By enacting the secondary laws to constitutional energy reforms back in August, Mexican President Enrique Peña Nieto detailed the opening of energy sector. However, while the press has been focusing on the reforms’ implications for the oil and natural gas sectors, the clean power market did not receive the attention it deserved, especially considering that Mexico has set the objective to generate 35% of electricity with clean power by 2025.
One of the reasons is that green infrastructure has been growing for a decade outside the political debate of oil and gas. Many plants in Mexico migrated to clean energy to replace natural gas generation. So, secondary laws for clean power were not amended per se, but were boosted with the opening of the sector to private companies. Unlike hydrocarbons infrastructure, clean infrastructure is ready to take off without big investments.
The new Power Industry Law will allow private actors to contribute to power generation with a legal framework that ensures fair competition. Regulations to that Law are in process of discussion among the industry and regulators. As private generators will be given access to the power transmission and distribution infrastructure, solar and wind energy projects are bound to increase where both sun and win are abundant. As for transmission and distribution, the Federal Electricity Commission (CFE) will be capable of performing power market planning as an independent system operator. As a result, it will be able to accommodate the growing numbers of clean energy generators and provide them with better cost-based access to the power market. Finally, private traders will contribute the green power they produce, allowing others to consume clean electricity.
Aside from these implications, the Power Industry Law creates a Clean Energy Certificate (CEC) system. The Ministry of Energy has been entrusted with setting a percent threshold for clean-to-conventional power production per annum. Power suppliers and consumers will have to uphold this threshold, allowing the government to enjoy a demand for its renewable power and the income it makes once the initial investment costs are paid off.
In addition to the Power Industry Law, other statutes are bound to fortify the production, distribution and trade of clean power. First off is the Coordinated Regulatory Bodies Law, which will support the power sector regulator Energy Regulatory Commission (CRE) and provide it with the technology, financing and operational autonomy it needs to tackle the more competitive power market in Mexico. Another law is the Geothermal Energy Law, which aims at prospecting, exploring and ultimately using geothermal resources for generating electricity and other uses.
With so many changes taking place in the Mexican power market, more global energy firms are focusing their attention towards the Latin American country. In June, Spanish utility Iberdrola announced that it would be investing $5 billion between 2014 and 2018. Following its footsteps was U.S. based power generator AES, which told Reuters in August that it plans to double its capacity in Mexico for $1 billion over three to five years.
The U.S. especially has shown interest in partnering with Mexico, even for its clean energy production efforts. After visiting the Mexican President in July and hosting him a month later, California’s Governor Jerry Brown has expressed his interest in Mexico’s energy industry. As many Californian companies are focusing on renewable energy goals, state energy officials have faith that they can help Mexico, especially when it comes to reducing its emissions and further promoting the use of renewable energy sources. However, other companies from Utah and Colorado have been scouting and developing solar projects even before the Reform.
Despite the challenges facing the Mexican power sector, especially its inability to access natural gas from the U.S. and the widespread theft of electricity, international firms are very optimistic and believe these problems to be some of the “vast and varied” opportunities they believe they can avail. Now, maybe it is time for PV companies to start evangelizing the home market as “everyday appliances”.
Photo credit: Wind turbines, eco energy by majeczka-majeczka – Bigstockphoto.com
Mexican President Enrique Peña Nieto has revolutionized his country’s oil and gas industry, opening it for foreign investors after 75 years and taking strict action against the 20 years of production decline, political stagnation, and a slow, underperforming economy. With the constitutional reforms already approved and the Congress finalizing discussion to determine and implement secondary legislation, Mexico is gearing up for a new future. It could end this very week.
The Effects of the Reforms on Pemex
Petróleos Mexicanos (Pemex) was previously celebrated as a symbol of national unity; the people of Mexico went as far as treat the day Pemex was established as a holiday. However, the oil and gas monopoly burdened the country by becoming a large employer of unskilled labor.
In addition, as half of its revenues were paid to the government in the form of taxes, Pemex’s low income was not able to contribute much to the economy. In 2013, Pemex reported an overall loss of USD 13 billion and about USD 2.74 billion in the first quarter of 2014. Inefficiency and low revenues aside, Pemex became a nuisance as it interfered with the country’s politics, meddling with the government whenever possible. Therefore, change was necessary to bring the company and the economy back on track.
