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Ep325: New Rules for Private Power in Mexico
00:22:16
Raquel Bierzwinsky, Norton Rose Fulbright partner, discusses the latest reforms to Mexico’s power sector, highlighting how new regulations are creating opportunities for private investment and project development after years of stagnation.
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- [00:00]
A
Foreign.
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B
Welcome to Currents, the Nord Rose Fulbright podcast. Today we're recording with my partner Raquel Berzwinsky. She joins us today to discuss the reforms, the Mexican power sector. Raquel, thanks for recording today. It's been a while since we've talked about the Mexican power sector, so hopefully you can let us know why it's been so long and what's happening there.
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A
It's definitely been a while. I think it was 2019 the last time we spoke about the Mexican power sector. But good news now there's, there's lots to talk about, so thanks for having me.
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B
So the, the Mexican power sector was redesigned when two of us were much younger and we're both, both very optimistic about doing many, many deals in Mexico and did many, many deals in Mexico for several years. So. And then everything went quiet. So maybe you can give people a brief history and then explain why now things may be moving back towards a period when we could be doing deals again.
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A
Yeah, so there was a reform in 2013 with new laws in 2014. And from a period of about five years, there was a lot of work, a lot of investment in the Mexican power sector. It was, it was open to private investment fully. There was a wholesale electricity market that was created. You could sell bilaterally to private off takers. You could sell into the market. There were auctions by the government. And yeah, as you said, we actually worked on the financing of a dozen or actually much more than that, projects under those auctions. But then a new administration came in late 2018, the beginning of 2019, and that's when everything stopped. And so this was the administration of Andres Manuel Lopez Obrador. And he was not a fan of private investment in the power sector. He considered that it had to be the Mexican utility CFE that should generate most of the power in the country. And they basically put a stop into the issuance of generation permits and the development of, of power projects in the country. And so for six years, at least six years, we the, the basically the sector came into a standstill and there was barely any investment and even any investment by, by the Mexican government. And in last year 2024, there was an election, there's a new government that came in now. The president is Claudia Scheinbaum and things are starting to change. Even though she's from the same party as amlo, and she's like the protege of amlo, she has different ideas in terms of energy generation, power production. And the country also would like to have a lot of investment. The country has been Refused talking about up to the beginning of this year when Trump started in, you know, imposing tariffs. But the, the thing that people were talking about in Mexico was near shoring, which is, you know, bringing industry to be, to be close to the United States instead of being in China. And so, you know, if you bring industry to a country, then what will they need? They're going to need power and they're going to need water. And so you need investment in those two things. And even though there is still uncertainty with tariffs and the like, and there's probably going to be a renegotiation of, you know, the, what used to be the North American Free Trade Agreement, which is now called the, depending on, you know, whether you're referring to it in English or not, but the usmca. And so even if there is a renegotiation of the usmca, there's still a lot of power needs. Hyperlinkers are in Mexico. There are a lot of data centers being developed there. And as everyone knows, you need power for that. And Claudio Shane Bound has been pushing through at the beginning of this year a new law that while it's not exactly what we had before AMLO was president, it has maintained the possibility of private parties developing power projects in Mexico. It maintains the wholesale electricity market, so sales into that market in different types of modalities is still permitted. And what it has done is this, the new regulations, what they do is that they two things primarily. One, now the development of power projects is going to be more organized and has to follow a certain development plan issued by, by the country. So you will not be able to build a power plant just and anywhere in the country where you think that, you know, the pricing for the node is good and that you have resources, you know, it's a good solar resource or there's good wind resource. It actually has to conform to what now is called binding planning. And so it's a plan that the government will issue on an annual basis, but it covers different periods in time of investment in the energy sector and it covers not only energy generation, but transmission as well. And, and so it goes hand in hand. And that's one of the, that's one of the main changes. And the other main change is that now there is this concept that the state or the government needs to have priority in, in the development of and the, in the production of, of power in the country. And in that, what that priority means is that 54% of energy, average annual energy injected into the grid must come from and this is a Broad term, the Mexican government or the Mexican government has to have some interest in that. And you'll ask me why. 54%, it's a random percentage. The prior President Amlo came up with that percentage and he said CFE needs to generate 54% of all the power in the country. And so this now is, is being interpreted in these regulations that just came out on October 3rd to mean exactly what I said. 54% of the average of energy injected into the grid every calendar year has to come from or has to be categorized as energy where the Mexican government is either generating or has some type of investment.
