Observers optimistic about CFE Mexico power plant tenders despite delays

Mexico City — Market observers in Mexico are optimistic about international tenders state power and natural gas utility CFE will conduct to build six natural gas-fired power plants despite delays in the publication of the tender guidelines.

Observers point out the tenders will be some of the few opportunities for investment during the current administration of President Andres Manuel Lopez Obrador, who has shown an unfriendly attitude towards private investors during his first two years in office. However, the observers warn it might take the government longer than it expects to have the six power plants built.

CFE in March announced it would organize international tenders for the construction or expansion of the power plants, which would add 4.3 GW of capacity. CFE said it would deliver the guidelines for the first five tenders by the end of March but so far, it has failed to do so.

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Considering CFE long-term power auctions were cancelled, the power plant projects are vital to meet growing load during the second half of this decade, John Hilfiker, S&P Global Platts Mexico analyst, said April 7.

"The location of the new power plants appear in areas that the national pipeline grid, Sistrangas, does not traverse through – potentially a sign that the new power plants will be developed on private pipeline systems," Hilfiker said.

Upon taking office, Lopez Obrador cancelled a series of exercises aimed at increasing participation of private capital in the different sectors of Mexico's energy industry, including international tenders for CFE to buy electricity from private producers. Over 70% of Mexico's electricity if produced with gas.

Power burn in Mexico is forecast to increase by 600 MMcf/d over the next five years, from 3.9 Bcf/d in 2020, according to Hilfiker's estimates.

"Although the plants may not enter service until the end of the forecast period, they will be the main driver of incremental gas demand through 2030," he said.

The power plants are expected to consume nearly 500 MMcf/d of gas when they are fully operational, he said.

At least one of the six plants will begin construction soon; the projects are needed, particularly those in Baja California and the Yucatan, David Rosales, a consultant at Mexico-based Urban Corporate told S&P Global Platts. The two peninsulas have for years suffered power scarcity given their lack of infrastructure and limited access to gas.

"It is also an election year, so building this type of infrastructure can yield political gains," Rosales said, adding that permitting and social impact studies could delay the projects beyond their expected start in 2023.

In recent years, some infrastructure projects have been delayed for months and even years because of how complex those permits and studies can be, Rosales said. Some projects have been cancelled altogether because of those requirements, and CFE will face those challenges too, he said.

Asian winners said likely

The tenders will attract the attention of large international builders, but the winners will likely be from Asia, either Japan, Korea or China, as they are trying to expand into Latin America and are able to obtain financing at very low costs, said a consultant who declined to be identified.

Spanish companies are also very capable of delivering these types of projects, but they are unlikely to participate given Lopez Obrador's recent criticism of the companies, the consultant said.

The Mexican president has consistently rapped Iberdrola, for example, alleging it obtained advantageous contracts during previous administrations through corrupt practices and taking away market share from CFE. He also accused Iberdrola of hiring a former energy secretary as senior advisor soon after leaving office to obtain privilege information.

In January 2020, Iberdrola cancelled plans to spend $1.2 billion to construct the Tuxpan power plant in Vercacruz, with the company saying it could not come to agreeable terms over gas transportation capacity with the CFE. Iberdrola had already spent $40 million on the project.

"The projects will likely be built by companies with long-term, low-cost financing, and those are increasingly coming from Asia," the consultant said.