What about corporate and industrial users in Mexico under other Tariffs (HM, OM and Tariff 2)? While dozens of companies and large industrial users in Mexico such as FEMSA (Coca Cola), Bimbo, Grupo Mexico, Wal-Mart, and P&G are already enjoying the benefits of lower cost electricity produced by independent developers or themselves — what will be the result of these reforms for other corporations? In the short term, most likely, not much if anything will change. Those companies in Mexico that seek to develop their own projects will do so, and others that fear change and uncertainty will not. For corporate and industrial users the question is whether they want to guarantee themselves electricity at a fixed, pre-determined rate or hope, thus wagering, that competition in and by itself will lower rates in the future. And if rates were to lower in the future, when would they decrease and at what amount?
The CFE had already established itself as an innovator by creating its virtual “energy bank” for developers and allowing them to deliver electricity through a national transmission and distribution network at a low cost. While the reforms generally broadened preferences given to renewable energy developers, they did not, of course go so far as to offer Feed-in-Tariffs or special tax subsidies to spur investment — the same poisonous Voodoo economics used to destroy renewable project developments in Italy, Spain, Germany and the United States. In Mexico, the market was open to developers before the reforms and it is open, albeit more slightly more publicly, today — as a result of the reforms. Over the last ten years, the CFE’s Tariffs for such corporate and industrial users have, predictably, increased. Nothing in these reforms would suggest a change in their upward trajectory.
Then what about the municipalities in Mexico that pay for their electricity via CFE’s Tariff 5 and 5A? As a result of these reforms will more developers come forward to invest in projects to generate electricity for them? No. In fact, while it is true that rates paid for electricity by Mexico’s municipalities have steadily (and not coincidently) increased every year at almost exactly the same amount, for reasons that relate more to their credit worthiness and the political theater that surrounds the issuance of PPAs signed by Mayors and City Councils that serve terms of no more than three years — "hell no." To developers, the risks and profit margins are the same today as they were before the reform.
There is a chasmic difference between reforms that merely embrace competition and further the chance that developers will invest their capital into power generation in Mexico (which is the case here), and reforms that provide specific incentives to developers, create investment funds (using state and private equity capital) to expand and construct modern transmission lines and power stations in the most critical areas, etc.), and focus on advancing a specific innovation or technology (as was the case in China relating to the development of solar panels).
So while there may be few tangible results defined by lower utility rates for residential, corporate, industrial and municipal users of electricity, for developers of energy projects looking around the globe to invest their capital in profitable, market based systems, the reform’s move towards competition offers a slightly brighter — although not particularly different — perspective.
As such a developer, we welcome and celebrate even the slightest change of brightness in the perspective in Mexico.
Lead image: Mexico senate via Shutterstock