Investing in Mexico

Mexico is among the top 10 most attractive countries in the world with the highest investment in renewable energy.

Currently, Mexico is in a situation of uncertainty and risk because the new Government of López Obrador has positioned itself against renewable energy auctions. In turn, the president of CFE (Federal Commission of Electricity) has requested the three previous auctions project contracts to be renegotiated.

So far, in Mexico, three auctions have been carried out in the years 2015, 2016 and 2017, and a fourth was planned for 2018, however, last January, the last clean energy auction was cancelled.

Despite this, the situation also represents an opportunity to obtain high returns for those willing to assume this risk. The abundance of solar resources, the high prices of energy, the decrease in technology costs and the growing need for diversification of resources combine to place Mexico among the world leaders for photovoltaic development.

The Mexican economy is growing at a good pace.  The Secretaría de Energía (SENER) expects energy demand to grow at 3% during the period 2018-2032, as well as retirement of nearly 12 GW of existing capacity in the same period.

SENER is implementing a Clean Energy Certificates market, based on the obligation of large consumers to have a minimum level of consumption from clean energy, from 5% in 2018 to 13.9% in 2022.

Also, price of electric power in Mexico is very high: in nominal terms, it is 73% higher than in the United States. Citizens do not realize this because 95% of households obtain an electric subsidy that covers up to 90% of their receipt. Even after the subsidy and adjusting for purchasing power, electric power in Mexico is still 25% more expensive than in the United States. Mexico spends 0.75% of its GDP subsidizing electricity tariffs.

Despite the negative impact of the cancellation of the 4^th auction, the current uncertainty, and the multiple challenges that await it, solar energy in Mexico is still in very good shape. Bilateral PPAs viability is already a fact in Mexico and the expansion of this segment could lead to a more sustainable market. It is worth mentioning as recent success stories of long-term PPAs the one of the French Engie with the steel producer Gerdau Corsa for a photovoltaic installation of 130 MW and a Balam Fund’s 35 MW photovoltaic plant that supplies Farmacias del Ahorro.

According to a report published by Bloomberg New Energy Finance, worldwide, the volume of energy consumed by companies that have decided to be supplied by clean energy and specifically through the bilateral market reached a record of 13.4 GW in 2018. Mexico is part of this global trend and between 2008 and 2017 PPAs were signed for a total of 3.4 GW, mostly from wind projects. Main sectors that have led this trend are: cement, malls, financial, mining, steel, consumer and automotive godos.

Vector Cuatro M&A and Financial Advisory business line provides its clients with tailor-made market reports covering, inter alia, country and sector analysis, development and connection process description, market price hedging (PPA and auction) description, tax memo, asset valuation analysis including expected returns and comparable transactions in the market, financing structures definition.

In addition, Vector Cuatro M&A and Financial Advisory business line is well experienced on the valuation of PV and wind projects through the preparation of financial models covering development, construction and operations.

Finally, Vector Cuatro provides potential investors with local investment opportunities according to the specific investor requirements and intermediates between large consumers and project owners in order to negotiate bilateral PPA agreements.