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Media Coverage

Mexico's Energy Industry Wins Big in Power Plant Auction

1 June 2016
Texas Lawyer

Mexico kicked off its historic public bidding to open its power sector to private foreign investors this spring, awarding rights to 11 international and Mexican companies in a move that energy lawyers called a huge step toward transforming its aging electric grid.

The winning companies said that they will invest $2.6 billion in new solar and wind facilities in the next few years. But some lawyers whose firms worked with the solar and wind companies who bid in March said that the biggest winner of the auction is Mexico itself.

"It was very positive, and it bodes well for the future of the reforms and Mexico," said Jose Valera, Houston energy partner at Mayer Brown, which represented some bidders. "It was an extraordinary level of interest on the part of Mexican and private investors, while taking into account that this auction was limited to generation with renewable resources."

The power plant auction is the key starting point in Mexico's plan to rely more on clean energy sources, while at the same time lowering the high electricity prices by bringing in competition. But it is also just the latest development in the sweeping Mexican energy restructuring launched in 2014 to privatize Mexico's energy sector and reverse 75 years of state control over its oil and gas fields in the Gulf, electric transmission lines and the power sector.

In the last year and a half, Mexico held three auctions for the rights for oil and gas investors to explore and develop fields in the Gulf of Mexico. The fourth and most anticipated auction, in December, is for "deepwater" rights and is expected to attract the multinational companies such as Exxon, Shell and others worldwide.

This latest auction was handled much differently than the oil and gas auctions in the Gulf. CENACE, the new entity that is now the independent controller of Mexico's electric grid, was just formed in January, and although the auction was its first and it had some glitches, the response was tremendous. In the auction CENACE was the buyer offering to purchase a defined quantity of energy, meaning that they would not purchase everything offered, but they would take the best offers.

When the bids were due in late March, about 70 companies bid, offering far more production than CENACE would buy. "Consequently, the prices were low," said Valera. Of the 11 winners, seven were solar projects, and the other four were wind farms.

"These megawatts are a huge step for the solar projects here in Mexico. This was a big surprise for everyone," said Mexico City lawyer José Estandia, a partner at Jones Day who worked with several bidders. Estandia said that the public bid was intended to award 2,085 megawatts of production. "Everybody believed it would be very close between wind and solar projects, but wind got 395 megawatts, or 25 percent of the total amount of electricity to be in the public bid."

One big winner, Enal Green Power of Italy, won rights to sign contracts for 15- and 20-year "clean certificate supply" with three new solar projects in Mexico. EGP said in a statement that it would invest $1 billion in constructing new facilities to start operations in 2018. It includes projects in Coahuila state and one in Guanajuato. EGP, which has operations in Brazil, Chile, Uruguay and throughout Central America, is already building wind projects in other areas in Mexico.

Another winner was China's JinkoSolar, which will build three projects in Jalisco and Yucatán.

California-based SunPower Systems won the rights to build a solar park in Guanajuato. Its subsidiary Vega Solar Energy won rights for solar generation projects in Yucatán, as did the Spanish firm Alter Enersun.

Guiding a client through the application and auction process, helping them to obtain the participation guidelines and then to prequalify and submit a bid took about five months, said José Antonio Prado, a partner at Holland & Knight in Mexico City. One of his firm's clients, Recurrent Energy, a subsidiary of Canadian Solar, submitted a winning bid and has been awarded the rights to build a solar park in Aguascalientes.

Financing the Deal

The lawyers also said that the greater capital requirements needed for some of these projects may be coming eventually from foreign investors. Up until now, many of the planned investments in Mexican energy have been equity investments provided by the companies.

"The next step will be the bankability of these projects. The lending community will be going through this. We are trying to get out in front of the banks to capture some of this if the banks are approached," explained Carlos Sole, partner at Baker Botts in Houston.

Houston energy partner Scott Schwind at Jones Day said that once the permits are obtained, the firm expects to be advising clients on project financing, as well as future power auctions: "The financing for the projects is long-term. We expect that this is only just starting and the work will be much larger, not just for power generation, but in the energy sector across the board."

Meanwhile, Prado said that lawyers are watching for the other big steps in the demonopolization of Mexico's power industry. He said that the next big part of the agenda would be the wholesale market, which started operations in January. "It is absolutely a major change," Prado said. The expectation in the coming months is that more players will be joining this new market to acquire and sell energy.

The March auction resulted in prices described as "very, very low," and some players were not prepared for or interested in that kind of low-price environment.

Juan Francisco Torres Landes, also in Mexico City with Holland and Knight, said that there would be further opportunities coming. "These energy reforms and power generation and distribution are long-term investments. When you start a train like this, it will gain speed gradually, but I think we are seeing the wheels spinning and that the train is moving.
"The interest in this market can be seen by the number of bidders. That is not something that can be ignored," Torres said.

He said that the interest is coming partly because Mexico's growing industry guarantees a stable pool of electricity consumers. "If we were an economy like some others, more centered on commodities, the interest would not have been there. But to grow the industrial sector, we need a reliable, efficient source of electricity."

More Auctions

A second power-generation auction has not yet been scheduled, but it is believed that it will include projects using natural gas as well as renewables. Plans tentatively call for one auction a year, said lawyers who are following the reforms.

They were confident that the glitches of the first auction would be ironed out. CENACE was running the auction live and evaluating the bids on its website according to a formula. But because of an error, they had to revise the results and reject some of the announced winners.

The lawyers said that the glitch with the algorithm was part of the learning curve and that the next auctions will be better.

Ultimately, Torres said, "a lot of contracts were awarded at a very cheap price. At some point for the users here in Mexico, the prices will go down."

Reprinted with permission from the June 1, 2016 edition of Texas Lawyer © 2016 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

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