FEATURE: Investors in Mexico power sector see increased private participation in next administration

The next government in Mexico, regardless of who is president, will likely be more open to private investment and cooperation in the power sector, according to observers and investors.

The market is hopeful that the following government will allow the private sector to increase its participation, if not out of conviction, perhaps because the current state of the country's power sector is unsustainable.

Upon taking office in December 2018, the current government of President Andres Manuel Lopez Obrador promoted a policy that benefits state electricity utility CFE and limited the participation of private players in a power market that only began in 2014. According to all polls, the candidate of the ruling Morena party, Claudia Sheinbaum, close to Lopez Obrador, is the favorite to win the election, but the opposition also has a female candidate, Xochitl Galvez, in second place. This has most people in Mexico assuming the country will have a woman as president for the first time in its history. Galvez has spoken openly about the need for a radical transformation in Mexico's energy sector. Sheinbaum has not spoken publicly about it, but according to sources, in recent weeks she has met with industry leaders and has made remarks that so far keep people hopeful.

Hope about the future

"I am optimistic about the future of the power sector in the country in the coming years," said Emiliano Detta, head of German development bank KfW in Mexico. Detta told S&P Global Commodity Insights he believes that the future government, whether it be Sheinbaum or Galvez at the helm, will be friendlier with the private sector. The KfW has in recent years managed a budget of roughly $400 million for Mexico, according to its website, although this sum varies. Detta did not specify the current budget, but said that Mexico remains a priority in the region.

Detta said he is not sure about the possibility that the big projects that put Mexico on the global map in terms of renewable power generation will come back, but he believes there are other areas where the country will focus and where his fund and others like it can play a role.

"We believe there will be opportunities in sectors like distributed generation, electro mobility, sustainability, water, solid waste management and infrastructure related to nearshoring," Detta said.

The optimism is shared by many in the industry. During a virtual panel discussion held Oct. 19 in Mexico, experts noted there are many "brave" companies that did not lose their hope in the country despite the "desert" the sector has experienced in this administration.

Atlantica Sustainable Infrastructure is an example of a company its time during this "drought" of activity in Mexico's energy sector obtaining those permits possible to get and leaving the difficult processes at the end, with the expectation that there will be more flexibility in the next administration, said the company's Mexico country manager, Luis Quero, during the webinar.

"This environment has to change, no doubt about it; Mexico continues to have strong fundamentals, like its location and its cheap and qualified labor, although the macro conditions have changed" Quero said referring to increased costs of capital and inflation.

"The next government, regardless of who the president is, should be more pragmatic and leave ideology aside," said Horacio de Uriarte, a partner specialized in the energy sector at law firm Mijares, Angoitia, Cortés y Fuentes during the webinar.

The country needs legal certainty and stability that promotes investments, which will be key to generate the power required to meet the demand that nearshoring will bring, de Uriarte said.

"The [Mexican power] sector cannot remain paralyzed and without investment for much longer," he said.

Urgent issues

Observers and market participants in recent years have speculated that the government would eventually have to accept it cannot provide all the energy needed in Mexico and would have to reopen the sector to private investment. During the panel discussion, experts noted the recent announcements made by CFE about new transmission lines in the country might be an example of this.

In 2019, the government of Lopez Obrador cancelled many projects and initiatives started by the previous administration, including international tenders for the construction of two transmission lines: one that would connect the Baja California Peninsula with the rest of Mexico and another that would transport cheap wind power produced in the state of Oaxaca to the populous center of the country. In September, CFE announced it had met with industry participants to outline a series of works in the transmission system, including a few new lines. With official details not made known, observers note that interest has so far been muted.

CFE did not return requests for comment.

Companies have been wary of this type of projects where companies that are used to taking over all the process, are reduced to be mere builders while taking all the risk, said Daniel Sanchez Morales, a partner at law firm Baker McKenzie who specializes in the energy sector.

"The way things work in Mexico, the asset has to be donated to the state," Sanchez Morales said, adding that the scheme used for these projects involves funds that may not be guaranteed in certain scenarios.

This is why other projects from CFE, like the combined-cycle power plants that it needs, have not generated any interest during the tender process and have had to be awarded directly.