Tough decisions • Focus: Impact of oil on green energy

Alternative energy efforts in Mexico are taking a hit as President López Obrador prioritizes oil. But in the midst of all the chaos, private auctions remain the only way to solve Mexico’s energy woes.

IT IS NO SECRET THAT MEXICO has some of the world’s best natural terrain to produce wind and solar energy. In recent years, the country has attracted alternative energy investors from across the globe, especially Europe and Canada. The 2013 Energy Reform and the 2014 Electricity Industry Law that liberalized Mexico’s power sector and ended the monopoly of the Federal Electricity Commission (CFE) were heralded by many as a potential turning point for renewable energy in Mexico. Between 2015 and 2017, international energy companies flocked to Mexico’s three auctions for long-term power supply contracts and won wind and solar projects accounting for a considerable share of new power demand. This put Mexico on track to generate the world’s cheapest solar power—with prices as low as USD17.7/MWh. Unfortunately, the renewable energy industry has taken a hit under President Andrés Manuel López Obrador, who has made clear that his priority is returning Pemex, Mexico’s state-owned oil giant, to its former glory. Only weeks after assuming office in December 2018, President López Obrador canceled the fourth long-term power auction and two major transmission-line projects that would have transported renewable energy around the country. His administration has also called for more investment in coal and stood by the CFE’s decision to dismiss wind and solar energy as unreliable and expensive. The government’s decision to cancel the fourth power action led to frustration among private companies, pushing them to take matters in their own hands with the help of Mexico City-based Bravos Energia, an energy company formed by some of the long-term power auctions’ original architects. Bravos Energia’s plan is to hold private energy auctions and attract private companies that otherwise would have participated in Mexico’s canceled auction. Talking to TBY, Bravos Energia’s CEO Jeff Pavlovic explained that the company was founded “to reduce barriers to private participation in the Mexican power sector, both by providing operational services that facilitate diverse companies’ activities in the Mexican Wholesale Electricity Market, and by supporting the negotiation of bilateral contracts that investors need prior to committing to build new infrastructure.” As to why the private sector’s participation in renewables is essential, Pavlovic highlighted that it is because of “the private sector’s ability to manage risk,” adding that “the established processes for public-sector investment planning and budgeting have never been well adapted to renewable generation projects.” Bravos Energia’s first private-sector energy auction, for which 19 sellers and buyers had signed up, was scheduled for May 27, 2020, but it was dealt a huge blow when the National Center for Energy Control (CENACE) issued a resolution on April 29, 2020 to suspend all ongoing pre-operational testing of wind and solar electric generation projects. The decree also provides that pre-operational testing of new wind and solar electric generation projects will not be authorized until further notice. Interestingly, the government has used the COVID-19 pandemic as a justification for new rules, which have granted a reprieve to the government’s aging fossil-fuel power plants. While priority was previously given to the plants with the lowest production costs, the new regulations give priority to CFE plants, which generate electricity at as much as USD141/MWh, almost seven times more than some renewable energy plants. Critics say this decision was taken to burn surplus fuel that Pemex is unable to sell elsewhere due to the global oil crisis and the pandemic. According to industry associations, the move will directly affect 28 solar and wind projects that were ready to go online and 16 that are under construction, with a total investment of USD6.4 billion. Several international companies who have invested in Mexico’s renewable energy sector, such as Iberdrola and Naturgy of Spain, Cubico and ARCO of Canada, AES and Sempra of the US, Enel of Italy, Engie of France, and Vestas of Denmark, have pushed their governments to warn Mexico that the new measures pose a serious threat to continued investment in the sector. The clock is certainly ticking for the López Obrador administration, which must quickly make some hard decisions. A glimmer of hope for private renewable firms did come in the form of an injunction, however, issued in late August, against government measures aimed at limiting the participation of renewable energy companies locally. The move could see previously approved projects move ahead.

What have been the greatest recent advancements in the Mexican energy sector?

There have been little advancements. Unfortunately, there is still confusion and uncertainty over the role the government would like the private sector to play as part of its energy policy. The only thing that is clear so far is that the government wants to strengthen the state-owned companies, Pemex and CFE. Besides that, there have been contradictory messages in terms of where the private sector would be welcome. A necessary condition for any kind of advancement is that the government has to be clear on this regard.

What role does the government want the private sector to have?

In general terms, it seems to me that it is a marginal role, a complement to what Pemex and CFE cannot—or do not want to—do. However, the current economic crisis will probably put great pressure on the government, up to the point it recognizes it will not be possible to have a vibrant and dynamic sector with CFE and Pemex alone, more so now that it is more difficult for it to obtain funds and given its limited budget. On the contrary, there is a private sector that, although suffering from the economic crisis, has other resources that the government does not. I hope there will be a change and a different message from the government, inviting the private sector to invest in the industry.

Will one of the positive things of these developments be the government looking to the private sector for production in the industry?

That should definitely happen as there are no options. This crisis has some implications in terms of fiscal policy, and the government will have to use its resources to attend to the crisis and help small businesses that have been and will be affected. All these resources will have to be redirected to these activities and issues, and the government may have to reduce taxes or give tax rebates. That means there will be a smaller budget and less resources for CFE and Pemex. If the government does not have those sources, the only source is the private sector. Reality will sink in, and the government will have to be more pragmatic. The announcement to be made by the government— which has been delayed—on investments in the energy sector done by the private sector will be even more relevant. That should be a signal that the government is really changing its thoughts on how to interact in this industry.

What should Pemex do in terms of its existing debt to emerge from its current financial crisis?

Pemex will have to redirect its small amount of resources, as one of our problems is that the budget is in pesos. With the depreciation of the peso, Pemex will have fewer resources to invest, and it has to focus on those activities with the highest returns, like the production of oil in shallow water or fields where the cost of extraction is low, instead of investing in new projects where the cost of production is higher. The government should redirect resources for the new refinery to other activities that are more profitable. Pemex should go with farm outs wherever it can in order to develop the resources without having to compromise its budget. That is definitely another option that will have to be evaluated by the government in the short term.

How do you help your clients prepare for possible emerging opportunities?

We do several things, but under the current circumstances we start by helping them navigate the adverse environment of changes in regulations. At the same time, we have identified opportunities that remain available independently of the circumstances both in the electricity and hydrocarbons sectors. It is those areas in which we are focusing our efforts. ✖

Relaunching auctions in the public sector would stimulate investment that the government lacks

Gas will continue to be main fossil fuel in the industry in the short run