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When Enrique Peña Nieto assumed the Mexican presidency in December 2012, he expressed a clear objective to improve the country’s economy and support renewable energy. This trend is likely to continue, thanks to the impact of cleaner energy as well as other benefits that this opportunity will bring to the country, such as employment.

There has been much speculation, especially during the country’s recent presidential campaigns, regarding the possibility of future reforms of Mexico’s energy sector, which would open up the market to private investors. However, it is still too early to confirm if this will, indeed, occur, as Peña Nieto has not yet defined how he intends to reform the energy sector and, as a consequence, boost the creation of renewable energy projects. A clearer picture of potential reforms for the country’s energy sector will likely emerge after the first half of the year, when the National Development Plan for 2012-2018 is released.

There are currently 18 wind projects operating in Mexico and approximately eight more under construction and development. These wind energy facilities are operated by ABB, Abengoa, Acciona Energía, EDF Energies Nouvelles, Iberdrola and Macquarie Capital Mexico, among others.

The Mexican Wind Energy Association (la Asociación Mexicana de Energía Eólica) has estimated the country’s wind power potential at approximately 50 GW. As of the end of 2012, only approximately 2 GW of installed wind power capacity had been installed in Mexico. This potential for growth – along with the Mexican government’s establishment of policies and programs and the country’s overall economic growth and stability trends – presents an outstanding opportunity for investment in wind power projects in Mexico for years to come.

In recent years, Mexico has taken steps to boost its renewable energy capacity in order to build a green energy future and reduce the country’s dependence on fossil fuels. Mexico’s former president, Felipe Calderón, began the process by creating policies and programs aimed at developing renewable energy. These policies include a climate-change law, which establishes milestones for obtaining energy from renewable sources within 15 years, and an amendment to the law for the use of renewable energy sources, which provides goals and incentives for the use of clean energy sources, including benefits from the assignment of carbon units for trade on the carbon market.

So far, these steps have helped Mexico increase its installed wind energy capacity from approximately 3 MW in 2005 to approximately 2 GW at the end of 2012. The Mexican government’s national energy strategy establishes, among other measures, the goals of procuring at least 35% of the country’s aggregate installed power capacity from clean energy sources by 2024 and reducing its greenhouse-gas emissions by 30% by 2020. Mexico’s national wind power goals are set at 4 GW by 2015 and 12 GW by 2020.

With Mexico’s wind power potential, the country is well positioned to reduce greenhouse gases and to trade carbon units in the different carbon markets. For these purposes, Mexican companies are required to submit their projects to, and obtain an authorization from, the Mexican Climate Change Interagency Commission (Comisión Intersecretarial de Cambio Climático). This authorization allows a project to be registered and reviewed by the Clean Development Mechanism (CDM) Executive Board. Once a project receives CDM Executive Board approval, a carbon-emission-reduction certificate is issued and can be traded in the different carbon markets.

Recently, due to various factors – such as the European financial crisis, a dramatic drop in the price of carbon units, Mexico’s geographic location and available financing – U.S., Canadian and Japanese companies and their Mexican subsidiaries have begun to play larger roles in the development of wind power in Mexico, either by financing or off-taking the power produced by Mexican wind projects. Entities such as the Cannon Power Group, Citibank, The Bank of Tokyo-Mitsubishi, International Finance Corp., the Inter-American Development Bank and the U.S. Export-Import Bank have provided affordable financing to wind projects in Mexico.

 

In recent years, Mexico has taken steps to boost its renewable energy capacity in order to build a green energy future

 

In addition, companies such as Grupo Bimbo, CEMEX, Wal-Mart de México, General Electric de México and other affiliates or subsidiaries of U.S. companies have been off-takers of wind power produced in the country.

These projects are uniquely structured in order to come within the bounds of Mexico’s laws regarding the production and sale of energy. Under Mexican law, a private entity may only generate energy with a permit or concession granted by the government, and an energy producer is required to sell all the energy produced to government agencies. One exemption exists that allows producers to generate energy for their own consumption (i.e., autoabastecimiento) and for the consumption of their shareholders, subsidiaries or affiliates but requires them to sell any exceeding installed capacity to the Mexican government.

Considering the limitations provided under Mexican law, private entities have structured their transactions such that the off-takers are shareholders or partners of their companies. By doing so, the producer is allowed to sell installed capacity to its shareholder, usually via the execution of a self-supply power purchase agreement (i.e., contrato de autoabastecimiento de energía). These types of agreements also allow the producer or developer to secure better terms of financing for the project.

These types of agreements may also be entered into with government agencies, such as Mexico’s Federal Power Commission (Comisión Federal de Electricidad), or CFE. These are usually long-term agreements in which the developer assumes the cost of construction of a wind project and then agrees to sell all of the power generated by that project to the CFE.

Mexico’s favorable environment for wind power investment is likely to continue for many years as the country works toward achieving its 50 GW of wind power potential. The Mexican government has a great opportunity to develop and take advantage of this potential by creating and developing suitable policies, reforms, incentives (tax and others), and programs to enhance and continue the positive investment environment. w

 

Allan T. Marks is a partner and Hernando Becerra is an associate at Milbank, Tweed, Hadley & McCloy LLP, where they are attorneys in the firm’s Los Angeles-based Global Project Finance Group. They can be reached at amarks@milbank.com and hbecerra@milbank.com, respectively.

Spotlight: Mexico

After Years Of Showing Promise, Mexico Is Set To Deliver

By Allan T. Marks & Hernando Becerra

Mexico’s enormous wind power potential and favorable energy policy present an outstanding opportunity for project investment for years to come.

 

 

 

 

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