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Do you happen to know what the percentage is today?
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It's closer to 70%.
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Okay, okay, so there's room for private sector growth then. So this then to me seems like it's more central planning because they're prioritizing specific areas and trying to ensure that the state maintains its role as the dominant power generator, but is allowing for more participation by the private sector. So what role then is the government expecting the private sector to play in trying to meet the needs of the increasing demand for power in the government's forecast?
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A
Yeah, so thankfully there are a lot of options and there's different types of rules that the private sector is going to be able to play. And so as I explained, private sector, well, private sector can participate and generate into the wholesale electricity market. You can have bilateral sales so you can continue selling to corporates. You can sell behind the meter, even though that's not going to count towards the calculation of this 54%. But I'll get into behind the meter generation in a second. But if it's for purposes of counting towards this 54%, there are actually different schemes that the government has come up with that they called mixed development. And so mixed development is the category itself. And then you have basically two type of specific projects. One that is basically the equivalent of an IP3. So you're old enough to remember that in the late 1990s and early 2000s, there were tons of projects, especially CCGTs that were, that were being built and the energy would be sold to cfe. And that's coming back not with the same technology. Now this central planning, actually what they do with the central planning is determine, you know, they have specific regions where they need, you know, they have specific needs. And they say, well, for this, for the next six, 15, 30 years, I need X gigawatts of power in the southwest or the southeast of Mexico. And I'm looking, I would like to have this type of technology. So solar, wind and maybe, I don't know, 1 gigawatt of C GTS or some gas solution, even though there's no gas over there. But I'm just, I'm just giving some examples of how this could work and they're doing that. But part of the way that they plan to achieve, for example, they just came out with this past Friday with the plan for 2026 and for the next several years they've said that they need to add 40 gigawatts of energy to the system. And so what we expect to happen is that they're going to say, well, of those 40, the government is wants 5, 7x number to be of these IPPS. And so it follows the, I'm not going to say exact same, but very, very similar scheme that we had back in the early 2000s where the private sector builds and finances that project and you get capacity payments and you get variable payments. And at the end of the 30 year contracts and at the end of 30 years, CFE has the option to purchase or to have that power plan transferred over. So I think we're going to see a rehash of those contracts which were very bankable and everyone knows. So I would expect that to be an opportunity that comes by pretty quickly for even starting next year. And the other type of investment with the government that would count towards this 54% where there is this mixed investment with participation by the Mexican government is one where CFE has to hold a 54% ownership interest in the common stock of the project company. And so the question there is that's tricky because CFE and the Mexican government don't have money. And so they're not going to contribute cash, but they can make contributions in kind. So the idea is they're going to, they're going to provide, they're going to contribute the land, they're going to contribute permitting. But at the end of the day you ask yourself, well, is that enough to have 54%? No, of course it's not. And so the private parties probably didn't have to put up much of the money and it's going to have to obviously be financed. But what CFE has said is that to reach the 54%, they're willing to accept different sorts or classes of equity in which they may have limited economic rights. And so that's one way to do it. Interesting thing there to analyze when the time comes is going to be corporate governance and how they're going to go about corporate governance with their 54%. If at the end of the day it's going to be a project that's going to be operated, built and operated by a private party, but you need to have the government as a shareholder there. So those are the two types of known mixed investments that we have right now. It could come up, they could come up with, with other ones. But, but that's how they, for the time being, that's how they're thinking about using those 54%. And it's going to take a while from the close to 70% that they own right now to come down to 54%. One of the concerns that we had before these new regulations came out was, well, does this mean that if, if there's private investment and at some point it exceeds the 46%, will they curtail private projects from, from generating and injecting power into the grid? And they haven't. The government hasn't said publicly that they will not curtail. But what they have said is that on an annual basis, to the extent that this percentage is close to changing, that they're going to consider for future, for the following years how it is that they can increase projects that have CFE investment. The other positive stone is that they will take into account for purposes of this 54%, the any private projects that actually sell their, all of their energy to cfe. So if you build a plant according to these guidelines, the central planning guidelines, and Even though it's 100% owned, it doesn't end and it's not part of these two different schemes. If you sell 100% of your power to CFE, then it will count towards the 54% kind of.
