Project finance: Mexico’s road to renewables recovery
Mexico’s renewable energy sector might be on the road to recovery, with elections to be held in July 2024. Following a run of lean years, sponsors and lenders alike were enthusiastic for the future while discussing the renewable landscape at REFF Latam 2023 last week.
Mexico’s economy has been growing steadily, with an annual GDP growth of 3.6% in 2022 and sectors like tourism, manufacturing and real estate thriving. With all that comes an ever-growing energy demand that still needs to be met.
“Irrespective of the political cycle, the fundamentals are there,” said Alfredo Salvo, senior vice president at Mexican power generation company Saavi Energia during a panel discussion.
Jorge Oria, a partner at Ritch Mueller, echoed that sentiment: “People seem to be starting to position pieces on the checkerboard and consider things moving forward. We have some interest from investors, starting to look at early-stage projects and interested in doing some development work.”
Mexico’s main issue resides in people's lack of trust in politicians and the political process. “The problem is the noise that is created by the president, it's not an amendment or law or intention to change the energy policy via the constitution,” said Alejandro Limon, managing director at Fotowatio Renewable Venture (FRV) and fellow panelist, referencing the failed energy reforms the government attempted last year.
Ever since Andrés Manuel López Obrador, also known as AMLO, took office in 2018, the government has waged war on the private energy sector in the name of regaining sovereignty for the people. Consequences on the power sector, specifically renewable generation, have been devastating.
Developments were halted and permissions to connect to the grid were delayed or denied, making investors turn their back on a once-promising market. According to IJ Global data, there was a more than 50% decline in renewables financings in 2019, and again by more than a third the year after.
Projects like Enel’s Amistad II, III and IV wind farms in the state of Coahuila have been waiting for permits to connect to the grid for more than two years. Other companies, like Engie, Iberdrola and Acciona, also have projects at a standstill.
But thanks to outside pressure (partially driven by Mexico’s location) from the US and Canada, as well as upcoming elections that will galvanize the administration’s efforts for the next year or so, the private sector might be able to regain some traction moving forward.
Last November, during COP27, Mexico also expressed its intention to reduce carbon emissions by 35% and deploy 30GW of additional renewable capacity by 2030 — ambitious targets crystallized in a $48 billion investment plan that has left many skeptical.
In the meantime, other investment possibilities are on the horizon. Where greenfield projects require more regulatory approvals, refinancings present a range of opportunities that are easier to seize and capitalize on.
“Investors are trying to look at opportunities that don't require them to go to the regulator,” said Oria. This can include behind-the-meter solutions (distributed generation) and energy storage.
While a friendly administration isn’t promised, and obstacles including worldwide supply chain disruptions and high turnover in key positions in Mexican regulators, the growing need for energy remains.
“If you’re willing to assume political risks, Mexico is a wonderland,” said Limon.