Banks and developers mull CFE's plans for renewables

As the Mexican government upends incentives, self-supply contracts and the market for clean energy certificates (CELs), project finance and investment bankers in New York and developers in Mexico City are attempting to gauge the impact and decipher the administration's motives.

The presidency of Andrés Manuel López Obrador, which began on 1 December 2018, has been characterized by open moves to bolster the presence of state-owned utility Federal Electricity Commission (CFE) at the expense of the private sector and international investors in particular − a stance characterized by one official at a developer in Mexico City as "economic nationalism."

But while the overall message is clear, the most recent reforms − increasing transmission tariffs to specific renewables projects, cancelling self-supply contracts and devaluing CELs − have caused confusion and, in some cases, provoked litigation.

In December (2019), the government announced its latest proposal, which impacts renewable energy projects approved by the Energy Regulatory Commission (CRE) before Mexico's 2014 Energy Reform, and some self-supply contracts.

Under the proposed reform, proyectos legados − as those renewables projects are known − would cease to enjoy a 50% discount in transmission fees that was originally put in place to promote investment in renewable energy.

Some self-supply contracts would also be canceled, which the official at the developer says would hurt "big companies such as bread producer Grupo Bimbo, Coca-Cola bottler Grupo Celsa, and grocery store Walmart."

CFE's aversion to the self-supply contracts had already been noted over the summer. Adrián Olvera, a director at CFE subsidiary CFE Generación V, said in a meeting held in June that the self-supply model had triggered "considerable losses to the state company and fostered unfair competition at the expense of CFE."

Private companies were profiting from CFE's transmission and distribution infrastructure, he explained.

Bankers in New York were at first worried, then skeptical. The cancellation of the self-supply contracts would impact several projects, which would then have to review their financings, said one.

The official at the developer in Mexico City agrees, and even suggests that the administration could be deliberately creating confusion to demoralize the private sector.

"[Lopez Obrador's administration] plays defense by publishing press releases or making announcements to disincentivize private investors," he says.

"He has paralyzed the market," adds an investment banker in Mexico City.

Last fall, Mexico's government also tried to alter the country's CEL programme, prompting a backlash.

In October, the government announced that assets owned by CFE and built before 2014 would begin to generate CELs, depressing the price for the certificates in the market. Developers that had based investment decisions on projected CEL prices were worried. So in November, six companies sued the government, halting the reform. They were:

  • AES Corp
  • Enel
  • Électricité de France
  • Cubico Sustainable Investments
  • Zuma Energía
  • Balam Fund

"The process is now blocked," explains the officer at the developer, adding that the government may however try to pass the reform again in the future.

Although the government's goal is to make CFE a "national player," the result, according to deal watchers, has been a deficit increase for CFE. The launch of tenders for projects owned by the state (Obras Públicas Financiadas) will increase the pressure on an already strained company, they say.

(A version of this story first appeared on Power, Finance & Risk)