme, which was also the case of Chihuahua’s gas combined cycle

JBIC also supports Japanese technologies for Mexican

power plant and Cozumel’s subsea transmission line, all of

customers by providing loans to companies willing to

them operated by Mitsubishi Corporation.”

acquire the country’s equipment. “Export loans are one of the most popular services used to support Japanese

Tada says the implementation of the Energy Reform has

companies that want to export their products overseas.

reignited the interest of Japanese energy companies and

Import loans also support Japanese companies indirectly

investors in the Mexican power and oil and gas industries.

by providing funds to borrowers willing to acquire

“The previous regulation limited private participation in the

strategic products from Japan, such as CFE in Mexico. We

energy sector, which was a barrier for Japanese businesses.

issued our first credit line to CFE 50 years ago, consisting

For this reason, Japanese companies were mostly focusing

of a power loan that tightened our relations with the only

on establishing IPP projects in the case of the power sector,

Mexican utility at the time. Since then, JBIC has been

while JBIC’s role in the oil and gas industry consisted

involved in the financing process of several CFE projects,

mostly of providing untied loans to PEMEX. However, these

including the gas combined cycle power plants of Saltillo,

initiatives also served as an entry point for Japan into the

Rio Bravo, Merida, Valladolid, Tuxpan and Chihuahua,”

Mexican energy sector, being the start of a good business

Tada says. Japanese companies have also shown interest

relationship between both countries on energy-related

in investing here since the IPP scheme was introduced

matters. The Energy Reform has opened a new set of

in Mexico in the mid-90s. This was the case for Mitsui &

business opportunities for Japanese investment in Mexico.”

183


VIEW FROM THE TOP

POWER GENERATION BOOSTS INVESTOR INTEREST SALOMON AMKIE Vice President of Power & Alternative Energy at Citibanamex

184

Q: Where do you see the most opportunities to finance

before that. If a sponsor bids aggressively on production

projects in the energy market?

then the risk of underproduction might be higher, making

A: Power generation in Mexico will continue as the subsector

financial institutions rely heavily on the contracted revenues.

with the most opportunities in the coming years. There is

But if the contract has a merchant component then banks

still a need for new, efficient power generation and not only

have to see how large of an impact it might have on the

in renewables, as we have seen in 2016, but also efficient

project’s cash flow. What we are seeing is that this risk is

gas-powered assets and maybe refurbishing of some older

contained and not as relevant as we may have thought,

assets. That will continue to be the greatest opportunity of

which is good for sponsors and means we can increase the

the sector. To a lesser extent, there will be opportunities

debt component in the overall capital structure.

in transmission starting 2017 but power generation will require the majority of financing.

Q: Are you also interested in working with other green financing tools?

Transmission is critical for the country's infrastructure with

A: Absolutely. We have great capabilities in issuing Green

almost half the existing grid being over 20 years old, so

Bonds as we did this year with NAFINSA and the New

while generation is critical in terms of efficiency, a renewed

Mexico City International Airport (NAICM). We are also

power grid is required to actually see its benefits. It is a

looking at supporting distributed generation players, who

massive market. At Citibanamex we have good expertise in

can not only help our commercial and industrial SME clients

financing projects of this sort and it is absolutely something

but also residential users from the private banking sector

that we will focus on.

who could benefit from having distributed generation solutions in their homes.

Natural gas, wind and solar-based power generation are all areas of interest for us. But in general, to decide our

Q: How do you expect Mexico’s energy industry to evolve

participation, we look at the project, the sponsor and the

and what will be Citibanamex’s contribution?

technology needed to make sure it all makes sense.

A: We are very optimistic about the sector in Mexico, we think that it is going to be one of the larger areas of growth

Q: How can a financial institution like Citibanamex help

for the country and as such we want to play aggressively in

create a flexible scheme for energy projects?

the sector. In particular, I think there are two sets of clients

A: CENACE’s PPAs are new and all financial institutions are

that we will look at and where we can add the most value.

still wrapping their heads around the best way to structure

The first are the players who have been in Mexico for some

this financing. At Citibanamex, we are being cautious of

time and know the sector very well, having a strong business

two things, with the first being the quality of the sponsor.

model already ongoing in the country. For this type of client,

Because of the way these auctions are awarded there is little

it is all about thinking strategically about their business

consideration for permits. Companies can win the auction

model. There are going to be huge opportunities in capital

without much permitting in place so a good sponsor with

markets, as well as some refinancing of existing projects.

a track record and proven development skills is critical. The

That is one area where we can definitely participate. The

second is the merchant risk the PPA carries beyond 15 years

other set of players are those that are just entering the

as well as the risk of underproduction for any given year

country. These could be multinational or local players that are developing their businesses here. They need to think

Citibanamex, previously known as Banamex, is a subsidiary of Citigroup

about how to ramp up their business quickly in an evolving

(Citi), an American multinational investment banking and financial

sector, which means project financing or equity structures

services corporation. Citi has about 200 million customer accounts and

that make sense. That is also an area where we can support

is in more than 160 countries.

and contribute.


INSIGHT

UNTAPPED POTENTIAL FOR GREEN BONDS ESTANISLAO DE LA TORRE Chief Operations Officer of HSBC Mexico

Mexico seems to transform every green opportunity into

also are sponsors and supporters of the Climate Bonds

gold. Its first global green bond, valued at US$500 million

Initiative, an organization aimed at mobilizing the global

and issued in late 2015, was five times oversubscribed. The

bond market for climate change solutions,” he adds.

first green bond issued in Mexican pesos also attracted a

185

lot of attention, with the total offering of seven-year notes

Regarding its regional operations de la Torre says that

for MX$2 billion sold in the local market. Both were issued

“our strategy in the Americas focuses on four key

by NAFINSA, Mexico’s development bank, to finance clean

themes: renewable energy,  sustainable buildings,  smart

energy projects here.

cities and  sustainable supply chains. The opportunities that are presented when we approach bonds, loans,

The country’s latest venture into the green bond market

securitizations and other corporate financing solutions

was its US$2 billion issuance to finance part of Mexico

from a low-carbon climate-friendly perspective are vast.

City’s new airport. The green bond was issued by Grupo

It helps to grow our business sustainably, in a way that

Aeroportuario de la Ciudad de México (GACM), a state-

serves both our clients and our communities.”

owned company, while the sale was coordinated by Citigroup, JP Morgan and HSBC, a bank with strong

Investors also want in. “Two thirds of institutional investors

expertise in the global green bonds market.

want to put more capital into low-carbon and climaterelated investments. HSBC advises large organizations

“As one of the top three global underwriters of green bonds

such

in 2015, we are really pushing for the overall development

renewables and clean technology. Here, we share their

as

multinational

companies

on

investing

in

of the market,” says Estanislao de la Torre, Chief Operations

views on the rising profile of green investment and on

Officer of HSBC Mexico. “Last year, for example, HSBC

some of the trends reshaping the low-carbon sector,” he

helped the International Finance Corporation (IFC) issue

adds. To facilitate the connection between green investors

the world’s first renminbi green bond. To date,  we have

and projects, de la Torre mentions two main areas of

committed to investing US$1 billion in green bonds and

opportunity. “Firstly, green investment opportunities,

to contribute to various multi-stakeholder initiatives

such as investments in energy efficiency, are often

including the ICMA Green Bond Principles, FSB Taskforce

small scale and can be very fragmented. A mechanism

on Climate Related Financial Disclosures and the Carbon

to aggregate green projects would make it easier to do

Pricing Leadership Coalition.”

more business efficiently. Another challenge is making the business case for green bonds clearer. Policy incentives

According to de la Torre, HSBC has been taking steps

that create even a relatively small change in the price of

with other financial institutions to push the development

green investments can drive investors and CFOs to pay

of green bond markets, which could be replicated and

more attention to green finance, rather than conventional

built upon, to grow and support a market for sustainable

bonds,” he says. “By building understanding and expertise

financing. These initiatives include the launching of

on low carbon technologies, and by arranging the finance

HSBC’s Climate Change Center of Excellence in 2007 and

that will help bring these technologies to market at scale,

its participation in a consortium with other banks and

HSBC, and the businesses and investors who are our

institutions that introduced the Green Bond Principles,

clients and customers or stakeholders, are supporting a

a framework for the issuance of bonds whose proceeds

low carbon future.”

support environmentally sustainable activities. “In 2015 we also issued our own EUR$500 million green bond,

Renewable energy has come a long way in a relatively

which has been used to finance wind, solar, smart grid

short time and de la Torre says it is here to stay, even if the

and sustainable waste projects in Europe and Africa. We

exact details remain unclear.


VIEW FROM THE TOP

RATE HIKE PROSPECTS KEEP INVESTORS CAUTIOUS HÉCTOR PÉREZ Managing Director & Head Corporate Banking & Capital Markets of Scotiabank Mexico

186

Q: How have the interest rates in Mexico impacted the

trajectory of other global economies that have already

infrastructure markets?

experienced this transition, Mexico is in a strong position.

A: We are seeing a lot of activity in electricity and

The electricity system is not subject to international

electricity-derived subsectors like pipelines importing

prices so more activity has been seen here. All the large

gas from the US to supply CFE’s electricity production.

infrastructure players are trying to win pipeline tenders

Interest rates are still relatively attractive and to some

and electricity plant contracts so CFE has done well in

extent the global volatility and the potential rate

attracting investment in its infrastructure.

increase in the US have caused local investors to be more prudent in buying debt locally. When examining

Q: What challenges have you found in Mexico’s financial

the debt capital markets, local issuance of debt this year

sector?

has seen a 50 percent drop compared to the first half

A: More than challenges we have found a tremendous

of last year. This is not caused by liquidity issues but

opportunity, especially given the lack of growth among

because investors are cautious in the face of possible

global economies. Mexico stands out as a destination

rate hikes. Issuance in emerging markets is starting to

where growth can be found. Every industry has its

regain its pace because of negative yields around the

challenges so the key is to focus on the areas with the

world due to low interest rates. Global investors are

greatest opportunities to offset this. There is a great deal

looking at emerging markets again.

of foreign investment entering Mexico and major global multinationals are investing here, especially in areas like

When examining the debt capital markets, local issuance of debt saw a 50 percent drop in 2016 compared to the first half of 2015

infrastructure, oil and gas and electricity, manufacturing and

automotive,

which

present

considerable

opportunities. We not only work locally with clients in Mexico but we work on a global scale with these major companies. We are also consistently bringing in foreign investors to meet with the Mexican central bank, the Ministry of Finance and other relevant authorities to showcase the attractiveness of investing in Mexico. Q: What is Scotiabank’s strategy to boost its presence in the Mexican market?

Q: How do you evaluate the effectiveness of the current

A: The franchise has been growing in Mexico in the last

regulatory framework?

two years as a result of the importance placed by the

A: I think in general, the implementation of the

group and the CEO on the Latin American strategy.

electricity reforms should be separated from the oil

This focuses on the Pacific Alliance countries of Mexico,

and gas reforms because the contexts in each market

Colombia, Peru and Chile and these countries are where

have changed drastically since the implementation.

our growth strategy is centered at the moment. Under

We should also remember that the reforms were only

that strategy, Mexico is the most important country and

implemented two years ago and, when compared to the

we are investing resources in all our business lines as well as in technology where we are changing completely

Scotiabank Mexico, part of the Canadian group The Bank of Nova

our core technological and operational platform. Our

Scotia, is one of the country’s 10 largest banks with over 4.5 percent

market share has already gone from 4.5 percent to

of the total assets in the system and close to 6 percent of the credit

around 5.5 percent in the last two years, which is a

portfolio.

considerable organic gain.


PROJECT SPOTLIGHT

LOS SANTOS I SOLAR PV PLANT Los Santos I is the first utility-scale solar park in Mexico

with the land owners in June 2014, including the permits

to secure a long-term PPA with private off-takers. The

to interconnect to the project’s transmission line. Prior

13.5MW project, located in the northern state of Chihuahua,

to signing the loan agreement, the project also had its

is expected to generate enough power to supply the

Environmental Impact Assessment (MIA) approved by

equivalent of almost 6,000 homes while also offsetting

SEMARNAT, received generation permits from CRE and the

carbon emissions.

land’s release from the National Institute of Anthropology and History (INAH). This legal headway also contributed

Texas-based

Buenavista

Renewables

developed

the

to the attractiveness of the investment.

project. The installation of the 52,000 polycrystalline PV modules from AstroEnergy was handled by IMASA

After evaluating Buenavista Renewables’ proposal, the

Ingeniería y Proyectos México, using single-axis tracking

banks concluded that the estimated revenues were

systems from NEXTracker and electrical equipment from

enough to cover the project’s O&M costs, pay senior debt

Chint and Schneider Electric. The project also required a

and interest on debt reserves while complying with the

switchyard to connect Los Santos I to CFE’s Moctezuma

debt coverage ratio. NADB rated the investment a low risk

substation.

thanks to the experience of the companies involved and

187

the strong project proposal in terms of technical feasibility, Buenavista Renewables designed the project’s financial

repayment vehicle and advanced bureaucratic processes.

model and secured agreements with La Salle and Leoni Cable, the off-takers. Also involved in the financing was the North American Development Bank (NADB) and the

LOS SANTOS I FINANCIAL STRUCTURE

Overseas Private Investment Corporation (OPIC), direct lenders to the project. Buenavista signed a US$18.5 million loan agreement with NADB in August 2015. OPIC contributed US$15.5 million in the form of senior debt while Buenavista Renewables’ US$6 million equity stake made up the remaining funding. The cost of the project totaled US$40 million. The correct estimation of power production was crucial

Buenavista

North American

Renewables

Development Bank

Overseas Private Investments

(Equity

(Market-rate loan

Corporation (Senior

US$6 million)

US$18.5 million)

debt US$15.5 million)

for securing financing because electricity sales were established as the company’s vehicle for repaying its debts. According to NADB’s documents, an independent evaluation performed by a third party estimated the project would produce 40.1GWh during its first year of operation, which was consistent with revenue estimations. That output can power 5,838 houses and has the potential for offsetting 16,509 tons of CO2 per year.

13.5MW

Having trustworthy off-takers and a sound PPA was also crucial for closing the deal. Buenavista Renewables signed

20-Year PPA

a 20-year PPA that was in line with the 18-year repayment

Debt Repayment

period established by the banks and the project’s 25-year estimated life span. The PPA was based in dollars to avoid currency risks. Leoni Cable, which will purchase most of the project’s power production, is a leading manufacturer of cables for the automotive industry, a sector expected to grow substantially in Mexico. La Salle Educational Network

Leoni Cable

Los Santos I started operations in April 2016 and was built on private property, easing the land rights acquisition process. The company established a leasing contract

Company Investor

Financial Backers

Source: MBP with information from Buenavista Renewables

Off-takers


VIEW FROM THE TOP

NEW DYNAMICS IMPACT PROJECT FINANCE JOSÉ SIFUENTES Partner at Nader, Hayaux & Goebel (NHG)

188

Q: What are the main changes in your client portfolio

institution, power suppliers often offer collateral that a

since the Energy Reform?

bank can collect in case of default. In a PPA it is necessary

A: We worked on many energy projects before the Energy

to make clear what each individual party is getting. It is

Reform but after this structural reform was approved we

also necessary to determine a taker-pay, which is what

decided to open an entire area fully dedicated to oil and

happens in case of certain events such as blackouts

gas and power generation. We have invested significant

where off-takers have to take the power under certain

time and money in this area and it is now one of the firm’s

conditions. Furthermore, all PPAs have an exit provision.

main divisions. Before the reform we used to work mostly

Banks prefer these conditions to be strict for off-takers.

with banks interested in financing energy projects but

These conditions cannot be flexible because it would be

now we have more energy companies coming for financial

undesirable for a power generator to find itself without a

support to launch their projects. Project developers used

buyer while it receives financing, forcing it to find another

to work by themselves in the past, looking for a buyer

under pressure and thus at a lower sale price. This would

after their projects were completed. This has changed.

place the bank in an unfavorable position.

Our clients now are increasingly interested in closing financing deals with off-takers before moving on with their

Q: What would you say is the biggest change the Reform

projects. In projects where our clients already have an off-

needs to facilitate operations?

taker, we support them in the structuring of their PPAs.

A: The current requirements are too cumbersome

The situation is highly different when the contracts are

and often redundant. Energy regulations need to be

done with a private or public off-taker. When the off-taker

greatly simplified. There are also other areas that need

is a government institution, companies are sometimes

to be addressed, for instance, fostering investment in

concerned with the payment scheme because there are

infrastructure for the transport of natural gas to supply

often complex requirements for companies to supply

existent and new combined cycle power plants. Once this

the public sector. For instance, some require approval

infrastructure is in place it will be necessary to get more

from the local congress. More often, energy companies

gas to flow through it.

require certain assurances before entering a long-term agreement with any local government, such as collateral.

Q: Do you expect to see a larger number of M&As in the

It is, however, not an industry standard for the government

sector?

to agree to collateral under these circumstances. Energy

A: We have seen a large number of M&As in the oil and

producers also need to have clear expectations of what

gas sector and we recently participated in PEMEX’s sale

they are going to get from such a contract.

of Gasoductos de Chihuahua to IEnova. But we do not expect many M&A for the energy sector with the exception

Q: What are the main concerns that financial institutions

of those involving large participants. I do not believe the

have when sponsoring PPAs?

industry is interested in that. What we expect are more

A: The duration for the financing has to be consistent

sales of public infrastructure to the private sector.

with the PPA’s life span. It is not possible to have a PPA that is shorter than the financing period because no bank

Q: What will be at the core of your agenda for 2017?

would accept that deal. To obtain support from a financial

A: We want to help power producers to participate in tenders. When participants bid in government tenders

Nader, Hayaux & Goebel (NHG) is a market leader in M&A, banking

they often do not have the infrastructure ready to operate.

and finance, securities and capital markets, It works in insurance and

We want to support them through the entire process of

reinsurance, real estate, energy, infrastructure and telecommunications,

bidding, winning the tender and building the necessary

among others.

infrastructure to comply with their obligations.


VIEW FROM THE TOP

LONG-TERM FINANCING NEEDED TO INCREASE CAPACITY CARLOS ALBARRACĂ?N Partner at Milbank

Q: How has Milbank adapted its offering due to the

cannot be stored, so companies need longer financing

market changes taking place in Mexico?

plans. To reduce financing costs, the main challenge is for

A: Our knowledge of and expertise in the energy industry

companies to negotiate a bankable off-take contract that

and the new regulations have created new opportunities

allows them to properly address their financing needs. The

for us in Mexico. The first change we saw after the Energy

other challenge is storage capacity for renewable energy

Reform was an increase in the number of new oil and gas

projects, but that is an issue across the industry.

projects and investment opportunities. Before the Energy Reform, there were one or two pipeline projects every year

Q: What opportunities and risks does Milbank see in

whereas now there are five or six tenders per new project

investing in transmission and distribution infrastructure?

in a single year. CFE’s restructuring is also positively

A: When CFE became a private utility company, it

welcomed by the market because it is likely to create

opened a new opportunity for equity and debt investors.

more opportunities to invest in and finance a whole host of

Transmission and distribution projects are particularly

power projects ranging from traditional power generation

attractive for fixed-income investors as they usually

projects to distribution and transmission projects.

have stable and predictable cash flows linked to the US dollar exchange rate or changes in the US producer price

Capital markets have also seen increased activity related

indices. In addition, the regulation of power distribution

to the financing of energy projects. As new projects require

and transmission projects is often more transparent and

more significant investments and a longer repayment

predictable than power generation. If Mexico creates

period, the size of financing has to be larger and the tenure

attractive conditions for new investment in its power

longer to more closely match the cash flow generation of

market through reform and by opening up to competition

the project with the repayment of the debt. Banks have to

from the private sector, it could become as competitive

comply with regulatory requirements that make larger and

as Chile, Colombia and other open markets. Previously,

longer-term financing more expensive and challenging.

investors were not interested in CFE because it would

Meanwhile, the advantage capital markets offer is that

mean investing directly in the state, so as an asset class

investors are much more comfortable with longer tenures

CFE was not very different from Pemex or the Estados

and the larger the size of the offering the more liquidity it

Unidos Mexicanos.

potentially offers. Q: What investment trends does Milbank expect for the Q: How can Mexico reduce the added costs for financing

Mexican market in the next two years?

in renewable projects?

A: We believe that in addition to continued investing in and

A: Mexico’s goal is for large energy consumers to source

financing of oil and gas midstream assets, transmission

about 5 percent of their energy needs from renewable

and distribution are the two main areas that will attract

sources by 2018. The challenge for the new regulations

more investment. CFE has focused mostly on generation,

is to raise the minimum consumption quota for large off-

so there is a much greater business opportunity in these

takers. That way, the market creates a captive demand

other two segments. Resources will come provided that the

that forces the country to invest in the necessary

regulations create adequate conditions to facilitate financing

infrastructure. This eventually creates more financing

alternatives, such as transparency in the tariff regime.

alternatives and increases the likelihood of banks and other financial players participating in the financing of

Milbank is a leading international law firm that has helped shape

these projects. Right now, the initial investment costs for

the legal landscape since its founding in New York City in 1866. The

renewable projects are extremely high, particularly for

company has one of the largest and most experienced Renewable

wind power. The resources are not continuous and they

Energy Practices.

189


San Pedro Dome geothermal power plant, Nayarit, Grupo Dragรณn

190


INSIGHT

METHODOLOGY HELPS MONETIZE ENVIRONMENTAL ASSETS BERNARDITA DÍAZ Chief Project Officer of Sustrend

The environmental benefits of investing in clean and

the disposal of useful materials in urban landfills and

efficient energy technologies are known to industry

uses 50 percent less energy than producing a new tire,

players but the economic benefits are not always crystal

therefore reducing carbon emissions and waste. “We

clear. The potential reduction in energy costs from these

adapted the CDM methodology of plastic recycling to

technologies is often seen as the only economic benefit

the retreading process with the objective of recording its

but there are other ways in which companies can capitalize.

environmental impact reduction, allowing us to translate

They only need to follow the correct protocols, according

it into financial assets. Now, we are in the process of

to Sustrend, a Chilean environmental consultancy.

certifying our guidelines in Japan since it is impossible to monetize environmental assets and participate in

The firm saw a business opportunity in helping companies

voluntary carbon markets without a certification by a

capitalize on their environmental assets, which are all those

recognized international entity,” explains Díaz.

investments and properties with the potential to decrease a company’s environmental impact while contributing to the

To determine the number of assets that can participate in

further adoption of sustainable processes and technologies.

these programs, Sustrend makes use of the International Financing Reporting Standards (IFRS), which are a

“Our company can evaluate these environmental assets and

standardized way to describe the financial performance of

monetize them through already established guidelines, or

an entity and which enjoys broad international acceptance.

design a specific methodology according to international

“IFRS is a useful tool for Latin American countries willing

standards,” says Bernardita Díaz, Chief Project Officer

to optimize their processes and make them transparent.

of Sustrend. “The UN has developed a wide range of

IFRS requires players to declare their environmental

technical methodologies to account for environmental

assets and allows companies to obtain preferential interest

emissions

rates from international banks that are in line with OECD

reductions. For those processes that are not on the UN

standards, such as KfW or HSBC. These usually provide

list, a new methodology must be designed, adapting the

rates to sustainable projects that are 2 percent lower than

guidelines already established for a similar activity. Other

for projects with a negative environmental impact. The

methodologies can be found in international voluntary

final rates, however, depend on the sector and the policies

carbon markets, such as the Carbon Trade Exchange (CTX),

of the bank,” she says.

assets in different sectors, including CO2

and most are based on the Clean Development Mechanism (CDM), which is a mandatory requirement for becoming a

All industrial processes involving recycling or revaluation

recognized market. We also use these methodologies to

of materials are candidates to participate in programs

monetize our clients’ environmental assets.”

for the monetization of environmental assets. Sustrend also looks to point companies implementing energy-

Díaz see an important opportunity for Mexican companies

efficiency

to monetize environmental assets through the carbon

creating a methodology, allowing them to monetize their

tax, a mechanism that was introduced to Mexico in 2014

environmental impact reductions. Renewable energy

with an initial price of US$5 per ton of CO2e. But to get

projects, for instance, produce environmental assets,

access to these resources, companies need to record their

a fact that is usually ignored by project developers

emissions reductions through a certified methodology,

and investors. “Our goal is to show renewable energy

such as those developed by the CDM.

companies that including environmental assets in their

programs

or

new

technologies

toward

financial status can represent different economic benefits, Sustrend’s first successful project was for the Chilean tire

such as a reduction in the interest rates offered by

industry, specifically retreading, a process that prevents

international banks,” Díaz says.

191


Building the foundations of Parque Eรณlico de Coahuila, Coahuila, CODISA CORP Energy


PROJECT DEVELOPMENT

8

Is it a new natural gas pipeline, a utility-scale solar development in Sonora or new wind power opportunities in windy Tehuantepec Isthmus? Does it need rightof-way permits across state lines? As the growing need for energy becomes a reality in Mexico’s heavily industrially oriented economy, the companies that build, design and operate energy solutions are collaborating with large equipment suppliers, engineering experts and consumers to better harness the possibilities offered by the liberalized industry and put shovels to the ground all over the country.

Lingering concerns about regulations regarding environmental and social impact assessments are discussed in this chapter, as well as the complex issue of the ejido communal land legal regime that brings unique challenges to developers and their advisers in Mexico. Also featured are the companies that offer infrastructure solutions, from temporary housing to vital project insurance, and those which offer consultancy services to navigate the still new legal environment of the country.

193


CHAPTER 8: PROJECT DEVELOPMENT 196

ANALYSIS: Infrastructure Opportunities Finally Unfold

197

INSIGHT: Vicente Tamés, Duro Felguera

198

VIEW FROM THE TOP: Alicia Barnetche, Kepler Constructora

199

VIEW FROM THE TOP: André Bosman, Wärtsilä

200

PROJECT SPOTLIGHT: Huinala FlexycicleTM Power Plant

202

VIEW FROM THE TOP: Giacomo Bonfanti, GDI

203

PROFILE: Amos Guillén, Global Energy Services Mexico

204

VIEW FROM THE TOP: Ana Horta, CISA Energía

205

PROJECT SPOTLIGHT: Alameda Hydroelectric Power Plant

206

VIEW FROM THE TOP: Sergio Martínez, MASE Energy

207

VIEW FROM THE TOP: Gerardo Hiriart, Grupo ENAL

208

PROJECT SPOTLIGHT: Nayarit’s San Pedro Dome

210

INSIGHT: Patricia Tatto, ATA Renewables

211

VIEW FROM THE TOP: Andrew Auns, Williams Scotsman

212

VIEW FROM THE TOP: David Atherton, Aon Risk Solutions

Peter Jakszentis, Munich RE

214

ROUNDTABLE: How Important are Social Impact Assessments And Community Consultations?

216

VIEW FROM THE TOP: Alfonso Caso, ANAF Energy

218

PROJECT SPOTLIGHT: Tamazunchale - El Sauz Pipeline

220

INSIGHT: Jaime Martínez, ERM

221

INSIGHT: Fabián Casaubón, Overflod Social

195


ANALYSIS

INFRASTRUCTURE OPPORTUNITIES FINALLY UNFOLD As in most emerging countries, Mexico’s economic

next three years, with variable dates depending if they

landscape is in constant transformation. In the energy

won the first or the second edition. Other projects were

sector, new projects are changing the country both below

constructed for self-supply purposes, mainly sponsored

and above the surface. More kilometers of natural gas

by large energy consumers in the manufacturing and

pipelines are running through the country, supporting

mining sectors. Construction companies, equipment

the growing demand from the manufacturing sector and

suppliers, consultancies, legal firms, project developers

power producers. Above the ground, new transmission

and all others involved in the infrastructure sector are

lines cross Mexico’s blue skies while more and more

thrilled about these new opportunities. But previous

renewable facilities are popping up, driven by the

experience shows that there are other stakeholders

availability of local natural resources.

– often overlooked in the past – that must be brought on board to ensure projects are successful: local

196

The approval of the Energy Reform slowed down

communities.

infrastructure development in its initial stage as the incomplete regulatory framework sparked uncertainty

“The strategic location of power generation projects

among private companies and investors. But now that the

is a crucial element for reducing costs and enhancing

implementation process is much more advanced it has

competitiveness,” says Alfonso Caso, Director General

brought the opposite effect, accelerating investments in

of ANAF Energy. “A lot of regions with attractive energy

energy infrastructure projects.

resources are located close to indigenous or rural communities, highlighting the importance of establishing

“The first change we saw after the Energy Reform was

communication channels between local communities

an increase in the number of new oil and gas projects

and project developers to agree the compensation the

and investment opportunities,” says Carlos Albarracín,

community will receive. Complying with the construction

Partner at Milbank. “Before the Energy Reform, there

schedule of the winning projects and having the support

were one or two pipeline projects every year whereas

of the different stakeholders involved will be key elements

now there are five or six tenders per new project in a

for the Reform’s success.”

single year. CFE’s restructuring is also welcomed by the market because it is likely to create more opportunities

Project attrition due to social rejection put Mexico under

to invest in and finance a whole host of power projects,

international scrutiny, but cases such as the Tamazunchale-

ranging from traditional power generation to distribution

El Sauz pipeline demonstrate that it is in fact possible to

and transmission,” says Albarracín.

complete profitable energy infrastructure projects on time with the proper environmental and social strategies

In the case of natural gas pipelines, the publication of

in place. Dealing with ejidos, numerous world visions

the National Expansion Plan 2015-2019 in October 2015

and languages in a country with some of the broadest

reignited companies’ interest in participating in the

biodiversity in the world is complex but companies

construction of Mexico’s natural gas transportation and

operating in Mexico are rising to the occasion, with the

distribution system, reassured by the publication of

help of specialized consultancies in anthropological

the Public Policy for the Implementation for a Natural

and environmental matters. They are demonstrating

Gas Market in mid-2016. By the end of this year, the

to international investors that Mexico’s cultural and

government had already committed 78 percent of the

environmental diversity is not something to fear.

10,000km planned for 2019, of which 2,386km are already in operation. Together, the pipelines operating and under

Companies in the infrastructure sector are used to

construction represent an investment of US$12 billion in

preparing ahead due to the large-scale nature of the

new energy infrastructure.

projects and the capital investments required. 2015 and 2016 were the tip of the iceberg in terms of infrastructure

MAIN DRIVERS

development opportunities. For those companies that

CFE’s public tenders for combined-cycle plants and

diversified their services into the energy sector, especially

CENACE’s long-term power auctions were the main

clean power plants, transmission assets and natural

drivers in the case of power generation projects. The

gas pipelines, the next three years will be particularly

auction winners committed to starting operations in the

interesting.


INSIGHT

RENEWABLE MOMENTUM SPARKS INTEREST VICENTE TAMÉS Regional Sales Manager at Duro Felguera

Greater prospects in the energy segment are not only

plans to focus purely on the construction stages, which

attracting new companies but also awakening leading

is the company’s core business. Natural gas-powered

firms already here. Top tier Spanish company Duro

projects will remain an important element in its strategy,

Felguera is among those that, after a period of slow

especially combined-cycle plants and cogeneration

growth, is hungry to grab its piece of the burgeoning

projects developed under different schemes.

197

potential. “After taking a low-profile approach we are working on growing our business in the country by

One area Duro Felguera has not been deeply involved

bringing more resources and taking a more aggressive

in is the electricity transmission and distribution sector.

stance,” says the company’s Regional Sales Manager,

In Tamés’ view, the construction of substations is not

Vicente Tamés. “We expect to be involved in more

as specialized as that of combined-cycle plants, which

projects in the power sector, as well as in the oil and

tends to discourage the EPC company from participating

gas industry.”

in tenders. “The low level of technical sophistication required makes costs the defining factor when choosing

Duro Felguera began operating in Mexico in the 1970s. It

a proposal, further complicating the situation for

got involved in infrastructure projects in the 1990s and

companies participating in open tenders. For these

enjoyed its most successful period in Mexico’s energy

reasons, the idea of developing electricity transmission

industry during the following decade. “We developed 13

and distribution infrastructure is attractive to us when it

combined and simple cycle power generation projects

is included in a power generation project. For instance,

for CFE, our main client, and private companies between

when a client asks us to complement a combined cycle

1998-2004,” says Tamés.

power plant with a substation and transmission lines.”

