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Mexican electricity reforms stalling seen driving bilateral transactions

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San Antonio — Stagnation in Mexico's electricity sector reforms is pushing some trading outside state-organized options into bilateral transactions with less price transparency, market observers said Sunday.

Speaking at the National Association of Regulatory Utility Commissioners annual meeting on Sunday, Jose Maria Lujambio Irazabal, former general counsel of Mexico's energy regulatory commission, said the current administration was unlikely to make constitutional amendments to reverse reforms or expend political capital in Congress to change the statutes.

"Nevertheless, we have seen some specific policy and regulatory measures that are kind of freezing the reforms on one side and in other cases just definitely canceling" them, as happened with an auction for long-term contracts for renewable generation, said Lujambio, now a partner with Cacheaux Cavazos & Newton in Austin, Texas. The auction was canceled earlier this year despite having drawn bids for low-priced wind and solar energy, he said.

PRIVATE TRANSACTIONS

Peter Nance, managing director of Que Advisors, said the broad disparity in power prices was continuing the incentive for companies to find cheaper sources of such generation.

"What we're seeing is that [companies] that have carbon goals, people that have multiple sites in Mexico [are] still looking at self-generation, still looking at the private sector to help with that problem," he said.

Rather than a centralized option for competition, "you're suddenly seeing the rise of private transactions, power purchase agreements." The effect, he said, is to move many of the transactions into "an opaque world, a negotiated world, but they're still happening."

AGGREGATORS

Lujambio said some aggregators were also trying organize small auctions. This, along with bilateral transactions is "really the future for new generation projects, because it's not going to come from the government, at least not in the way it was," he said.

Nance said a key question was credit and whether supply or demand aggregators could function in the new world. "I think it favors companies that can place a balance sheet guarantee" on their own, such as large global utility companies based in Europe, he said. Iberdrola, for instance, has announced $5 billion in investment in Mexico.

Lujambio also said he regretted changes to Mexico's clean energy certificates program. In the last month, he said a change in regulation meant the certificates could be granted to existing facilities, which could include hydropower, nuclear power and geothermal. "Then the clean energy certificate is longer an incentive for new generation," because the market will be flooded with certificates, he said.

Lujambio and Nance were also worried about the erosion of the independence of the main energy regulatory commission.

Nance, however, said there was confidence in the wholesale market structure, which had been a day-ahead construct. He called this one of the "shining bright spots" of Mexico's energy reform.

-- Maya Weber, maya.weber@spglobal.com

-- Edited by Jonathan Dart, newsdesk@spglobal.com

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