By Tom Kleckner
HOUSTON — During a recent workshop on the Mexican power market, Tenaska’s Bob Anderson ran through the litany of woes wrought on the market since President Andrés Manuel López Obrador took power last year.
The canceled power auctions, the gutting of the regulatory commission, the reconstitution of the state-run electric business — the government’s heavy hand in creating more uncertainty in an already fragile market.
Still, Anderson said, Tenaska’s vice president of business development, you will find some investors willing to take a chance in the Mexican market.
“It won’t be Tenaska,” he said. “We at Tenaska are not speculative traders.”
“I am a bit more sanguine about this,” Que Advisors’ Peter Nance said. “My experience in Latin America tells me that rules will change, but there will still be opportunities for private capital. Nevertheless, the new situation may be considerably different than the old, and there may be certain participants that are disadvantaged by the changes.”
“It’s a real-life three-ring circus, but the clowns are in charge,” said a more sardonic Mannti Cummins, who is working to develop a wind farm in Baja California Sur. (See Land Rights a Challenge to Mexico Tx Developers.)
José María Lujambio Irazábal, who heads the energy practice for Mexican law firm Cacheaux Cavazos & Newton, said the changes will result in a stronger state-run utility (the Federal Electricity Commission (CFE)), a weaker regulatory body (the Energy Regulatory Commission (CRE)) and a neutered Ministry of Energy (SENER).
A former member of President Felipe Calderon’s administration (2006-2012), Lujambio Irazábal said CFE will enjoy a “privileged position” under the new administration. Its octogenarian CEO Manuel Bartlett Díaz is determined to “Make CFE Great Again,” Anderson said, having felt insulted by the 2014 reforms designed to open up Mexico’s electricity market. “He will tell you the ignorant ways that was done,” he said.
Cummins called it a back-to-the-future agenda, designed to strengthen CFE by reconsolidating the various generation businesses created by the reform. The focus is now on maintaining the utility’s aging fossil plants, as that will mean jobs.
“Any unit that CFE has that can run, should run. You’re talking about 500 different maintenance jobs to prepare for this summer,” Anderson said, noting the upgrades will make about 4 GW of additional capacity available this summer.
That should be a welcome development for the Mexican grid, which has seen its reserve margin drop from about 6% last year to less than 2% this year, said Rebecca Bollenbach of Essentia Advisory Partners. She said Mexico suffered through 44 cases of “emergency situations” and more than 1,000 alerts last year.
“Six percent is [grid operator] CENACE’s happy place right now,” Bollenbach said. “When ERCOT looks at a 6%, 7% reserve margin, everyone gets real nervous.”
Already this year, the Yucatan Peninsula has been twice hit with major power outages, leaving millions of people across three states in the dark for more than an hour.
Perhaps that’s why in April, CFE’s board approved an expansion plan to develop 13 GW of new facilities, all owned and operated by the utility. The first major projects involve five combined cycle gas-fired plants with an aggregate capacity of 2.76 GW, at a cost of $2.4 billion.
“That’s a substantial shift from the last administration,” Nance said.
In the meantime, López Obrador’s administration canceled a long-term auction, the fourth in a series, planned for last December. Bartlett Díaz has said there will be no more power auctions.
“Why should we buy electricity when we can produce it ourselves?” he told El Financiero, a business publication. “We are not going to discuss this; the CFE is not a company that buys electricity. It is a company that produces and distributes electricity. Why should anyone force us to buy electricity?”
It apparently won’t be the CRE, which had its budget reduced by 31.1% in December and then fired about 60% of its workforce.
“That’s a great amount of technical and intellectual capital out the door,” Anderson said.
López Obrador was also able to fill four vacancies among the seven CRE commissioners, appointing them himself when he was unable to gain approval from the Mexican Senate. All four newcomers come from petrochemical backgrounds.
“Some real doozies,” Cummins said. “Heavy on state control, lacking orientation of any sort to electrical markets.”
“Some of them are not real experts,” said Lujambio Irazábal, a former general counsel at CRE. “Who will regulate the market and impose sanctions when needed?”
Lujambio Irazábal said SENER, Mexico’s counterpart to the Department of Energy, is facing many of the same issues.
“With no undersecretary of electricity appointed, a dramatic lack of expertise and no political commitment to keep promoting new developments in the market, who will design and implement electricity policy?”
López Obrador himself has been all over the map. He initially promised new coal plants, thus reducing Mexico’s dependence on U.S. gas, before April’s announcement of five combined cycle projects. He has talked about repowering the country’s hydro installations, and the administration has publicly announced a goal of 100,000 solar rooftop installations by 2024.
“If you want to make jobs, many jobs can result from installing stuff on rooftops,” Nance said.
Mexico’s demand for power continues to grow at an annual rate of 2 to 3%. While the country has 75 GW of capacity on the grid, about a third of it is aging and unreliable or dependent on similarly aging transmission lines. Demand is expected to hit 50 GW for the first time this year.
In addition to canceling remaining power auctions, the López Obrador administration also pulled tenders for two major transmission projects up for international bids: the $1.2 billion, 870-mile, 500-kV connection between Mexicali in Baja California and Hermosillo, Sonora, in northwestern Mexico; and the $1.7 billion, 1,000-mile, 500-kV Oaxaca project between Mexico City and Veracruz.
The projects were “not a priority for the government,” Bollenbach said.
“You still have 3% growth nationwide. How are you going to meet that demand?” Nance questioned. “In an operational sense, there’s a very, very low reserve margin for certain hours of the year. Eventually, someone has to build something.”
Anderson called the language private investors hear “very aggressive … so most of us just back away.”
He said the market needs to express why the reforms are so important. “It wasn’t to tip the scale for private companies. It was to create market efficiencies,” Anderson said.
Foreign investment is not dead, however. Spain’s Iberdrola recently said it plans to spend $1.3 billion in five new generation plants — two combined heat and power, two wind farms and a combined cycle plant — as part of an initiative to invest $5 billion in Mexico over the next six years. The power will be marketed to “private enterprise” as part of an agreement with the Confederation of Industrial Chambers.
“There’s still room for international capital. My view is that it will just be put to work in different ways,” Nance said. “With the pending CFE restructuring, you could have a separate business unit focused on new technologies that could partner with other firms. That might be where development takes place. Improved partnerships with CFE might be a more expected and typical outcome of all this.”