Mexico's clean energy power market legal battles intensify, shift outlook

Author: Emily Green

2019/12/04

Market impact of CELs appeals may vary

Collective industry action may have greater impact

Alternative market mechanisms could be game changers

MEXICO CITY (ICIS)--A flurry of lawsuits filed by renewable energy companies challenging new regulations governing clean energy certificates (CELs) could have limited impact because of the intricacies of Mexican law, said Natalie Flores, a Mexico City-based attorney with the law firm Baker McKenzie.

At least half a dozen companies have filed suit challenging the regulation and seeking an injunction against the rule change, which would for power plants built before 2014, including hydropower and geothermal plants. The companies say the new regulation undermines the purpose of the CEL market to incentivise investment in renewable energy plants.

Flores said even if all the lawsuits succeed, under Mexican law, judgements in their favour would apply only to the specific companies that brought the suit. “We expect to see more lawsuits and injunctions. If we are talking 15, 20 injunctions, that’s where we are going to start seeing that broader impact,” Flores said.

In the meantime, the private sector is bracing for a fallout, especially from foreign investors, Flores said. The administration is “saturating the market with CELs, and these changes are contrary to the original purpose of incentivising foreign investment, bringing in new power projects, and meeting ambitious energy goals.”

Under the original regulations, CELs applied only to projects built 2014 and later. The concept was to help developers finance their projects and sell credits to large consumers trying to meet their clean-energy quotas. It was also supposed to help Mexico reach its goal of producing 35% of its electricity from clean sources by 2024 — a goal Flores said was always ambitious but now seems impossible with the rule changes.

Long-term impact

Flores said her biggest concern about the change in regulation is not the direct impact on the CEL market, but that private companies and foreign investors will get scared off by the frequent changes in regulation. As a result, she said many smaller energy companies have pulled out of the Mexican market for now, while larger companies appear more willing to absorb the risk.

“As a foreign company, you look at your risk. And a lot of them wake up every morning and see Lopez Obrador changed the rules of the game again, and they get scared,” Flores said, referring to the Mexican president.

Patricia Tatto, vice president of Spain-based Ata renewables, also said she has seen a change in the market under the new administration, with a bigger presence by Mexican companies that have “the stomach to resist” the legal uncertainty.

“The CEL market is going to plummet,” Tatto said. “The administration is sending a sign to the market that they are not willing to play on a level playing field.”

Other Contracts

Despite lingering anxiety about the future of the clean energy market, both Tatto and Flores said they believe the administration will leave alone contracts awarded under the second and third long-term energy auctions.

Tatto also described the cancellation of the fourth long-term auction as less impactful than originally feared — although she called it a bad decision that would make it harder for Mexico to reduce its carbon footprint.

Tatto said less than a third of the solar projects in Mexico were built as a result of the government auctions — and that some investors were not interested in participating. She said she has seen more interest in recent months from private equity investors and large construction companies that prefer merchant and private power purchase agreements (PPAs).

A looming issue for the private sector is around delays in connecting renewable projects to the energy grid. Both sources said the interconnection process has slowed under the new administration — a problem they attributed to employee turnover. Tatto also said there were added infrastructure costs that were not considered in grid impact studies.

Moving forward

Tatto said given these factors, she would advise companies looking to enter Mexico’s renewables market to be extra cautious: “find the right projects, good interconnection points, and be way more selective.”

Despite lingering anxiety about the future of the clean energy market, Tatto and Flores both said that the development of the private energy auctions organised by Mexican consulting firm Bravos Energia and the Mexican arm of Swiss trading house Vitol is exciting. The auctions would help replace the government-run electricity auctions.

“Both are game-changers,” Tatto said, adding that they will bring dynamism to Mexico’s energy market. “It will allow the private market to carry on doing their transactions with cheaper and long-term PPAs.”

Flores said the big question is whether Bravos can bring its auction online without generating a backlash from the government.

“Companies are interested, but the question is can they really pull it off? If so, it will be huge.”