The company slowed its Mexican activities around 2005

The

to capitalize on the popularity that combined-cycle power

alternating current substations. “In Mexico there is talk

plants were experiencing in Spain. “Although we have

about the potential construction of a direct current

experienced periods of sluggish activity in Mexico, we

transmission line, also known as an electric bipole, an

have never stopped working in this country and we strive

area in which few companies have sufficient expertise. If

to maintain our relationship with the companies operating

this materializes, we would be interested in participating

in this market by developing smaller projects,” Tamés says.

in partnership with the technology provider,” Tamés

company

also

has

experience

in

developing

says. Previously, the company has won several contracts Now that renewable energies are gaining momentum in

with private clients for the development of cogeneration

Mexico, Duro Felguera is assessing different strategies

projects including a 39MW power plant for Biopappel

to capitalize on new opportunities. “At some point

powered with General Electric turbines and a 36MW

we were considering participating in the wind power

cogeneration plant for Kaltex Fibers in Altamira, which

industry by summiting proposals under the old Open

uses cutting-edge SGT-750 turbines from Siemens. In

Season scheme and we even analyzed the possibility of

2015, CFE tendered seven combined cycle plants. Duro

investing in our own wind farm,” Tamés says. Although

Felguera participated in several including the Empalme

he sees great potential in the mini-hydro segment, the

I, Escobedo and Topolobambo projects, finally winning

required paperwork has discouraged the company from

the contract for Empalme II, a 792MW combined

participating in the sector. Likewise, it stays away from

cycle power plant in Sonora that will be developed

large-scale hydroelectrics due to the civil works those

in partnership with Elecnor. The company also is

entail. But it is eager to participate in geothermal and

developing an 18MW cogeneration plant for Scribe, a

solar energy projects and Tamés says Duro Felguera

Bio-PAPPEL Group company.


VIEW FROM THE TOP

PIPELINES TO FEED PROJECT DEVELOPMENT ALICIA BARNETCHE President of Kepler Constructora

198

Q: Where do you see the greatest potential for investing

A: We did not have letters of credit in the past because

in energy infrastructure?

we mainly work with our own financial resources. This

A: The government’s plan to expand the national pipeline

situation was challenging for some projects in which we

network will create many opportunities for industrial growth.

required additional credit. This was the case for instance

Having more pipelines will also allow the construction of

with a project we developed in the Dominican Republic

small-scale power generation plants across the country,

in 2010. We finally managed to get our first credit line in

supplying electricity to remote or small towns. This will

the history of Kepler Constructora for this project but it

enhance development given the cost-effectiveness of

was challenging because we had no credit history. Banks

these technologies. Fostering renewable energy is also

have increased their requirements for providing lines of

indispensable, providing great opportunities for the Mexican

credit to construction companies, which is understandable

energy industry. Given Mexico’s great natural resources such as

because it is a risky sector but it makes it difficult to

wind and solar, the potential for sustainable power generation

achieve growth. We have overcome this challenge thanks

is enormous. Biomass power generation is also interesting as

to our strong reputation that has permitted us to earn the

it would serve a double purpose: the large amount of residue

trust of insurance and financial companies.

generated in the country would be used and it would cover power demand in a cheaper and cleaner way.

Q:

How

do

you

prevent

corruption

and

ensure

transparency in the development of projects? Q: How much of Kepler Constructora’s business is devoted

A: Our main and only strategy is corporate ethics. The

to energy infrastructure projects?

industry knows that Kepler does not offer, give or take any

A: We cover almost all construction disciplines, from civil

resource or asset beyond the strictly legal. The company

engineering to commissioning and startup and we have

relies on its reputation and works every day to maintain it.

built over 30 power generation plants in Mexico and other

Having a solid reputation does not only give peace of mind

regions. Kepler’s structure is horizontal, which allows for

to the company itself but also to vendors, sub-contractors,

quick response to clients. We comply with international

clients, developers and every other player we deal with.

certifications including the “S” and “U” of the American Society of Mechanical Engineers (ASME) certifications

Q: What is Kepler’s strategy for 2017 to seize the

for the on-site design and construction of high-pressure

opportunities the energy industry is offering?

containers. Our supervisors are Occupation Hazard and

A: Kepler Constructora has 41 years with a solid reputation

Health Administration (OSHA) certified and we have

and positive feedback from its clients. Engineering

held the ISO 9000:2008 for quality for the last 14 years.

companies seeking to develop turnkey projects are our

Kepler has 31 national and international construction and

main clients, since we provide all services in construction

quality awards, which indicate our international prestige.

including project procurement. Preparing for opportunities

We have developed specific techniques and know-how

in the electric sector requires two or three years planning

over time that have allowed us to become one of the best

for construction companies so we have been working on

construction companies in the country.

it for a while already. We have a number of combinedcycle power generation plants in the pipeline for 2017, but

Q: What is the major challenge you have faced to become

many of our clients as well as other players are waiting

one of the leading construction companies in the sector?

for the regulation to be fully developed before making any major investment. We have identified a large number

Kepler Constructora is a 100-percent Mexican owned construction

of companies approaching Mexico's energy sector, such

company founded in 1975. In the energy sector it has participated in the

as pipeline builders and mining and power generation

construction of 10.8GW power plants for public and private customers.

companies. The world’s eyes are set on Mexico.


VIEW FROM THE TOP

FLEXIBILITY KEY FOR COMPETITIVENESS ANDRÉ BOSMAN Director of Service Unit Caribbean, Central America & Mexico at Wärtsilä

Q: How have the oil and gas and electricity markets changed

and resources. As for the technology, we can attain very

since you entered the country in 2004?

high efficiency and availability, which makes it cheaper

A: We are witnessing a deep transformation in both sectors.

and more competitive than other products in the market.

They are now more accessible so it is easier for us to do

The flexibility of the response time is another key factor.

business here. Our main focus traditionally has been the oil

Many companies underestimate a technology’s capability

and gas industry, being a supplier for PEMEX, but we have

to adapt to local circumstances but this is also crucial.

also worked with independent power producers (IPPs) in the

Operations do not always happen at 24°C at sea level

electricity sector. We are seeing a diversification of producers

conditions and the equipment needs to be adaptable to

of base load energy as well as a more secure market where

these situations.

energy prices are increasingly more competitive. Q: What opportunities have you seen with the liberalization Our company now has several interesting projects in the

of the market and new players coming in?

pipeline but I would like to highlight Huinala in Monterrey,

A: We can now work together with our clients to develop

a 140MW flexicycle power plant running on gas that has

technological solutions. The challenge in the oil and gas

delivered outstanding efficiency and availability numbers.

sector is that all companies are trying to reinvent themselves

The Huinala plant started operations in the second quarter

while looking ahead to prepare for the industry’s future

of 2016 and we are enthusiastic about the efficiency and

needs. We are working with our clients to develop optimal

availability levels we are getting there. It is definitely one of

solutions to overcome this difficult period and increase

our flagship projects in terms of technology and successful

operational

collaboration with local staff.

solutions for times when production needs to be cut due to

efficiency.

This

also

includes

developing

low market demand. Q: In which segments do you expect further growth given market conditions?

Q: What potential have you identified for distributed

A: Power producers. There is enough demand in the

generation development in Mexico?

market for new technologies such as the dual and tri-fuel

A: Distributed generation has huge potential in Mexico.

technologies we offer. Our engines can quickly shift from

We see a strong appetite for flexible and reliable power

one fuel to another, from heavy fuel to gas. That capability

generation but at competitive prices in both CAPEX and

allows companies to adapt their operations to current fuel

OPEX. We offer several solutions that take the best aspects

prices and to choose the cheapest option. Fuel flexibility

from solar and wind energy technologies to comply with

is particularly important in this time of insecurity because

these requirements. Mexico’s regional characteristics are

the future price of fuel is uncertain in Mexico. That is one

helpful because factors like temperature and altitude have an

of the key added values that our technology offers, maybe

enormous impact on an installation’s efficiency. The flexibility

our biggest advantage. Single-fuel power plants have no

of our solutions allows companies to respond more quickly

other option than to pay the market price, even if it is too

to demand changes in the system. We use integral solutions

expensive. This is the main reason why most of our clients

for this purpose, integrating many fast-response engines that

choose the dual-fuel option.

can respond to a system’s changes in milliseconds. Flexibility is one of the key characteristics that power generators look

Q: What are the main advantages of multi-fuel engines

for in new technologies.

compared to traditional engines? A: Besides engines, we also have multi-fuel turbines. The

Wärtsilä is a Finnish corporation that manufactures and provides

biggest advantage is having EPC capabilities to build

services to power sources and other equipment in the marine and

any power plant at any location with reasonable terms

energy markets.

199


PROJECT SPOTLIGHT

200


HUINALA FLEXYCICLETM POWER PLANT Wärtsilä has delivered over 4,700 power plants ranging from 10-60MW in 170 countries. The most cost-effective of these plants is located in Huinala, a municipality near Monterrey, using the world’s most efficient reciprocatingengine power plant. The Huinala plant was completed in 2016 and demonstrates many of the requirements expected of future power generation. Highly flexible, reliable and modular, the asset uses advanced technology to maintain efficiency even through variable operational modes and environmental conditions. It generates about 140MW with seven gas engines and one steam turbine. A 10-year O&M agreement is in place that helps optimize performance, maximize life span and lifecycle costs, all in a safe, reliable and environmentally sustainable way. What makes the plant truly unique, however, is the solution behind its success: FlexicycleTM, a technology developed by Wärtsilä that combines two key characteristics: flexibility and combined cycle. Flexibility is a significant characteristic that is missing in nearly all the existing power-generation facilities in the world. Most existing power plants take hours from startup to full load and even simple cycle gas turbines, while relatively fast, cannot be started immediately after being turned down. Wärtsilä’s FlexicycleTM plants by contrast can start and stop as many times as required, similar to a modern car that has a start-stop function to turn off the engine when stopped at a traffic light. This is made possible because these plants are powered by reciprocating engines. Almost every country is adding more wind and solar power into their systems to lower emissions and improve costs and Mexico is not an exception. But neither of these targets is possible if a coal plant or a large traditional combined cycle has to be kept running at low load just to be ready to pick up when the wind does not blow or the sun does not shine. FlexicycleTM is the ideal solution to keep emissions and costs down. It efficiently generates electricity from natural gas when needed, thanks to its fast startup combined cycle technology, and it can operate on low load or stop completely whenever needed, making it an ideal match for renewable energy. This flexibility enables important cost savings while generating additional revenues for power producers.

201


VIEW FROM THE TOP

PIPELINES EXPERTISE AT THE SERVICE OF RENEWABLES GIACOMO BONFANTI Commercial Director of GDI

202

Q: How did the company branch into renewable energy

Q: How have the energy market changes influenced GDI’s

from the mining and oil and gas sectors?

evolution?

A: We have experience in diverse sectors and throughout

A: During the past six years, we have seen greater

this time it has always been necessary to adapt to the

investment in infrastructure projects, which has reduced

country’s context. For the past two years, we have studied

the need to finance them through government debt. We

the intricacies of renewable energy projects, capitalizing

have decided to transform into a contractor capable of

on our experience in other sectors. For instance, our

offering turnkey projects, which can guarantee owners the

work in the mining sector involved the mobilization of

protection of their investment costs and infrastructure. This

large volumes of soil in a short period and wind farms

strategy has some risks but we have positioned ourselves

require similar processes. Mining companies also require

as constructors capable of handling complex projects from

the construction of dams to manage water and mineral

engineering to construction, giving us an advantage over

residues. These dams require a complex construction

other developers. We have built over 2,500km of pipelines

process because they must be adapted to existing

and we are capitalizing on this experience. The key to our

environmental regulations. Our objective is to capitalize

growth was a comprehensive knowledge of our capabilities

on this knowledge and begin building hydroelectric dams.

and a clear identification of our weaknesses, looking for

We have also been using construction techniques that

strategic alliances with companies that can complement our

allow miners to work without damaging the environment

services. The future of renewable energies will require a clear

or bothering the local community. This technique is being

identification of the best players in every area and to establish

used in Switzerland and it can also be used in hydroelectric

partnerships to achieve the best results. GDI now handles

plants, mainly small hydropower facilities. Many of our

engineering, earthworks, civil works, mechanical works,

technologies can be repurposed for the renewable energy

logistics and supply services. We also offer community,

sector and we are prepared to enter the wind, solar and

permitting and environmental management services and we

hydraulic markets.

work to ensure the best possible results for our projects.

Q: How do you identify the technologies in which you

Q: What are the main risks that project developers face

need to invest?

in Mexico?

A:

Developing

requires

a

infrastructure

significant

for

investment

renewable in

energy

equipment.

A: The acquisition of sites can be problematic. The situation

In

is different for developers of wind or solar parks than for

comparison, the construction of a building requires less

developers of pipelines, the latter being more complex. It

specialized equipment and most of the investment goes

is necessary to fully align the interests of the federal and

to management. For that reason, many companies with

state governments with those of owners and contractors.

a focus on renewables prefer to use their equipment for

The Energy Reform is fairly new so many are unaware of its

similar projects all over the world. In our case, we decided

importance and necessity. It is common for these projects

to focus on Mexico and to do so it was necessary to

to be halted mid-project for one reason or another. It is

research different uses for the same equipment. For that

necessary to create awareness of their importance to gain

reason, whenever we have to invest in equipment we must

the support of local communities. We are developing several

think of what we will be doing for the next five years.

projects in 2017, including a pipeline in Bajio and another near the US border. We are waiting for new tenders in March

GDI is a 100 percent Mexican company providing specialized

and August for which we will offer our support for solar,

construction and infrastructure services. It has over 13 years’ experience

electric and small hydro projects. This sector moves at great

in pipelines, mining, drilling and blasting, site preparation and optical

speed so some players may bid for a tender and only look for

fibers, among others.

a developer if they win.


PROFILE

WIND LESSONS EASE TRANSITION TO SOLAR AMOS GUILLÉN Country Manager and Commercial Director of Global Energy Services Mexico

The global transition to sustainable energy production has

challenges in terms of social-related issues, which enabled

passed the point of no-return as companies increasingly

GES to expand its operations.

turn to renewables for their electricity supply. Knowing which way the wind was blowing, project developer Global

“Other important wind energy projects that we have

Energy Services (GES) dismantled its fossil fuels division

developed are Piedra Larga, Pedrera I and Pedrera II, all in

to concentrate on new opportunities to deploy clean

Oaxaca. Also, we participated in the development of the

energies in emerging markets like Mexico. GES is a leading

Eurus wind project in Oaxaca, which was highly relevant

international construction and services provider for the

for GES in 2009 due to its size. We have been involved

renewables segment. It has already established a solid

in all the projects that Enel Green Power, Gamesa and

presence in Mexico, having pioneered the development

Iberdrola have in the regions of La Ventosa and El Espinal

of wind farms in Oaxaca. It has also participated in

in Oaxaca. All our projects serve as a showcase for GES’

emblematic projects such as the construction of the

capabilities to negotiate commercially, discuss contractual

74MW wind farm Stypa Nayaá, one of developer Gamesa’s

details and successfully execute the project,” says Guillén.

first projects in the country. The experience acquired developing wind farms in Entering a new market can be a daunting task. GES

Oaxaca has also given GES the confidence to dive

says having the ability to adapt is the most important

into an unknown territory for the company in Mexico:

characteristic a company can have in this situation. “A

utility-scale solar projects. According to Guillén, the

company cannot change the way business is done in a

company was already planning to boost its presence

country so it has to adapt to the local culture to move

in the local solar sector before CENACE held the first

forward and GES understands that,” says Amos Guillén,

power auctions, so the remarkable results achieved by

Country Manager and Commercial Director of GES Mexico.

solar in the auctions were just an additional incentive

GES, with over 1,700 employees in 20 countries, has an

for GES to look at the sun. “The results of the long-term

extensive track record. In wind, it has provided BoP for

electricity auctions were extremely surprising, even for

over 12GW of capacity globally, 23.6GW assembly and

the winning companies,” Guillén says. “So far Mexico

11GW O&M. In Solar, it includes 430MW BoP/EPC and

holds a negligible number of utility-scale solar projects,

380MW O&M. In Mexico, the company has installed over

with just a pair of solar parks already constructed in

2GW in power plants, with 400MW under O&M contracts.

the north, making large-scale solar power a fairly new industry in the country. Wind energy, on the other hand,

The initial projects developed in a new region are usually

has 1GW of projects already installed and we have been

the most challenging, Guillén adds. “Our first renewable

actively participating and building a reputation among

energy projects were carried out in Oaxaca, which is a

the players in this industry. In solar energy we have to

highly complex region due to social conditions. At GES,

start from zero, like all other companies, but we will

we work with local talent, which helps us to adapt faster. In

benefit from the reputation that we have already built in

Oaxaca, we followed the same strategy, eventually learning

the wind industry,” he says.

how to deal with the region’s inherent challenges. In 2009, the wind industry was still in its infancy in Mexico, which

The aggressive prices bid by renewable energy companies

meant that all other players were going through similar

will be another challenge, Guillén says, because all players

challenges, including project developers such as ACCIONA

must now optimize their costs. “We want companies to

and Gamesa.” That experience, he says, gave the company

know the added value that GES can bring to their projects

the foundation it needed to develop successful renewable

by avoiding the risk of financial penalties associated with

energy projects, especially as other states presented fewer

contract defaults."

203


VIEW FROM THE TOP

CONCERNS EMERGE OVER NEW FRAMEWORK ANA HORTA Director of Project Development at CISA Energía

204

Q: How does CISA Energía see the energy market

peninsula network gets connected to the national grid, we

maturing in Mexico?

could offer energy supply to a wider number of customers,

A: There is a lot of uncertainty here. The private sector will

which would make projects more attractive to us. As a

have a more active role in the energy generation system

construction company we have collaborated with other

due to the newly implemented auction process. However,

wind project developers to offer electrical infrastructure

energy generation projects have to adhere to the prices

engineering and construction. The most recent contract

agreed in those long-term auctions, which might affect

consisted of installing 47 wind turbines in La Rumorosa,

project development under other schemes. But we have

the first wind power project installed on Mexico’s border

identified advantages in the sector as we create synergies

that exports energy to the US.

with other project developers that are interested in improving the country’s energy infrastructure. We are also

We are also developing commercial solar projects in

witnessing an increase in expertise and qualified services

Baja California. Unfortunately, CFE is entering this same

in the Mexican energy sector, which will help developers

market with an unfair advantage because it has a national

improve the quality of their projects and to optimize their

database of all electricity consumers. The state-owned

time frames.

company also enjoys a subsidized installed infrastructure and the fact that all participants in this market will depend

Q: How advanced is the company’s initiative to supply

on its net-metering system.

renewable energy to private consumers? A: We have seen a growing interest from different sectors

Q: What innovative technologies has the company

in investing in renewable energy in the past few months

adopted recently?

but we have also identified several concerns regarding

A: We designed a technology for hot weather locations,

the new regulatory framework. Our customers are

which is similar to what is used in Europe for indoor

particularly skeptical about the functioning of long-term

heating in cold weather regions. The process consists

PPAs, especially after the announcements of the natural

of perforating the soil to install an underground pipeline

gas infrastructure plan and the fixed price per megawatt-

system and a radiator in the space that needs to be

hour. In this landscape, renewable energy investors believe

heated. To warm the room, water is used as a heat

that it is a challenging market. Green investors are still

transfer fluid that absorbs the underground heat and

interested in promoting these technologies but they are

transfers it to the room’s air. Using this same principle,

concerned about future prices.

we designed a system that absorbs the air’s heat to release it underground, making it suitable for hot weather

Q: What are your perspectives on project development in

locations. The end user can save significant amounts of

Baja California?

energy on air conditioning and refrigeration using this

A: We are already developing a new wind farm in Baja

technology. In Mexicali, we ran a test using our system

California and we keep looking for strategic partners to

and achieved energy savings of 39 percent in comparison

expand our business in the region. We are also taking

to a house with simple air conditioning. We are trying

into account the current plans to connect Baja California

to promote this technology but the cost of perforating

to the national grid, particularly as there is great need

the soil remains a challenge, particularly in places with

for developing energy infrastructure in the region. If the

bedrock foundations. Therefore, this technology is only cost-effective now in places with high-energy costs

CISA Energía is a Tijuana-based EPC company with experience in wind

and soil that is easily perforated. We are researching an

energy projects on Mexico’s Pacific Coast. It also operates energy-

efficient and low-cost way to perforate the soil but we

efficiency projects.

have not yet succeeded.


PROJECT SPOTLIGHT

ALAMEDA HYDROELECTRIC POWER PLANT Located in Malinalco, State of Mexico, the Alameda

panel for each unit as well as corresponding relays,

Hydroelectric Power Plant originally started operations

metering

in February 1923, becoming the fourth hydroelectric

generation unit at the Alameda plant has a 2,800kW

facility to produce electricity in the country. The plant,

capacity with 600V tension, operating at 600 RPM

built by Siemens in 1912, had an initial capacity of 8.9MW

and 60-cycle frequency. The company is also installing

and its three units were originally operated by Canada-

communications systems to send voice, data and images

based Mexican Light and Power Company. In 1937, after

to CENACE’s facilities to keep statistical productivity

a decree made power generation and distribution public

records.

arrays,

switches

and

test

blocks.

Each

interest activities, CFE acquired control of the plant. The plant was recommissioned with the idea of eventually Years later it was mothballed because of flooding. The

reaching a generation capacity of 9MW. The SME union

rehabilitation of the facility began in May 2015 when

has promised between 12 and 14 percent lower energy

Generadora Fénix, a partnership between Portugal-based

costs than CFE with the operation of the 14 plants it

Mota-Engil and the SME electrical workers’ union, took

controls with Mota-Engil through Generadora Fénix under

over the plant from CFE. Extensive repairs to the three

a 30-year agreement with the government that put an

generating units, implementation of safety and control

end to a labor dispute. Alameda is the first of the facilities

systems, components maintenance and replacement, civil

to be refurbished. It required an initial investment of over

maintenance, intercommunication systems installation,

US$6 million.

water outlet and canal and substation maintenance were carried out and the historic facility roared back to life in

Mota-Engil, which controls 51 percent of Generadora

September 2016.

Fénix, has said the plants have a total potential installed capacity of 2GW. In 2015, the company said it was

The extensive refurbishing of the facility also included

developing an investment plan to duplicate the current

the installation of a Protection, Control and Measurement

installed capacity.

205


VIEW FROM THE TOP

CFE SPLIT TO HAVE ENORMOUS IMPACT SERGIO MARTÍNEZ CEO of MASE Energy

206

Q: How has MASE energy grown in the last few years

putting together a group of experts to create the regulations

considering the changes in regulations?

and is now in the process of taking the opinion of private

A: In Mexico the sustainability trend is rising, allowing us to

investors into account to make the Mexican electricity

grow in wind as well as in solar energy. The Energy Reform

market more appealing for investment.

benefited us wind park developers, where we have been participating as members of AMDEE, but we are still waiting

As expected for the early stages of any project this big,

for several advances. The authorities have not been very

CENACE and CRE have a larger workload than they

punctual with deadlines but that has allowed us to focus on

projected, resulting in longer wait times than expected, which

other markets.

complicates the process. I hope they help us developers better understand the processes and organization that must

Two years ago, we decided to enter the residential solar

be followed to move ahead with medium-sized projects of

market and we have installed over 500kW to date. It has been

around 30MW.

a slow process but at the same time it has been insightful and productive. We now manufacture our own panels and

The biggest challenge in Mexico’s is the grid because the

have achieved CFE’s Laboratory of Testing Equipment and

infrastructure is deficient. There are many bottlenecks that

Materials (LAPEM) certification, something very few have.

hinder the efficiency of sustainable generation and put us

We have opened offices in five different cities throughout

far below the objective Mexico wants to reach. The Ministry

Mexico and we have expansion plans for the US.

The

of Energy has done an outstanding job promoting a DC

company has two solar projects, at 30MW and 10MW, and

transmission line through southeast Mexico. That being said,

our wind energy division has a 50MW project in Zacatecas

at the locations where we have more renewable resources,

and a 30MW project in San Luis Potosi.

the transmission is insufficient and the capacity of the substations is very bad. We need to have more distribution

Q: What impact will the split of CFE have on business?

potential in Oaxaca and get to Chiapas.

A: We think it could benefit the country enormously. It will improve distribution, generation, regulation and power

Q: What is your strategy to stand out as a national company?

variations. As an electricity-generating entity, CFE will be in

A: We are providing innovative schemes for our customers

position to compete with private companies in many ways,

such as leasing, which enjoys high demand in the residential

one of them being CFE’s solar unit, where MASE could play

sector and we hope to sell this energy for a good price. We

an important role due to our geographical position and the

will also continue doing wind parks and our objective is to

size and experience of our company. Such competition will

develop around two parks per year. Right now we have four

most likely bring down the cost of producing and distributing

wind parks in development and we want to maintain this

energy and help us as integrators obtain better knowledge

growth rate in the near future.

of the market, which is key for our business line. We do not try to copy or steal from other companies. For Q: What conditions do you require from the regulatory

us success is a matter of looking for something new. It is not

framework to ensure projects succeed?

about replicating but knowing what to do and using our local

A: I believe the next steps would be to fine tune the

insight and knowledge of the country to do it differently. We

regulations and reduce the time frames. CFE did a great job

always have to look for added value for our clients instead of just focusing on how to save more money and increase

MASE Energy is a 100-percent Mexican company specialized in the

profits. The fact that we always try to improve the quality of

development of sustainable energy projects such as wind farms and

our services is the most significant and valuable trademark

solar parks.

that distinguishes us as a company.


VIEW FROM THE TOP

RISKS AND OPPORTUNITIES IN GEOTHERMAL ENERGY GERARDO HIRIART Director General of Grupo ENAL

Q: What role will geothermal energy play in the new

Q: How does ENAL’s in-house technology improve the

landscape and the country’s clean energy goals?

company’s capabilities for developing geothermal power

A: Geothermal energy will play an important role because

plants?

it is the only renewable source that is totally independent

A: We have learned a lot throughout the years about

of weather and oil prices. Geothermal is the most constant

geothermal energy, which is something not all companies

among all renewable sources and it is easy to dispatch,

understand. The knowledge and experience we have

which increases its competitiveness. The intermittency of

acquired drove us to develop our own software. During

other renewables such as solar or wind increases the need

the drilling process, we need to evaluate the well’s

for storage capacity, raising project costs and therefore

condition, so we developed technology to enhance

energy prices. Geothermal can also offer steady capacity,

productivity by means of high-velocity water jets. We have

adding value to a project’s competitiveness. The problem

made contributions to improve drilling and exploration

now is the lack of fields ready to develop as there are no

technology, lowering exploration costs and increasing the

advanced geothermal exploration projects besides those

success rate, which is part of Grupo ENAL’s added value

from CFE. Geothermal projects take longer than solar or

to the industry.

wind energy to analyze and select a location and it also takes longer to build the plant. Financing geothermal

Q: What makes geothermal projects attractive for Mexico?

projects is also a big challenge, particularly when

A: There are many places in the country offering high

compared with other renewables.

geothermal potential under different conditions, some more accessible and attractive than others. Mexico is

Q: How can the Fund for Risk Insurance of Geothermal

a pioneer in geothermal development, always placing

Exploration ease financing for geothermal projects?

among the top five countries with the highest geothermal

A: The fund, which is managed by the development bank

capacity, but a lot of potential remains unexploited. To

NAFINSA, is the only solution at the moment. But it is

boost geothermal development in Mexico, we need to

not that easy to obtain. Geothermal project developers

acknowledge that it is different from other technologies,

usually have to pay for all the preliminary studies, which

not only regarding costs but in several aspects. We would

can add up to US$1 million and are not financed by banks.

like to have a special auction for geothermal projects

We can use the fund for the construction of wells but we

where project proposals could compete on a level playing

need to cover 30 percent of the total costs upfront. This

field. Mexico has around 2,000 geothermal experts and a

mechanism represents a huge risk for a small company like

developed local value chain, which must be considered

us because that 30 percent can be lost if the exploration

in the selection of technologies for the country’s future

stage is unsuccessful.

energy mix. Local content is one of geothermal’s strongest points but it is often overlooked because the

For the same reason it is hard to find private investors

government favors cheaper technology even if all the

willing to share the risk. Geothermal projects always run

components are imported. Geothermal energy is also at

the risk of finding different conditions at the bottom

a disadvantage against other technologies participating

of an exploratory well from what was projected in the

in the auctions because CFE gives under three years to

preliminary analysis. This situation differs from solar or

start operations while a geothermal development usually

wind energy projects where the failure margin is small.

takes four or five years.

We do get loans and insurance for the construction of large wells in which we pay a premium and are protected

Grupo ENAL is a partnership formed by specialists from diverse

against project failure. This mechanism partially helps

engineering backgrounds focused on the development of geothermal

project developers.

energy projects.

207


PROJECT SPOTLIGHT

208


NAYARIT’S SAN PEDRO DOME Sometimes, it is the harder road that brings the best results. Grupo Dragón embarked on its ambitious plans to build a geothermal power plant in Mexico before the new regulatory landscape reshaped the market. There were no clear processes in place for its development but the group went ahead and its San Pedro Dome power plant now contributes both to the power grid and the community. The San Pedro Dome is a 25MW geothermal power plant in San Pedro Lagunillas, Nayarit. The company started exploring the field in November 2010. By 2014, it had drilled and evaluated five exploratory wells and began building transmission lines, substations and generating units. It started commercial operations in 2015. But the road was not always easy. By 2011, when Grupo Dragón started drilling for the Dome’s first well, there was no regulatory framework to capitalize on the vast potential of geothermal energy in the country. As a private entity, the processes needed to develop the project were unclear. Grupo Dragón forged the path with this project. The San Pedro Dome was developed under the Public Electricity Service Law with a self-supply arrangement and a 52MW power-generation concession. The plant’s estimated power generation is equivalent to the average annual usage of over 133,000 Mexican households. Among the off-takers are national and international industrial users, commercial users and schools. These partners not only reduce their electricity costs significantly but also actively contribute to the reduction of GHG emissions. From the outset, Grupo Dragón reached out to the surrounding community and built a close relationship, which has been a key element in its success. The cooperation has resulted in significant economic and social benefits for the area. The continuous influx of exploration,

construction

and

maintenance

work

is

an important source of employment for the adjacent population. Many of the components used in the project, such as pipelines, pumps, motors, electric equipment and sensors, are also built in Mexico, boosting job creation and economic development not only locally but across the country. Beyond the economic and environmental benefits of geothermal energy, there is the added value of having it in the country’s power matrix. As a result of not being dependent on hydrocarbon imports and the uncertainty of prices associated with that, geothermal increases a country’s energy security.

209


INSIGHT

INDEPENDENT ADVICE KEY TO BANKABILITY PATRICIA TATTO Country Manager of ATA Renewables

210

Every energy project is expected to meet goals and

Banks tend to hire us because they need our expertise as

requirements but there is one aspect that all, no matter

engineers either during the process of buying an asset or

the technology, must have: bankability. Developers,

in regards to a project they already own. We help them to

investors and energy companies need to pay attention to

reduce risks in their investments,” Tatto adds.

detail to ensure projects are worth the time and money they are investing. Considering the significant resources

ATA Renewables also has wide experience doing due-

needed for energy infrastructure projects, expert advisers

diligence for mergers and acquisitions, but Tatto says

can be a difference-maker.

these kinds of deals have been slow to materialize as a result of the changing market environment. “Banks

“Independent engineering services are crucial to the initial

are not comfortable doing these sorts of transactions

development of a project,” says Patricia Tatto, Country

because the regulation is taking a while to resolve and it

Manager of ATA Renewables, a Spanish leader in technical

is not clear how the market will pan out. They are taking

due diligence for M&A and non-recourse project finance.

slow steps toward financing. Some of them are waiting for good projects to hit the market before becoming involved

Tatto sees Mexico, together with the Middle East and North

in these deals. “

African regions, as one of the fastest growing markets for companies like ATA Renewables, which started 12 years

Banks are also changing their yardsticks in line with the

ago, helping energy project developers in Spain gain

new landscape, which is also causing uncertainty. “We

bankability. “In Mexico we do development, construction

have noticed bank criteria changing and at this stage we

and operation. We have participated successfully in the

are uncertain how this is going to unfold,” says Tatto. “I

auction processes as an independent expert — perito

can say that without a PPA structure, it will be difficult to

independiente — and adviser for companies that have

receive any financing. It is a good window of opportunity

won and will build solar and wind projects,” she says.

to create new models. Companies just need to be

“We estimated plant production and predicted how

creative.”

many megawatt-hours a certain project can provide. This estimation was then used in the bidding offer. As

There is also a greater number of vertically-integrated

technical adviser, we also help with the entire process,

companies entering Mexico, such as EPCs that bring their

which includes filling out documentation that needs to be

own funds to support their company and their projects.

presented to CENACE.”

This is an emerging strategy in the market because EPCs are seeing new opportunities and are trying to support

ATA Renewables is a lean, independent renewable

their own business, Tatto says.

energy group with more than 17GW of expertise in projects worldwide. It provides engineering, advisory and

ATA Renewables remains optimistic about the future of the

certification services for renewable energy, especially

Mexican energy sector and the role the company will play

solar and wind.

in this new market. “We were very surprised and satisfied with the results of the auctions,” says Tatto. “As a main

The company believes there is much more to come in

player in the renewable energy industry, ATA Renewables

Mexico. “We believe that Mexico is capable of building

is certain that Mexico has many opportunities for business

many plants and will be the connection to Central

diversification. We now have 11 projects to support and

America,” Tatto says. “We mostly serve as advisers for

eventually our business will be on the rise thanks to new

banks, developers and sponsors. We have been working

industrial applications. We also look forward to advising

with Santander as technical advisers for nearly three years.

governments or governmental institutions such as CFE.”


