Legal, regulatory uncertainty ups project financing costs for renewable power in Mexico

Claudia De La Rosa

02-Jul-2020

MEXICO CITY (ICIS)–If there is one thing that regulatory uncertainty is guaranteed to bring, it is higher financing costs. Mexico’s renewable energy sector is no exception to this rule, and the last two months have made financing projects a lot more complicated, panelists agreed on a panel on legal certainty in the country.

“For financing to go ahead, there will be new requirements, such as strict demand for storage capabilities and more guarantees from the developers,” said Eduardo Garcia, a partner at Mexico-based law firm Galacia Abogados.

Banks are also asking for impact studies on already-funded projects, trying to calculate how their investments will perform.

As a result, it is the higher-risk investors who are becoming the most likely sources of funding for projects in Mexico, but at higher rates than development and commercial banks typically lend.

The issue of financing was just one of the impacts of regulatory changes in the renewable energy sector, the topic of a 25 June webinar sponsored by the Mexico Energy Law Summit and the Mexican Academy for Energy Law (AMDE).

LEGACY CONTRACTS

The potential impact on legacy contracts – that is contracts signed before 2013, under the previous laws that allow companies to self-supply renewable and other types of power – would also be significant. State-run utility CFE and energy regulator CRE recently raised transmission rates for these private self-suppliers significantly: On 10 June, CFE announced that legacy contracts would have to pay a more than 400% month-on-month increase for use of its transmission lines.

While the increases target private suppliers, legal experts say that the costs will rise for all Mexican consumers as a result, as these kinds of changes damages the country’s reputation as a solid investment opportunity, while simultaneously dampening interest in the kind of competitive renewable energy projects the private sector had been interested in building.

TECHNOLOGY EFFICIENCIES

Yet while the cost of investment in renewable power is rising, because of these financing concerns, the technology for the kind of storage that Mexico’s federal administration says it wants is actually getting cheaper, said Cynthia Bouchot, Director General of Mexico-based consultancy Energía CB Consultores.

“Storage is now a viable option and utility-scale projects incorporate them to the point that renewable energy is more than viable,” she said.

Interest in storage, however, will require the kind of transmission and distribution investments that Mexico needs to make to attract more renewable power. Only CFE can make thse investments in Mexico.

LEGAL RISKS

The use of legal arbitration is increasingly being touted as a viable alternative to court battles over injunctions, known as amparos in Spanish, as companies have to decide how to respond to the many successive regulatory changes the administration has made affecting the renewables sector.

“Amparos are a good option, but they can be either won or lost,” said Herfried Woss, partner at Woss & Partners, acknowledging the risks that companies are taking in the court battles. “And even if they are won, regulatory changes can simply move forward in other areas.”

Under Mexican law, while the government has some rights to expropriate projects, it is still required to pay fairly. If contract disputes end up in arbitration, The London International Arbitration Court is expected to play an important role.  Emily Pickrell

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