MEXICO CITY — Mexico’s energy secretary opened the Gulf Coast Power Association’s fourth conference on the country’s electric power market on Thursday with what observers labeled a “stump speech” and an olive branch to the foreign investment community.
Making her first public appearance since Fitch Ratings downgraded Mexico’s sovereign debt rating to BBB — just above junk status — and Moody’s Investors Service lowered its outlook to negative, Rocío Nahle, secretary of the Ministry of Energy (SENER), told her audience of about 100 attendees that the country’s energy market is still very much open to private interests.
“The private sector is playing a very important role that requires our full attention,” Nahle said. “We are at your service. We are public servants. We are servicing everyone. We can help you out, as much as possible.
“Where there’s synergy, we will push forward. Where it’s not possible, we will say it’s not possible. We’re looking to increase investments … to find joint energies between the public and private sector,” she said.
Nahle’s message was a departure from the actions the administration of President Andrés Manuel López Obrador has taken to reverse much of Mexico’s electric market reforms since taking power in December. AMLO, as he is commonly referred to, has railed against the 2013 reforms, calling them a “neoliberal” economic policy that favors markets and investors over the Mexican people.
Most of the administration’s early measures have benefited the government-run Federal Electricity Commission (CFE) electric utility. Capacity auctions, which obligated CFE to buy power, have been canceled, and plans announced for new power plants. (See Changes Add Uncertainty to Mexico’s Power Market.)
The country’s electric regulatory agency, the Energy Regulatory Commission (CRE), has seen its independence threatened by four new commissioners, all appointed by López Obrador. CRE President Guillermo García Alcocer last week announced his resignation, effective June 15, saying the commission “has a new composition with a majority vision different to mine.”
The changes “have left us in a situation where companies that want to do business here and invest are sitting on the sidelines,” said Bravos Energia President Jeff Pavlovic, who had a large hand in writing the new market rules. (See American Market Architect Reflects on Mexico’s Reforms.)
Pavlovic said he’s been enloquecido, or driven crazy, by the recent market developments, his bleary eyes emphasizing that point. The market is still active, he said, “but the pieces canceled by the government and the government statements send confusing signals.”
Thus, Nahle assured investors that the government will “abide” by all contracts signed under the previous administration.
“Not only abiding, but helping you push forward” through red tape, Nahle said. “Everyone has been complaining about the paperwork,” she said, promising to shorten the time it takes to obtain permits and regulatory approvals.
Nahle said the changes to the market were necessary because of an uneven playing field for CFE, never mind the utility’s 90% market share. She pointed to what she said was poor performance in the power auctions, which CFE is required to buy from, contending only 9% of the contracts from the second auction were actually completed and none from the third.
“There has been an imbalance. There should be a balance, which is the main strength of the power sector in Mexico,” she said. “There’s so much power and capacity, there is a place for everyone. There is space for all of us. Everything should be under order, which is what the government is working for.”
Shrugging off negative media reports on the market (“Sometimes we read different media. Some opinions are not very right, or people have personal opinions with firm foundation.”), Nahle said the reforms will be maintained.
“We’re not going to implement any changes. We will continue to work with the regulators, as we are now,” she said. “We can make it so much stronger. We invite you to participate, so we are going in the same direction. We have to take full opportunity, because this country is demanding lots of power.”
When asked whether Nahle’s statements will reassure market participants and investors, ICIS Heren’s James Fowler, a senior energy analyst for the Americas, firmly said, “No,” pointing to the changes made to strengthen CFE’s role in the market.
Andrea Calo, director of Mexican market intelligence for Customized Energy Solutions, said she has to counsel clients and investors interested in the market to better understand the signals coming from the new administration.
“We knew the power market was going to suffer some modifications,” she said. “It’s evident that it’s evolving. It’s a dynamic market, and it should change. It faced a structural power reform in 2013 … originated in part to attract private investment, because there’s not enough public capital to meet that demand. We’re seeing a change in that principle. It doesn’t mean the changes announced will become a reality. We will see how it goes at the end.”
Hard Line on Corruption
López Obrador’s 2018 campaign included a pledge to eliminate government corruption, a message Nahle says the president repeats “every single day.”
“Corruption is very, very costly to Mexico. Power insecurity is because of corruption. Inequality in this sector is because of corruption,” she said. “We’re even changing some public servants, because we do not tolerate corruption. Not any longer. No corruption is being tolerated by this administration.”
While there have been no wholesale purges in the energy bureaucracy, some personnel have seen their salaries slashed because they were making more than the president. One attendee questioned the strategy, pointing out that those who lost income might be incentivized to find other ways to make up the difference.
“The private sector is asking if there is still room to endorse investing in Mexico,” Calo said. “There’s a need to have a permanent dialogue with the new government and the new administration. Ideally, they might take advantage of all the agencies and public servants that were a part of the previous administration, taking advantage of their expertise to provide the technical advice in determining the best way forward. This market will help them reach their stated goals, a reliable supply and more efficiency.”
Market Reality: Change Will Happen
Asked to make sense of the new administration and its effect on energy market reforms, the conference’s final panel suggested patience with the sudden change in direction.
Severo Lopez, a partner with Galo Energy Consulting, said power markets “tend to be politically complicated,” which could lead to a long learning curve for the “nuevos” (newcomers).
“We had been working on the reforms for the past 20 years, but the last administration was the first time we saw political support for changing the energy sector,” Lopez said, referring to the Enrique Peña Nieto presidency. “We’re back to reality. Reality is that these processes are complex; the changes being made here are by changes in regulation. We shouldn’t freak out. It’s the usual process.”