By liberating the market from Pemex’s hold and allowing foreign oil companies in, the national Mexican oil producer will receive the help it needs to start efficiently producing oil. The reforms will also spare the Finance Ministry from its duty to approve the company’s budget. In addition, selling gasoline, which was monopolized by Pemex, will now be open to competition.
This may come as a blow to Pemex, especially after being in control of Mexican oil for so many decades. However, the government is taking steps to ensure a little leniency towards its national oil company. Not only is the government proposing that Pemex pay it fewer taxes for the next ten years, but President Peña Nieto himself assured its 153,000 employees that they will not be losing their jobs.
Regardless, Pemex expressed its wish to control most of its operations. Despite acknowledging that it lacks the financial and technical requirements to make the most from its existing fields, its officials are demanding that they be in charge while private companies entering the market join them as junior partners. This has brought on the criticism of many in the oil and gas sector, including deputy energy minister Lourdes Melgar who said, “Pemex wants to eat all the cake, but it can’t. I think there will be gray areas where we will have to ask Pemex for more information and at some point tell them, ‘This one won’t work.’ ”
In order to boost Mexico’s production by 20% or approximately three million barrels a day come 2018, President Peña Nieto intends to separate Pemex from the government and make it function like a for-profit company. To give the company the help it needs to start oil exploration and production operations in 2014, the government will also provide USD 28 billion. Though it may seem like an unnecessary step since the government wants to weaken the company, it will actually open the opportunity to boost the competition level in the Mexican energy sector. Pemex may even become as successful as Brazil’s Petrobras or Columbia’s Ecopetrol.
Through these changes, money and expertise will be flowing through the Mexican energy sector. The U.S. especially will be interested in partnering with Pemex since it shares many reserves of shale gas and oil with its southern neighbor.
How the Reforms Affect Market Valuations
The Mexican stock market in 2014 may not be as strong as experts expected, but many investors remain positive as the market has been trading at a higher valuation than most Latin American markets. However, investors are cautious, especially since the economy is still recovering. Besides, the past year came with its set of problems, including adverse weather conditions, lower government funding, and financial distress reported by three of Mexico’s top homebuilders. This explains why the Mexican economic activity did not meet forecasters’ expectations and the GDP growth amounted to a mere 1% in 2013.
Complementing the energy reforms is Mexico’s fiscal reform, which has affected both companies and citizens. Around the end of 2013, before the tax reform was implemented, corporations hesitated before investing and hiring. However, things have changed in 2014 and companies are following the new fiscal rules and higher taxes. Similarly, individuals are starting to slowly embrace healthier habits as high taxes were levied on sugary, high calories foods and drinks. Their spending habits will also recover near the second half of 2014, which is when the true effects of the new rules will be noted.
A Look at the Risks Facing Investors
Investing in Mexico is not that difficult, especially since the country flaunts the lowest banking penetration in Latin America. Experts believe that the financial sector will help boost the economy and ensure potential growth in consumption. However, as is the case in any form of investment, there are numerous risks which can lead to devastating consequences including loss of principal. Foreign securities are especially most susceptible to currency fluctuations and economic and political uncertainties.
Since the energy market is one of the emerging ones in Mexico, the risks associated with it are plenty. For starters, the lack of legal, political, business and social frameworks will cause chaos in the market. Prices will grow more volatile and the market will show lesser liquidity. There may even be numerous trade barriers and exchange controls, all of which may affect currency rates and ultimately reduce returns. Therefore, the government should start establishing regulations quickly.
Corruption risks are also hindering foreign players. According to the Department of Justice’s Transparency International’s Corruption Perception Index, Mexico scored 34 out of 100 with 100 being a corruption-free country. Mexicans themselves admit this characteristic and even associate Pemex with it. However, even corruption is not deterring many large investors as they can always create a risk-based compliance program that is perfectly tailored to overcome risks.