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B
In conclusion here, the name of the game, it sounds like for the administration is to let the markets know that even though we were closed, largely closed for business for long time, we're now open for business on these new ground rules, which sound pretty good. They sound similar to what the rules were back when two of us were doing a bunch of deals in Mexico. Yeah, but we have the experience now that a lot of the people that invested under the old rules didn't do so well. So how has the reaction been from the private sector? You think that at least initially, most of the investors who are willing to put their toe in and see if this works will be large Mexican companies? Or do you think the French and the Spanish in the US and the Canadians will come back in immediately and try again?
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I think that everyone who has done business in Mexico will come back and it's not that they Left, they're still there and they were just, you know, quietly developing projects or quietly or just, you know, staying under the, the radar of, of the former president. I think I'm very bullish about this and I think if you're, you, you're in Mexico and you talk to people, everyone is very bullish. I think you will see, you will see significant investment. There are other types of participation, forms of participation for private generators. There's also one that, it is one that's called self consumption. And so that one is behind the meter and I think we're going to see that as well because that one is probably going to be very popular with industrial parks, maybe data centers where you and, and I have seen developers that want to provide very specific solutions for that, you know, for data centers as an example, they want to provide the real estate, they want to provide the facility and they want to provide the power. And you just have your, you know, your Googles, your Amazons, et cetera, just come in with their equipment, set it up and these companies provide basically all the services. Obviously there's a question there whether, you know, regardless if you set up a dedicated facility that's going to be enough for all the power needs and whether that, you know, load center will have to actually connect to the grid and have as a backup cfe. I would think so. But I think everyone is very bullish about this. We've heard also, as I said, I think there's going to be a lot of interest in these long term production contracts which are the ipps. I think we're still going to see to the extent that a lot of the private projects meet the parameters of this, of the central planning. Then I think we're going to see even power plants that continue to sell to corporates just bilaterally while trading. If you do that, you have to trade into the wholesale electricity market. And so and also the other thing that the, the new regulations do from since the, the law that was issued in, in March and now with the reds is that finally after I don't know how many years, maybe over a decade, we have specific guidelines on storage projects. And in fact there's an incentive that new projects that actually will interconnect into the system need to have a storage component. And there is a possibility now for obviously to install batteries on existing projects, on new projects and also on a standalone merchant basis. So I think that's. So you're going to say, well, we've been doing this in the US for a long time, even Chile now is all over battery storage. Well, Mexico is getting there, but they're, you know, finally it took them over a decade and now we have finally guidelines. So I think that's also going to be a source of huge investment for existing projects that need to have that will benefit from storage capacity, especially renewable projects, and then for new projects as well. Right.
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B
I think all that sounds great. It sounds like maybe I gotta get my passport and reacquaint myself with the Mexican airport, Mexico City airport, and see you down there.
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Well, if anything, you'll have to plan for World cup for next year.
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You had to throw that in there, of course.
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Of course. All right.
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Thanks for joining us. The intercount.
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All right. Thank you.
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B
You can find us online at www.projectfinance.law or send us an email at currentsordonrosefullbright.com Please rate, review and subscribe on Apple Podcasts, Spotify or your preferred podcast app. Our show today was produced by Emily Rogers. Stay ahead of the Currents.