VIEW FROM THE TOP

REMOTE LOCATIONS REQUIRE UNIQUE SOLUTIONS ANDREW AUNS Vice-President and General Manager of Williams Scotsman

Q: What makes modular solutions more attractive than

A: What we have seen typically in Mexico is that the

traditional options for Mexican developers?

project’s employees stay in hotels, rental houses in nearby

A: Modular solutions are still relatively new in Mexico but

towns or even outside the project’s geographical scope.

more companies are embracing them because construction

This is why our purpose is to create safe, comfortable

timelines are short and penalties for infringing them are

and quality space solutions that give companies the

stiff. We also are always developing newer products such

opportunity to improve the efficiency and productivity

as our ASFlex line, which was developed in Europe and

of their workforce. We keep in mind the needs of our

consists of 20 steel panelized boxes. These can be used

customers so we work together to get the best solution

for buildings up to three levels high.

on time and on budget. We absolutely believe that having workers in one place where they are safe, feel well-rested

Q: What challenges have you identified in the power

and avoid long commutes, improves their usual activities

sector that could be addressed with modular systems?

considerably, resulting in the successful completion of

A: The remoteness of the locations is the biggest challenge

the project.

in the power industry. Some of the energy projects we have been working on still need infrastructure built off

Q: How do you adapt your products to the different

the main highways to get to the construction site. We

conditions found in the country?

have had some wind farms where part of the scope of

A: Our solutions come 100 percent pre-manufactured, a bit

the project was to build a road to get to the site. Williams

of installation work is required onsite but that is the extent

Scotsman’s advantage is that we have different types of

of the labor needed. Everything comes pre-wired, pre-

products, some of our lines are highly versatile and can

installed and air-conditioned. We can handle hot and cold

get to hard places.

weather. We have used the product across the country and tested it against the variety of weather conditions that

Q: What added value does Williams Scotsman offer to

exist in Mexico, from the south where it is typically wet and

the energy industry?

humid, to the north where it is typically dry and hot. We

A: Our solutions are 100 percent temporary. We build

are experienced enough to handle any climate in Mexico.

them to comply with the highest US building codes so they last a long time. We can bring in a new work camp

Q: How do you ensure your products comply with local

in a third of the time it would take a regular site to be

regulations regarding construction standards?

built and when we leave there is no proof of the work

A: Typically, the requirements for modular solutions are

camp’s existence. This is because we do not need to create

much less severe than for regular buildings worldwide.

cement foundations. All we need is compact earth and a

The industry is not as heavily regulated in Mexico as it

clear space to put it in place, so it is environmentally non-

is in other parts of the world such as the US but we use

intrusive. The semi-permanent solutions typically used

American building codes to ensure our products are top

in Mexico require a concrete path and the installation of

quality, which separates us from the competition. Safety

panels. When a project is completed the company either

and quality of the product matter to Williams Scotsman.

has to uninstall the solution, which increases the budget, or

With us, customers know exactly what they are getting

leave it onsite, which hurts the environment. Our solutions

regarding electrical and installation standards. We use

are not only quicker to install and uninstall but also are less

codes that we know work, are safe and last for a long time.

intrusive on the environment. Williams Scotsman, a Baltimore-based company, offers modular space

Q: How can these products impact a workforce’s

solutions for temporary infrastructure such as housing and offices for

productivity?

building sites.

211


VIEW FROM THE TOP

JOINT EFFORT BOOSTS SOLAR DEVELOPERS

David Atherton Director Energy & Infrastructure Practice at Aon Risk Solutions

212

Peter Jakszentis Technical Services Director of Munich RE

Q: What drove Aon and Munich RE to launch a joint

Q: What are the biggest risks for solar project developers

coverage product for developing solar parks in Mexico?

and how do your products address them?

DA: Aon and Munich RE have been working with the

DA: The biggest risk for an energy investor is failure to

operation and construction of solar parks since they started

complete the project. This might be caused by internal or

becoming popular across the world. We now have broad

external factors such as unexpected weather conditions,

expertise in the area. Solar parks offer low risks in terms of

inadequate

technology and installation procedures, which make them

estimations, wiring theft, earthquakes or social issues. Our

attractive to insurance and risk management companies like

goal is to identify all project risks from its early stages and

us. Local insurers lack the capacity and expertise to work with

provide strategies to mitigate them in an optimal way,

medium to large-scale projects, especially as those were until

including those that take place elsewhere. For instance,

very recently uncommon in Mexico. Premium companies

our products cover solar panels from their manufacturing

behind large-scale projects can justify the resources needed

origins to the project location. By using the products that

to analyze their financial and risk-mitigation strategies from

we have with Munich RE, an international company with

abroad, which is why foreign companies in Munich, Houston

top financial ratings, project developers can ensure their

or London are managing most of these projects even when

investors and financing providers that all uncertainties are

they are developed in emerging countries. We saw an

taken care of.

financial

planning,

innacurate

production

attractive business opportunity in the medium-scale market, which we also expect to represent the largest number of

PJ: We have shifted from the pure compensation of physical

solar projects in Mexico. In the upcoming years, we expect

damage to a comprehensive scheme that ensures all the

to see an increasing number of 25-30MW projects being

projected cash flow is returned to investors. The insurance

installed, which is our product’s target segment. The Energy

sector has specialized markets for each of the different

Reform provided the perfect timing to release this product,

areas of a project, meaning that a wide range of coverage

which is flexible and in line with the needs of the medium-

is available. However, these do not always match, leaving

scale market.

gray areas that result in uncertainty. We avoid the inherent conflicts of managing different policies by providing

PJ: We see great potential in solar projects due to their low

project developers an integrated coverage service that

complexity and different environmental benefits, including

excludes transition periods, for instance, from shipping

low visual impact and ease of integration in the case of

to construction coverage. In project finance, insurance

rooftop installations. The results of the electricity tenders

accounts for around 1.5-2.5 percent of the total project cost

in Peru, Mexico and Saudi Arabia have also demonstrated

even though it is the bank’s collateral for repaying debt.

the technology’s competitiveness, which is now reaching grid parity with traditional technologies without the need

Q: In which ways do your products and services improve a

for special subsidies. We see in Mexico a particularly

project’s overall financing costs?

attractive hub for solar energy development due to the

PJ: Our products offer the advantage of avoiding delayed

high availability of land with no agricultural value and

payments. We have optimized our process to ensure the

strong solar irradiation levels. Sonora and Chihuahua’s

down payment is provided within the first 30 days after

deserts offer the same solar conditions as the Sahara, which

submitting a request, accounting for at least 30 percent of

is estimated to have the potential for covering the entire

the total coverage. Munich RE can support this guarantee

world’s electricity demand. With our innovative product

because it works with its own capital, a factor that

addressed to this market, we are enabling higher inflows of

differentiates us from other insurance companies that might

investment to the sector, promoting further development of

take years before they start paying their clients. When a

the Mexican solar industry.

company is paying back its debts, a delay in the insurance


might also delay the repayment process, forcing the

and social studies. The information contained in these

company to apply for more investment capital or a higher

documents is all we need to perform a quick and effective

credit line. This situation could put the company in a difficult

risk assessment.

negotiating position, which could have been avoided if it had used Aon and Munich RE’s services. Our offering shuns

Q: What new products are you working on to serve the

the use of interim financing with relatively high interest

needs of the new niches arising in Mexico?

rates, therefore minimizing the total cost of the project.

DA: We always keep track of the new trends in the market to adapt our offer to its evolving needs. We are prepared

Q: How do you ensure that your clients’ projects are

to provide products and services in all the niches gaining

correctly assessed given that you offer a 48-hour response?

importance in Mexico due to the experience that we have

DA: Once we get all the information needed from the

acquired in other emerging and developed markets.

project developer, providing a response in less than 48 hours becomes a straightforward process thanks to our

Q: What new trends will shape the future of the energy

companies’ expertise in the sector. Our experience and

industry in Mexico according to your experience?

knowledge allow us to give a quick response, which is the

DA: We expect to see greater investment in smart grid

added value that we offer. To optimize the assessment

development. CENACE is controlling a spot-based market,

process, we have defined a risk baseline to benchmark our

dispatching energy according to their production costs and

clients’ projects.

always prioritizing the cheapest energy source. However, Mexico does not only need to have cheap electricity but

PJ: Our insurance products can cover a wide range of

also a diversified and reliable energy matrix. We would

scales in record time due to our companies’ human capital

not be surprised to see plans to construct one or two

and innovative risk-assessment tools. Our analytical

new nuclear reactors. Nuclear energy has the potential

system allows us to provide a quick service by considering

to become the country’s main source of baseload power.

a range of risks that have been previously rated and

Geothermal might also become popular because it can

classified in specific clusters, defined by factors such as

also provide baseload power using the country’s enormous

the project’s location. Munich RE can provide this service

geothermal potential.

in a short time due to its long experience in the sector and simplified approach. For instance, we can avoid

PJ: Solar energy will play an important role in the future

wiring theft by advising developers to use aluminum

because Mexico offers higher solar irradiation than

cables, a simple but effective solution that can bring huge

Germany, a reference in solar energy production, as well as

economic savings as the substitution of missing wiring

an unsubsidized market where solar power already enjoys

is highly expensive once the project is up and running.

grid parity. Solar power is becoming increasingly important

This tool is the first of its kind in Mexico that provides a

in emerging markets worldwide.

transparent and rapid-risk assessment for energy projects in their early stages. Banks and financial institutions

Aon Risk Solutions is a reinsurance broker and risk consultancy.

require technical and economic viability analyses as part of

Munich RE is an insurance group that supports Aon in this task with its

their process, as well as the correspondent environmental

expertise in engineering and renewable energy insurance.

213


ROUNDTABLE

HOW IMPORTANT ARE SOCIAL IMPACT ASSESSMENTS AND COMMUNITY CONSULTATIONS?

The

archeological

sites

often

found

during

the

construction stages of infrastructure projects are a silent reminder of Mexico’s cultural richness. Having different world views and languages is part of the country’s charm but they also add complexity to the strategies project developers must use to communicate and connect with local communities. The existence of the ejido figure also complicates the process of obtaining land access or rights of way for large energy projects.Some of our interviewees

shared

their

experiences,

highlighting

the importance that local communities play in the development of Mexico’s energy infrastructure.

Social aspects are extremely important for large-scale projects such as wind farms. 214

There are regions in Mexico that are more sensitive than others, like indigenousowned lands. Wind energy companies are bound by law to perform a social impact assessment, which is challenging now because not all the regulations and guidelines have been defined. A right approach to the communities implies close interaction and well-designed communication strategies that get the message clearly to the

LEOPOLDO RODRÍGUEZ President of AMDEE

communities. Many communities in Mexico tend to think that infrastructure projects are equal to money but they must keep in mind that private companies are not the government. Project developers should have social plans to make a positive impact on the project’s surrounding communities but these plans do not substitute government actions.

We are investing in social projects in Yucatan together with our partner ViveEnergía. For the past three years we have had a local office with a team fully dedicated to working with the communities on social initiatives related to our wind farms and additional projects. We also are working with other project developers in Yucatan, including solar and wind energy producers, to further expand communication and development initiatives with local communities. We are convinced that energy

RAFAEL VALDÉZ Managing Director Latin America & the Caribbean of Envision Energy

projects are positive for society, not only as electricity providers but as drivers of wealth, economic growth, job creation and businesses development. Having a diversified commercial activity will be beneficial for Yucatan’s economy and population because the state relies heavily on tourism and other limited industries. We are also working to maintain open communication channels.

Social-related risks are a common concern among different energy sectors, including electricity transmission and distribution companies. As is the case with generators, companies in this sector must obtain right of way permits to move their projects forward, which involve liaising with local authorities and communities. The situation is particularly critical in indigenous communities that are not regulated by federal laws but by customs and traditions that endure from the past century or before. The

MARCO ANAYA Sub-Director of Power and Infrastructure at Marsh

other relevant risk for distribution and transmission companies the transmission fees set by the government, which have a strong impact on the financial viability of a project. In both cases, Marsh can make use of its extensive local expertise to help companies understand the risks associated with these activities and to establish particular strategies to address them.


We always visit landowners to understand what they expect as remuneration for their land, making the proper negotiations before advancing the project. For many of these people, that land is everything they have. Energy infrastructure projects are designed so the economy evolves in the area and we always try to communicate that. Following the right processes is extremely important as the construction cannot proceed if we do not have the required permits. Moreover, companies that do not comply with the established processes might be subjected to expensive fines. We agree with the authorities that having these kind of controls is necessary

FERNANDO CALVILLO Chairman of the Board of Fermaca

because it prevents abuses. In addition, following the right social management strategies is crucial to secure financing for the project because many financial institutions ask that projects comply with the Equator Principles.

Rights of way permits for natural gas projects are especially complex in Mexico, 215

particularly due to the novelty of the industry, which has been present in the country for less than 20 years. During our business activities, we have observed a recurrent lack of awareness about natural gas risks and benefits in the communities located near transportation infrastructure. Natural gas is usually perceived as a dangerous element, with high risks of exploding and polluting the environment. Our strategy is to contact communities involved in the development of new infrastructure and communicate to them the positive effects that natural gas has, such as attracting industries and boosting the local economy, as well as the objective risks by using

LUIS MONTGOMERY Director General and CEO of ACCESGAS

open and clear information. At ACCESGAS we believe that honesty and education are the most important aspects to ensure the success of a project.

The social dimension of energy projects must be managed as a win-win situation. We are making use of this approach for a 12km electricity transmission line that is being constructed in the state and it has proven successful. We have not yet experienced any problems with obtaining the rights needed. Another important aspect has been the close collaboration with the municipal and federal governments. Baja California Sur’s energy department contributes to easing this process by providing legal and technical support for all the documents and permits required.

LUIS SOLIZ Energy Director at the Government of Baja California Sur

Social challenges are not just particular to Mexico. Project developers in the US also need to consider many aspects to ensure their projects will be accepted by local communities, particularly if they cross a Native American territory. We believe that bringing communities on board is more of an opportunity than a challenge. It leads to a win-win situation. Communities can have better services and economic development and companies can have a local labor force and easier access to land, even in regions outside the project’s scope because locals are likely to spread the good news. Being clear about the added value that a project can bring to a community is the best way to avoid hurdles along the way. To ease this process, the Mexican government can set up working groups to support companies in this process and act as a mediator between them, local governments and communities.

LEONARDO BELTRĂ N Deputy Minister of Planning and Energy Transition


VIEW FROM THE TOP

FOCUS ON THE SOCIAL PLAN MORE THAN ASSESSMENT ALFONSO CASO Director General of ANAF Energy

216

Q: What motivated ANAF Energy to include social

actual benefits to the community. By approaching the

impact assessments and indigenous consultation in its

communities correctly and explaining the benefits, the

portfolio?

project will have the required social license to operate.

A: The Electricity Industry Law and the Hydrocarbons

But companies must ensure there are actual benefits if

Law now require Social Impact Assessments (SIAs)

they are to build a successful relationship. The idea is to

as a mandatory requirement for energy projects. The

generate a win-win situation.

important part is not the assessment per se but the successful implementation of the social management

Q: What common mistakes do companies make and how

plan. The goal of the new law is to return part of a

can these be avoided?

project’s profits to the community as compensation for

A: One of the main challenges faced by power companies

any negative impact it might cause. We want companies

is the lack of social knowledge. Engineers, technicians

to

for

and other decision-makers do not have the required

communities is far more important than just complying

be

aware

that

producing

positive

results

social and anthropological knowledge to manage social

with the paperwork. To write the social regulations

impact projects. It is not part of their core competencies.

accompanying the new laws, the Mexican government

Therefore, companies should hire specialized parties to

considered the principles and the methodology of the

perform adequate SIAs. Failing to build agreements with

International Association of Impact Assessment (IAIA)

communities is one of the reasons an energy project may

and the International Petroleum Industry Environmental

not materialize. Dialogue and understanding are the only

Conservation Association (IPIECA).

way to permanently and efficiently resolve social issues. Many companies tend to solve these issues through

Complying with corporate social responsibility implies

economic compensation instead of looking for joint

matching a project’s profitability to the community’s

solutions.

needs to create a sustainable model in harmony with human rights, while guaranteeing the long-term

Another common mistake is to allow inexperienced

viability of investments. I had the opportunity to gain

people to deal with local authorities and establish

experience in this matter during my time as a director

agreements that do not always reach all the involved

of an investment fund for agribusiness. I worked closely

stakeholders. Following the anti-corruption guidelines

with ejidatarios and rural communities during this period

of the Organization for Economic Development (OECD)

to develop productive projects, some of which are still

and the World Bank’s standards for SIAs helps to ensure

in operation 20 years later and are seen as successes.

the successful implementation of a project so we include

This experience comes in handy for ANAF Energy’s

them in all our processes.

social department because it gives us perspective on how to develop successful community projects using a

In the case of indigenous territories and communities,

productive approach and taking into account the limited

the

resources companies have to support these initiatives.

established in the International Labor Organization (ILO)

regulatory

framework

follows

the

principles

Convention 169, related to indigenous and tribal people’s Q: What main opportunity areas have you identified in

rights. These principles state the mandatory nature of

the social impact legislation?

performing previous, free and informed consultation

A: The enforcement of the social management plan is the

to comply with international regulations. This process

most important element of the new legislation. The focus

can only be performed under the Ministry of Energy’s

should go beyond the authorization of the assessment

supervision but consultancies can help with the process

for the sake of compliance and instead look to bring

by addressing the companies’ needs and possibilities.


Project developers also need to be aware that all

from sources such as CONEVAL, INEGI, the Ministry of

completed agreements must be based on the legal

Urban and Territorial Development (SEDATU) and the

framework, for instance in the case of municipal permits

Ministry of Agriculture, Farming, Rural Development,

or communal assemblies.

Fisheries and Food (SAGARPA). The fact that our database is built at municipal and community levels sets

Q:

How

can

companies

balance

economic

us apart from other consultancies and gives us a deeper

competitiveness against community benefits?

local perspective. The initial analysis allows us to identify

A: There is no exact formula to achieve such a balance.

the needs of the community that must be worked out

The current regulatory framework does not establish a

with the company and the stakeholders in the social

mechanism to define the social retribution percentage

management plan. The challenge is to ensure social

that must be considered in each type of project. The

management plans do not get politicized.

compensation that will be allocated to the different identified

activities

will

be

defined

in

the

social

There should always be an open dialogue to establish

management plans. We have indicators that take into

where

account the investment needs, the affected population

government’s responsibilities begin. We all strive for

the

and the infrastructure required by the project that also

social and economic progress. Mexico has the huge task

will be beneficial to the community. The combination

of validating in practice the energy sector transformation

of such factors will give a coefficient to calculate the

it has envisioned in the reform, particularly in the

equilibrium between economic competitiveness and

electricity segment. It has already achieved some of

community benefits.

the most competitive prices for renewables globally, promoted

company’s

clean

commitments

energy

investment

end

and

and

the

identified

Q: What is the added value that ANAF Energy brings to

potential benefits for the local communities in which the

a project’s social dimension?

projects will be built.

A: The first step in our process is to develop the SIA, which includes a baseline study to understand the community

ANAF Energy is a multidisciplinary consultancy offering integral

through a set of variables. We have developed a social

services for the Mexican energy industry, including social engineering,

database that includes 32 states, 2,400 municipalities

indigenous consultations, land tenure, financing, integration and

and over 120,000 communities, incorporating information

processing of permits.

217


PROJECT SPOTLIGHT

218


TAMAZUNCHALE - EL SAUZ PIPELINE Few people in Mexico — even those with long experience in the construction of natural gas pipelines — know that xanthi-ncuni is the Otomi word for pipeline. That, however, is the level of detail that Mexican developers need to adopt to ensure their projects’ success. The construction of the Tamazunchale-El Sauz pipeline was not free of technical hurdles but it was the innovative strategy that Grupo Desarrollo Infraestructura (GDI) implemented to ensure the local communities’ approval that made this case so special. The success of the project is even more remarkable considering its scale: the 229km natural gas pipeline passes through 125 communities in the states of San Luis Potosi, Hidalgo and Queretaro, including indigenous territories and ejidos. This means that GDI had to negotiate with hundreds of landowners as the average length of the properties was a mere 200m. Energy infrastructure projects are likely to improve the economy of a region but they also cause disruptions in daily lives of communities, especially during construction. Being clear about the project’s impact becomes crucial to avoid false expectations and bring communities on board. Understanding this, GDI launched a thorough communication campaign during the 18 months of the project’s construction that included material in the local indigenous languages. The company also made use of protocols to perform indigenous consultations in line with the uses and practices of the region. Given the number of indigenous groups living around Tamazunchale-El Sauz, it is not surprising that several archeological pieces were found during construction. But the relevance and quantity of these pieces was in fact a pleasant surprise for GDI’s engineers and the group of archeologists from the National Institute of Anthropology and History (INAH) that accompanied them to explore the area and safeguard pieces and land of historical value. Among the most relevant discoveries was a pyramid on top of a mountain in a remote location of Hidalgo’s cloud forest. The company’s interest in protecting and documenting the region’s historical heritage was also crucial in the establishment of strong relationships with the communities. Dealing with rural communities is often seen as the most challenging part of developing large infrastructure projects in Mexico. But cases such as the Tamazunchale-El Sauz show that it is possible to carry out profitable projects in areas with high cultural diversity.

219


INSIGHT

SOCIAL ISSUES CLARITY NEEDED FOR PROGRESS JAIME MARTÍNEZ Business Development Director of ERM

220

More than 5GW of new, clean power plants will be built

Martínez agrees that the lack of clarity in the regulatory

in Mexico in the next three years as a result of CENACE’s

framework regarding social management is a challenge

two long-term power auctions. Much of the new power

for companies in the sector. But he does not consider that

will come from wind farms and solar parks, using Mexico’s

a valid excuse for poor social strategies. “There are several

abundant natural resources to satisfy the growing

international guidelines that make reference to this topic

electricity demand. The acquisition of land rights and right

and could be used as a model until the Mexican guidelines

of way permits is crucial to these projects as many are

are completed. In fact, some of the Mexican regulations

technologies that require great tracts of land. To ease these

or requirements are based on international treaties such

processes the new law makes Social Impact Assessments

as the International Labour Organization (ILO) Convention

(SIAs) and indigenous consultations mandatory for energy

169 that states the procedures that must be followed when

projects both in the oil and gas and electricity sectors. But

dealing with indigenous communities and territories.

the lack of specific guidelines is stopping companies from

Even though there would be local considerations, it is

taking full advantage of these mechanisms.

recommended to follow international standards, in which ERM has strong expertise. So, why wait?”

“There is a general concern in these industries about the lack of certainty and clarity in the law,” says Jaime Martínez,

Timing, he says, is one of the most important factors.

Business Development Director of ERM, a global provider

“We always recommend our customers get involved

of environmental and social consulting services. “Many

with the community as soon as possible. Despite the

projects are not moving as fast as they could due to social

lack of certainty in local guidelines, waiting too long to

issues so we would like the government to clarify these

approach the community is the worst move a company

aspects soon. In Mexico, complying with social-related

can make. For instance, communities might find out

regulations is often harder than with their environmental

about the project through the media and adopt a

counterparts, so having certainty and clarity over this

reluctant attitude due to the lack of clear information

issue is a concern for energy companies.”

and the feeling of being left out of important decisions. When it comes to establishing friendly relationships with

Public opinion often perceives communities as the most

communities, we always say the sooner the better.” Even

vulnerable partner in the negotiating process but Martínez

if companies follow Martínez’s advice, other challenges

suggests companies are also exposed to many risks as a

are on the way. The Energy Reform has spurred a greater

result of failed social management strategies.

number of energy infrastructure projects in Mexico, leading to a larger backlog of SIAs than the Ministry of

He says there have been cases where a community’s

Energy can handle.

expectations have skyrocketed due to inappropriate communication strategies, making it impossible for

“Companies know there are many projects in the

companies to handle the situation. “Transparency is

pipeline that require permits and that public authorities

usually the best approach to avoid social issues because it

have a limited capacity to manage all these processes,”

allows communities to weigh the project’s positive impacts

Martínez says. “The Ministry of Energy has recognized its

and make informed decisions. Opening communication

limitations and has been flexible with project developers,

channels allows the discussion of a projects’ positive

showing a proactive approach and presenting a proposal

aspects that include not only economic incentives but

based on international regulations while the Mexican

employment and development opportunities, which must

guidelines are unavailable. The Ministry’s flexibility has

also be considered by local communities in the decision-

been crucial to keeping the projects moving amid the

making process.”

uncertainty."


INSIGHT

NEW RULES BRING INDIGENOUS COMMUNITIES ON BOARD FABIÁN CASAUBÓN Partner at Overflod Social

All energy companies that want to operate in Mexico

states of Oaxaca, Yucatan and Chiapas holding the largest

should get familiar with the Social Impact Assessment

indigenous populations. The most common spoken

(SIAs) and the Free, Previous and Informed Consent

languages are Nahuatl, Maya and Tsetsal but more than 72

process for indigenous communities because both are

languages are found across the country. 221

here to stay as part of the new regulatory framework. Mexican regulation stipulates the compulsory nature of The social dimension of energy projects has not enjoyed

the two requisites but it still lacks in-depth specifications

the same level of attention as the environmental side,

about the proper way to implement them, according

even though failure to address social considerations could

to Casaubón. “The government’s biggest challenge is

lead to a project’s cancellation. The Mexican government

to clarify the guidelines that companies should follow

aimed to change that by implementing SIAs and

to respect the indigenous communities’ rights without

making indigenous consultations mandatory in project

compromising

development. Both measures are expected to promote the

projects.”

the

viability

of

renewable

energy

use of adequate social strategies, avoiding project attrition due to social rejection. “Social license to operate has been

In Casaubón’s view, “acknowledging the social dimension

understood as getting the local communities’ approval

of the project is not the same as being a socially

by investing in them,” says Fabián Casaubón, Partner at

responsible company. A proper social strategy goes

Overflod Social. “The Mexican regulation wants to expand

beyond providing physical or financial assets to the

this vision further. It looks to acknowledge that companies

community. It is about creating strong bonds among all

can generate profits due to the resources provided

the stakeholders involved.” Implementing participatory

by local communities.” Overflod Social is a Mexican

processes and involving the community in decisions

consulting company with over 15 years' experience in the

are key to effective social management strategies. “We

design, implementation and assessment of strategies to

managed the successful case of a hydroelectric company,

establish healthy relationships between companies and

establishing a social strategy in its project’s early stages

communities impacted by infrastructure projects such as

and adopting a benefit-sharing approach by improving

pipelines or power plants.

the water infrastructure of the surrounding communities,” says Casaubón.

According to Article 120 of the Electricity Industry Law, all companies interested in obtaining the required permits

GENERAL PHASES OF INDIGENOUS CONSULTATION

to develop an energy project must present a SIA to the Ministry of Energy. This assessment, as defined by law, consists of a document identifying, characterizing, predicting and assessing the project’s social impact, as

1.

Consultation Plan

2.

P rev i o u s Agreements

well as the corresponding mitigation strategies and social management plans. The law also states that a previous consultation must be carried out in the case of projects having indigenous communities in their area of influence.

4.

3.

5.

6.

Consultative Stage

Information Stage

“The indigenous consultation is another critical part of the new framework because failing in this aspect might lead to the project’s cancellation,” says Casaubón. According to INEGI, more than 7 million people belong to an indigenous group and speak a native language in Mexico, with the

Deliberative Stage

Source: Rules of the Electricity Industry Law

Monitoring of Agreements


Bii Hioxo wind farm, Oaxaca, Gas Natural Fenosa.


WIND

9

Wind power is no newcomer to the Mexican energy matrix but 2016 saw strong consolidation of wind farms as a reliable source of power in the country, taking advantage of known locations such as Oaxaca but also moving past them to less established regions such as Tamaulipas and Baja California. The creation of the MEM has brought about increased demand for renewable energy from both heavy industrial and commercial companies looking to comply with clean energy targets and to reduce their dependence on CFE’s supply.

This chapter showcases the progress made by local and foreign wind power companies to establish wind as a main, dependable source of energy in the country and the increased competition it faces from relatively new sources like solar, one of the main winners of the country’s 2016 long-term power auctions. It also shows what developers, operators and technology companies are doing to increase the competitiveness of wind power in the country and deal with regulatory challenges.

223


CHAPTER 9: WIND 226

ANALYSIS: Wind Power Blowing Past Tehuantepec

227

VIEW FROM THE TOP: Leopoldo Rodríguez, AMDEE

228

VIEW FROM THE TOP: Angélica Ruiz, Vestas

231

INSIGHT: Jorge Lobatón, Gamesa

233

INSIGHT: Armando Negrete, ABB México

234

VIEW FROM THE TOP: Michael Brower, AWS Truepower

225

Jorge Ochoa, AWS Truepower

235

INSIGHT: Jorge Melero, UL-DEWI

236

MAP: Wind Projects in Operation & Construction

243

VIEW FROM THE TOP: Manuel Iglesias, Kintech Engineering

244

INSIGHT: Sinaí Casillas, Government of Oaxaca

245

VIEW FROM THE TOP: Savir Ruiz, CODISA CORP Energy

246

VIEW FROM THE TOP: Francisco Con, CEMEX Energía

247

INSIGHT: Glen Hodges, Pattern Development

248

INSIGHT: Alejandro Robles, SOWITEC

249

INSIGHT: Fernando Villarreal, Oak Creek Energy

250

VIEW FROM THE TOP: David Barrie, SgurrEnergy

251

VIEW FROM THE TOP: Marco Anaya, Marsh

252

Rosa Morán, Marsh

ROUNDTABLE: What is the Outlook for Wind Energy?


ANALYSIS

WIND POWER BLOWING PAST TEHUANTEPEC In 2016 wind consolidated as a reliable source of

construction across the country. “Wind farms tend to be

renewable energy in Mexico's electricity sector. The

more solid than other renewable energy projects because

country's wind power potential is estimated at over

they have longer maturing periods, being supported

50GW and the regions with the most promise such as

by extensive wind forecasting studies and permitting

the Isthmus of Tehuantepec and La Rumorosa in Baja

processes,” says Jorge Lobatón, Director General of

California are developing several projects to harness that

Gamesa for Mexico & LATAM.

power. In Baja California, there are three wind parks under construction and two operating, while Oaxaca, a pioneer

THE CHALLENGES

in this technology with 21 parks already operating, has

To keep developing this technology, new and prospective

three under construction.

projects must be met by an equal development in

226

transmission.

Because

of

the

delay

in

several

The new market rules have given private companies a

infrastructure projects, many of the projects planned

wider scope for power generating schemes, launching

for the Oaxaca government’s first energy open season

a rapid expansion of new wind developments way past

have not been able to begin construction. The planned

Oaxaca and Baja California, with places like Tamaulipas

Oaxaca-Valley of Mexico HDVC line, to be auctioned in

also sailing the high winds of energy generation. But

2017, is expected to benefit this industry the most, as it

where wind turbines once ruled supreme — and almost

will open new markets to the energy developments of

alone — in the Mexican renewable energy matrix, the new

the windy Tehuantepec corridor.

rules and power auctions have also brought increased competition from other renewable sources like solar.

The coming years will be crucial as the government strives to accomplish its goal of producing 35 percent

With solar PV being so successful in the first power

of its power from clean energy sources by 2024, for

auction, wind had to step up and increase its cost-

which wind power will hold a key position. In its 2016

competitiveness to ensure its position in the second

Mexico

power auction. This increase in competition also resulted

Agency (IEA) projects a 5-20 percent cost reduction

in several wind developers considering diversification

in the long term for wind power in Mexico, resulting

into other renewable sources. “We realized we needed to

from technology development. The Internet of Things

diversify our services and after doing some benchmarking

and other technological advances have already started

we decided to go for something that was already

penetrating the industry, with the potential of increasing

established. We went for solar, which is a product people

competitiveness and efficiency. Monitoring solutions

are asking for and which has an important opportunity in

are beginning to shape the industry and boost the

the country,” says Sergio Martínez, CEO of MASE Energy,

performance of wind parks.