The Bottom Line
As the reforms are still at a delicate state, Mexican opposition figures are constantly criticizing them. However, officials like the Mexican Secretary of Finance Luis Videgaray Caso believe that changes are never easy. “Making fundamental changes is always challenging,” he said. “There… [is] some resistance to change. Mexico’s energy sector has a lot of potential to create jobs and to lower the cost of energy to families and companies across Mexico. But for that, we need to have investment and we need to have technology that we currently don’t have,” he added.
However, opportunities will come Mexico in due time to those who follow and analyze in depth the reform.
Photo credit: PEMEX gas station by Alberto Esenaro
Originally posted in my Twitter Account @DoBusinessMX on June 24, 2014, this is a collection of tweets trying to explain the Energy Reform in detail. Well, as much detailed as possible within the 140 characters constrain. Flexibility on style and spelling is understood. One tweet per topic block, as presented by the Executive Branch to the Congress. Currently under discussion. I welcome any RT, fav and reply.
Im making a 9-tweet analisys of 21 energy laws under discussion @ the Mex Congress (659 pgs) HT #EnergyMX RT please. Thx.
1 #EnergyMX PEMEX w/o monopoly on hydrocarbs or ducts. Keywords>1st refusal Sep21 DFI contracts profit/prod sharing MexicoEagleFord!!!
2 #EnergyMX Electricity opens. Pub&priv: Gen, Trans/Dist, Supply (priv>big users / pub>basic users), Trade. CENACE to admin the grid.
3 #EnergyMX Geothermal opens for recon (8mo permit), exploration (3+3 yrs) and exploitation (30 yrs + renewal). Big data analytics biz.
4 #EnergyMX Industrial Security and Environment Hydrocarbons Agency gets more powers to oversee PEMEX, CFE, oilers and gas companies.
5 #EnergyMX PEMEX & CFE 2yrs to become gov corps under private law. Leave gov proc laws. Flexible contract&JVs. +Governance.
6 #EnergyMX Hydrocarbs (upstream) and Energy Commisions (mid-downstream) regulate in coord. Res challenges in court. No suspension.
7 #EnergyMX hydrocarbs incomes from licenses (explor quota, royalty, signing bonus, consideration) and contracts (explor quota, royalty).
8 #EnergyMX sovereign fund will receive all oil&gas incomes for savings, investment and protect public finance.
9 #EnergyMX if sovereign fund is 3%+ of DGI can be applied to universal pension, renewables, infra and ed (% spending rules apply).
Photo credit: Solar energy by Morten Sarring
After the failure of subsidies in driving the solar markets of Spain, Italy and the Czech Republic, Mexico and a number of Latin American countries are planning to ensure the growth of their renewable markets through private sector investments.
Mexico is currently highly dependent on its fossil fuels, which is why the government of President Enrique Peña Nieto has initiated energy reforms that open up the previously closed energy sector to private and foreign investors. However, Mexico is just as invested in its renewable energy sector, which is why its energy ministry “Secretaria de Energía” (SENER) is focused on researching and developing renewable energy sources.
Solar energy combined with wind energy make up 0.01% of the 7% renewable energy used in Mexico. However, solar energy is expected to thrive in the North American country. In 2012, Northern Mexico displayed the world’s third largest solar insulation potential at 5 kWh/m2 per day. As the country’s resources are 60% more than Germany’s, Mexico only needs to develop 1% of its land to power the entire nation.
Author of GTM Research’s Latin America PV Playbook Adam James has high hopes as he believes Mexico to be an emerging “hotbed for solar deployment in Latin America”. He writes that Mexico’s current solar energy market is very much like that of California six years ago; despite big promises that didn’t materialise in the past, business strategies that reflect the reality of the sector can help in expanding solar operations in the renewable energy industry.
However, there are some hurdles in the way of Mexico’s bright solar energy sector. One of these is Mexico’s utility monopoly and its insistence on keeping projects small in scale (up to 20 MW). Managing Director of the North American Development Bank (NADB) Geronimo Gutierrez pointed out, “You need [utility] co-operation if you are going to do utility-scale projects.”
This won’t be an issue for long apparently as the Comision Federal de Electricidad (CFE), which owns and operates most power plants in the country, has been partnering with independent power producers. CFE signed a power purchase agreement with Sonora Energy Group to obtain 46.8 MW while Martifer plans to initiate a 30 MW merchant solar project with the electricity provider.