“There are companies that want to contribute. We know we provide value,” said Jonathan Pinzon, director of regulatory affairs for Invenergy’s Mexican business. He said he was surprised by the “limited numbers of U.S. companies participating in this market” but noted that “things will change.”
“That was the reality six years ago,” Pinzon said.
Acclaim Energy Advisors’ in-country manager, María José Treviño, said she was spending her third straight day at an industry event. “The message is the same. Investment is here,” she said.
“A lot of companies have their generation facilities developed. They’re willing to keep developing, but there is a bit of uncertainty,” Treviño said. “The reality is … demand is growing. We see contracts being signed; we’ve seen consumers making decisions quickly. They want certainty in their budgets. There’s movement, but we need more. We need more investment in infrastructure to move forward.”
Pavlovic told RTO Insider that it won’t be CFE building the needed new generation plants and transmission facilities, despite the utility’s regained prominence. He pointed to the recent news that CFE had lost almost 14 billion pesos (about $710 million) during the first quarter of 2019, news that was only made public when the company missed a filing deadline and the Mexican Stock Exchange halted trading of its shares.
“Most people are trying to identify how to adapt to the new rules, but a big piece is unclear: Can CFE build new generation?” he said. “They don’t have the balance sheet to finance that many projects.”
SENER Planning Document Yields few Insights
If market participants were hoping SENER’s annual planning document would add clarity to the electricity sector’s future, they were sorely mistaken.
The ministry released the Programa de Desarrollo del Sistema Eléctrico Nacional (PRODESEN) at the end of May. The document, which provides a 15-year look-ahead, calls for CFE to add 18.8 GW of new capacity by 2025, equivalent to about 27% of the country’s current generation. Despite Nahle’s claims that the administration would stick to Peña Nieto’s goal of 35% renewable generation by 2035, the PRODESEN calls for only 2.9 GW of additional renewable energy.
Galo’s Lopez said the document has a CFE flavor because of political concerns that the utility “is at some disadvantage.”
“This plan has a strong part where it says CFE has to invest in generation, transmission and distribution,” Lopez said. “They talk about private investment, but there’s no fine definition of where investing in the private sector starts and ends. Why? There are no financial numbers in the plan. If you don’t put numbers in plan, you can say anything you want.”
“[The PRODESEN] sends some high-level signals. In the end, the challenge is how to implement them,” said Antonio Noyola, chief development officer with Avant Energy and a CFE veteran. “We need to read it, digest it, understand it. I’ve read it twice, and every time I read it, there are many questions. What exactly do they want to say?
“Electricity is a basic need for all. Who is going to supply it?” Noyola asked. “Shouldn’t [national ISO] CENACE be a part of it, if we are to grow the power system in a balanced way? We would like to see there is open access, when in practice, there is no access. So, a few challenges, yes.”
“The answer has to be provided by the government. It’s not coming from us,” said Laurie Fitzmaurice, EDF Renewables vice president of business development for Mexico. “I believe the PRODESEN knows we do not have the [background information] to understand this PRODESEN. We’re just starting to digest it. Whether we have a level playing field is not up for discussion. What does equality for CFE mean? There are many opinions.”
Outgoing CRE Chairman Plays it Straight
A newly minted short-timer, CRE President García Alcocer refrained from taking shots at the administration during his luncheon address. Instead, he delivered straightforward comments on CRE and its role in regulating and monitoring markets and sanctioning those that don’t comply.
“Regulating bodies are struggling to show why regulation is necessary. Our primary objective is to provide certainty to the investment community,” García said. “The certainty that the legal framework won’t change is important to you.”
He quoted “Game of Thrones” character Tyrion Lannister in explaining the difficulty in balancing consumer interests with those of public and private energy companies: “No one’s very happy, which means it’s a good compromise.”
García Alcocer’s resignation will leave CRE with just one holdover commissioner from the previous administration and two of seven slots to be filled. López Obrador responded to the resignation during one of his daily morning press conferences by saying officials that don’t share the administration’s goals should seek work elsewhere in an “act of honesty.”
“A regulator has no one to stand for him,” García Alococer said. “To have certainty for investment, we provide the blame shifting. It’s important for a politician to have someone take that responsibility.”
Looking back on his tenure with CRE, he seemed to take pride in its transparency. He pointed out its meetings are open to the public but noted the most recent meeting was the first with four new commissioners, all from petrochemical backgrounds.
“They are extremely boring, until a few days ago,” he said, drawing hearty laughter.
Bilateral Contracts Show Hope for Future
A year ago, an industry insider addressed the lack of activity in the bilateral market by saying that whenever a contract is signed, “There’s a big fiesta.”
Times have changed, said Cesar Reyes, a partner with Zumma Energy Consulting.
“I’ve seen a lot more momentum the last six months,” he said. “There’s more appetite on both the part of the qualified supplier [aggregator] and the end user. That’s because the rates and tariffs are following the same steady upward paths.”
“We see more movement, much more suppliers seeking clients, and higher dynamism,” said Yosafat Coca Huerta, with Suministradora (Supplier) Fenix. “A supplier has to think how can [it] get power … on tendering process. … There’s a big interest on behalf of generators seeking suppliers who might help out [with backup power]. We saw this in the last quarter and again this year. There’s a lot of interest by big parties … to reach bilateral agreements. Maybe we will have at that time, based on private bilateral hedge contracts, we’ll have a better price.”
“The outlook will be cleared up eventually,” Pavlovic said, “and we can go back to the fast-growth cycle we were in.”
— Tom Kleckner