Energy

Outlook,

the

International

Energy

which previously had been mainly a wind farm developer. “Control is critical,” says Armando Negrete, Energy

THE AUCTIONS

Leader Wind Power of ABB México. “Imagine wind farms

The results of the long-term power auctions made

as large fields with several subsystems, which include

clear investor confidence in the feasibility and cost-

subtransmission and transmission power systems. All

competitiveness of this renewable resource. Private

elements have to be coordinated in such a way as to

companies showed readiness to invest in wind projects,

deliver efficiency despite all possible variations. It is

which resulted in wind being the second most awarded

necessary to balance the system to optimize it.”

technology in both auctions, at 11 projects with a total capacity of 1,522MW. The largest project awarded was

Financial schemes and the regulatory framework will also

Parque Eólico Reynosa, a 387MW plant to be developed

determine the evolution of the wind industry in Mexico,

by Intaván México. With those results, wind consolidated

as initial investments for renewable projects, especially

as a promising renewable resource for the Mexican power

for wind parks, is still extremely high. Innovation and

industry. Even though PV energy was awarded a larger

adaptation will be the main elements for achieving

share of capacity, it remains a novel technology in the

success for wind project developers and the banks and

national context. Wind, on the other hand, already has

institutions that are willing to bet on the future of this

34 parks installed and operating and 26 more parks in

promising technology.


VIEW FROM THE TOP

CONTRACT FLEXIBILITY A BOON FOR WIND POWER LEOPOLDO RODRÍGUEZ President of the Mexican Wind Energy Association (AMDEE)

Q: What are some of the advantages and challenges for

Q: What added value does wind energy provide large off-

wind project developers as the market evolves?

takers over other technologies?

A: It is now easier to incorporate new off-takers without

A: Long-term certainty and larger productivity. Solar PV

having to include them as shareholders of the project.

parks, for instance, offer capacity factors in the range

Although off-takers will not have the same level of price

of 20–30 percent, while competitive wind farms in

certainty as before, they will benefit from the possibility

Mexico have capacity factors above 40 percent, some

of more easily incorporating or removing loads in different

getting close to 50 percent or even above. In certain

nodes. In that way they can also secure stable prices

windy regions of the country, wind profiles also offer the

but under more complex bilateral contracts. We expect

advantage of a closer match to the typical daily demand

these new possibilities to result in a mix of short, medium

profile than solar because it is common in windy regions

and long-term contracts for the same project. Once the

for the wind to blow very well during peak demand hours,

industry matures we also foresee more activity in the short

including late afternoon through midnight. This is the case

term and in spot markets. In the past, legacy projects

in the northeastern region where wind farms are more

could offer a fixed block of energy on an annual basis,

productive in the late evening or at night.

given the old energy bank mechanism to balance loads. It is now possible to have a similar portfolio but companies

Q: What are the major technological advances that have

must take on greater risks for the amount of energy they

allowed the deployment of wind energy in Mexico?

commit to producing, having to purchase energy at higher

A: It was not possible to develop renewable energy

rates from other generators or suppliers if their forecasts

projects in Mexico six or seven years ago without the help

fall short. If well played, however, suppliers can secure the

of subsidies and special financing plans. Back then, wind

lowest tariffs in the market. The market’s logic has changed

energy development was only feasible in the Isthmus of

so energy companies need to refine their strategies to

Tehuantepec in Oaxaca, a region with remarkable wind

remain competitive. Mexicans got used to fixed tariffs but

energy resources. Technological developments in the past

now they need to adapt to having more volatility.

few years have allowed companies to capitalize in other Mexican regions such as Tamaulipas, Coahuila, Nuevo

Q: How do you expect the new market to impact project

Leon, Jalisco, Chiapas, Yucatan and Baja California, among

development and ownership?

others. These advancements have raised wind farm

A: We used to see a good number of top wind turbine

capacity factors to close to 40 percent from 30, making

manufacturers developing and operating projects for

projects more economically attractive. Developments

developers and off-takers, many of which have been

include the introduction of digitalization and automation

transferred to third parties that will keep them in the long

technologies such as monitoring sensors that analyze a

term. But major international developers and operators are

turbine’s performance to maximize its availability. We now

well established and planning for significant expansions

see wind farms with 90-98 percent availability factors,

and we also have seen large Mexican off-takers involved

meaning they are ready to operate as soon as the wind

in self-supply projects, thus evolving and creating their

starts blowing. Another technological advance is the use

own project development divisions to become relevant

of larger rotors and higher towers, which allow companies

players in this new, competitive market. We are also seeing

to take advantage of lower wind speeds.

an influx of international project developers interested in entering Mexico. In addition, the market will require the

AMDEE, founded in 2005, brings together project developers,

involvement of new players providing complex financial

manufacturers and service providers to present a united front on

and technical services, some of them very specialized. We

common issues to the authorities, society and economic players.

are not used to this.

227


VIEW FROM THE TOP

WINDOW OF OPPORTUNITY TO TRANSFORM LANDSCAPE ANGÉLICA RUIZ Vice President & Director General Mexico & LATAM of Vestas

228

Q: What is Vestas’ role in promoting the expansion of

Denmark in April 2016 is a clear indicator of the

wind projects in Mexico?

government’s interest in learning about this subject.

A: The results of the COP21 climate conference

Mexico could learn from Denmark about the challenges

made it clear the world is entering a historic window

and solutions related to managing an electricity network

of opportunity to transform its energy landscape,

heavily reliant on wind energy. About 42 percent of the

particularly in countries like Mexico that have been

Danish energy matrix is based on wind power, which

active in the negotiations. The Mexican government

is an outstanding percentage and makes the Nordic

has been supporting international initiatives to tackle

country a leading example of efficient natural resource

climate change not only by participating in the events

management.

but by taking action through the country’s energy policy. Mexico’s clean energy goals are clear, concise

The official visit to Denmark led to the signing of two

and ambitious, which talks to the government’s interest

bilateral deals regarding technology transfer and the

in pushing the incorporation of a higher share of

opening of new financing lines. These agreements

renewables into the country’s energy mix. These new

included the recognition of Vestas as a guaranteed

circumstances are favorable for companies like Vestas

technology by Danish banks, which means that our

that have expertise in the sector, a unique track record

products have the potential to reduce a project’s CAPEX

of projects and a mature technology with the potential

and to optimize costs. To a certain extent Vestas can

to optimize the performance of wind turbines. Vestas is

be seen as a symbol of Denmark, representing the

driving the wind industry forward by lowering production

country's innovation and technological development.

costs and pushing for the creation of an energy system

The three crucial points in the bilateral relationship

similar to that of Denmark where renewable energy

between Denmark and Mexico will be for Mexico to

takes a central role.

understand how a wind-based energy matrix like that in Denmark works, technology transfer and the inflow of Danish investment into Mexico’s wind power sector.

Mexico currently produces around 3 percent of its electricity from wind power while Denmark has the world record at 43 percent

Q: What is the current role of the country in your Latin American portfolio? A: The implementation of the Energy Reform is helping Mexico take a leadership position across different sectors in Latin America, with particular emphasis on the electricity industry. Besides the liberalization of the market, Mexico’s proximity to the US has placed the country in a privileged position in the eyes of international investors, increasing its attractiveness over other Latin American markets. Nonetheless, there are many interesting situations in the region. For instance, Argentina is already on the way to implementing its

Q: How can Mexico take advantage of Denmark’s

own energy reform and both Peru and Chile have just

expertise in the wind energy sector?

conducted a successful series of electricity tenders in

A: The fact that President Enrique Peña Nieto, Minister

the utility-scale field. The lessons learned from different

of Energy, the Ministrer of Economy and the Deputy

countries have been crucial for achieving the record

Minister of Electricity attended the official visit to

low electricity prices that we have witnessed this year.


In this scenario, Mexico is playing a relevant role, being

Q:

What

business

models

and

technological

clear about its clean energy objectives and moving from

breakthroughs are needed to reduce wind energy

words to action as was demonstrated in the country’s

production costs?

first long-term electricity tender.

A: The wind energy industry has optimized costs over the last 10 years while solar has just started to improve

Q: Which Mexican regions are best-suited for developing

its performance. Technological advances will continue to

wind farms?

be crucial for optimizing wind energy’s costs and Vestas

A: Regarding natural resources, Mexico is one of the most

expects to play an important role in this transformation.

privileged countries in the world, making it a suitable

We are an innovative engineering company that is

location for the development of diverse renewable

constantly looking to optimize the functioning of wind

energy projects. In the case of wind energy potential,

turbines, maximizing energy production on site to reduce

Mexico offers wind Classes I, II and III, Oaxaca state

costs. One strategy to enhance a wind farm’s performance

being the most attractive region because it has Class I

is to work on the generator design, testing different

wind speeds. The center and north of the country offer

diameters, heights, control and monitoring systems.

Class II and III wind speeds, suitable enough to develop profitable wind farms. All of these characteristics make

There also are opportunities to lower wind energy costs

Mexico a unique hub for wind energy development,

by optimizing the industry’s supply chain. CENACE’s

including regions that remain largely unexploited. To

electricity tenders and the highly competitive PPAs will

promote the deployment of wind energy in Mexico,

be an incentive to improve the whole ecosystem. We see

Vestas has collaborated with the Ministry of Energy

great potential to optimize civil engineering, electrical

to create a wind resource map, identifying the regions

installations and material transportation activities.

with higher potential to allow a numerical visualization. This

information

has

been

made

public

to

help

Q: How popular are Vestas’ EPC and O&M services in

companies select the most suitable technologies and

Mexico and what is currently driving demand?

the optimal sites to capitalize on the country’s potential.

A: With the new regulatory framework, the Mexican

Fortunately, Vestas has a wide range of products to suit

market offers ideal conditions to sustain the entire

the conditions of different Mexican regions, from north

wind energy chain. The country already has a wide

to south, which is another competitive advantage.

range of qualified suppliers along different segments and locations, contributing to the deployment of wind

Q: What is Vesta’s strategy to hold its leading position

projects in the region. However, there are still occasions

in the face of fiercer competition after the Siemens-

in which our clients prefer to receive a turnkey project,

Gamesa merger?

which is part of Vestas’ value proposition. In these cases,

A: We consider competition a favorable force to move

Vestas is prepared to offer our customers the services

the industry forward. In the wind energy market, as

required to provide a turnkey project, benefitting from

in all others, M&A have upsides and downsides but it

our internal expertise in Balance of Plant (BoP), turbine

is too soon to tell what will be the impact of Siemens

design, data analysis and technical solutions.

and Gamesa’s merger. The industry adjustment will bring new challenges for Vestas but it will not change

In Mexico, Vestas has broken ground for the development

our goal to remain a worldwide leader in the sector.

of wind energy projects in different regions, including

To maintain our position, we consider R&D investment

challenging locations like Tamaulipas or Oaxaca. This

a crucial part of our strategy because innovation has

expertise has differentiated us from other companies in

been the key feature separating Vestas from other wind

the market and might act as an incentive to increase the

companies. We are confident that Vestas will grow with

demand for this kind of service in the future. We have

the competition. We are not afraid of new challenges.

already developed some turnkey projects in Mexico, mainly for new companies entering the market as

Q: What is Vestas’ relationship with CFE?

mature ones prefer to complete the project themselves.

A: CFE, with whom Vestas has established a fruitful

As long as our clients require them, we plan to continue

collaboration, will continue playing an essential role

offering EPC and O&M services as part of our portfolio

in the new electricity market. In 2015, Vestas signed a

in Mexico, especially as we already have the internal

memorandum of understanding with CFE to become its

capabilities needed.

technological partner and promote the deployment of wind fields in Mexico. Vestas wants to continue moving

Vestas, founded in 1898, is now a global company and a wind energy

this project forward, strengthening our partnership and

leader. It has over 75GW of wind capacity installed, representing around

looking for new opportunities to collaborate.

20 percent of the global installed base.

229


La Venta wind farm, Oaxaca, Gamesa

230


INSIGHT

TOP OEM THIRD YEAR IN A ROW JORGE LOBATÓN Director General for Mexico & Latam of Gamesa

Gamesa’s predominance in the Mexican wind power

plant in 2017 from WINDAR Renovables, a company

market goes without question. The Biscay, Spain-based

in which Gamesa holds a stake. We are evaluating the

company holds over 50 percent of the local industry’s

possibility of manufacturing more in Mexico to reduce

market share and was named the top-ranked wind OEM in

logistics costs, a significant part of our business.”

the country for the third year in a row, according to MAKE To strengthen its position, Gamesa is turning to local

Consulting’s “Global Wind Turbine O&M 2016” report.

companies,

establishing

long-term

agreements

with

Since its arrival here in 1999, Gamesa has installed around

local providers and partners such as manufacturers in

2GW of wind farms. When asked about the company’s

Coahuila and Ciudad Juarez. “What we generally look for

recipe for success, Jorge Lobatón, Director General of

in our partners can be summarized in three points: quality,

Gamesa for Mexico & LATAM, is clear: “Our technology

commitment and cost-competitiveness. We consider it

focuses on reducing energy costs. Three or four years ago

important to support the development of a local value

there were many areas in Mexico where it was impossible

chain. We have been supporting the industry through

to develop profitable wind farms but our innovative

agreements with our partners but we have not made any

products, tailor-made for the Mexican market, made it

direct investment yet,” Lobatón says.

possible. Companies that do not innovate are condemned to disappear. We are always looking to innovate to

The company’s commitment to the Mexican market is

increase the competitiveness of Gamesa and wind energy

also reflected in its plans to open an O&M hub in Oaxaca,

in different market settings and we are proud to say that

which will not only serve Gamesa’s clients in Mexico

we have achieved it in Mexico.”

but throughout Latin America. “The O&M services unit, managed by a highly qualified international and

team, constitutes a fundamental tool for the creation

adaptability as necessary ingredients in making it a

of value from the development, servicing and profitable

global leader. “Particular locations present their own

operation of wind projects. Gamesa has a large O&M

challenges and characteristics so we adapt to the needs

team operating almost 3GW of O&M contracts in Latin

of each client,” Lobatón says. “Our ultimate goal is to

America. In 2017, the company will inaugurate its new

provide solutions that allow customers to produce energy

installations in Oaxaca, equipped with offices, storage

efficiently and at competitive costs. We have four different

and training, operation and repair centers. This new

product platforms, including 2MW, 2.5MW, 3.3MW and

installation will be the O&M hub for Latin America,

5MW and each platform includes technologies that are

including Brazil,” he says.

Gamesa

also

counts

product

diversification

common to all of them. For instance, in the 2MW platform, we handle rotors with diameters from 80m (G80), like

Lobatón sees great potential for wind energy in Mexico

the ones already used in Oaxaca’s wind farms, up to 114m

even though solar projects held the spotlight in 2016 due

(G114). In between we have rotors such as G90 and G97.

to CENACE’s power auction results, particularly in the first

Similarly, we handle different tower heights, going from

event. “Although solar energy was the main technology of

44m to above 120m. This versatility allows us to play with

the first power auction, the results were highly influenced

different components to find the right solution for each

by the economic benefits given to certain geographical

customer under a wide range of conditions.”

areas. But in the second power auction, in which all regions competed on a level playing field, wind energy accounted

Even though the company has not yet built manufacturing

for 43 percent percent of the capacity. This is up from 20

facilities in Mexico, Lobatón considers that a possibility. “We

percent obtained in the first auction. Solar energy reached

are awaiting the opening of a wind tower manufacturing

54 percent versus 80 percent in the first auction.”

231


INSIGHT

CONTROL IS CRITICAL FACTOR FOR EFFICIENCY ARMANDO NEGRETE Energy Leader Wind Power of ABB México

Behind every megawatt-hour of wind power injected into

generated there are certain similarities too,” Negrete says.

the grid there is a ton of planning, generating, connecting,

“In solar, the curve between day and night is predictable

transmitting, monitoring and controlling. To facilitate

and within a range, whereas in wind the curve is not that

these processes, wind operators make use of advanced

predictable and has a narrower range. Each control system

technological equipment that must be designed with all

is therefore designed to those types of considerations. In

possible operational variations in mind. For that reason,

both cases ABB provides the level of safety, reliability and

leading suppliers of electric equipment for the wind

sustainability to deliver excellent results.”

industry are companies with strong R&D cultures. One of the added values that ABB brings to wind energy automation

projects is its expertise in electricity transmission and

technologies, invests around $1.5 billion annually to fund

distribution systems, which has allowed it to develop

the R&D activities of its 8,500 technologists in seven

products to cope with wind’s intermittency and comply

corporate research centers. The amount of resources

with increasingly stricter grid codes. “We have a

invested in technological development seems to be

product known as STATCOM (Static Compensator). The

paying off as ABB’s products are used by top companies

implementation of the new grid code is recent in Mexico

in different sectors, including wind energy. “As a global

and people are just becoming interested in our solutions. In

player, ABB has the portfolio to help customers from

the UK, where they have had a stricter grid code for longer,

the inception of the projects, through specific software

ABB has a large installed base. The technology is not new

packages, to services offered during the wind park’s life

but the application is. We have growing expectations for

span,” says Armando Negrete, Energy Leader Wind Power

this technology in Mexico. We are determined to remain

of ABB México. “This means ABB works with all different

the leader of Flexible Alternating Current Transmission

systems, subsystems and elements of a wind farm to get

Systems (FACTS) technologies in Mexico, now also in the

the best balance on technical performance and return on

renewable energies sector,” says Negrete.

ABB,

a

global

leader

in

power

and

investment. From equipment in the turbine’s nacelle to the connection to the grid, covering all new requirements on

CRE released the new Mexican grid code in early 2016

grid code and power quality, ABB helps to capture wind

as mandated by the Electricity Industry Law, introducing

energy with the highest efficiency.”

stricter interconnection requirements as a strategy to move Mexico’s power network closer to international

The critical factor for all wind projects is control. Without

standards. The code includes new requirements for

it, efficiency is reduced and an imbalance becomes

reactive power compensation to ensure the stability

probable. “Control is critical across the project. Imagine

of the transmission network, which is more complex

wind farms as large fields with several subsystems, which

with intermittent sources like wind. ABB’s STATCOM

include subtransmission and transmission power systems.

helps renewable power producers to meet these new

All elements have to be coordinated in such a way as

requirements by increasing power transfer capability

to deliver efficiency despite all possible variations. It is

through enhanced voltage stability, maintaining smooth

necessary to balance the system to optimize it and get the

voltage profiles under different grid conditions. Negrete

energy in the most efficient way to the network,” Negrete

expects the demand for its grid code compliance products

says. In both wind and solar applications, there are

to increase as the industry digests the implications of

technologies that require specific, tailored products and

these new rules. But power production optimization

companies are looking for reliability to produce quality

needs to be considered from the early stages of the

results. “There are some considerations that need to be

project. “The earlier we can intervene the greater value

taken into account in both cases but once the power is

we can add.”

233


VIEW FROM THE TOP

SHARING EXPANSION COSTS MAKES SENSE

Michael Brower President & Chief Technical Officer of AWS Truepower

234

Jorge Ochoa Mexico Country Manager of AWS Truepower

Q: Which segments offer the most opportunity to

Q: What role will PPPs have in developing the country’s

strengthen AWS Truepower’s position in Mexico?

new energy infrastructure?

MB: We provide services across the whole project lifecycle

MB: The private sector should be engaged in the

but as the Mexican market is still in its early stages, our

development

services for assessing resources and preconstruction

particularly in the wind energy sector. Sharing expansion

energy production estimates are the most requested. We

costs with the private sector makes sense for the

also offer independent engineering services for transaction

authorities. The development of energy infrastructure

and investment analysis, which we have already provided

must not be defined only by a central public authority

to some of the operational wind energy projects in

because that might hinder optimal investments. Mexico

Mexico. We hope to get more involved in forecasting and

must develop an adequate market for grid services and

other studies concerning the grid’s operation, as well as

establish a mechanism for planning the grid expansion

performance assessment.

to reach critical locations. Other countries have in-depth

of

new

transmission

infrastructure,

planning studies to decide where the investments will Q: What hurdles does Mexico face regarding energy

be allocated, which tend to have several stakeholders

infrastructure for the integration of renewables?

involved due to the need for economic and technical

JO: One of the main issues is the interconnection

assessments during the planning process. It is more

infrastructure. Its future development is established

efficient to have a clear plan for the project’s early stages

by PRODESEN and is highly dependent on whether

because transmission infrastructure requires resources

CFE decides to build transmission lines by itself or

and time to develop.

to establish partnerships with private parties. The Electricity Industry Law allows private companies to

Q: What are the shortcomings of the Mexican grid

suggest new transmission lines and substations but

compared to global standards?

there are restrictions on their full participation in the

MB: Every region in the world has its particular issues.

development of new infrastructure.

Texas, for instance, was famous for building more wind energy than its transmission infrastructure could

We see a huge need for forecasting services to estimate

handle, which resulted in the curtailment of much of its

the amount of energy that will be entering the grid at

wind facilities. The state responded by expanding its

certain times. This information is particularly important for

transmission capacity and that has made the situation

new generators and for CENACE, the grid’s operator, since

much more manageable. Hopefully, Mexico will not make

it needs to plan operations and investments in advance.

the same mistakes.

Forecasting energy flows becomes especially important when including renewables because of their intermittency

Q: What advantages does AWS Truepower have over its

and technical complexity. At the beginning of 2016 when

competitors?

the electricity spot market was launched, it became more

MB: AWS Truepower is known for being technically

important to predict and measure the amount of energy

advanced and it is well respected for setting technical

to be injected into each node. We have the experience and

standards. We also are transparent about the methods

the skills to address this task.

we use for our analyses and we have a lot of experience. Finally, we strongly emphasize customer service. I think

AWS Truepower is a leader and innovator in renewable energy

these elements explain why, in every market where we

consulting, providing engineering services and operations as well as

have established a presence, we have participated in

software solutions to support clients while developing their projects to

30 to 50 percent of the assessment or financing of new

turn them into durable assets.

wind projects.


INSIGHT

HISTORY, BIOLOGY FACTOR INTO SUCCESS JORGE MELERO Renewable Energy Unit Manager Mexico of UL-DEWI

UL-DEWI, a global wind energy services provider, came

Those assessments have to pass through the National

to Mexico to tap into the country’s renewable energy

Institute of Anthropology and History (INAH), the entity

potential. Until its arrival, the company had served its

charged with safeguarding the country’s historical legacy

clients here from abroad but decided to open a local office

and evaluating a particular location’s historical value. The

to more efficiently meet the needs of the growing market.

Law of Historic Monuments and Zones with Archeological, Artistic or Historical Value allows the relocation of

Then the Energy Reform threw a temporary wrench into

movable assets with INAH’s approval and supervision

the works. “The planning and development stages of the

prior to releasing an area for development. Permits can

new regulations paralyzed the sector to a certain extent

be denied because of fixed assets such as pyramids or

due to the uncertainty they created,” says Jorge Melero,

ceremonial centers.

Renewable Energy Unit Manager Mexico of UL-DEWI. “But we already are seeing a growing interest from renewable

An example of the process carried out by INAH is the

energy companies in investing here as well as the start of

Hipolito ejido in Coahuila, where a 200MW wind farm is

new projects from the government.”

under construction. A number of fossils have been found in Coahuila’s desert, including remains of dinosaurs. These

UL-DEWI is the result of the acquisition of DEWI by UL,

have scientific value and have made the state a source

a safety science company that certifies and validates

of paleontological information. With this in mind, INAH

products to comply with the requirements of different

assessed the ejido prior to the start of construction, later

markets. DEWI is a global wind energy service provider,

providing the required permission because no relics were

serving 1,500 clients in more than 50 countries, including

found. Another important aspect of MIAs is to identify

wind turbine and components manufacturers, project

endemic and migratory species that could be affected by

developers, utilities and other wind industry players.

a project. For wind farms it also is important to map out

Melero believes Mexico’s new regulatory framework is not

the migration patterns of flying species, which can impact

an impediment to successful projects. “From a technical

expected power output and hence have implications for

standpoint,

particular

the project’s estimated revenues. “We have analyzed

challenges for wind energy projects but they are not more

wind farm proposals located in the monarch butterflies’

complicated than their international counterparts. Each

migratory route, which may imply technical complications

market has its own specific challenges.”

because of stoppages that must happen during the

Mexican

regulations

present

migration period,” says Melero. Many factors impact the development of an energy project. Two that could lead to difficulties if not

Even though Mexico’s biodiversity can increase a

considered early in the process are a location’s historical

project’s complexity, it is viable to successfully integrate

relevance and its natural diversity. “In Mexico, these

energy

mainly relate to archeological sites and endemic species

demonstrated by the Dominica wind farm, developed

protection, regardless interconnection requirements,”

by Enel Green Power in San Luis Potosi. That project

Melero says. SEMARNAT requires all new electricity

received the 2016 Infrastructure 360° Award, issued

projects to deliver a mandatory Environmental Impact

by the Inter-American Development Bank (IDB), in

Assessment (MIA) prior to development. According to

the “Climate and Environment” category. UL-DEWI’s

SEMARNAT’s guidelines, MIAs for power generation

capabilities and local knowledge have placed the

projects must include an inventory of the location’s

company at the forefront of wind service providers.

cultural resources, including existent and potential

“We are among the four main players in the technical

archeological vestiges.

advisory sector in Mexico,” says Melero.

projects

with

surrounding

ecosystems,

as

235


Source: CRE

5

11 44 33 2 2

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6 6 7 7

88

20 20

26

21 21

22

23 24 25

10 10

9 9

27

12 12 14 13 13 11 11 18

1617

19

1415

30 31

28

29

32

33

34

WIND PROJECTS IN OPERATION AND CONSTRUCTION

236


37

Airport

Ixtepec

Zaragoza

Juchitan de

El Espinal

Ixtaltepec

Asuncion

61

53

39

44

52

55

51

58

56

54

48

50

42

45

La Venta

59

40

41

Hidalgo

Union

43

237

46

38

47

49

Santo Domingo

60

57


WIND PROJECTS IN OPERATION AND CONSTRUCTION

238

No.

Company

Project

Arrangement

1

IEnova and InterGen

Energía Sierra Juárez

Export

2

Wind Power de México

La Rumorosa

Export

3

MPG

Rumorosa

Self-supply

4

Municipio de Mexicali

La Rumorosa I

Self-supply

5

Fuerza Eólica

Fuerza Eólica de San Matías

Self-supply

6

Energía Sonora PPE

Generator

7

Energía Sonora PPE

Small-scale producer

8

Comisión Federal de Electricidad

Guerrero Negro

Generator

9

SOWITEC

La Amistad

Self-supply

10

Minera Autlán

Parras

Self-supply

11

Grupo Comexhidro

Santa Catarina

Self-supply

12

SOWITEC

El Mezquite

Self-supply

13

Energía y Proyectos Eólicos

14

ACCIONA Energía

Ventika I

Self-supply

15

ACCIONA Energía

Ventika II

Self-supply

16

Intaván México Energías Renovables

Parque Eólico Reynosa I

Self-supply

17

Intaván México Energías Renovables

Parque Eólico Reynosa II

Self-supply

18

Soriana, Grupo ECOS and GEMEX

El Porvenir

Self-supply

19

Abengoa

Tres Mesas

Self-supply

20

Energías Renovables de Durango

21

MPG

La Bufa

Self-supply

22

Enel Green Power México

Dominica

Self-supply

23

Eoliatec de México

Chinampa

Self-supply

24

Grupo Dragón

Ojuelos

Self-supply

25

Grupo Dragón

El Vigil

Self-supply

26

Eólica Cerritos

27

Parque Eólica Huimilpan

San Pedro

Self-supply

28

Grupo Dragón

Coyoles

Self-supply

29

Eoliatec

Fuerza Viento Papaloapan

Self-supply

30

Central Eólica de México

Central Eólica México 2 (CEM-2)

Generator

31

Iberdrola Renovables

Pier II

Self-supply

32

Vive Energía de México and Envision Energy

Energía Renovable de la Península

Self-supply

33

Eólica del Golfo

Dzilam de Bravo

Self-supply

34

Comisión Federal de Electricidad

Yuumil’iik

Generator

35

Generadores Eólicos de México

Arriaga

Self-supply

36

Grupo Dragón

Arriaga

Self-supply

37

Secretaría de la Defensa Nacional

SEDENA

Self-supply

38

ACCIONA Energía

Oaxaca IV

Independent Power Producer

39

Industrias Peñoles

Fuerza Eólica del Istmo (I, II)

Self-supply

40

Zuma Energía

PE Ingenio

Self-supply

Self-supply

Self-supply

Self-supply


Plant Size (MW)

Authorized Energy Production (GWh/ year)

Investment (US$ millions)

Status

State

156.00

457.00

312.00

Operational

Baja California

300.80

998.00

601.60

Construction

Baja California

72.00

220.75

144.00

Construction

Baja California

10.00

27.00

20.00

Operational

Baja California

30.00

89.87

60.00

Construction

Baja California

2.00

7.08

4.38

Construction

Sonora

2.00

7.08

4.00

Operational

Sonora

0.60

0.20

1.20

Operational

Baja California Sur

200.00

640.00

400.00

Construction

Coahuila

300.00

920.00

600.00

Construction

Coahuila

22.00

45.00

44.00

Operational

Nuevo Leon

250.00

832.20

500.00

Construction

Nuevo Leon

50.00

153.00

100.00

Construction

Nuevo Leon

126.00

330.00

252.00

Operational

Nuevo Leon

126.00

330.00

252.00

Operational

Nuevo Leon

60.00

187.00

120.00

Construction

Tamaulipas

60.00

187.00

120.00

Construction

Tamaulipas

54.00

213.00

108.00

Operational

Tamaulipas

49.50

187.00

99.00

Construction

Tamaulipas

120.70

387.00

241.40

Construction

Durango

180.00

476.00

360.00

Construction

Zacatecas

200.00

620.00

400.00

Operational

San Luis Potosi

64.00

196.00

128.00

Construction

Jalisco

64.60

198.00

129.20

Operational

Jalisco

40.00

122.00

80.00

Construction

Guanajuato

76.00

220.40

152.00

Construction

Jalisco

30.00

90.00

60.00

Construction

Queretaro

50.00

153.00

100.00

Construction

Veracruz

40.00

126.00

80.00

Construction

Veracruz

50.40

169.30

93.75

Construction

Puebla

66.00

243.69

132.00

Operational

Puebla

92.40

315.67

184.80

Construction

Yucatan

70.00

270.00

140.00

Construction

Yucatan

Operational

Quintana Roo

1.50

2.18

3.00

19.97

61.82

39.93

Construction

Chiapas

32.00

98.00

64.00

Operational

Chiapas

15.00

42.05

30.00

Construction

Oaxaca

102.00

326.40

204.00

Operational

Oaxaca

80.00

350.00

160.00

Operational

Oaxaca

49.50

179.68

99.00

Operational

Oaxaca

239


WIND PROJECTS IN OPERATION AND CONSTRUCTION (cont.)

240

No.

Company

Project

Arrangement

41

Comisión Federal de Electricidad

Central La Venta

Generator

42

EDF-EN

La Mata-La Ventosa

Self-supply

43

ACCIONA Energía

Eurus (I, II)

Self-supply

44

Enel Green Power México

Sureste I Fase II

Independent Power Producer

45

ACCIONA Energía

Oaxaca III

Independent Power Producer

46

ACCIONA Energía

Oaxaca II

Independent Power Producer

47

DEMEX

Piedra Larga II

Self-supply

48

Instituto de Investigaciones Eléctricas (IIE)

Parque Eólico Municipal

Small-scale Producer

49

Mitsui and EDF-EN

Santo Domingo

Self-supply

50

Iberdrola Renovables

La Ventosa I, II, III

Self-supply

51

Enel Green Power México

Bii Nee Stipa II (Stipa Nayaa)

Self-supply

52

Enel Green Power México

Bii Nee Stipa III (Zopiloapan)

Self-supply

53

Energía Eólica del Sur (EES)

Eólica del Sur (I, II)

Self-supply

54

Iberdrola Renovables

Bii Nee Stipa II Fase IV (Dos Arbolitos)

Self-supply

55

Gas Natural Fenosa

Bií Hioxo

Self-supply

56

Grupo México

Bii Nee Stipa II Fase III (El Retiro)

Self-supply

57

Iberdola Renovables

La Venta III

Independent Power Producer

58

Mitsui and EDF-EN

Bii Stinú

Self-supply

59

DEMEX

Piedra Larga I

Self-supply

60

Energías Ambientales de Oaxaca

Oaxaca I

Independent Power Producer

61

Iberdrola Renovables

Bii Nee Stipa I

Self-supply

Wind farm under construction, Oaxaca, AMDEE


Plant Size (MW)

Authorized Energy Production (GWh/ year)

Investment (US$ millions)

Status

State

84.20

198.60

168.40

Operational

Oaxaca

67.50

365.16

135.00

Operational

Oaxaca

250.50

883.73

501.00

Operational

Oaxaca

102.00

388.00

204.00

Construction

Oaxaca

102.00

326.40

204.00

Operational

Oaxaca

102.00

326.40

204.00

Operational

Oaxaca

137.50

508.75

275.00

Operational

Oaxaca

5.00

21.90

10.00

Operational

Oaxaca

160.00

600.00

320.00

Operational

Oaxaca

101.90

312.00

203.80

Operational

Oaxaca

74.00

292.00

148.00

Operational

Oaxaca

70.00

254.45

140.00

Operational

Oaxaca

396.00

1310.00

792.00

Construction

Oaxaca

70.00

218.89

140.00

Operational

Oaxaca

234.00

700.68

468.00

Operational

Oaxaca

74.00

231.39

148.00

Operational

Oaxaca

102.85

288.00

205.70

Operational

Oaxaca

164.00

642.00

328.00

Operational

Oaxaca

90.00

333.02

180.00

Operational

Oaxaca

102.00

410.00

204.00

Operational

Oaxaca

26.35

100.13

52.70

Operational

Oaxaca

241


VIEW FROM THE TOP

ACCURACY A KEY MEASURE OF SUCCESS MANUEL IGLESIAS Country Manager of Kintech Engineering

Q: What role does Mexico play in your global portfolio

intervals. The new algorithm was awarded a prize by the

given the local wind industry development?

