Despite the heightened tensions between Mexico and the U.S. on account of President Trump’s threats to shut down the movement of goods, people, and investment between the two countries and the effect that the resulting uncertainty has already had on Mexico’s economy, there is good news to report from the energy front. The projects awarded in the two renewable energy auctions carried out in 2016 are moving forward, with one generator signing a PPA with a private consumer, the first under the new rules set forth by the energy reform. It is an indication that the electric energy market is beginning to function outside the sphere of the CFE (Federal Electricity Commission), with long-term contracts that help set reference prices, and more importantly, that provide a predictable payment stream on which projects can be financed. It is worth noting too, that renewable energy is taking the lead and making long-term commitments to increase its share of the market.
Largest solar plant in Mexico
The PPA signed with an unnamed major Mexican industrial group will add 112MW to the 250 MW of solar power already in the works. The group composed of Acciona Energy, who will carry out the EPC, and Tuto Energy, a subsidiary of Biofields Group, was adjudicated the first phase of the project in the second energy auction held by the CFE last September. The plant is located in the State of Sonora and is expected to come online in 2019.
The role of PPAs
The PPA signed by Tuto Energy Trading with private industrial consumers comes at an interesting juncture. CFE has announced yet another electricity price increases for February in the 6.4-8.4% range on top of the 22-35% increase doled out during 2016, and the government recently removed gas subsidies which resulted in a 20% prices hike at the pump. In addition to that, the rapidly falling peso and the lingering uncertainty caused by the Trump administration make pricing difficult, with some costs being priced in dollars while revenues are received in pesos.
It is fair to assume that the PPA recently signed was in the works for some time and is not a direct reaction to recent events, such as the removal of gas subsidies. But it is reasonable to think that industrial users are resorting to long-term contracts to reduce uncertainty in the pricing of their inputs and that renewable energy producers, such as Acciona-Tuto Energy, are offering competitive prices. They are also offering the seal of approval that comes with clean energy, and which many companies are looking to add to their corporate profiles.
Up until now, large consumers had been reluctant to enter long-term PPAs in Mexico. Immediately after the reform the international price of oil collapsed and system prices went down, and given that Mexico has a large reserve margin in the hands of CFE, the advantages of signing on with new generators were not obvious. The circumstances have changed and the promises of the energy reform may be starting to materialize, at least in the electricity sector, in the form of cheaper, cleaner energy for industrial users.0