Another obstacle in the sector’s growth is the Mexican solar market’s lack of expertise when it comes to project development and financing. Though NADB has been helping solar energy agencies to improve, finding projects and power purchase agreements has been difficult. “Since we are a public development bank, we accompany projects more than a traditional bank – meaning that we, to some extent, put the project together, especially when there is no well-developed expertise in the sponsors,” said Gutierrez.
Regardless, the future of Mexico’s solar energy sector is quite bright. Due to legislation to reduce carbon emissions by 30% come 2020 and a National Energy Strategy to develop 6 GW of solar energy by that time, GTM expects installations to grow from 60 MW to 240 MW in 2014.
I made an early review of the Mexican Energy Reform. Now it is time to revisit in full. This is part 1 of 3 for a series of posts trying to construe the recently approved Mexican Energy Reform. Despite the political opinions, this Reform sets a new landmark on how Mexico sees the future of energy sector and the free market economy.
Mexico has liberalised the energy market, leaving behind the vision that PEMEX and CFE must have monopoly over hydrocarbons and electricity. Mexican Congress has already declared constitutional the Energy Reform, after having received approval from majority of State Congresses. President has already signed the publishing Decree, and is being published this afternoon. On Monday, the Reform will have effects.
The approval happened despite the opposition of the left-wing party PRD, who proposed an overhaul to PEMEX and not allowing private investment into the energy sector. As PRI/PAN majority on Senate and Representatives approved the Reform, it passed. Regardless of the political opinions, the majority decided. PRD is analysing legal recourses to challenge the Reform, and also suggesting a public consultation that could happen in 2015. Considering that this Reform was to the Constitution, it will be very hard to challenge it, as there are very limited cases where the Constitution can be challenged.
What is firm now?
The Reform has two sets of provisions: The constitutional articles and the transitory articles. The first are firm, and as indicated, it is very hard to challenge due to the circumstances of majority. The second are provisions that rule during vacant time until secondary legislation is enacted. Secondary legislation would be enacted during first quarter of 2014.
The Constitutional Articles that were amended are 25, 27 and 28, and provide for the following:
1. A common mistake is that PEMEX had the monopoly of oil and gas reserves, and CFE from electricity. However, the Mexican State has always been the owner, and decided, as public policy, granting monopolies to PEMEX/CFE, not by Constitution. According to the Reform, Mexican State will keep control of government-owned companies (GOC) in the oil, gas and electricity sector. From the Reform, PEMEX and CFE will remain 100% state-owned, but breaks the customary monopoly, i.e. the State itself can create other GOCs that compete or collaborate into those markets. Creation of diverse GOC is not so uncommon, as happened with CFE and Luz y Fuerza del Centro.
2. Nuclear power and radioactive materials are property of the State, and always will be used for pacific purposes.
3. In electricity sector, the State will keep control of the grid, transmission and distribution. In relation to the generation (and self-generation) of electric power, there will not be licenses, but contracts for private parties. For practical purposes, licenses equal contracts.
4. In oil and hydrocarbons, the State will be their owner and there will be no concessions. However, for the purpose of obtaining economic benefits, it can grant, for exploration and extraction: a) assignments to GOCs, or b) contracts with GOCs or private parties. GOCs can subcontract or partner private parties. Secondary activities like refining, transport, sub-products and retail are not provided for, which would be regulated on detail by secondary legislation.
5. Banco de México will manage a sovereign fund for receiving the rents, manage the investment and distribute the benefits and make payments in relation to oil rents.
6. Executive Branch will have regulatory bodies for hydrocarbons sector (Comisión Nacional de Hidrocarburos) and electricity (Comisión Reguladora de Energía).
For now, many details are to be defined by March 2014. However, the Reform draws four main conclusions: 1) There is not coming back to state-monopoly; 2) The Reform is good enough to start exploring opportunities, 3) PEMEX and CFE will require experience, resources and partners/contractors to compete, as well as private players, and 4) Mexican energy market is being fuelled by growth in the manufacturing industry and public infrastructure.