Spanish Association of Wind Energy, recognizing our

A: Kintech Engineering opened an office in Mexico in

contribution to the sector. Kintech Engineering’s devices

2014 but it has been present in the country for a longer

are the only ones in the market using this algorithm but

period. We are a Spanish company founded in 1999 with

we are pushing wind power associations to include it in

the development of the EOL 2020 data logger, which

the regulations for wind energy equipment, such as the

was an extremely successful and innovative product due

IEC 61400.

to its integrated telemetry system. In 2007, the company launched the EOL Zenith data logger, which presented

Q: Which of your products are most popular among

considerable improvements in comparison with the

companies operating in Mexico and why?

previous version. That same year, Kintech Engineering

A: The EOL Zenith data logger has been extremely

started to increase its presence in international markets,

successful in Mexico and it is the company’s flagship

including Mexico. So far, Mexico does not represent as

product. Its cutting-edge characteristics, such as the high-

large a share in Kintech Engineering’s portfolio as other

reach telemetry system that works perfectly in remote

emerging markets, such as Brazil, but it is expected to

areas with weak or absent GSM wireless coverage, make

grow in the coming years. What differentiates Kintech

it very attractive. Furthermore, the data logger uses a

Engineering from its competitors is that we are also

special encoder system to compress data packages,

manufacturers, which in combination with our wide

making it easier and cheaper to transmit data via satellite

network of regional offices allows us to provide better

in places without a GSM network. We have also seen great

aftersales services. In Mexico, as in other international

demand for the KT-470 wind tower, which was designed

markets, we distribute our products and offer technical

by Kintech Engineering and provides shorter installation

support to renewable energy developers.

times as a result of its user-friendly structure.

Q: How important is R&D for your business and what is

Q: How do you ensure your products provide accurate

your latest groundbreaking innovation?

measurements to avoid overestimating generation rates?

A: Kintech Engineering was founded as an electronic

A: Our data logger equipment is designed according to

engineering

electronic

the specifications of the IEC 61400 norm and is based on

equipment. R&D has been a core part of our business since

our vast knowledge and experience in the sector. It uses a

the early stages, as Kintech Engineering is always looking

special operating system designed by Kintech Engineering,

to innovate and improve the performance of its equipment.

which has been specially tailored for wind and solar energy

We are not the only company providing real-time

applications. This particular characteristic makes our

telemetry, for example, but we offer the best performance.

systems more accurate than other data loggers that use

One of our key innovations has been the integration

generic operating systems. The accuracy of anemometers

of an additional wiring panel to our devices’ sensors to

is especially critical as a variation of 0.1m/s in the average

protect the system from natural electric discharges, which

wind speed is equivalent to around 100 equivalent hours

some internal protection systems might not withstand.

of nominal power per year. We have considered that

This

sensitivity while designing our equipment, giving our

solution

firm

to

avoids

develop

the

innovative

incorporation

of

external

protection devices that might affect a measurement’s

systems the ability to perform real-time measurements.

quality. Another important innovation is the algorithm the company developed for measuring wind turbulence,

Kintech Engineering is a Spanish manufacturer of wind-data loggers for

which improves the accuracy of the most-used method,

wind resource assessment like data acquisition systems, anemometers,

incorporating standard deviation methods at 10-minute

wind vanes and remote communication.

243


INSIGHT

WIND POTENTIAL STILL UNDERDEVELOPED IN OAXACA SINAÍ CASILLAS Renewable Energies Coordinator of the State of Oaxaca

Already known for its beautiful beaches, exquisite food,

significant opportunities for new projects to be built in our

ancient traditions and wide biodiversity, Oaxaca is also

wind corridor. In fact, there is a second open season coming

a big name in sustainable energy. In the last six years, the

for approximately 2.3GW.”

state went from having seven wind farms to 22. But there 244

is one hurdle keeping Oaxaca from capitalizing on its wind

To take advantage of the state’s abundant natural resources,

resources: the lack of appropriate infrastructure.

Casillas also highlights the importance of involving local communities in the development process and ensuring new

“The Energy Reform generated big expectations in the state

projects bring added value to the local inhabitants. Some

that were not fulfilled,” says Sinaí Casillas, Renewable Energy

wind projects in the state became infamous when they

Director at the Government of Oaxaca. “The problem is not

were cancelled due to social issues but the industry has

the Reform itself but the lack of accompanying infrastructure

learned its lesson, acknowledging the relevance of bringing

to support it. While on paper there are many infrastructure

communities on board from the early development stages.

projects to be built, most have been delayed. For instance, the Xipe substation with 400,000V transmission lines

Casillas says the ‘Luz en Casa Oaxaca’ program, a joint

was expected to be ready in 2013 but it was delayed to

initiative between Oaxaca’s government, ACCIONA Energía,

2017. This caused a delay in the projects of our first open

a Spanish project developer with strong expertise in wind

season, an initiative to kick start wind energy projects in the

farm construction, and the Spanish Agency of International

Tehuantepec Isthmus. The state expected this open season

Cooperation for Development (AECID), is a flagship case.

to deploy 3.3GW of wind projects but to this date only

The program installed solar panels in isolated communities

2.3GW have been built.”

that were not connected to the national grid. The cost of the PV solar systems is shared equally by the government and

Oaxaca has a little over 1,600 wind turbines generating

the end user, while the operational costs and maintenance is

approximately 2.3GW. These are spread over 22 wind farms

provided by ACCIONA Energía and AECID. During the past

in six regions: Isthmus of Tehuantepec, Juchitan, El Espinal,

three years, the program has provided electricity to around

Ixtepec, Santo Domingo Ingenio and Unión Hidalgo.

7,500 households.

“Oaxaca is a leader in wind energy,” Casillas adds. “The state

That initiative's success prompted the state to support a

has the largest potential for wind development in Mexico. The

second project with Ilumexico Foundation, which covered a

Isthmus of Tehuantepec, for instance, has 10GW potential, of

further 3,000 households. The two programs jointly helped

which only 23 percent is being used.” The new HVDC line

it to increase its electrification rate by 1.3 percentage points,

that will connect Oaxaca with the Valley of Mexico – the first

a significant improvement considering that Oaxaca is almost

in the country to use this technology – will provide more

4 percentage points below Mexico’s average electrification

space for the state’s wind resources to be harnessed and

rate, currently set at 98 percent. One reason for Oaxaca’s

transmitted to high-demand regions. The project will also be

lag is the dispersion of its population. There are 1,000

the first to be developed under the new private participation

communities constituted by only three or four households,

schemes opened by the Reform, which adds certainty to its

for instance. Distributed renewable energy generation might

due date. It will have a capacity of 3GW.

be the key to bringing light to off-grid communities.

Casillas believes that further projects will fall in line once

The state government is clear: With the proper infrastructure

the initial challenges have been addressed. “We believe

in place Oaxaca can supply end users in the country’s high-

the reform will open the market to several projects that will

demand regions with the electricity they need but only if its

strengthen the value chain of the sector,” he says. “We see

inhabitants can enjoy the same benefits.


VIEW FROM THE TOP

CHEAPEST OFFER NOT ALWAYS THE BEST LONG TERM SAVIR RUIZ CEO of CODISA CORP Energy

Q: What challenges do wind energy companies face in

the foundations are properly secured, we use specialized

Mexico and how does CODISA help?

grouting applicators imported from Europe and we work

A: A common challenge international companies face when

with grout materials that have been certified by leading

entering the Mexican market is finding reliable suppliers and

turbine manufacturers such as Gamesa or ACCIONA.

service providers. We have heard of companies suffering time delays on their projects due to faulty services, a

Q: What are CODISA’s flagship projects in energy and

situation we want to avoid at all costs. When we decided to

what developments are in the pipeline?

enter the energy industry, we invested time and resources

A: One of the first projects we developed for wind

identifying the problems developers usually face, so that we

energy companies was the Wigton III wind farm in

could design a strategy to mitigate or avoid these incidences

Jamaica, which was commissioned by the Portuguese

during the development of our projects. We invested heavily

company CJR Wind. We were in charge of installing

to equip our company with enough specialized machinery to

the foundations and ensuring the mechanical forces

serve the needs of our clients, for whom we have imported

were transmitted from the top structure to the concrete

cutting-edge technology from top manufacturers in Europe.

foundation.

We complemented that leading-edge equipment with a

to work in international settings. In Mexico, the first

group of certified technicians and quality construction

project we developed was the Tres Mesas wind farm in

materials specially designed for wind turbine applications.

Tamaulipas, with Abengoa acting as our first customer

This

project

demonstrated

our

ability

in this industry. Afterward we collaborated with Global The market is pressuring suppliers and service providers to

Energy Services on the construction of Primero de

lower prices but we want developers to know the cheapest

Mayo, a 100MW wind farm in Jalisco operated by Enel

offer is not always the one with the lowest long-term costs.

Green Power.

We have clients that have contacted us after having had a bad experience with cheaper contractors that turned out to be more expensive in the end. This can be avoided by selecting the right options in the project’s early stages. Our objective is to offer services at a reasonable price without compromising quality and efficiency. Q: How can a faulty foundation impact a project’s costs

The base of a wind turbine represents only 2.5 percent of its total cost but a design failure can add relevant costs during the project’s lifetime

over its lifetime? A: Foundations represent only 2.5 percent of the total cost

As for our current developments, we have a signed

of a wind turbine but a fault in the design can add relevant

contract to help Peñoles with the development of a wind

costs during the project’s lifetime. Due to their large size,

farm to supply energy to its zinc treatment facilities in

wind turbines must be installed on site using steel bolts

Coahuila, the first wind energy project developed in that

to join the different parts, including the tower sections, to

state. Peñoles’ wind farm will consist of 95 wind turbines

the foundation. If the foundation is not set correctly, the

that will rest on our foundations and it will be developed as

vibration caused by the blades and the engine’s movement

a joint venture between Energía Eléctrica Bal and Energías

can destabilize the structure and damage the motor. The

de Portugal.

only way to repair a turbine’s motor is to dismantle the structure and bring the engine down, which is costly. The

CODISA Corp Energy has been operating since 1995 as a provider of

cranes required to dismantle the tallest sections of a turbine

high-quality construction materials, working both in Mexico and abroad

alone can cost thousands of dollars per day. To ensure

to help wind power projects get off the ground.

245


VIEW FROM THE TOP

CONCRETE EXPERIENCE SOLIDIFIES ENERGY DEVELOPMENT FRANCISCO CON Business Development Director of CEMEX Energía

246

Q: What drove you to bet on power production and what

specific areas and once the projects are shovel-ready we have

are the main pillars of CEMEX’s strategy in this sector?

a natural investor in PEGI, a Pattern affiliate. Our partners

A: Our production process is energy-intensive. For more

have to have specific qualities, like proven experience,

than 20 years we have made strides toward improving

access to long-term capital, a set of technical skills that

our efficiency and lowering our power and fuel costs by

complements ours, appetite and resources to grow in Mexico

using alternative sources. This pushed us to develop power

and a positive attitude to make the relationship fruitful. We

plants for our own needs in the late 1990s, shortly after

found all of this in Pattern and together we have taken ideas

private power generation was originally allowed in Mexico.

from paper to very competitive advanced-stage projects.

In fact, CEMEX is a pioneer in large-scale self-supply and in introducing renewables to Mexico by developing the 250MW

Q: How can CEMEX’s energy division benefit from the

Eurus wind farm in Oaxaca almost 10 years ago.

company’s experience in the production of cement and concrete?

Even though CEMEX Energía began with the goal of obtaining

A: Land rights and community relationship management

lower and predictable costs for our own manufacturing

are two clear examples where we work together and learn

processes, its scope was expanded to develop power

from each other. We also receive valuable support from

plants for third parties. Our strategy is based on developing

other corporate areas: finance, risk management, social

projects that combine first-rate resources, responsible risk

responsibility, IT and logistics, to name a few. Another

management and strong sponsors, without dipping into

advantage as a producer is the management of self-supply

CEMEX’s balance sheet.

projects as a critical part of our business model. Through this experience, we have learned the challenges of negotiating

Q: What are the challenges for companies like CEMEX

bankable PPAs, the benefits of a long-term strategy that

Energía versus 100-percent energy companies?

reduces the impact of volatile markets and also how to

A: Our group has a different origin than most of the other

adapt our commercial offerings to an evolving competitive

players in the energy sector so that presents both challenges

landscape. We’ve also learned how to manage thousands of

and advantages. Being large consumers ourselves, we can

customer load points, which is a unique experience in Mexico.

better understand the point of view and the concerns of final users. We have acquired experience from operating

Q: What makes wind power such an attractive investment

in markets whose electric sectors have undergone similar

for the company?

reform processes, such as in Europe, Central and South

A: We have a history of developing wind assets in Mexico

America and the US. In Mexico specifically we can leverage

which we will continue but we are also developing solar

our proven track record in project development, a well-

projects. We see these two technologies as equally

recognized name and a wealth of support from different

competitive and complementary, both for a single consumer

areas across our entire organization.

and for the grid. Although wind has a higher inter-annual variability, it also has advantages such as producing power

We plan to work with selected partners that complement

across all periods, especially during late afternoon hours in

our skills and can facilitate obtaining long-term capital. An

the northeast, which improves the prospects of capacity

example of this is our joint-venture with Pattern Development

recognition over the long term. Any balanced supply portfolio

to develop renewables in Mexico, whereby each of us leads

should include both. Our model is to contract the output of the projects we develop. We will focus on bilateral contracts

CEMEX Energía is a division of CEMEX, one of the world’s largest

and power auctions, leaving a small exposure to the spot

cement producers, focused on the development of projects in the

market, although we see a lot of potential in optimizing the

Mexican power industry.

positions between the day-ahead and real-time markets.


INSIGHT

CEMENTING ALLIANCES FOR EMERGING MARKETS GLEN HODGES Mexico Country Manager of Pattern Development

After savoring success in the Chilean market, Pattern

1GW of generation projects in Mexico, being a pioneer in

Development, a renewable energy developer based in San

the development of energy projects under the self-supply

Francisco and Houston, looked at Mexico as the next logical

scheme. The company has experience both as an off-taker

step to continue its Latin American expansion. The company

and a supplier, which drove it to establish its energy division

expects electricity demand here to keep growing and sees

at the beginning of 2015. According to Hodges, “the joint

more opportunities arising in line with the government’s bold

venture between CEMEX and Pattern Development was a

energy targets. “Mexico fits very well in our goal of entering

mutually beneficial decision. We were looking for a strong

strong and attractive markets,” says Glen Hodges, Country

Mexican partner to start our business here while CEMEX

Manager of Pattern Development. “Both the economy

Energía was looking for an alliance with an experienced

and electricity demand are growing and we expect this

and well-capitalized renewables development company to

trend to continue in the future. Additionally, Mexico needs

help its ambitions in the energy sector.”

to substitute old and inefficient power plants with cleaner facilities and the government has set ambitious goals regarding clean energy usage. All these factors are crucial

“Mexico needs to substitute old and

drivers behind our commitment to Mexico.”

inefficient power plants with cleaner

The company has already developed 19 projects globally,

facilities”

accounting for almost 3GW of wind capacity and is looking to add 1GW in Mexico through greenfield developments of

Glen Hodges, Mexico Country Manager of Pattern Development

solar and wind projects as well as strategic acquisitions. “We have a primary focus on greenfield development

CEMEX Energía leads the way in real estate, permitting and

but we also intend to acquire some projects already in

interconnection aspects while Pattern Development takes

advanced development stages. We are particularly looking

the lead on issues such as meteorological prospecting,

for clean energy projects that are located in interesting

wind measuring, engineering and design and equipment

nodes and have solid land rights and good interconnection

procurement. Marketing and project financing are handled

facilities,” he adds.

jointly, he adds. Pattern Development also brings to the table its credentials regarding project financing. It has a

The main challenge for ambitious companies in Mexico is

proven record of providing access to long-term equity

to cope with specific aspects of the local energy industry

and financing through its affiliate Pattern Energy Group,

while dealing with a different business culture. “The

publicly listed on the NASDAQ and Toronto exchanges.

basics of wind farm development do not vary much from

Pattern

country to country but there are certain aspects that differ

Riverstone, an energy-focused private investment firm.

Development

is

financially

supported

by

considerably, particularly those related to bureaucratic and legal processes such as land rights acquisition, permit

“Riverstone is Pattern Development’s primary investor,”

issuance or interconnection,” says Hodges. For Pattern

says Hodges. “The capital and business expertise it has

Development,

helped

brought to our company have been essential to our

accelerate the process. “We looked for a partner with

success. Project development is risky so it is important

the skills and experience needed to help us move up the

to have financial backing from experienced investors.”

learning curve faster and we found it in CEMEX Energía.”

He believes CENACE’s power auctions will represent the

finding

a

compatible

partner

largest business opportunity for project developers in the CEMEX Energía is the energy division of CEMEX, one of the

near term, but bilateral transactions with private off-takers

world’s largest cement producers that has developed over

will become more important as the market evolves.

247


INSIGHT

WINDS OF CHANGE BRING FRESH OPPORTUNITIES ALEJANDRO ROBLES Country Manager of SOWITEC

248

The events taking place in the Mexican energy industry

megawatt-hour even in a scenario with record-low natural

during the past two years have been so dramatic that

gas prices. Intermittency is a concern, especially when it

numerous energy companies are entering segments they

comes to offering capacity. “Considering these issues, we

had never thought of before. The opening of the wholesale

are planning to build a diverse portfolio to offer products

electricity market has some project developers analyzing

to most of the market,” he adds.

the possibility of expanding their portfolio of services to include activities that were unavailable before, such as

SOWITEC has already sold all the projects it had under

commercializing energy.

the previous scheme, keeping only those with permits under the Electricity Industry Law, which are eligible to sell

But anyone who thinks it will be a simple process, should

energy. Wind energy is expected to continue playing a key

think again. SOWITEC, a German project developer, is

role in the company’s portfolio, mainly in the medium to

among those branching out into fresh niches. It says a new

long term, but Robles also sees a great opportunity in the

market brings new challenges to overcome. The industry’s

solar sector that he expects will become more relevant to

various players need to be aware of this, especially as

his business in the near future. “The same permits that are

the rules are not particularly clear. “The industry needs

required for wind are needed for solar. What really varies is

to fully understand all the mechanisms available in the

the engineering and we are receiving great support in this

new market,” says Alejandro Robles, Country Manager of

area by SOWITEC’s team in Brazil, which has a good deal

SOWITEC. “There are many elements that did not exist

of expertise in solar development. The greatest challenge

before and are unclear to potential market participants.

for solar development in Mexico in comparison with wind

For instance, some off-takers are taking the results of

will be social impact. Solar parks use more land than wind

the auctions as a benchmark for PPA prices. But they are

farms, which calls for a more complex social management

not considering that there are also obligations to acquire

strategy,” he says.

capacity, CELs, ancillary services, financial transmission rights and other related costs. Most companies still have

Robles is confident that SOWITEC can handle the social

the mentality to ask for contracts that offer discounts over

management of solar projects because it has done it for

CFE’s prices, considering it as the decisive factor. In reality

wind farms in the past, including some developments

there are many more factors that need to be considered

in Nuevo Leon and San Luis Potosi. The company also

in today's market.”

has experience in securing land rights for transmission lines, which can imply negotiating with a high number

SOWITEC is among the leading wind power developers

of landowners depending on a project’s length. “In

worldwide. It has installed over 100 wind turbines

less than a year, we have secured the land rights for a

in 30 different wind farms globally. In Mexico, it has

40km transmission line with 300 landowners. It was a

participated in the development of wind farms mainly in

challenging process as many of these landowners were

the north. Now, the company is looking at the possibility of

out of the country and hard to reach. But we managed to

commercializing energy through qualified suppliers, which

do it properly and close all the negotiations on time.”

are among the most sophisticated elements introduced by the new rules. “The auctions are interesting for us

SOWITEC plans to complete at least 500MW of projects,

but they are also highly competitive. We are therefore

including both solar and wind, in the next two years. “Our

looking at other alternatives, opening the spectrum of

plan is to sell projects to utility investors and investment

possibilities as much as we can,” Robles says. Renewable

funds although we will have to see how the political

energies are interesting options, he says, because they

changes in the US impact this sector. We remain positive

have demonstrated they can offer competitive costs per

nonetheless.”


INSIGHT

BET ON MEXICO WIND PAYS OFF FERNANDO VILLARREAL Director of Project Development at Oak Creek Energy

The US economy’s slower pace of growth in the last

most of the megawatts tendered in the first two auctions.

decade drove American energy companies to look south

Wind did, however, win a higher percentage in the

of the border for new business opportunities. Oak Creek

second round than the first, at about 43 percent. “In the

Energy was among those that placed a strong bet on

present market environment, power auctions offer great

Mexico’s nascent energy industry, a wager that is now

opportunities and add certainty to project development

paying dividends. To establish a foothold the company

in Mexico, particularly as they involve long-term PPAs with

acquired Frontera Renovable in 2012, a Mexican developer

CFE, ensuring the energy produced has a stable off-taker,”

with a number of wind projects in the pipeline in northern

says Villarreal. “Wind energy is quite competitive at the

Mexico. “Since that date, our company has dedicated a

moment. Mexico is craving a diversified electricity matrix

great share of its resources to Mexico, particularly after

and we believe that wind energy will be an important

the implementation of the Energy Reform,” says Fernando

component of the future energy system.”

Villarreal, Director of Project Development at Oak Creek Energy, a wind project developer with over 30 years of experience. Oaxaca was the crown jewel of wind energy in Mexico when Oak Creek Energy decided to invest in the country’s renewables sector but the company went against the prevailing winds and instead targeted the north. “The region showed great wind potential but remained largely

“We believe that wind energy will be an important component of the future energy system” Fernando Villarreal, Director of Project Development at Oak

Creek Energy

unexploited, making us one of the first companies to develop wind farms in Tamaulipas,” says Villarreal.

CELs are another aspect introduced by the reform and have added value to renewable energy projects,

Three factors drive the company’s interest in other

contributing to the auction success of solar and wind. “We

locations: availability of attractive wind resources, trends

believe CELs are a good incentive to promote renewable

in energy demand and electricity grid interconnection

energy projects in Mexico, but it is too soon to determine

capacity. The Energy Reform added nodal prices into

the extent to which they can boost the country’s renewable

the mix and those are now crucial to the attractiveness

industry,” Villarreal says.

of a project’s location. Nodal prices were identified as the main factor behind Yucatan’s transformation into Mexico’s

Oak Creek Energy also is waiting to see the Ministry of

next renewable energy hub during CENACE’s first power

Energy’s final regulations for Social Impact Assessments

auction. The state also benefited from the auction’s

(SIAs) on energy projects. “SIAs’ guidelines are not yet

economic structure. To promote investment in regions

completely defined, making the whole process more

with the highest energy needs, states like Yucatan were

challenging for us. We will continue working with the

assigned an adjustment factor to reflect the real value of

communities, slowly incorporating the new guidelines

energy in that area. For instance, if a company offered

until the definitive regulations are published,” Villarreal

energy at US$100/MWh in Yucatan, it was perceived by

adds. The company has already worked with ejidos and

the system as US$78.02/MWh ( a factor of US$21.98/

rural communities for its projects in Mexico, which allows

MWh), giving it an advantage as the cheapest offers were

them to look at the new regulations with an experienced

selected first. Oak Creek Energy believes the auctions, the

eye. “In the current regulations, we have identified certain

second of which was held in September, are beneficial to

areas related to land rights that we expect will be modified

the wind business, even though solar energy projects won

as the guidelines are improved.”

249


VIEW FROM THE TOP

AUCTIONS DRIVE NEWCOMERS TO SOLAR DAVID BARRIE Business Development Coordinator at SgurrEnergy

250

Q: What was behind SgurrEnergy’s decision to open a

The expansion of the grid and growth in energy demand

local office in Mexico?

will be crucial for defining the feasibility and economic

A: Over the last two years we identified an increasing

potential of energy projects in Mexico. Yucatan is

number of clients that have been involved or have a

becoming a renewables hub after being awarded

presence in Mexico, a trend encouraged by the enactment

a large portion of the tendered projects. However,

and implementation of the Energy Reform. The country’s

uncertainty remains as to whether or not the Peninsula’s

ambitious clean energy targets and abundant natural

power network can support more renewable projects.

resources, combined with the market potential, have made

SgurrEnergy is working to identify areas of the country

it an attractive location for renewable energy investment.

that have potential resources and which could benefit

So our decision to move here was a reaction to market

from the development of renewable energy projects.

trends and an ability to identify a burgeoning market with

Like in other regions, our strategy to capitalize on the

real potential for development. Mexico is one of the most

country’s resources is primarily dictated by the needs

attractive emerging markets in the world and we wanted

and expectations of our clients, helping them with

an on-the-ground presence to truly understand the

technological aspects or the optimization of certain

country’s local market and the challenges it faces.

stages of the project, all according to local constraints.

Q: How did the results of the first power auction affect

Q: How has R&D impacted the development of

the company’s perspective of the market?

renewables and prices?

A: We were pleasantly surprised by the results in the first

A: R&D has been crucial for the development and

tender carried out under the new regulatory scheme. The

expansion of renewable energy in recent years. For

immediate impact of solar energy and the low prices for

instance, the advances made in wind measurement

tendered contracts are positive for the renewable energy

technologies have allowed developers to gather more

industry and in line with the goals of the Energy Reform.

accurate data, which is used to design more efficient

We were not expecting solar to surpass wind energy in

wind farms that yield higher power outputs. One of

the number of megawatt-hours awarded so quickly,

the industry’s goals is to develop a product capable

particularly at the tendered prices, although dropping

of measuring wind speeds across an entire region

renewable energy prices is a trend the industry has been

in an efficient and cost-effective way, which would

observing in different regions, such as Peru or the southern

help reduce uncertainty, time to market and improve

US. This is a result of improvements in efficiency, a decrease

overall project development processes. Innovations in

in manufacturing costs and the use of innovative financing

measuring technologies allow developers to optimize

mechanisms. But we remain somewhat cautious about the

the performance of the individual wind turbines as well

potential reaction of investors and project developers to

as the work of the wind farm as a whole.

record-low energy prices, because the ability of a diverse range of developers to compete at the rates tendered in

Q: What are SgurrEnergy’s expectations for its first

the first auctions will be somewhat limited. If Mexico wants

years in Mexico?

to build a diversified market it will have to push prices up

A: We expect a greater number of projects to be

so a wider range of developers and suppliers can also be

developed in Mexico in the coming years and we expect

involved in the process.

to become a trusted partner to these developers. There is a considerable difference between winning a tender or a

SgurrEnergy is part of Wood Group. It entered Mexico in 2016

PPA contract and successfully developing a wind farm or

but has assessed over 160GW of renewable energy developments

a solar park, so we want to focus on helping companies

internationally, including wind, solar, biomass and hydro.

close the gap and make their projects a reality.


VIEW FROM THE TOP

LOCAL EXPERTISE HELPS NAVIGATE MURKY REGULATIONS Marco Anaya Sub-Director of Power and Infrastructure at Marsh

Rosa Morán Sub-Director of Energy at Marsh

RM: At Marsh we have an engineering team specialized Q: What market risks, particularly for solar and wind

in power generation that can help companies identify

energy companies, exist in Mexico and how can Marsh

different risk scenarios and design mitigating strategies.

help mitigate those?

There are other specialized companies that can collect

MA: Wind and solar power generation in Mexico has

or generate relevant information to evaluate the risk

encountered difficulties due to changes brought by the

effectively. So far, we have not experienced any problem

Energy Reform, which transformed the previous regulatory

with information availability, which is a good indicator.

framework completely. In this regard, Marsh can help companies navigate the new regulations by using its local

Q: How does Marsh expect electricity-sector M&As to

expertise and knowledge of the market, taking part of the

develop and how is the company positioned to assist

load off their shoulders and allowing companies to focus

clients?

on their core activities. We want to play an advisory role

MA: Marsh has a special department dedicated to M&A

for new and existing companies willing to understand the

services, known as the Private Equity and Mergers and

new market rules and the risks inherent in it.

Acquisition (PEMA) practice. This practice has already handled several M&A projects for Marsh. Presently

RM: In terms of risks, one of the main concerns for power

a number of firms are analyzing the possibility of

generators is the vulnerability of their facilities in certain

establishing joint ventures with other companies to enter

regions, particularly in isolated locations. For renewables,

the Mexican electricity market. In these cases, we can

this concern is especially relevant because their location

provide risk assessment services from the early stages

must be selected according to where the renewable

to the actual operation of the project. During all the

resource is available. It happens that the optimal resources

M&A operations we work hand in hand with our clients,

might be in remote or difficult to access locations, which

using our expertise to help them successfully navigate

raises risk exposure and security concerns. These types

this process. We have seen an increasing interest from

of projects may also be exposed to natural hazards,

companies to generate electricity as a side operation

including the effects of climate change, which may affect

and are therefore looking to establish partnerships, such

their profitability. Social issues, including right of way

as through joint ventures or acquisitions, with supplier

permits, are another recurring matter. If a company fails to

companies that have expertise in power generation. As

handle these issues correctly it can face delays or even the

the Energy Reform advances, we expect to see an ever-

cancelation of the project, heavily impacting its finances.

growing number of M&As in the sector.

Marsh can help companies with all these issues by developing special insurance programs to better address

Q: What is Marsh’s view of the renewables sector and what

these challenges.

will be the company’s position in this new landscape? RM: The whole energy industry remains cautious about the

Q: Globally, one obstacle to effective risk management

transformation of the sector due to the uncertainty that

is the lack of information. What has been the firm’s

still reigns regarding regulations, particularly in respect to

experience in Mexico?

the operation of the wholesale market, which involves new

MA: Fortunately, there are many firms operating in Mexico

players and new trading products, as well as CENACE as

that are performing analytical studies, such as mapping

operator of the grid and administrator of the wholesale

the potential of wind and solar resources. This has created

electricity market.

a pool of information that can be used for our operations. We have not come across any restrictions for accessing the

Marsh is a leading US-based consultancy, insurance brokerage and risk

information required for our risk and strategic assessments

management company, looking to help customers in over 130 countries

because there is plenty of information available.

discover new growth opportunities in markets such as energy.

251


ROUNDTABLE

WHAT IS THE OUTLOOK FOR WIND ENERGY?

Together with hydropower, wind has been the king of renewable energies in Mexico since private companies began tapping into Oaxaca’s outstanding potential, with average wind speeds over 10m/s while most wind farms in the world are located in regions averaging 6.5m/s. The results of the 2016 power auctions, however, shifted the spotlight to solar energy, which won most of the bids for energy and CELs, achieving record low prices. But that does not mean the impetus for developing wind farms in Mexico is slowing and many developers are still very much in the run to develop the wind potential of the country, which is not restricted to the south.

The future looks promising for wind energy. Some players in the industry were concerned after the first power auction’s results because the largest share of megawatt252

hours and CELs were awarded to solar energy projects, but we expected wind to play a more important role in the second power auction and that happened. The Mexican government has made a strong commitment regarding clean energy in the Energy Transition Law, stating that 35 percent of the country’s power must be produced from

LEOPOLDO RODRÍGUEZ President of AMDEE

clean energies by 2024, and we expect wind to represent between 40-50 percent of that goal. With the competitive prices we are seeing per megawatt-hour of wind energy, we hope to reach 12GW of capacity installed by 2020. There are already 4GW installed and several large projects in the pipeline and the strong technical attributes of wind energy will be increasingly acknowledged.

With the new regulatory framework, the Mexican market offers the ideal conditions to sustain the entire wind energy chain. Mexico’s energy policy offers a positive panorama for the wind energy industry, particularly as it has set aggressive targets regarding renewable energy, not only in the generation sector but in demand-side management, too. We believe the main industry trend in the years ahead will be to optimize the wind energy chain with the

ANGÉLICA RUIZ Vice President & Director General Mexico & LATAM of Vestas

objective of lowering costs. We are analyzing the possibility of incorporating a new product into our portfolio designed to optimize site selection. Mexico is a fundamental market in Latin America and Vestas is prepared to make the most of it. We expect the country’s wind energy capacity to grow year on year, representing an attractive market for us.

So far, our experience in Mexico has been satisfactory and we expect to continue growing at a similar pace. We foresee additional interesting opportunities for renewable energy developments in Mexico, especially given the country’s clean energy targets, and we are suited to take advantage of the favorable circumstances brought about by the opening of the market. Our goal is to be a long-term player in the Mexican market, which is why we are making strong efforts to build a great reputation among

FERNANDO VILLARREAL Director of Project Development at Oak Creek Energy

our clients in the country, successfully finalizing our projects while promoting positive relations with the local communities. We are looking for new opportunities, including the establishment of partnerships with other renewable energy companies that can complement our resources while they benefit from Oak Creek Energy’s added value. The idea is to form alliances to create even stronger projects from a diversified portfolio.


Undoubtedly, Mexico is one of the wind markets with greater potential in the region. Once the buzz of the power auctions is over, we expect to see a larger number of wind farms being constructed for private off-takers through the bilateral contract scheme. Wind is a proven and mature technology that nowadays is competitive with other energy sources and contributes to reducing the cost of energy. Wind farms tend to be more solid than other renewable energy projects as they have longer maturing periods, being supported by extensive wind forecasting studies and permit processes. All these factors positively contribute to the proposals’ seriousness. Mexico plays an important role in Gamesa’s business strategy. Since Gamesa started operating in

JORGE LOBATÓN Director General of Gamesa for Mexico & LATAM

Mexico back in 1999, the company has been very active in its capacity as an OEM, having installed close to 2GW, making us the number one OEM in this market.

Currently, Mexico presents great niche opportunities for us and we expect it to grow considerably in the upcoming years. Nonetheless, we are also aware of the 253

number of new companies that are being attracted by the favorable conditions, making the competition fiercer for us. Furthermore, we have identified a pipeline of a few large-scale projects rather than a great number of small-size wind farms, diminishing the number of potential clients. However, we remain positive as we expect the market to keep growing in the near future, bringing new opportunities for Kintech Engineering and other companies entering the Mexican market. We have experienced a successful introduction period, reaching an important number

MANUEL IGLESIAS Country Manager of Kintech Engineering

of potential customers. We are now starting to focus on increasing the regional office’s capabilities to better serve this growing market.

Wind development is focused in windy areas like Oaxaca, Tamaulipas, Baja California, Jalisco and other central regions. A factor that will become more decisive in the future for wind power development will be the location of transmission infrastructure. CFE will hold in 2017 a tender for a HVDC transmission line that will be developed through a PPP. According to PRODESEN, the country needs to develop around 15,000km of transmission lines and their associated infrastructure in the next 10-15 years. This first auction will be interesting as it will shed some light on the operation and construction of these kinds of lines, which are new to

ALEJANDRO ROBLES Country Manager of SOWITEC

Mexico, and the model to expand the network. There is also another transmission line expected to be built between Sonora and Baja California, which is also creating high expectations in the sector.

The main lesson we learned from our wind projects is the importance of linking them to social development to support local communities. Renewable projects must benefit communities with infrastructure or development of human capital. These efforts have to run parallel to the construction of renewable projects. Without them, existing energy projects might be placed at risk and future projects might be hindered because Oaxaca has a strong capacity for social mobilization. To improve this we are analyzing social development projects that will effectively and transparently include information, participation and communication plans. With the support of the Special Economic Zones (ZEE) project, we hope to begin these developments, which will play a significant role in the creation of jobs and the socioeconomic growth of these areas.

SINAÍ CASILLAS Renewable Energies Coordinator of the State of Oaxaca


Hyder II solar park, Arizona (US), Trina Solar


SOLAR

10

The sun is starting to power Mexico. With some of the best solar irradiation indicators in the world, the country saw significant presence of solar projects in its first two long-term power auctions in 2016. Solar PV projects won the lion’s share of the power generation awarded, displaying globally competitive prices and dispelling worries about the reliability of the technology. Global companies from the US to China and beyond are embracing the power of the sun and applying themselves to the task of harnessing it.

The country, which has set demanding clean energy targets for the medium term, has become a lab for new technologies and several utility-scale projects are starting to prove the potential of solar power. In this chapter, technology companies, developers, plant operators, engineering firms and customers discuss the implications of solar power’s entry into the Mexican energy mix and what the future might hold, hand in hand with emerging storage solutions that reduce concerns about the intermittent nature of this power source.

255


CHAPTER 10: SOLAR 258

INSIGHT: Lou Marrero, Trina Solar

259

VIEW FROM THE TOP: Diego Molina, ET Solar Energy for Latin America and the Caribbean

261

ANALYSIS: Mexico Heating Up

262

INSIGHT: Alberto Cuter, Jinko Solar

263

PROJECT SPOTLIGHT: Alion Energy ARC Tracker

264

MAP: PV plants in Operation in Mexico by Aug. 2016

266

VIEW FROM THE TOP: Óscar Bernal, Eosol Energy 257

267

INSIGHT: José Ruiz, Buenavista Renewables

268

VIEW FROM THE TOP: Mark Kingsley, Alion Energy

Jesse Atkinson, Alion Energy

270

INSIGHT: John Huffaker, OCI Solar Power

271

INSIGHT: Bernardo Fernández, Hive Energy

272

MAP: PV in Construction by Aug. 2016

278

VIEW FROM THE TOP: Andrea Bernardi, Enerray

280

INSIGHT: Francisco Bonilla, SYNERGY

281

TECHNOLOGY SPOTLIGHT: Power Electronics’ UL Outdoor Set

282

INSIGHT: David Arelle, ILIOSS/SolarCity Mexico

283

INSIGHT: Vladimir Ruiz, Fronius México

284

ANALYSIS: Distributed Solar Energy Sees Growth Uncertainty

285

VIEW FROM THE TOP: Arturo Almanza, Industronic

Miguel Barrientos, Industronic

286

VIEW FROM THE TOP: José Zambrano, Galt Energy

287

INSIGHT: Juan Ávila, Top Energy

288

MAP: Residential PV usage as of 2015

291

VIEW FROM THE TOP: Sergio Beristain, Beristain + Asociados


INSIGHT

QUALITY AND REPUTATION TRUMP COSTS LOU MARRERO Director Latin America & the Caribbean of Trina Solar

Power auctions across the world in the past year have left

a solar panel, we improve the efficiency of the product at

little doubt which way prices are heading. The record lows

a component level. In addition, we work continuously on

at auctions in Mexico, Peru and Saudi Arabia surprised the

optimizing our manufacturing processes, which is another

global industry as the development of higher-efficiency

factor impacting our products’ quality and costs.”

PV panels and improvements in BoP components have 258

helped to bring costs down. But while price is one thing,

Trina Solar’s flagship product is its double-glass module,

quality is another.

an innovative system developed at the company’s research center. Trina Solar’s R&D team spent years investigating

“We will never give up quality for the price,” says Lou

before finding an adequate solution to diminish the

Marrero, Director Latin America & Caribbean of Trina Solar.

negative impact that UV degradation, high temperatures

“It has taken us 20 years to build our reputation and we

and moisture have on a PV panel’s performance. “Their

are not willing to put it at risk just for the sake of reducing

idea was to replace the back sheet used in regular solar

costs.” Mexico’s first long-term power auction produced

panels with an extra layer of glass. The final design consists

a record price per megawatt-hour of solar energy with

of a 60-cell module that yields a higher power output rate,

average prices of US$45.15/MWh. The country beat its

in excess of 260W, with above 16 percent efficiency. The

own record later by reaching 30 percent lower prices in

product’s characteristics make it particularly attractive

the second auction, with energy costs of US$33.47/MWh

for hot and humid regions, which are common in Mexico,”

on average. The fact that the costs related to solar PV

Marrero says.

modules have fallen by around 80 percent from 2009 to 2015, according to IRENA, has helped to make solar energy

Trina Solar also has developed a smart system for its

more economically attractive. But it has also put pressure

PV panels that positively impacts a project’s costs. “The

on manufacturers to continue optimizing production

system, called Trina Smart, improves a plant’s power

systems and to keep costs down.

output and reduces the cost of the balance of the system, reducing installation and O&M costs. It allows project

Trina Solar is a Chinese manufacturer of crystalline PV

operators to monitor the performance of the individual

modules founded in 1997 and listed on the NYSE since

panels and the solar park as a whole,” he says.

2006. It supplied a total volume of 3.66GW PV modules in 2014, placing it as a leading supplier in the global solar

The company complements its technical capabilities with

market. Quality control is a core part of the company’s

strategic partnerships. “Part of our strategy consists of

strategy, with 30 internal quality tests currently running,

working with local talent, particularly those who have the

according to its website. “Our great attention to detail

ability to offer aftersales services according to our clients’

and vertically integrated structure have been our secret to

regional needs,” Marrero says. “We also work to establish

success because that enables us to control every aspect

strong and long-term relationships with our suppliers, such

of our processes,” Marrero says. “This strategy has allowed

as inverter or rack providers, which helps us establish a

Trina Solar to provide an efficient, high-quality and cost-

symbiotic bond that improves our product’s performance

competitive product that works perfectly under a wide

by linking it to the appropriate components.”

range of conditions,” Marrero says. Innovation is one of the strongest points that differentiate the company from

Trina Solar sees itself as a bankable business with a proven

other Tier 1 manufacturers, complemented by the strict

track record, which plays in its favor. “We are certain that

control Trina Solar exercises over its manufacturing chain,

Trina Solar’s name will be in the conversation repeatedly,

from the silicon to the assembly of the key components.

particularly because we lower a project’s risks and increase

“By ensuring the quality of all critical materials needed for

its bankability,” Marrero says.


VIEW FROM THE TOP

ENERGY TRANSFORMATION LEADS TO REVAMPED STRATEGY DIEGO MOLINA Regional Director of ET Solar Energy for Latin America and the Caribbean

Q: What led to ET Solar Energy’s successful entry into

that the DG market had recently opened in Mexico. Before

the Mexican market?

that year, solar-energy companies had to do a lot of

A: Since 2015, we have positioned the brand successfully

multitasking due to the market’s immaturity. In 2015 the

in Mexico, starting with medium and small-sized DG

DG market was finally established so we looked around

projects and then focusing on utility-scale PV projects.

for suitable partnerships. Unfortunately, in Mexico there

We

developers,

were only a few companies with the required financial

supporting their efforts to reduce the LCOE in their

are

working

closely

with

project

capabilities, infrastructure and experience to become our

projects. The company decided to follow this strategy

local partners. Nonetheless, companies like Exel Solar, a

because of the transformation taking place in the

Mexican wholesale supplier of solar-energy products,

Mexican energy industry. We expect the market to

emerged as an excellent option to become our partner.

take off completely in two to three years once financial

We worked closely with them to design and launch the ET

certainty has been established, and we built our strategy

Smart Flex product in Mexico, which is assembled locally

around this assumption. Luckily, we seem to have made

to reduce costs, providing an added value for customers.

the right decision as ET Solar’s panels were among the

Exel Solar not only had the proper financial and physical

three most sold solar panels in the Mexican DG sector in

resources to become our partner, it also had a great team

2015 and 2016.

that contributed enormously to our entry into Mexico.

We are now redesigning our strategy to fit the industry

Q: How can ET Solar help utility-scale developers be

changes we witnessed in 2016, putting a stronger focus

competitive in the current price environment?

on utility-scale customers. Mexico is a highly attractive

A: Our strategy is to help utilities with plants between

market for a wide range of industries and it is a gateway

5-500MW achieve competitive power-generation costs

for other interesting markets not only in the energy

and reduce their LCOE. We are part of the efforts by the

sector, which has motivated us to consider opening a

solar-energy chain to increase competitiveness against

manufacturing facility here. We have plans to build a

other technologies, which is crucial for companies

top-notch solar cell factory in Mexico. ET Solar Energy

participating in CFE’s power auctions. As happened

places great importance on innovation, so we would like

in the first electricity tender, solar-energy prices have

to have high-level production lines with digital platforms

become highly competitive, forcing companies to take

so clients can customize their products.

an aggressive approach.

We are now expanding our local workforce and we are

We are working with some of the tender’s participants,

confident will close the year as the best-selling solar-

establishing macro-agreements across different Latin

panel brand in the market. We have already signed

American markets to ensure they have competitive prices.

contracts in the utility-scale segment, accounting for

We guarantee aggressive prices through contracts based

200MW to be delivered in the next two years. This has

on market estimates, in which we consider everything

taken our company to the next step, allowing us to invest

needed to produce a solar panel for the next four years,

further in local business development and drawing closer

so we can now guarantee a competitive fixed-price for

to materializing the idea of manufacturing in Mexico.

panels that will be produced and sold in 2018-2020.

Q: What do you look for in a local partner and what kinds

ET Solar provides solar energy solutions including components

of partnerships have been crucial for your operations?

manufacturing and package services throughout the life cycle of solar

A: When we were planning our strategy for entering the

power plants, from project design, financing, engineering, procurement

medium and even small-scale market in 2015, we realized

and construction management operations and maintenance services.

259


Hyder II solar park, Arizona (US), Trina Solar

260


ANALYSIS

MEXICO HEATING UP If ever there was an underdog story in the Mexican

both long-term power auctions in 2016, surprising all

energy matrix it is solar PV energy. Despite Mexican solar

players involved in the process. “The biggest growth

resources being among the most abundant in the world,

opportunities in the Mexican power market are in

it has remained a mostly untapped source of potential

solar PV,” says Héctor Olea, President & CEO of Gauss

renewable energy in the country.

Energía. “It has been a surprise for everybody.

Mexico has daily solar irradiation levels between 4.4KWh/

A year ago authorities would say solar was too

m2 and 6.3KWh/m2, with the country’s latitude between

expensive and that it needed subsidies. However, at

15 and 35 degrees, often considered as the optimal band

the first auction, solar was awarded a large percentage

for sunlight access. The country has 129MW authorized

of the total energy committed and at the lowest price

capacity operating in eight states (Aguascalientes, Baja

worldwide. This success was ratified in the second

California, Baja California Sur, Durango, State of Mexico,

auction, where most of the energy was awarded again

Guanajuato, Sinaloa and Chihuahua), which stands in sharp

to solar PV and at an even lower price, an average of

contrast to the 3GW of wind generation capacity in place.

US$31/MWh, which is below any other technology.” This sentiment is shared by the authorities, project

But the narrative changed quickly after 2016’s power

261

developers and consumers.

auctions and with advances in technology availability and lower costs. Mexico now has 2.4GW of solar power coming

DISTRIBUTED GENERATION

from projects being built and another 6.2GW in plants

Among the most promising applications for solar PV in

about to begin construction.

Mexico is distributed generation (DG). Several of the key players in the industry, including analysts, company

TECH TO THE RESCUE

directors and officials, point to this as one of the defining

Technological development is one of the key elements

trends that will shape the market for the coming years.

that has boosted the competitiveness of renewable

According to Loïc Le Gall, Executive Director-Power &

energy. “In the past, renewable energy was heavily

Utilities of EY, the potential for developing DG relies

dependent on subsidies, which is no longer the case

on the several benefits companies, developers and

thanks to technological improvements that made prices

customers would get from it. “We consider DG to be

of renewable energy competitive, allowing technologies

in line with the needs of the recently created market

like solar to reach grid parity,” says Bernardo Fernández,

because it allows placing the generation point close to

Mexico CA&C Country Manager of Hive Energy, the UK’s

the consumption,” he says. It also presents a convenient

leading developer of solar energy on commercial rooftops

complement

and solar parks that recently entered the Mexican market.

resulting from a lack of transmission and distribution

The LCOE for utility-scale solar PV saw a dramatic

infrastructure in some parts of the country.

for

solving

congestion

problems

decrease of 82 percent between 2009 and 2015, according to Lazard’s Levelized Cost of Energy Analysis Version 9.0, benefiting PV project developers all around the world. But the drop in LCOE has not been the only factor behind the cost-effectiveness of PV parks. The Internet of Things has introduced monitoring and control solutions that can optimize production and improve the OPEX rate of PV parks during their life span. New technologies such

Mexico has daily solar radiation levels between 4.4KWh/m2 and 6.3KWh/m2

as smart metering are now available to collect data and adjust operations of a utility in real time. These solutions

The main challenge for the development of DG will be to

allow companies to save large sums of resources by

conclude the regulatory framework that will determine

avoiding unscheduled maintenance and prolonging the

its operation. Anticipating this situation, the CRE

operability of the infrastructure.

submitted all dispositions and contract models for DG systems for consultation in September 2016. The arrival

THE CROWN JEWEL OF THE CROWN JEWEL

of pertinent rules and dispositions for DG will move

The promise of PV energy is undeniable as this

the story forward and boost this system in the Mexican

technology was crowned the undisputable winner for

energy industry.


INSIGHT

TRAIL BLAZER RAMPS UP AS SECTOR GROWS ALBERTO CUTER General Manager Latin America of Jinko Solar

262

In the past 15 years, China has spawned a wave of

of project development was awarded three projects

solar energy companies that are now blazing a trail in

totaling 188MWAC of new solar capacity. Moreover, Jinko

international markets. Jinko Solar, the third largest PV

Solar’s panels will be used on projects by the auction’s

modules supplier in the world by capacity, is the name

other winners, with the company signing contracts equal

with the strongest presence in the Mexican market and

to 1GW. “We are covering 75 percent of the total solar

the company says the sector has the potential to become

capacity that was allocated in the bidding round. In the

the biggest in Latin America. “In the upcoming years, we

next tenders, we expect to achieve similar results because

expect Mexico to become the largest solar market in Latin

we have built trust with our customers and we have a

America, so we have plans to continue investing heavily

great local team,” says Cuter.

in the country, expanding our resources while promoting our products and services,” says Alberto Cuter, General

Like many others in the industry, Cuter was surprised by the

Manager Latin America of Jinko Solar.

results achieved by solar energy in the auction, qualifying them as a turning point for the industry. “The use of innovative make

business models was crucial for lowering the costs of solar

advancement difficult. “In Mexico, there is a 15 percent

energy and we feel proud to have helped our clients develop

tax on imported solar panels that represents a barrier

competitive proposals for the tender by providing high-

to the expansion of solar energy, particularly in the case

quality technology at affordable prices,” says Cuter.

Cuter

has

also

identified

challenges

that

of distributed generation projects. We are designing a strategy to overcome this challenge without affecting our

Jinko Solar was one of the first companies to manufacture

final customers,” he says.

1,500V PV panels, which helped to lower BoP costs of utility-scale solar parks. As Cuter explains, “raising the

“We expect Mexico to become

peak voltage of the modules by 10V decreases about 1.5

the largest solar market in Latin

amount considering the record-low prices reached in

America”

CAPEX, we have contributed to making financial models

Alberto Cuter, General Manager Latin America of Jinko Solar

percent of the total utility-scale project cost, a significant recent international tenders. By reducing the project’s more affordable for solar energy projects.” Additionally, Jinko Solar’s modules offer efficiencies of over 17 percent, one of the best power generation rates in the market.

“It is still unclear if the winners of the tender will be exempt from the imported panel tax, as they might still be

Besides utility projects, Jinko Solar sees great potential

considered in the Mexican Sectorial Promotion Program

in Mexico’s DG sector and the local team is working to

(PROSEC),” he adds. “Before making any important

capitalize on that. “We are investing in promoting the

investment, companies must understand the stability and

products and services we have in this sector, carrying out

functioning of the local regulation."

an important marketing campaign addressing potential customers willing to develop small and medium-scale

The company installed around 50MW of capacity in 2015,

solar energy projects,” he says. The company’s 2015 and

which represents around 50 percent of the country’s

2016 results in addition to its strong market value allow

market share, according to Cuter, which he says is an

Cuter to dream big. “At the moment, our main goal is to

indicator of the Mexican market’s business potential. The

maintain the 50 percent share that we currently have in

results of CFE’s first power auction should also increase

the Mexican market. This target is highly ambitious but we

Jinko Solar’s after the company’s division in charge

are confident we can do it.”


PROJECT SPOTLIGHT

ALION ARC TRACKER In an industry as competitive as PV power production, the

tracker in the market and ensuring its longevity. Alion

need for efficiency and cost-effectiveness has become

is so confident in the durability of this solution that the

more relevant than ever. Alion’s ARC Tracker is a powerful

company offers a 30-year warranty, a considerable length

tool for ensuring the maximum availability of a solar

of time especially considering the changing conditions of

resource for power production.

Mexico’s geography. The ARC Tracker is an ideal solution for rocky, hard, dusty and other challenging environments.

The ARC Tracker is a ballasted single-axis tracker with undulating slope capability, ensuring resistance and

In addition to the ARC Tracker’s unique design, another

making it ideal for high-wind zones, which are a frequent

main advantage is its capability for fully automated

feature of Mexico’s geography. The ARC Tracker also

cleaning using the company’s SPOT maintenance robots.

allows wind analysis by CPP, guaranteeing wind resources

This solution has a track fitted for a SPOT cleaning device.

are not a problem for this PV solution. The system allows

SPOT is the first cost-effective robotic cleaning solution

for a 50 percent panel increase per drive, compared to that

for PV panels that improves performance. This cleaning

allowed by typical torque tube systems, thus increasing the

solution is programmable and can be operated from a

power production capacity of each PV farm and ensuring

computer, tablet or smart phone, making it completely

maximum efficiency from the installation and operation

accessible.

of the project where it is employed. The system’s unique design encompassing Arc Drive load reduction eliminates

The primary components of the ARC Tracker are a

the need to employ large torque tubes, making it a more

continuous, jointed concrete track that supports the

flexible option than others available in the market. The

unique A-Frame structure and Arc Drive, purlins, drive

design of the ARC Tracker also allows a more distributed

shaft and flexible coupling joining tables. Most of the parts

profile and low bearing pressure, decreasing long-term

are pre-assembled, thus reducing field labor to the point

ground settlement risk, making it the most trustworthy

where they can be installed by a two-person team.

263


PV PLANTS IN OPERATION IN MEXICO BY AUGUST 2016

1

2

6

264

3

5 4

7

8

Source: CRE


Company

Plant

Arrangement

Plant Size (MW)

Authorized Energy Production (GWh/year)

Investment (US$ millions)

State

Self-supply

1.04

1.91

2.08

Baja California

4009.91

693.70

Baja California

1

Plamex

2

Comisión Federal de Electricidad

Central Cerro Prieto*

Generator

574.85

3

Comisión Federal de Electricidad

Central Santa Rosalía

Generator

0.97

2.04

1.94

Baja California Sur

4

Servicios Comerciales de Energía

Small-scale producer

30.00

86.00

60.00

Baja California Sur

5

Coppel

Self-supply

0.99

2.30

1.97

6

Buenavista Renewables

Los Santos Solar I

Self-supply

13.70

7

Eosol

TAI Durango I

Small-scale producer

Sinaloa

40.10

40.00

Chihuahua

30.00

57.90

60.00

Durango

TAI Durango II

15.62

32.42

31.25

Durango

TAI Durango III

6.25

12.06

12.50

Durango

TAI Durango IV

6.25

12.06

12.50

Durango

TAI Durango V

3.50

6.75

7.00

Durango

265

8

Autoabastecimiento Renovable

Self-supply

0.79

1.80

1.57

Aguascalientes

9

Generadora Solar Apaseo

Self-supply

0.98

2.14

1.95

Guanajuato

10

Iusasol

Self-supply

18.30

37.19

36.60

State of Mexico

1.84

State of Mexico

Iusasol 1 Iusasol Base

0.92

1.86

*Note: Only 5MW of the Cerro Prieto Plant come from PV Solar, while the remaining power is produced from geothermal sources.

9

10


VIEW FROM THE TOP

AGGRESSIVE STRATEGY CHASES O&M PROSPECTS ÓSCAR BERNAL Director General of Eosol Energy

Q: What motivated Eosol to bet on Mexico and what new

energy. In this way, we have contributed to a positive

opportunities have you identified?

image for renewable energy in Mexico, showing it can

A: We are betting on Mexico because we are convinced

operate without having a negative impact on the system.

of the country’s potential. Eosol is used to taking on risk

266

and we have been following an aggressive strategy here.

Q: Why is Eosol migrating projects to the new regulatory

We have invested US$140 million in Mexican projects,

plan, given the option to keep them as legacies?

US$26 million of which came directly from Eosol. The

A: We are migrating six of our legacy projects to the new

company also is working on consolidating its recurring

Electricity Industry Law. Government officials expect most

revenue streams, such as the O&M contracts we have

of the legacy projects to migrate to the new plan soon,

with third parties.

which is logical. We are trying to adapt our company to the new regulation because it is beneficial for all involved.

We see 2017 as a year of great opportunity because the

The Electricity Industry Law offers more attractive features

contracts awarded in the first power auction will start

than some of the former plans. Self-supply projects are still

construction. According to the auction’s contracting

interesting but the small-producers’ plan in the previous

terms, the winning projects need to start operations by

regulation is handicapped because it uses a PPA that was

January 2018 and will be penalized if they have not done

specifically designed for these kinds of projects and is

so by July of that same year. We have identified three

not as favorable as the new pricing rules. The cost of the

large corporations with the highest potential to become

electricity sold through small-producer PPAs is calculated

our clients. They will need O&M services from smaller

using the power plant’s average production, which is a

companies such as Eosol that have experience in Mexico.

disadvantage. Some of our small-producer projects are

We are small in size but we are the largest renewable

now selling electricity at January 2016 prices, the month

energy operator here, having over 60MW of capacity

with the lowest production rate in two decades. Because

under operation and 240MW in the pipeline.

of that we are now receiving US$31 per megawatt-hour, which is below the market price. CRE has not updated the

Q: What has been your experience operating TAI Durango,

standard prices for small-producer projects as it has not

the country’s largest solar park?

yet defined how they will be calculated without affecting

A: We expected to face bigger challenges operating in

the new market participants. The situation is having a

CENACE’s northern control area and managing our new

negative impact on our financial balance.

relationship with CFE but both processes have been running smoothly. We have had zero unplanned operational

Q: What is your strategy for continued growth and to gain

stoppages since April 2014 when the first project stage

a larger market share?

was inaugurated. We have been free of accidents and

A: Our main focus is to promote energy consultancy

grid distortion incidents, only stopping operations during

services, particularly those related to O&M, public

routine maintenance services. The 50MW we added in

works supervision and engineering. The construction of

January 2016 have been operating smoothly, following the

a wind farm or a solar park is an anecdotal event that

success of TAI Durango’s first phases. Eosol has avoided

takes between six to 16 months, depending on the size

operational problems at our facilities, which also benefits

of the project. O&M lasts the project’s entire life span.

grid operator CENACE and CFE, which purchases our

We are about to start building a 23MW solar park in Coahuila, developed by the Australian Macquarie fund,

Eosol Energy is a renewable energy development company, working

and we will provide O&M services afterward. Eosol has

in different technologies and mainly focused on wind, photovoltaic,

around 217MW in its pipeline for Mexico, developed and

thermosolar and biomass power.

operated by us.


INSIGHT

EXPECT GREATER INTERNATIONAL FINANCING SCHEMES JOSÉ RUIZ CEO of Buenavista Renewables

Buenavista Renewables is a renewable energy developer

environmental

impact

assessment

and

the

financing

founded just three years ago but it has already scored a

scheme, particularly as banks had never financed a private

first for Mexico’s solar energy industry: Chihuahua-based

solar project in Mexico before,” he says. “In the end, we got a

Los Santos Solar I is a utility-scale solar park that will supply

club deal in which the capital and support of our partner, OCI

energy to private off-takers via a long-term PPA. To develop

Solar Power, was a critical component,” says Ruiz.

the project, the company used an international financing scheme it believes will become more common in Mexico. “The

Another crucial factor for obtaining private financing was

financial model we selected for Los Santos Solar consisted of

the selection of the project’s major service providers.

a contract with a number of US banks that included a 20-

“When you are dealing with banks, all of these details can

year dollar-denominated PPA, an 18-year financing scheme

make the difference between getting funded or not,” he

and a long-term equity stake to a Korean entitiy,” says José

says. “In Los Santos Solar I we used a leveraged scheme,

Ruiz, CEO of Buenavista Renewables. “The financing method

meaning the debt component was highly significant in

we used in Los Santos I is the most common method for

comparison with the equity. In this case, we evaluated

financing renewable projects internationally and we expect

the bankability reports of our main component suppliers,

to see similar cases emerging in Mexico soon.”

which were supported by a third-party engineering firm that analyzed their manufacturing plants and products

The 13.5MW Los Santos Solar I, the first phase of a project

independently,” Ruiz says. “Additionally, we assessed

that will supply energy to industries, commerce and public

their balance sheet, the degree of diversification, quality

off-takers, received US$40 million in financing from the

certifications and experience in the industry because

North America Development Bank (NADB) and the Overseas

all these aspects have considerable impact on the risks

Private Investment Corporation (OPIC). It will provide energy

associated with external suppliers.”

to 12 schools of the La Salle group and one manufacturing plant belonging to German cable and cable systems company

Off-takers’ awareness of the importance of establishing

Leoni Cable. OCI Solar Power was Buenavista Renewables’

financially sound long-term PPAs was also crucial for the

partner and contributed with capital and technical support.

project’s success. “For instance, Leoni Cable has a 20-year plan for its Mexican subsidiary, highlighting the importance

Buenavista Renewables, a company providing financial and

of guaranteeing a stable LCOE for its future operations.

technical expertise to develop renewable and conventional

Unfortunately, this strategy is uncommon in Mexico, where

energy projects with a particular emphasis on Mexico, was

most companies tend to focus on the initial rates,” he says.

created with the purpose of closing the gap in renewable markets

To address this, Buenavista Renewables has designed

and selected island economies. “We define ourselves

services for off-takers. “We can help companies decrease

as a finance-oriented company with expertise in the

the volatility risks associated with electricity prices by

development of renewable energy projects. Our objective

tailoring projects suitable to their energy needs, considering

is to develop projects that get to the finish line and are

the seasonality of the industry and the client’s resources,”

financially sound to investors and banking institutions,”

Ruiz says. Mexico is Buenavista Renewables’ main market,

Ruiz says.

representing 60 percent of the company’s ongoing

project

financing,

particularly

in

emerging

business. It is also looking at opportunities in South America Even with its broad experience in project financing,

and South Asia. “As a medium-sized company, we want to

Buenavista Renewables faced several challenges in closing

focus on projects with the potential to increase our market

the Los Santos Solar I deal. “We experienced challenging

reach, prioritizing challenging regions usually ignored by

situations

bigger firms."

with

the

interconnection

agreements,

the

267


VIEW FROM THE TOP

OPPORTUNITY BETWEEN A ROCK AND HARD PLACE

Mark Kingsley President & CEO of Alion Energy

268

Jesse Atkinson VP Marketing and Business Development of Alion Energy

Q: Given the slow growth of solar in Mexico, which

Q: How will the company adjust its strategy to Mexico,

opportunities have you identified for expansion?

compared to operations in the US and Japan?

MK: Mexico is unique because it contains the ideal

MK: Partnerships are a key component to success in every

conditions for the implementation of our technology, such

country we enter. Alion looks for local companies with a

as rocky soil, corrosive soil, dust and high winds, especially

deep history that may have experience and expertise in

in coastal areas. Our system is designed with these terrains

another industry. We contribute the technology to improve

in mind so we have located opportunities in the northern

the economics of the work these companies carry out. With

parts of the country along the border with the US and in

solar energy, the central element is partnerships because

Guadalajara, among others. Contrary to other solutions, we

hard costs can be controlled, whereas without a strong

operate well in harsh environments such as those prevalent

local alliance, soft costs can spiral quickly. We already have

in Mexico. The real value proposition lies in two aspects:

identified several potential partnerships for expansion into

extended life for the solar installations and cleaning

Mexico. This is something we have been considering for

services to generate more energy. A company can spend

three years while waiting for the market to really reach its

20 percent more on a tracker to add capacity to its system

potential. The company is looking for larger projects that

but if the tracker accumulates dust this value is limited,

can take a little longer to develop but we believe Mexico

potentially reducing a 320-watt panel to the equivalent of

is a strong fit for our business strategy. Based on energy

280 watts. Our SPOT cleaning robot addresses this. With

economics, we know that as the pricing evolves in the

solar there is no outlay for fuel and the technology requires

country the market could become lucrative. We make

almost 100 percent upfront infrastructure investment,

solar energy profitable and affordable for those installing

meaning that extending the lifetime of a product can

the equipment and we have always worked with a model

improve returns significantly. Harsh environments can

wherein the technology does not require any subsidy.

corrode metal components and strong winds can damage the systems so Alion uses strong, corrosion-resistant

JA: Many have commented that Mexico seems like a

concrete to cost-effectively extend the life of the system to

slow-moving market but when comparing its pace and

40 or 50 years, which could be an invaluable advancement

development with that of similar markets globally, it is clear

for the industry.

the industry here is advancing rapidly and in a way that does not use artificially high Feed-in-Tariffs, which is better

JA: As solar develops, a considerable number of benefits are

for the market in the long term.

generated for the community but there also are concerns about the use of high-quality land, such as farmland, for

Q: What is the expected demand for Alion’s three lines,

solar. Examples of this can be seen in countries like the

AMS and ROVER technology complemented by SPOT

US and the UK wherein automatically the most easily

automated maintenance services?

developed land was used for solar installations, despite

MK: Alion’s goal is to obtain long-term service contracts of

the fact this land could have been allocated to farms or

40 years or more because this is how our systems maximize

commercial development. We believe that as a matter of

value. Our core O&M business lies in service contracts and

public policy we should use otherwise unproductive land,

we work through EPC partners. In terms of migration to

such as brownfields and rocky sites, for solar farms. In turn,

Mexico, ROVER assimilates more easily into countries like

this will encourage the consolidation of the solar market.

Japan with limited labor and high costs whereas in Mexico there is an abundance of affordable, quality talent. As a

Alion Energy is an innovative company that provides solar solutions for

result, we can see more demand for manual installation

installation and cleaning, which can reduce costs of solar energy by up

of the AMS concrete track and supports and for SPOT

to 75 percent.

cleaning technology in areas where harsh conditions make


Rooftop solar installation, Aguascalientes, Top Energy

269

it unconducive to using manpower. Our O&M robots not

storm the operator simply needs to push a button on his

only clean, they maintain the equipment, spraying the

or her smartphone without worrying about the logistics

panels with protective coatings to maximize energy and

of scheduling a cleaning crew. The human capital in

extend the life of the system. ROVER also is suited to toxic

our operations will be focused on interpreting data. We

areas such as decommissioned mining sites and industrial

see this as part of the natural evolution of the industry,

locations and to places where there is a need to minimize

much like the use of remote maintenance tools in the

human contamination. It is easy to remove our system at

oil and gas sector, wherein we will generate continuous

the end of its lifespan due to the use of shallow concrete,

data to pinpoint problem locations within the system.

which can then be grinded and recycled.

Essentially, human capital will be used to interpret data, optimize efficiency and generate more energy. It is not

JA: ROVER also is an affordable service for large-scale

an issue at the moment but if the industry sees more

Mexican projects, especially remote ones. Even though

success in Mexico there could be labor shortage issues

some manual labor will be used, ROVER will reduce the

for installation and cleaning, similar to what happened

required workforce and improve quality. Logistics is greatly

in Southern California and Chile. Alion’s technology can

simplified by the use of robots because rather than having

eliminate these issues.

to coordinate a workforce of perhaps 400 people, this process can be automated through the use of the ROVER

JA: Several large projects were under construction in the

system. Even if there is no great cost benefit in terms of

Atacama Desert in Chile and the labor situation became

cost per panel, the simplification of the logistics in itself will

desperate as large staff numbers were required. Ultimately,

create a significant cost and quality advantage because

the EPCs were forced to import staff from Bulgaria and

risk is much easier to manage and speed is improved.

other distant countries, which was clearly not costefficient or effective in the long term. Manual cleaning is

Q: What role does human capital play in the deployment

labor-intensive. It can become prohibitively expensive

of these technologies?

even with low-cost labor and it is generally inconsistent.

MK: We already have carried out accelerated life-testing on

Another benefit of SPOT is that it uses less than one-third

these robots and we can confirm they are durable. Unlike

the amount of water normally required. This is significant

more complex robots that require spatial awareness,

especially for projects in the desert region where the

SPOT uses the concrete track as a predetermined path,

resource is scarce, too expensive or allocated for domestic

meaning the technology is simple and robust and requires

purposes. In many areas of the world water is becoming a

very little ongoing maintenance. In the event of a dust

more expensive commodity than gasoline.


INSIGHT

SOLAR SHINES LIGHT ON LOCAL JOBS JOHN HUFFAKER Vice President of Commercial Operations at OCI Solar Power

270

The solar industry is more than just a source of energy. It

NEE’s consortium, including Mission Solar Energy, Sun Action

is an employment generator. While the sector in Mexico is

Trackers, KACO inverters and Mortenson Construction,

developing, countries that are further along, like the US,

also collaborates with other project developers, financial

offer a good example of what is possible. From state to

agencies and service providers, all from Texas. “The

state, the adoption of solar and other renewable energies

consortium employs over 800 people in the San Antonio

in the US is creating jobs. California heads the list of Top

area and 800 more in other regions of Texas, meaning

10 solar states, with 75,598 jobs at the end of December

that 1,600 jobs were created as a result of the CPS and

2015, according to the Solar Energy Industries Association

OCISP agreement,” Huffaker says. Texas has the 10th largest

(SEIA). It also leads on the amount of cumulative solar

installed solar capacity in the US. The state installed 181MW

electric capacity installed. Coming in at number six is Texas,

of new solar capacity in 2015 to surpass 534MW, enough to

with 7,030 industry-related jobs.

power around 57,000 homes, according to SEIA. OCI Solar Power already has had a taste of success in Mexico with the

Companies behind the numbers in the Lone Star state,

Los Santos I. The project was developed in collaboration

such as OCI Solar Power (OCISP), say the economic

with Buenavista Renewables, which designed the financial

factor is a key to success that can be emulated in Mexico.

model. It includes a 20-year PPA with La Salle University

“OCISP views solar projects from a regional perspective

and Leoni Cable, making it the first utility-scale solar park to

and considers economic development and local job

secure a long-term PPA with private off-takers.

creation as an integral part of our projects,” says John Huffaker, Vice President of Commercial Operations at

According to the North American Development Bank, which

the San Antonio-based company, which was involved in

helped finance the park, Los Santos I generated around

Los Santos I, a 13.5MW solar park located in Moctezuma,

50 and 60 local direct jobs during its construction phase

Chihuahua.

and between five and 10 permanent jobs during the O&M stages, most of which went to people from the surrounding

“In San Antonio, Texas, we have a PPA with CPS Energy,

communities, an important element for OCISP. “Our goal is

the city’s municipal electric utility, to develop and

to build a long-term relationship with the community, which

construct 450MW of solar capacity as part of an economic

differentiates us from other solar power companies,” says

development and job creation program known as the New

Huffaker. “We are looking forward to replicating our San

Energy Economy (NEE),” Huffaker says.

Antonio model in Mexico.”

RENEWABLE ENERGY EMPLOYMENT BY TECHNOLOGY (MILES) RENEWABLE ENERGY EMPLOYMENT BY TECHNOLOGY (thousands) Solar Photovoltaic Liquid Biofuels Wind Energy Solar Heating / Cooling Solid Biomass Biogas Hydropower (small) Geothermal Energy CSP 0 Source: IRENA Source: IRENA

0.5

1.0

1.5

2.0

2.5

3.0


INSIGHT

PARTNERSHIPS A WIN-WIN IN EMERGING MARKET BERNARDO FERNÁNDEZ Mexico CA&C Country Manager of Hive Energy

As the dust from the Energy Reform settles, some companies

which will give private off-takers enough confidence to

are waiting to see how the playing field pans out. Bernardo

enter the market.”

Fernández, Mexico CA&C Country Manager of Hive Energy, believes now is the time for a more proactive approach.

PPAs are in Hive Energy’s spotlight because the company

Companies should be looking for potential partners to

is still uncertain about the potential of other market

strengthen their business offering and start capitalizing on

mechanisms. “All other schemes are a continuous collection

the market’s opportunities. “In Mexico, a fairly new market,

of permits, which is costly and inefficient for us. Therefore,

local companies can benefit from the extensive expertise we

we have decided to wait until the wholesale electricity

have acquired in other locations and we can benefit from

market is completely established before introducing other

our partner’s knowledge about the local administrative

schemes into our strategy,” he says.

processes and the Mexican business culture,” he says. In the last five years in the UK, Hive Energy has developed over

The company is especially curious about the possibility

30 solar parks that generate 300MW of power, enough to

of working with energy traders, a market participant that

power 90,000 homes according to the company’s website.

Fernández expects will fast become increasingly important.

The scale of Mexico’s energy market and its strategic

“So far, we have not seen many energy traders entering

location drove Hive Energy to select the country as its base

Mexico but we believe this will change as the market evolves.

for the Americas, from which it hopes to also capitalize on

Considering the Mexican wholesale electricity market was

the potential of Central American markets.

based on the American nodal scheme, we expect to see an increasing number of US firms moving to Mexico and

The company’s focus on finding local strategic partners to

opening virtual trading offices in the country,” he says.

boost its capabilities in Mexico is a strategy Hive Energy is using in other developing markets. “We have a business

Fernández is not as enthusiastic about the CEL market. “For

model that is strongly dependent on finding adequate

us, the CEL market is one of the gray areas of the Energy

partners and that is extremely beneficial for both sides,”

Reform. Most players understand the concept of CELs but

Fernández says.

few know how these will actually work in the open market. Because of this we have decided not to include CELs in

Fernández arrived in Mexico with the idea of establishing

our business models until the workings of that market are

PPAs with large private off-takers. Market uncertainty,

clarified,” he says. “A general concern for the CEL market is

however, drove him to rethink the company’s strategy.

that a 50 percent over-demand is needed for the market to

“We decided to restructure our strategy and target

work and, at the time, there is no certainty regarding this

mostly municipalities, which have huge energy demands

percentage. If the market manages to work properly there

associated with public lighting or water-pumping services,

will definitely be an incentive for international investors to

instead of private companies,” he says. “Local authorities

enter the Mexican market.”

are willing to sign PPAs with any company offering a lower tariff than CFE and they are not as cautious about the

Another uncertainty is CFE’s role in the new market, which

Energy Reform.”

is as much a question mark for Hive Energy as it is for many other companies. But Fernández is confident CFE's

Hive Energy, however, has not forgotten the private

part will be clearer as liberalization evolves. “We expect

sector. “Mexico offers a great customer base because it

CFE to eventually specialize in one area, particularly

is a highly industrialized economy with a good number

after the Mexican government decides to cut electricity

of potential off-takers,” Fernández says. “We are sure

subsidies, which will pressure the company to increase its

the industry will boom once the regulations are clarified,

competitiveness,” he says.

271


PV PLANTS UNDER CONSTRUCTION BY AUGUST 2016

1

15 16 2 3 14

4 5

6 7

8 9 10 17 11

272

18

12 13

19

21 20

40 39

64

33 34 32

35 36 37

38 29 30 31

Source: CRE

65


41

42

43 44

28

45 46 47 48 49 50

54 55 57

51

56

52

58

53

61 273

23

59 60

22

62 25

24

26 27

70

69 63 68 66

67


PV PLANTS UNDER CONSTRUCTION BY AUGUST 2016 Company

274

Plant

Plant Size (MW)

1

Parque Solar Galápago I

30

2

Cuatro Solar

Central Caborca

30

3

Bocas Planta

Central Sonora

30

4

Aleph Solar I

50

5

SEGH Sonora Energy Group de Hermosillo

30

6

Solar Carbo I México

30

7

Cuatro Solar

Central Hermosillo

30

8

Nueve Solar

Central Sonora

30

9

Solar Wind Baja

Central Hermosillo

30

10

Sol de Sonora

30

11

Garambullo Solar

30

12

Cuatro Solar

13

Solar Wind Baja

14

Central Ciudad Obregón

30

Central Navojoa

30

Cuatro Solar

Central Casas Grandes

30

15

Solar Wind Baja

Central Ciudad Juárez

30

16

Solar Wind Baja

Central Samalayuca

30

17

Solar Wind Baja

Central Chihuahua

30

18

Solar Wind Baja

Central Camargo

30

19

Cuatro Solar

Central Parral

30

20

XIII Colima

Central Torreón

30

21

Solar Wind Baja

Central Torreón

30

22

Solar Wind Baja

Central Monclova

30

23

Solar Wind Baja

Central Sabinas

30

24

Solar Wind Baja

Central Saltillo

30

25

Solar Wind Baja

Central Reynosa

30

26

Tamaulipas Solar

27

Solar Wind Baja

Central Güémez

30

28

Solar Wind Baja

Central Mante

30

29

Saferay Solar

Planta La Pasión

30

30

SEG Sonora Energy Group Caborca - Mexicali

60

31

EPC Gea System

30

32

AEE Energía Renovable de México

30

33

Solar Wind Baja

34

Cuatro Solar

35

30

Central Mochis

30

Central Los Mochis

30

Solar Wind Baja

Central Guasave

30

36

Solar Wind Baja

Central Guamúchil

37

Eneready

38

Solar Wind Baja

Central Costa Rica

30

39

Solar Wind Baja

Central Mazatlán

30

40

Bocas Planta - Chihuahua Solar - Solar Wind Baja

Central Durango

90

41

Cuatro Solar

Central Fresnillo

30

42

Nueve Solar

Central Zacatecas

30

43

Solar Wind Baja

Central Zacatecas

30

44

Zacsol 1

30

45

Solax Energía Altiplano

30

46

Cuatro Solar

30 30

Central Peñasco

30


Authorized Energy Production (GWh/year)

Estimated Investment (US$ millions)

Arrangement

State

61.07

60

Small-scale Producer

Sonora

60.00

60

Small-scale Producer

Sonora

60.00

60

Small-scale Producer

Sonora

96.25

100

Self-supply

Sonora

100.00

60

Small-scale Producer

Sonora

58.84

60

Small-scale Producer

Sonora

60.00

60

Small-scale Producer

Sonora

60.00

60

Small-scale Producer

Sonora

60.00

60

Small-scale Producer

Sonora

58.00

60

Small-scale Producer

Sonora

64.49

60

Small-scale Producer

Sonora

60.00

60

Small-scale Producer

Sonora

60.00

60

Small-scale Producer

Sonora

60.00

60

Small-scale Producer

Chihuahua

60.00

60

Small-scale Producer

Chihuahua

60.00

60

Small-scale Producer

Chihuahua

60.00

60

Small-scale Producer

Chihuahua

60.00

60

Small-scale Producer

Chihuahua

60.00

60

Small-scale Producer

Chihuahua

60.00

60

Small-scale Producer

Coahuila

60.00

60

Small-scale Producer

Coahuila

60.00

60

Small-scale Producer

Coahuila

60.00

60

Small-scale Producer

Coahuila

60.00

60

Small-scale Producer

Coahuila

60.00

60

Small-scale Producer

Tamaulipas

60.00

60

Small-scale Producer

Tamaulipas

60.00

60

Small-scale Producer

Tamaulipas

60.00

60

Small-scale Producer

Tamaulipas

58.18

60

Small-scale Producer

Baja California Sur

182.00

120

Small-scale Producer

Baja California Sur

58.18

60

Small-scale Producer

Baja California Sur

79.30

60

Self-supply

Sinaloa

60.00

60

Small-scale Producer

Sinaloa

60.00

60

Small-scale Producer

Sinaloa

60.00

60

Small-scale Producer

Sinaloa

60.00

60

Small-scale Producer

Sinaloa

56.343

60

Small-scale Producer

Sinaloa

60.00

60

Small-scale Producer

Sinaloa

60.00

60

Small-scale Producer

Sinaloa

180.00

180

Small-scale Producer

Durango

60.00

60

Small-scale Producer

Zacatecas

60.00

60

Small-scale Producer

Zacatecas

60.00

60

Small-scale Producer

Zacatecas

66.60

60

Small-scale Producer

Zacatecas

65.01

60

Small-scale Producer

San Luis Potosi

60.00

60

Small-scale Producer

San Luis Potosi

275


PV PLANTS UNDER CONSTRUCTION BY AUGUST 2016 (cont.) Company

276

Plant

Plant Size (MW)

Central San Luis Potosí

120

47

Bocas Planta - Cuatro Solar - Querétaro Solar - Solar Wind Baja

48

Alten Energías Renovables México Cinco

120

49

Comercializadora Capo

30

50

Eolia San Julián

Central San Juan

30

51

Solar Wind Baja

Central Altamira

30

52

Solar Wind Baja

Central Tonalá

30

53

Solar Wind Baja

Central Acatlán

30

54

Sonne de Kiko

30

55

FV Mexsolar I y II

60

56

Querétaro Solar

Central Querétaro

30

57

Cuatro Solar

Central Ezequiel Montes

30

58

Cuatro Solar

Central San Juan del Río

30

59

Solar Wind Baja

Central Calpulalpan

30

60

Nueve Solar

Central Estado de México

30

61

Cuatro Solar

Central Tepeji del Río

30

62

Controladora de Renovables

63

Solar Wind Baja

Central Amozoc

30

64

Solar Wind Baja

Central Manzanillo

30

65

Solar Wind Baja

Central Tecomán

30

66

Solar Wind Baja

Central Chilpancingo

30

67

Solar Wind Baja

Central Arriaga

30

68

Solar Wind Baja

Central Macultepec

30

69

Solar Wind Baja

Central Campeche

30

70

K’iin

30

30


Authorized Energy Production (GWh/year)

Estimated Investment (US$ millions)

Arrangement

State

240.00

240

Small-scale Producer

San Luis Potosi

303.28

240

Small-scale Producer

Aguascalientes

60.00

60

Small-scale Producer

Jalisco

61.50

60

Small-scale Producer

Jalisco

60.00

60

Small-scale Producer

Jalisco

60.00

60

Small-scale Producer

Jalisco

60.00

60

Small-scale Producer

Jalisco

60.00

60

Self-supply

Guanajuato

143.20

120

Small-scale Producer

Guanajuato

60.00

60

Small-scale Producer

Queretaro

60.00

60

Small-scale Producer

Queretaro

60.00

60

Small-scale Producer

Queretaro

60.00

60

Small-scale Producer

State of Mexico

60.00

60

Small-scale Producer

State of Mexico

60.00

60

Small-scale Producer

Hidalgo

53.17

54

Generator

Mexico City

60.00

60

Small-scale Producer

Puebla

60.00

60

Small-scale Producer

Colima

60.00

60

Small-scale Producer

Colima

60.00

60

Small-scale Producer

Guerrero

60.00

60

Small-scale Producer

Chiapas

60.00

60

Small-scale Producer

Tabasco

60.00

60

Small-scale Producer

Campeche

74.50

60

Self-supply

Yucatan

Tai Durango PV solar park, Durango, Eosol Energy

277


VIEW FROM THE TOP

RIGHT PLACE, RIGHT TIME ANDREA BERNARDI Mexico Country Manager of Enerray

Q: What challenges did Enerray face on entering Mexico

We are confident the Mexican solar industry will take off

and how are these conditions changing?

eventually but the pace of adoption will depend on how

A: As a foreign company, we had to work hard to build

the market evolves.

a reputation and establish trust with our customers. Enerray 278

built

a

complete

local

structure

for

its

Q: How has Enerray confronted difficulties such as

commercialization, distribution and technical operations

project financing?

here in 2014. To help build our market presence, our

A: Obtaining financing for rooftop solar projects is

headquarters in Italy decided to invest US$500,000 in

complicated because few banks consider these as project

a solar rooftop installation for our offices in Queretaro,

finance but rather as CAPEX investments. In other words,

which was our first step as an EPC company in Mexico.

banks continue to perceive a rooftop solar installation

This allowed us to learn in-house about all the factors

as a company’s asset and not as an investment with

influencing rooftop project development in the region.

the potential to generate revenues. There still is little

It became a showcase of our ability to deal with local

awareness about the advantages and performance

regulations and permits in addition to our technical

of these installations so we spend a lot of resources

capabilities, reassuring our customers about Enerray’s

spreading information and educating customers about

value proposition.

solar energy solutions.

Since that first project, local conditions have changed

One particular aspect we want to highlight is the

considerably. One of the factors affecting the market has

extended life span that solar systems offer in comparison

been the depreciation of the Mexican peso against the US

to other energy investments. For instance, LED lighting

dollar, which has reduced national investment inflows. The

has a shorter recovery of investment time of almost one

implementation of the Energy Reform also has brought

or two years but its useful life is limited to five years,

uncertainty to the regulatory environment, slowing

which means the company will have to make a capital

market growth. Electricity tariffs, meanwhile, represent a

investment every five years to replace old items. A

barrier for solar market deployment, particularly in the

solar installation, on the other hand, can last 25 years if

DG sector. Despite the market challenges, Enerray has

suitable O&M is provided. In other words, the recovery of

successfully positioned itself in the country.

investment for a solar installation is not as short as other energy investments but its benefits will last longer. In

On the positive side, we finally are observing a change

Mexico, project contracting tends to take longer than in

of mindset in the Mexican industrial sector, which now

other countries but industry success stories are likely to

recognizes solar as a suitable option for powering its

change this. If the right technology and EPC partner are

facilities. Regarding solar irradiation, Mexico is in a

chosen, solar installations can offer competitive energy

privileged position, with some of the greatest solar

prices, in some cases even more cheaply than traditional

resources in the world. The fact that Germany continues

technologies.

to invest in solar even after the government cut back on subsidies is an indicator of the technology’s potential,

Q: In which areas do you foresee growth opportunities?

which can be even greater in countries such as Mexico.

A: The Mexican market offers a wide range of business opportunities for Enerray. In fact, we are short of

Enerray is a leader in the design, installation and maintenance of

human resources to cover them all. We plan to continue

medium and large photovoltaic systems. It offers turnkey solutions for

developing

photovoltaic systems located on roofs, canopies, greenhouses and on

equity funds from abroad to provide financing along

the ground.

with our EPC services.

rooftop

installations

and

incorporating


Enerray in Mexico is supported by a large Italian

our business in the country. In Mexico, we believe we are

corporation, the Maccaferri Industrial Group. Its history

in the right place at the right time.

dates back to 1879 and it has 58 factories worldwide. The group has been active in Latin America since the

Our goal is to find the best technology according to our

‘70s and in Mexico since 2003. Having the financial

clients’ needs. In rooftop installations, collaboration between

backing of an international group increases Enerray’s

our technical, financial and purchasing departments is

bankability, giving us access to different financing plans.

crucial. In the DG sector, projects are tailor-made so no system is equal to another. We cannot suggest a preferred

The business models we plan to use in upcoming years

technology because it depends completely on the client’s

are bilateral contracts and leasing plans. We consider

requirements and the project's location, particularly as

those models to be the most attractive options for

weather conditions influence panels’ performance. For utility

our final customers. The company is working with a

scale, developers and investors have an important say in the

number of shopping malls, which involves the use of

final product selection. In Latin America, system components

different electricity supply and their respective tariffs.

such as inverters have been well-received because they have

In these cases, we can install a large solar park to supply

dramatically decreased costs.

communal areas and sell the surplus energy to the independent stores located in the commercial area.

In addition, we are using a cost-engineering strategy, avoiding the use of unnecessary components without

For utility scale, we need to have a bilateral contract

compromising the installation performance. Regarding

or PPA signed prior to the start of construction. We

technological advances, we are favoring the use of remote

can support companies in electricity tenders with the

monitoring devices as well as electric components allowing

technical aspects of their proposals, partnering in their

for a 1,500V connection. Energy storage for industrial

project development. In other markets, we already have

applications has become an affordable technology in the last

acquired renown in the utility sector, for instance in Brazil

couple of years, anf is required by some projects to stabilize

where we have begun the construction of 100MW.

the distribution lines. In other cases, energy storage devices are being incorporated into systems to save electricity in

This expertise has made Enerray an interesting player in

high-production periods to sell it back in high-demand

the EPC sector and we plan to use these skills to boost

peaks, where megawatt-hours are more expensive.

279


INSIGHT

ADDING FLEXIBILITY TO PV SOLAR ENERGY FRANCISCO BONILLA Director General of SYNERGY

280

The residential market in Mexico has never looked as

The latest challenge for the use of solar energy in small

attractive as it does now for solar energy companies, with

and medium applications is the murky landscape in the

dropping generation costs boosting purchasing interest

sector. The Mexican government has not yet defined the

under different schemes, although new barriers have

energy trading rules for DG systems, defined by law as

also emerged. With bigger companies looking to tap the

those below 0.5MW. The DG industry also was shaken

sector’s potential, Mexican enterprises are also ready to

in 2016 by strong rumors about the introduction of net-

reap the trickle-down benefits. A good example of this

billing in Mexico, a possibility that has been denied by

symbiotic possibility is the partnership between SolarCity

CRE. The industry, however, is waiting to see the final rules

and Mexican EPC business SYNERGY, says SYNERGY’s

before putting those fears to rest.

Director General Francisco Bonilla. Under net-billing, users with DG systems connected to “We still consider that regulated tariffs do not reflect

the grid would be charged for their consumption while

the real market conditions and make it difficult to have a

being paid for the energy they give back to the grid

level playing field for technologies such as solar rooftop

according to the hourly prices in which energy is used

systems,” Bonilla says. SYNERGY, experienced in working

and produced. This plan could be a drawback for PV

with solar rooftop installations for commercial users,

solar systems because they produce energy in low-priced

partnered with SolarCity’s Mexico unit to facilitate the

hours while users consume it at peak times, when it is

US company’s effort to bring affordable and renewable

more expensive. “Net-billing could impact negatively on

energy to small and medium-sized consumers, adding

small and medium-sized solar installations, particularly

energy storage solutions to residential PV systems. The

for residential customers. SolarCity experienced a similar

relationship will help reduce uncertainty about pricing and

situation in Nevada at the beginning of 2016, affecting the

regulatory hurdles, Bonilla says.

profitability of its residential solar business in the state,” Bonilla says.

“We were the first company to develop large-scale rooftop solar in Mexico in 2009, starting with two 250kW rooftop

Nevada’s Public Utility Commission threw a bucket of cold

installations for Walmart in La Paz and Aguascalientes.

water over the solar industry there when it announced in

Both projects were also the first solar rooftop installations

December 2015 its decision to phase out net-metering and

to be privately financed in Mexico,” recalls Bonilla. “We met

increase fixed monthly fees for solar users from US$12 to

ILIOSS, now SolarCity Mexico, in 2013 and established a

US$40 over a five-year period. The commission decided

new contracting model in the country consisting of PPAs

to grandfather existent solar users but new consumers

for solar rooftop systems. We were the pioneers in this area

were subjected to the new rules, forcing solar companies

as all renewable PPAs before were used for utility-scale

to rethink their presence in Nevada. SolarCity even said in

projects,” Bonilla says.

January 2016 that it would cut 550 jobs in the state due to the changes in regulations.

“It took great effort to structure this scheme as it was new in the country but we decided to invest in it believing it

SYNERGY is working on a new product to help users deal

was the way to move solar energy forward in Mexico.”

with this new market challenge. According to Bonilla, “the

SYNERGY and ILIOSS experienced early success with this

idea is to couple renewable energies with batteries so

new business model but the situation changed two years

customers can produce energy at low-price periods and

later. “We experienced a setback when electricity tariffs

use it in peak hours. This product would also allow our

decreased considerably in Mexico at the beginning of 2015,”

customers to offer controllable demand to the market,

Bonilla says.

which is now possible under the new rules.”


TECHNOLOGY SPOTLIGHT

POWER ELECTRONICS’ UL OUTDOOR SET PV project developers in Mexico also need to look north

Importantly, the UL Set complies with the basic requirements

when determining which solution is best for them.

of the country’s northern neighbor – an important advantage

The Mexican industry tends to work toward regional

for cross-border consistency. The UL Set meets US

homogenization and the country’s proximity to the US

requirements for medium or low-voltage power connections,

means developers prefer a solution that is adaptable to

making it a perfect fit for the Mexican market.

both countries. The HEC Plus AC, included in the UL Set, enables the AC side Just as important is a more integrated solution, where

connection and reduces installation costs to a minimum. HEC

companies no longer need to seek out every element of

Plus AC is the most potent and reliable inverter in the market,

the required infrastructure. These solutions not only make

maximizing efficiency in output voltages from 400Vac to

processes easier but they help keep costs down.

460Vac for medium and utility-scale PV installations. This set is the most cost-effective solution for utility-scale PV plants

Power Electronics provides a wide range of complete

because of its capacities, unique design and the flexibility it

solutions for PV project developers that address key

provides the customer.

industry needs. Its outdoor sets include a transformer alongside a solar inverter, making it a complete and

With the market evolution following the Energy Reform

integrated solution that complies with the requirements of

and constant technology development, solar energy has

utility-scale PV plants.

experienced an upsurge in the country. Mexico expects to produce 35 percent of its energy from clean sources by

Of its several offerings, Power Electronics’ UL Set is

2024, which has increased the development of renewable

among the best-suited to the Mexican market due to its

energy projects. The results of the first two power auctions

physical assets and connection characteristics. The UL Set

made clear that solar energy is here to stay. Given the

comprises a pad-mount type transformer of up to 2.5MW

large number of projects that will be developed in the

and the HEC Plus AC solar inverter. The design of the

years to come and the low costs seen at the auctions,

transformer allows a quicker and less risky connection than

cost-effectiveness will be more important than ever. The

conventional transformers. It transforms a 400Vac-690Vac

UL Set is an attractive innovation that will allow utility-

input voltage to 7.2kV, 14.4kV and 34.5kV output voltage.

scale projects to be competitive.

281


INSIGHT

HERE COMES THE SUN DAVID ARELLE Director General of ILIOSS/SolarCity Mexico

The merger between the No. 1 solar provider in the US

or the installation and the company retains ownership

and a domestic leader of distributed solar energy is

of the system.

expected to boost the adoption of PV solar systems in the residential market in Mexico, making use of long-term

The model, however, is not without controversy. SolarCity’s

leasing schemes that SolarCity pioneered in the US.

business strategy was questioned in the US as the company faced troubles in 1Q2016 when Nevada’s government

282

SolarCity, founded in 2006 with the ambitious idea of

announced

changes

in

the

net-metering

scheme,

delivering clean and more affordable energy, already

negatively impacting homeowners’ interest in investing in

has climbed to the top of the US residential market,

solar across the US and affecting the company’s revenue

serving over 260,000 customers across 27 US states. The

projections for 2016. Mexico has been using a net-metering

company looked to Mexico as the next logical step to

scheme since 2007 and it is likely to continue in place. But

expand its business and bought into the country with the

energy trading rules for systems under 500kW capacity are

2015 acquisition of ILIOSS, which has the nation’s largest

not clearly defined yet and adverse regulatory decisions

installed capacity on commercial and industrial roofs and

might be a drawback for SolarCity’s plans in Mexico. The

carports with over 10MW, according to its website.

company has not yet made the leasing model available for residential users in Mexico. That step will likely come when

“SolarCity chose us because we were the only company

the necessary regulations are defined by CRE.

in the Mexican arena dedicated to selling energy. Engineering, maintenance, due diligence and financing

One silver lining during this uncertain period, is the

are all crucial to complete a quality installation,” says

increment in electricity tariffs for commercial and

David Arelle, Director General of ILIOSS/SolarCity Mexico.

residential users under the DAC scheme. The DAC tariff

Arelle sees the acquisition as the boost the company

rose 7 percent from the first to the third quarter of the year

needed here. “Although ILIOSS was already a large solar

while commercial tariffs rose almost 6 percent in the same

company in Mexico, its capacity to grow was limited due

period. The increment in natural gas prices is expected

to the company’s financial status. The acquisition gave

to continue driving electricity tariffs up, which is likely to

the combined business the ability to become what we

be an incentive for commercial and residential users to

hope will be the most important player in the solar power

invest in PV solar systems. The Mexican solar residential

industry in Mexico.”

market remains a diamond in the rough. Durango and Baja California have the largest penetration of PV solar usage in

ILIOSS

had

focused

mostly

on

commercial

and

industrial applications but it now expects to conquer

the residential sector and only 2.1 percent of houses have a system installed in both cases.

the residential market with the support and experience of SolarCity. Arelle says the company wants to follow

In the US, SolarCity also offers residential users the option

the parent company's business model and offer long-

to buy energy through a PPA. A residential PPA differs

term contracts to residential customers. “CFE’s current

from a leasing model because customers pay per kilowatt-

energy market is extremely volatile. Establishing this

hours consumed. In Mexico, however, the law states that

long-term solar contract will give our customers peace

basic users can only purchase electricity from basic

of mind when it comes to their energy,” he says. The

services suppliers at a regulated tariff and CFE is currently

solar leasing model that SolarCity offers in the US

the only basic service supplier registered in the market.

consists of a 20-year contract where the user commits

The law does not restrain other companies from becoming

to pay a fixed monthly rate with a 0 to 2.9 percent annual

registered to serve this niche but price regulations make

escalator. The user is not required to pay for the system

this option unattractive at the moment.


INSIGHT

TESLA, FRONIUS GO AFTER ENERGY STORAGE VLADIMIR RUIZ Sales Director at Fronius México

Renewable energies are clean and cheap but they are

product for Fronius to introduce into the Mexican market

intermittent. To fully exploit their potential the industry

given the country’s great solar potential and recent growth

must first cope with this irregular nature. The introduction

in distributed generation systems.

of affordable and efficient storage solutions might be particularly attractive for solar users in the distributed

“We have identified significant growth in the distributed

generation market, allowing them to work off-grid while

generation market in 2016, much larger than the previous

protecting their investments from dramatic regulatory

year. For us, one of the factors driving this change has

and technical changes. The race to find an economically

been the opening of the electricity market that took place

competitive storage solution has pushed technological

this year,” says Ruiz. “The new regulatory framework might

manufacturers to invest heavily in R&D and to create alliances

have a negative impact on current business models used

that target this area. Austria’s Fronius, a maker of battery-

in distributed generation but it can be avoided through

charging systems, and US-based Tesla, the first company to

energy storage,” he says. The potential phasing out of the

produce a battery for electric cars able to compete against

net-metering scheme would be particularly challenging

gasoline-driven units, are among those joining forces to

for distributed solar systems but using storage solutions

solve the storage dilemma. “The alliance between Fronius

can help users mitigate the negative implications of

and Tesla has created great expectations in the market.

using another system. As Ruiz explains: “PV solar panels

Fronius has collaborated with Tesla before in the automotive

produce energy in low-demand periods. Solar producers

sector and we are now looking for opportunities in energy,”

might therefore receive less compensation at these hours

says Vladimir Ruiz, Sales Director at Fronius Mexico.

than the cost they would pay to purchase energy at peak hours. So, it will be more profitable to store energy during

Fronius has over 30 years’ experience in Mexico. In the

low demand periods and use it at peak hours.”

solar sector, it is mostly known as a leading supplier of inverters for PV solar systems, having developed innovative

Fronius International GmbH is an Austrian manufacturer of battery-

products for the Mexican market such as the IG Plus

charging systems, welding technology and solar electronics (inverters).

inverter. The partners are working on a battery solution.

The Mexican office opened in 2007 but the company has been present

When it is ready, Ruiz believes it will be an attractive

in Mexico since the 1970s.

MEXICO'S EVOLUTION OF INSTALLED ANDGENERATION POWER GENERATION DG SYSTEMS EVOLUTION OF INSTALLED CAPACITYCAPACITY AND POWER FROM DGFROM SYSTEMS (THOUSAND OF UNITS) (thousands of units) KW 70

61,562

60 50

60 50

40

40

36,480

30

30

20

20

14,138

10 0

MWh 70

1

8

88

569

2007

2008

2009

2010

Capacity Installed (kW) Capacity Installed (kW)

2011

Generation (MWh) Generation (MWh)

Source: Ministry of Energy with Information from CFE and CRE Source: Ministry of Energy with Information from CFE and CRE

10

2,926 2012

2013

2014

0

283


ANALYSIS

DISTRIBUTED SOLAR ENERGY SEES GROWTH, UNCERTAINTY Mexico has enjoyed a promising DG market since the

guaranteed open and non-discriminatory access to the

country introduced the net-metering scheme back in

Mexican grid according to the terms of the law.

2007. The country’s new energy landscape has delivered more opportunities but regulatory uncertainty, as in other

Broadening the spectrum of energy trading options

segments, is keeping solar players on edge.

has opened the door for new business models to commercialize solar energy from DG systems. For

284

According to the Wilson Center, PV solar energy

instance,

technology has enjoyed the biggest growth under the net-

residential users, selling them energy from a PV system

companies

can

now

arrange

PPAs

with

metering plan, with CFE reporting it had 26.5MW of small

installed on the users’ rooftop. Companies could also

and medium-scale solar systems under those contracts by

aggregate several DG systems and sell energy, CELs or

December 2013.

ancillary services through a registered supplier.

The dramatic drop in PV solar energy costs — solar’s LCOE

On the downside, the new landscape has also required

fell by 58 percent between 2010 and 2015, according to the

solar energy producers to increase their levels of

International Renewable Energy Agency (IRENA) — has

specialization because the market’s rules are now more

also contributed to the dissemination of DG because it has

complex. DG also faces uncertainty because of the lack

made PV systems economically attractive, particularly for

of guidelines for this segment.

residential users under the DAC scheme and commercial and small-scale industrial users under Tariff 2.

The draft for the “Interconnection Manual for Generation Plants

Under

0.5MW

Capacity”

was

published

in

The introduction of the Energy Reform brought new

September 2016 and raised concerns in the industry

advantages for this sector by allowing DG system

about a potential elimination of the net-metering scheme.

operators to sell surplus energy in the MEM through a

That possibility, however, was later dismissed by CRE.

basic (CFE) or qualified supplier. In the past, distributed producers could only receive energy back from the grid

While the allure of the Mexican DG market continues

as compensation for the surplus energy injected into the

unabated, solar companies will be on edge until the rules

network, working as a “virtual storage” system.

are clearly defined. The rooftop solar market alone is estimated to have a MX$30 billion value during the next

There are now a wide range of possibilities on the horizon.

five years, according to ANES. This represents around

The Electricity Industry Law considers DG, or “exempt

100,000 residential and 300,000 commercial users, or 20

generators,” as those systems under 500kW. DG systems

percent of the country’s electricity consumers, which is

do not require generation permits from CRE and are

too big a cake to leave alone.


VIEW FROM THE TOP

BIG POTENTIAL IN SMALL-SCALE SOLAR

Arturo Almanza Sales Director at Industronic

Miguel Barrientos Sales Director at Industronic

Q: Where are the market’s best opportunities and what

percent of the project in these cases including 10 percent

does Industronic bring to the table?

of sunk costs. For larger projects FIDE does not cover any

MB: Industronic stands apart from other Mexican companies

of the sunk costs but it finances the project at low-interest

in the sector because of its strong focus on innovation. Our

rates. We also collaborate with INFONAVIT, enabling our

founder was the inventor of the first voltage regulator made

clients to use their housing credit to finance solar energy

in Mexico and his innovative vision remains at the heart of the

projects. The company is in talks with INFONAVIT to

company’s culture. Being in Monterrey we have first-hand

integrate solar panels directly into the housing facilities it

knowledge about the industrial sector’s needs, which has

offers its beneficiaries.

helped us develop attractive solutions for this segment. We are working to adapt our products and services to the future when we expect to see a larger share of renewables on the grid. We foresee substantial growth in solar energy capacity, which is why we decided to open our solar energy division. The company has four business units: energy storage, voltage

High-consumption (DAC) users represent 85 percent of the company’s solar division’s sales

regulation, power conditioning and power generation, which mostly focuses on solar energy production.

Q: To what extent is Industronic interested in entering the commercial and utility-scale market niches?

Q: What is the company’s share of the solar market and how

AA: We see great potential in those sectors, which is where

is it distributed?

we see the market heading. But we are not interested in

AA: We provide turnkey solutions for solar energy projects,

entering these niches until new attractive financing schemes

with over 15,000 clients in our portfolio. Since the opening

are available. The financing plans our clients can access now

of our solar division in 2015, we have grown 800 percent,

are too expensive, discouraging them from investing in solar

which speaks of the great business opportunities available

energy projects. We have witnessed this in the restaurant

in this segment. Our solar division benefits from the

industry where a project’s ROI is not interesting enough to

company’s 43 years of experience, large client portfolio and

favor installing a solar system over opening a new restaurant.

a strong network of local offices, which has allowed us to serve different market segments including residential and

Q: What strategies are in place to maintain the company’s

industrial projects. The residential sector is our main market

solar energy business growth rate?

niche, especially high-consumption (DAC) users, which

AA: We will continue focusing on building long-term

represents 85 percent of our solar division’s total volume

relationships rather than just closing a sale and installing

sales. Our projects with PEMEX also play an important role in

a project. Solar projects for residential customers should

our solar business. We have finished two projects to provide

be advertised by word-of-mouth because that is the best

self-sustaining energy to oil platforms, both consisting of

strategy to overcome the mistrust of potential customers.

an off-grid solar system with inverters and storage, and we

This is particularly important for us as we sell the promise of

have six more already signed with the state-owned firm.

cheaper and more reliable energy. We have faced challenges

Our projects with PEMEX represent 50 percent of the total

but we are prepared to solve them. No one can ensure zero

revenues generated by our solar energy division.

failures but we can ensure a prompt and efficient response in any eventuality.

Q: What financing plans are available to residential customers?

Industronic is a Mexican company that designs, produces and

AA: We work together with FIDE to provide special

commercializes systems to save, regulate, backup and generate

financing plans for projects up to 6kW. FIDE finances 100

electricity. It offers integral solutions for electrical problems.

285


VIEW FROM THE TOP

PLATFORM PRODUCES RESIDENTIAL SUCCESS JOSÉ ZAMBRANO Director General of Galt Energy

286

Q: What is the added value that differentiates Galt Energy

Q: Which financing plans are most popular?

from its competitors?

A: Product-leasing schemes are becoming more popular,

A: Galt Energy was founded three years ago to create a

particularly with the low-income segment. By offering these

platform that would allow customers in the residential,

plans we are moving away from the high-consumption

commercial and industrial segments to switch from

residential sector, which most solar companies are targeting

purchasing to generating power. The idea is not to rely

but only represents 2 percent of residential electricity

on PPAs, because we are not looking to be an electricity

consumers in Mexico. Our model does not require a large

provider, but to liberate users from the obligation of

initial investment so we can target a wider market. Low-

purchasing power from a utility. Our strategy is to listen

income customers do not pay the high tariffs that wealthier

to customers, understand their needs and offer them

users do but they represent a higher share of their income.

tailored solutions. We identified a lack of financing

So it might be a greater incentive to invest in a solar system

options in the market so we created our first fund for

that could eliminate up to 25 percent of electricity costs.

residential solar projects. Instead of replicating a foreign

Our short-term contracts also offer our customers the

model, we created a new, attractive one adapted to

possibility of achieving energy independence.

the Mexican context. In 2014, as a result of the drop in electricity tariffs, we decided to reshape our commercial

Q: What aspects of the Energy Reform will benefit the

strategy and focus mostly on residential customers. Our

development of solar projects?

main objective is to reach a large enough scale to lower

A: The Energy Reform offers several opportunities for

our capital costs and increase our experience, which

utility-scale solar projects because it allows companies to

will be useful when the commercial sector regains its

sell electricity directly to consumers but several of those

attractiveness.

will be hard to put into practice. There is uncertainty about the profitability of solar projects here because the prices

Galt Energy is a Monterrey-based company that specializes on the

for CELs and transmission rights remain unknown. If CFE’s

installation of custom-made solar PV panel systems for Mexico's

electricity tariffs continue decreasing, it will be even more

residential market.

difficult for solar to compete.


INSIGHT

SOLAR AT HOME ON THE RANGE JUAN ÁVILA CEO & Associate at Top Energy

Identifying a niche market to cultivate can result in big

in local banks. “In Europe and the US it is easy to get

business. Mexican EPC Top Energy uncovered a unique

financing for these projects because banks understand

segment for its product when it entered the solar market:

the mechanism behind it, including the savings that users

poultry farms. But the company warns potential entrants

obtain in their energy bills that should be considered in

not to count their chickens before they hatch.

the refinancing assessment. Most Mexican banks do not see the business case in financing small and medium-

“It is a difficult market segment,” says Juan Ávila, the

scale renewables, even if they would also benefit from

company’s CEO and Associate. “We have seen many solar

having more borrowers. European and American banks

energy companies enter this sector only to go bankrupt

know that financing renewable energies is one of the

after one year.” Top Energy, which focuses on distributed

safest investments because they become a productive

generation, got its solar foot in the door with agricultural

asset. Mexican banks need to be aware of this so we can

businesses in Aguascalientes, mainly medium to large-

all benefit from the deployment of renewable energies in

sized chicken farms. One of the company’s flagship

small and medium applications,” he says.

projects was a 700 PV panels installation at one of the state’s largest chicken producers, which sparked the

To overcome this challenge, Top Energy has made use

interest of other farmers in solar solutions. “Opening the

of favorable credits and incentives provided by Mexican

door to other chicken producers was a great hit for us.

development banks NAFINSA and Financiera Nacional de

Each chicken coop consumes 35-60kW. There are plenty

Desarrollo (FND), as well as the energy-efficiency private

of opportunities for solar energy in rural applications

trust FIDE. “We work a lot with NAFINSA, which has a

because it is a competitive option even where other

program for buying fixed assets that SMEs can use to

renewables can also be considered,” Ávila says.

borrow money at a low preferential rate. NAFINSA offers credit up to MX$2.5 million over a five-year period and

The rural sector, however, is not an easy niche to

without any collateral,” says Hernández. “We also work

capitalize on so diversity can provide a buffer, he adds.

with FIDE, which provides four-year loans and gives a 10

“We are redesigning our strategy so we can bring more

percent subsidy for residential high-consumption (DAC)

SMEs aboard, factoring the new regulations into our

projects. We also have the support of FND in the case of

business model. This special market niche is also known

projects located in rural areas, whether they are farms or

as distributed generation and according to some analysts

other customers located in rural municipalities. FND offers

this is one of the fastest growing markets for renewables,

attractive loan schemes for rural habitants, which can go

especially solar PV.”

up to MX$240,000 at a 7 percent fixed rate for men and 6.5 percent for women.”

Even though the electricity consumption in SMEs is not as impressive as in large corporations, the scale of the market

Top Energy is looking to adopt a more proactive approach

makes it an attractive segment. According to INEGI 99.8

for breaking the financing barrier by introducing a new

percent of the over 4 million businesses in Mexico are

business model. “We launched a new company focusing on

SMEs, responsible for 52 percent of the country’s GDP.

distributed generation and commercialization of energy,”

Investing in solar technologies might be an attractive

Hernández says. “We saw that financing continues to be a

option for companies in this segment using automated

constraint for many potential customers so we take care

processes or with important electricity-related costs.

of all the investment, giving customers the option to repay the project at lower payments than CFE’s rates. We have

Financing is the major hurdle for SMEs to access solar

specific customers from other sectors we want to start

solutions, a problem exacerbated by the lack of knowledge

working with, so we will focus on them as our next step.”

287


RESIDENTIAL PV USAGE AS OF 2015

288

State Baja California Sur

Percentage 2.1

Durango

2.1

Chihuahua

1.4

Campeche

1.1

Nayarit

1.0

Jalisco

0.7

Queretaro

0.7

San Luis Potosi

0.7

Coahuila

0.6

Guanajuato

0.6

Sinaloa

0.6

Sonora

0.6

Aguascalientes

0.5

Baja California

0.5

Mexico City

0.5

Hidalgo

0.5

Michoacan

0.5

Nuevo Leon

0.5

Quintana Roo

0.5

Tamaulipas

0.5

Colima

0.4

Chiapas

0.4

Guerrero

0.4

State of Mexico

0.4

Oaxaca

0.4

Tabasco

0.4

Veracruz

0.4

Zacatecas

0.4

Morelos

0.3

Tlaxcala

0.3

Yucatan

0.3

Puebla

0.2

Source: INEGI 2015


2.1

PERCENTAGE OF HOUSEHOLDS USING PV SOLAR POWER

0

289


290


VIEW FROM THE TOP

CHINESE GIANT TO LAUNCH OPERATIONS IN MEXICO SERGIO BERISTAIN Founding Partner of Beristain + Asociados

Tsinghua Solar Systems (THS), a Chinese high-tech

University and embracing the challenge of creating five

solar company, will open a new manufacturing facility

more patents of our own,” says Beristain.

in Mexico to support its entry strategy in the country, which also includes building three new solar parks, each

“Technological investment is necessary for the country’s

of 200MW capacity.

development as patents create a technological advantage. The ideal scenario would be to develop these patents

“The company will finish building the solar panel

with Mexican universities – an idea supported by THS –

manufacturing plant by the middle of 2017, so all the panels

following the model the company has used in China with

used in our projects will be manufactured in Mexico. We

Tsinghua University,” he says.

will use German top-quality manufacturing equipment in our facilities and we will also benefit from the expertise

THS is busy in Mexico as it is also working on three large-

and experience of Tsinghua University,” says Sergio

scale solar projects in parallel to its local manufacturing

Beristain, Founding Partner of Beristain + Asociados and

project. “The solar parks will be developed over the next

legal representative of THS in Mexico.

five months; two will be located in the central part of Mexico and one in the west. We are still managing the

“Our partners are trying to create a new era in PV solar in

required diligences to obtain the necessary permits and

Mexico with the best technology, quality and price. Right

contracts to keep developing these projects but we are

now, THS’ products are among the best panels in the market

positive they will be solved in due time.”

and they are manufactured in China. The company is now ready to increase its production by 10 percent,” he adds.

The role of Beristain's firm in these projects is to facilitate all legal matters and promote the support and confidence

The main motivation behind THS’ new overseas operation

between the Chinese partners and Mexican investors.

is the area of opportunity the company spotted to develop

He especially highlights the importance that social

a robust solar supply chain in Mexico, which is supported

management aspects – an area with heightened relevance

by the market growth expected from the solar sector in the

in the industry after the Mexican government established

coming years. According to the Ministry of Energy, solar

Social Impact Assessments (SIAs) as mandatory for

capacity is expected to increase its capacity by a factor of

energy projects – have for the Chinese firm.

20 by the end of 2019, adding over 5,400MW of new solar developments. Distributed generation is also expected to

“We are careful of our projects’ social management

boost solar capacity in the country, particularly now that

aspects because our goal is to bring added value not only

the government released the new interconnection manual

to the industry but to surrounding communities. We will be

for generation facilities below 0.5MW capacity. Under this

involved in several sustainable and clean energy projects,

landscape, building a local facility seems like a good bet.

such as wind, solar and combined-cycle power plants, to boost the development of local communities. We strive

“The solar energy supply chain is not as well developed

to contribute to new employment and industry advances

in Mexico as we wished. Most SMEs that sell solar panels

for communities in need because we believe social impact

and operate in the country distribute products from local

from energy projects is direct and immediate,“ he says.

and foreign manufacturers from China or the US, for instance, without a robust distribution chain. We have

Beristain + Asociados is a Mexican law firm specialized in litigation,

decided not to buy solar panels from foreign companies.

enterprises, energy, food, insurance and intellectual property. It also

We instead want to provide an added technological value

offers consultancy services regarding the creation and structuring of

to our product using over 200 patents from Tsinghua

companies’ legal departments.

291


NATURAL GAS & COGENERATION

11

Hydrocarbon-powered energy plants might not be the center of many visions of the world’s energy future but the increasing availability of cleaner-burning natural gas in Mexico and the US is definitely creating an opportunity to generate cheap and dependable power, while at the same time helping comply with more stringent environmental goals by using gas instead of more polluting alternatives such as coal and fuel oil. Alternative technologies such as cogeneration and combined-cycle plants are also creating opportunities for savings and efficiency for industrial users.

The gradual liberalization of the gas commercialization and distribution markets is also creating business opportunities for companies planning to crisscross Mexico’s map with new and more modern pipelines to supply the ever-increasing demand for industrial and domestic energy in Latin America’s second largest economy. This chapter takes a look at the growth of the natural gas-powered energy industry and the billions already invested in its development.

293


CHAPTER 11: NATURAL GAS & COGENERATION 296

ANALYSIS: Natural Gas a Competitive Alternative in Energy Mix

297

INSIGHT: Guillermo García Alcocer, CRE

298

INSIGHT: Eduardo Erhard, Government of Nuevo Leon

299

INSIGHT: Ricardo Ortíz, Grupo Diavaz

300

INSIGHT: David Madero, CENAGAS

302

INSIGHT: Fernando Calvillo, Fermaca

304

VIEW FROM THE TOP: Vernon Murray, Emerson

306

MAP: Natural Gas Pipelines

310

INSIGHT: Alberto Escofet, Enagás México

311

PROJECT SPOTLIGHT: Expertise for Pipeline Development

312

VIEW FROM THE TOP: Philippe Delmotte, ENGIE México

313

INSIGHT: Luis Montgomery, ACCESGAS

315

INSIGHT: Dessire Colina, Promotora Energética E3

316

VIEW FROM THE TOP: Juan Hernández, Industrias Energéticas

317

INSIGHT: Enzo Losito, AB Energy México

Dick Kramp, AB-Greenhouse Power Netherlands

318

INSIGHT: James Delano, ATCO

319

VIEW FROM THE TOP: Carlos Prieto, Caterpillar

320

VIEW FROM THE TOP: Oscar Scolari, Rengen Energy Solutions

322

VIEW FROM THE TOP: Kevin Piccolo, IGSA

323

VIEW FROM THE TOP: Lorenzo Arena, INCO

295


ANALYSIS

NATURAL GAS A COMPETITIVE ALTERNATIVE IN ENERGY MIX electricity

the national integrated system capacity in which private

demand, the government unveiled a five-year plan in

companies could request pipeline capacity for their

late 2015 to expand the country’s natural gas pipeline

operations at market-regulated prices.

In

response

to

the

country’s

increasing

network that key industry players welcomed for the

296

opportunities presented. These include transportation,

The landscape will change further in early 2017 as the

commercialization and storage of the molecule as well

sector embarks on a liberalization process. “Our goal is

as opportunities to develop the infrastructure required to

to perform a gradual liberalization for the natural gas

comply with the plan.

market,” says Jesús Serrano, Commissioner of CRE.

In 2016, the market saw concrete action on the plan as

“We expect to begin in the northern part of the country

money was invested, commercialization permits were

since we believe that is the region with the most

awarded and CENAGAS made its presence known. Around

competitive potential. Afterward we will expand to the

US$1.6 billion is being invested in Mexico to double the

rest of the country. Initially, there will be price regulation

size of the pipeline network, creating new prospects all

but as we go along and infrastructure develops, we

along the project development chain. Beyond the pipeline

will experience price liberalization. The driver of the

expansion, existing infrastructure needs to be modernized

energy reform is market openness, competition and

to ensure homogeneity between the previous and

empowering users.”

developing pipelines.

A COMPETITIVE ALTERNATIVE “The legacy infrastructure will have to be upgraded,

The success of natural gas will be largely dependent

revamped and improved,” says Vernon Murray, Vice

on Mexico’s northern neighbor. Mexico has benefited

President

and

greatly from US natural gas reserves. It is connected to

technology solutions provider. “Thanks to the Energy

the world’s most cost-competitive molecule production

Reform,

private-public

in Waha, Texas. But the current political context in the

partnerships that will benefit both parties because their

US, where energy policies under President Donald

existing infrastructure has the competitive advantage of

Trump are yet to be defined, has raised concerns and

location.”

allowed uncertainty to penetrate the market. On the one

of CFE

Emerson, and

a

PEMEX

leading can

engineering

form

hand, Trump seems to be favoring the development of CRE has been instrumental in the evolution of the natural

hydrocarbons, including natural gas. On the other, his

gas sector. The regulatory body issued the Gas Release

harsh perspective on bilateral trade and joint operations

Program at the beginning of 2016, establishing a natural

between companies from both countries have raised

gas commercialization market. Additionally, along with

some questions regarding the feasibility of Mexico’s

the newly created CENAGAS, the commission presented

collaboration with the US.

a strategy for the natural gas market that included the start of a permanent open-access system for natural gas

Even though prices are expected to fluctuate, the

transport. Alongside the natural gas market, CRE has

general industry expectation is for this commodity to

now awarded over 20 permits to commercialize the fuel

remain a competitive alternative for the Mexican energy

in Mexico, incentivizing competition and ensuring the

mix. Some companies already have mechanisms in

correct operation of the market.

place to protect themselves from future price volatility. “We control uncertainty through hedges, futures and

CENAGAS RAMPS UP

other control mechanisms addressed to settle costs

CENAGAS was created in 2014 to oversee the country’s

and define a sales price,” says Kevin Piccolo, Energy

natural gas pipeline system but 2016 saw the center

and Cogeneration Director of IGSA, a leading company

ramp up to full speed. In January, PEMEX’s natural gas

in the construction of power generation plants. The

storage and transportation infrastructure was transferred

introduction of the Internet of Things (IoT) to this sector

to CENAGAS. It also took on new responsibilities and

will also help optimize production, enhance safety and

capacities as it adapted to its role as SISTRANGAS’

reduce operational costs, thus making natural gas an

manager, technical manager and transportation company.

exciting investment opportunity for companies in the

In October, CENAGAS launched the first open-season for

mid to long term.


INSIGHT

CUTTING THE MARKET’S CHAINS GUILLERMO GARCÍA ALCOCER Chairman of CRE

One of the major components of the Energy Reform is the

which is not included in the percentage of contracts it

opening of Mexico’s natural gas market, a milestone that will

has to give up. We want to promote competitiveness in

be partially reached in the first quarter of 2017 as prices in

the natural gas market involving private companies, so it

the north are finally liberalized. Promoting a competitive

will only affect PEMEX’s contracts with third parties,” says

market in the segment will attract the combined-cycle and

García. “The 70 percent threshold will be calculated over

cogeneration developments that are crucial for the country’s

PEMEX’s historical records and will only be applied in the

power supply, says Guillermo García, Chairman of CRE.

market’s ‘year zero.’ PEMEX might recover the transferred contracts afterward but it will depend on its capacity to

“Once the market is robust enough, we will eradicate

compete with the new market players.” The asymmetric

the first-hand sales condition on PEMEX, by which the

regulation came into force in 2016 and is expected to be

regulator sets a maximum price for the state-owned

completed over a four-year period.

company’s services,” says García. “We used a point of arbitrage to define natural gas prices, located at the point where international gas meets with PEMEX’s supply from the southeastern region. The price will be liberalized in 2017 in the region located north of the arbitrage point while it will continue being regulated in the south because PEMEX has no direct competition there.” First-hand sales were defined as the first sale of natural gas produced in Mexico and sold by PEMEX to a third party for delivery in the national territory, according to PEMEX’s website. Two reference points were used: Reynosa in the north and Ciudad Pemex in the south. The tariff imposed on

“Price fluctuations will be present as in any other market but it will not be related to the government, it will be a response to the market’s conditions” Guillermo García Alcocer, Chairman of CRE

first-hand sales impacted directly on the natural gas price to the public because it represented the first component

Having a free market is expected to lower natural gas prices

of the formula used to calculate the end-user price. Now

in the medium to long term by increasing competition and

the maximum price of the molecule will no longer be set

the possibility to import gas from the US, the world’s largest

by CRE but will respond to open market dynamics with

producer of the molecule, without being tied to a fixed

different players being able to introduce natural gas to the

price once it enters the national territory. But free markets

Mexican market, at least in northern states. To eliminate

also come with some risks and after 78 years of having

first-hand sales in the north, CRE has been working on

a regulated marketplace some Mexican companies might

five pillars to define its natural gas strategy: improving the

have trouble adapting to the new dynamics. “Mexican

national transportation infrastructure, issuing open access

companies are not used to the price volatility that comes

and capacity reserve regulations, unbundling PEMEX’s

with liberalized markets. They were used to having the

services, implementing asymmetric regulation to force

same price per unit of natural gas and electricity in all the

PEMEX to give up 70 percent of its contracts to other gas

regions they operated for long periods. But this was not

marketers and maintaining transparency.

a reflection of the market’s dynamism,” García says. “We need to make a great effort in our communication strategy

“The asymmetric regulation takes into account PEMEX’s

to teach private consumers the reality of the new market.

need to maintain its own supply. The company uses a

Price fluctuations will be present as in any other market

significant amount of gas in its different subsidiaries,

but it will not be related to the government."

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INSIGHT

CONSTRUCTING MEXICO’S NATURAL GAS HUB EDUARDO ERHARD Energy Division Director for the Government of Nuevo Leon

As Nuevo Leon’s natural gas resources receive fresh private

L02

hydrocarbons

bidding

process,

which

includes

investment with the awarding of seven new fields in the

nine additional fields in Nuevo Leon. “We have been

Burgos Basin area, the state’s government looks forward

working closely with the R1-L03 winning companies and

to consolidating and promoting the industry by improving

supporting them in administrative aspects. We have great

the energy security of its burgeoning industrial sector,

expectations about the R2-L02 in which the Burgos Basin

according to Energy Division Director Eduardo Erhard.

will play an important role again and we are willing to collaborate with the winners,” Erhard says.

298

Nuevo Leon’s proximity to the US, the world’s largest natural gas supplier, adds another layer to the northern

It is not surprising that the first private supplier operating

state’s ambition to become Mexico’s natural gas market

in the wholesale electricity market is based in Monterrey.

reference, Erhard says. “Nuevo Leon has the infrastructure,

The state is the country’s third-largest power producer and

local production, access to the world’s largest natural gas

the leader in internal electricity sales. An important part of

market and growing energy demand. In other words, it has

Nuevo Leon’s power production comes from combined-

everything to become Mexico’s prime natural gas hub.”

cycle power plants fueled with natural gas and there are more to come, according to Erhard.

In July 2016, around 250 million cubic feet was produced daily in Nuevo Leon’s natural gas fields, the third largest

“We have several combined-cycle projects already

producer of non-associated natural gas in Mexico. The state’s

under construction and more to be developed soon.

production is expected to increase as the Burgos Basin holds

Increasing local power generation would be beneficial

the largest non-associated natural gas production in the

for the state’s industrial sector because it would make

country and has been opened to private investment.

electricity prices more competitive,” he says. There are also opportunities in storage to complement the already

In July 2016, around 250 million cubic feet of natural gas was produced daily in Nuevo Leon’s natural gas fields

important distribution infrastructure in place, such as the Mier-Monterrey and Los Ramones pipelines. “Improving the state’s storage infrastructure is one of our greatest challenges,” Erhard says. The government’s efforts to strengthen the local energy industry have echoed across the private sector, replicating

Seven of the fields awarded in the third phase of the

a collaborative model that has long been a feature of

Round One bidding process (R1-L03) launched by Mexico

Nuevo Leon. “The energy cluster was an initiative pushed

to welcome private investment into its hydrocarbon’s

by the private sector to build synergies and develop the

industry are located in Nuevo Leon — Peña Blanca,

human resources needed to face the Energy Reform’s

Benavides Primavera, Mareografo, Carretas, Duna, San

challenges. It also works as a platform to promote the

Bernardo and Calibrador — and all correspond to onshore

state’s electrical manufacturing industry, strengthening

developments in the Burgos Basin area. Operations in this

the local energy value chain,” says Erhard.

region are expected to increase Nuevo Leon’s natural gas production considerably, as the fields have aggregated 3P

The end goal for the government is to transform Nuevo

reserves of 735 billion cubic feet of gas.

Leon into an energy self-sufficient state. “We want Nuevo Leon to be the most competitive state in Mexico

In the first quarter of 2017, the National Hidrocarbons

and a global reference for industrial development,”

Commission (CNH) will announce the results of the R2-

Erhard says.


INSIGHT

LIBERALIZATION LEADS TO OPPORTUNITIES RICARDO ORTÍZ Director of the Energy & Natural Gas Division at Grupo Diavaz

The liberalization of Mexico’s natural gas market is creating

On the distribution side, Grupo Diavaz unit Compañía

ample business opportunities for energy enterprises while

Mexicana de Gas has put in place a five-year business plan,

providing an array of benefits for clients, says Ricardo

authorized by CRE, that estimates 195,000 connected

Ortíz, Director of the Energy and Natural Gas Division at

clients in the company’s home base of Monterrey by

Grupo Diavaz. “The liberalization of the market will enable

2019. “Most of the investments are focused on extending

our clients to access natural gas under better conditions,

the distribution network and increasing the scope of the

in a competitive environment with clear rules.”

service,” Ortíz says. Safe processes in the facilities and continuity of service are pillars of the model. “The reading,

The country’s second largest oil producer and the

billing and payment processes are recognized by the

winner of the Barcodón and Catedral gas fields, Diavaz

ISO-9000-2015 system, which assures the quality and

is now expanding its natural gas business through a new

continuous improvement in the delivery of the service.”

trading subsidiary, complementing its participation as distributor and operator. “The liberalization of the market

Despite the planned expansion of the country’s pipeline

implies that PEMEX will no longer be the only natural gas

system, Ortíz says it will not be enough to meet the nation’s

supplier in Mexico, which is bringing new players to the

needs. Another subsidiary, Neomexicana, is dedicated to

game,” adds Ortíz. “Diavaz has taken advantage of this

virtual pipelines to various locations and Ortíz expects

opportunity, opening a subsidiary for natural gas trading

that to continue. “We still foresee demand for natural gas

called Diavaz Gas Com.

on wheels in the medium term,” he says.

“Through aggregation of volume from our clients, Diavaz Gas Com will achieve better buying conditions for the

GRUPO DIAVAZ NATURAL GAS OPERATIONS

imported and national gas molecule. Additional benefits include the transportation capacities of pipelines, which

NEOMEXICANA (Virtual Pipeline)

H

are either privately owned or from CENAGAS,” he says. Diavaz Gas Com is looking to offer firm services but is waiting for CENAGAS to finalize regulatory processes

H

C

COMPAÑÍA MEXICANA DE GAS (Distribution Company)

H H

before defining its