Wind developers, once keen on Mexico, losing heart as energy reforms stall

Source: By Emily Pickrell, Houston Chronicle • Posted: Monday, August 26, 2019

Mannti Cummins, an experienced wind developer from Corpus Christi is trying to build a wind farm in Baja California Sur, but has run intoPhoto: Courtesy photo / Courtesty photo

MEXICO CITY — Mannti Cummins, a Corpus Christi wind developer, has spent the last 17 years building wind energy projects in the Rio Grande Valley, from Brownsville to Baffin Bay.

So when Mexico deregulated its power markets as part of the nation’s landmark energy reforms six years ago, he saw a golden opportunity. His small company could profit from new laws that encouraged international renewable generators to set up shop, while helping Mexico improve the reliability of its power system and reach its climate change goals.

But four years after striking a deal to develop a 50-megawatt wind plant in Baja California Sur, Cummins has yet to break ground, still waiting for environmental permits and an interconnection contract from the Mexican government. His prospects dimmed further with last year’s election of Andrés Manuel López Obrador, a left-leaning populist widely known as AMLO who has slowed the market reforms enacted under his predecessor, Enrique Peña Nieto, and created uncertainty for companies that had hoped to get a piece of the country’s huge energy market.

“The current administration is doing its best to regress from a market mentality, saying that we don’t need private investment for power,” Cummins said. “Smaller guys like me are getting trampled.”

Cummins’s firm, Eólica Coromuel, is among the dozens of renewable energy companies that flocked to Mexico after the country ended some 75 years of monopoly control of its oil and gas and power markets, only to find their expectations dashed. López Obrador’s nationalist policies have downgraded efforts to attract foreign investment and encourage competition while propping up the state-owned oil and gas and power companies, Petróleos Mexicanos, or Pemex, and the Federal Electricity Commission, or CFE.

The 2013 legislation passed under Peña Nieto opened the power sector to international generators for the first time and established wholesale market for power that would allow prices to fluctuate according to supply and demand. CFE was required to break up into several different companies in order to not dominate the market. The market was designed specifically to encourage renewable energy to meet Mexico’s climate change targets of 35 percent clean power by 2024 and 50 percent by 2050.

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The reforms attracted big wind and solar investors from around the world, as well as small players such as Cummins, who had deep family ties to Mexico as the descendant of Confederate soldiers who fled to Veracruz after the Civil War and stayed. Mexico’s power market strategy under Peña Nieto had lofty environmental goals, but it also was a realistic assessment that the stated-owned CFE had neither the financial capability nor the technical know-how to harness the potential of Mexico’s bountiful wind and solar resources.

“The reality is that the CFE could not compete with any other renewable company because they don’t know how to build renewable generation plants and they are not as efficient as the private companies,” said Rosanety Barrios, a senior official at the Energy Ministry in the prior administration. “We thought they could make some joint ventures to acquire knowledge and technology but that definitely did not happen.”

Progress stymied

Since taking office last December, the López Obrador administration has been quick to stall any further progress in developing Mexico’s wholesale power market, blaming any problems in the sector, such as insufficient transmissioncapacity and blackouts in Yucatán and Baja California Sur, on outside forces and neglect of the CFE from prior administrations.

In January, the administration announced the indefinite suspension of its government auctions for clean power, even though the three auctions held under the previous administration had generated some of the world’s lowest prices for wind and solar power. A further blow was the cancellation of two auctions for building high-voltage transmission lines, despite Mexico’s inability to move the renewable power to where it is needed.

“What the López Obrador administration wants is state-energy dominance, and for electricity, this means a pre-eminent CFE,” said Dwight Dyer, a former senior official in the Energy Ministry in the Peña Nieto administration. “They are driven by electoral politics and national ideology.”

Mexico has about 73 gigawatts of installed power-generating capacity, roughly the size of Texas’ competitive market. Power demand in the country is expected to double in the next 20 years.

At the same time, CFE has struggled to make the necessary investments in new plants and transmission lines to keep up with the demand. The rating agency Moody’s in June downgraded CFE’s credit outlook, which will make it more expensive and complicated for the state power company to finance its own projects.

Adrian Garza, a senior analyst for corporate finance at Moody’s Ratings in Mexico, said the downgrade was a result of policies such as canceling new transmission lines despite the growing congestion that makes it harder and more expensive to move the power. The resulting higher borrowing costs make it even less likely that the CFE will be able to develop the needed generation and transmission projects, even though Mexico’s growing population and manufacturing sector are pushing up power demand.

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“There is not a lot of visibility on how the CFE is going to develop new capacity that is required,” Garza said, “and whether it will be renewable or not.”

Mexico has already experienced power blackouts. In Baja California Sur, where Cummins still plans to develop his wind project, the nation’s grid operator is repeatedly asking hotels and companies to use emergency generators on a regular basis to avoid blackouts.

Cummins’ decision to invest in Mexico was driven in large part by the tremendous opportunity that Baja Sur provided, with attractive wind resources, a growing demand and new and favorable investment conditions. He began exploring the possibility in the early 2000s, intrigued by the potential of the Coromuel Wind generated by the Sea of Cortez’s heat and the thin strip of peninsula. But it was not until 2012, when it looked like the market could open up to outside investment, that he got serious.

Reluctant reformers

Cummins hired the same local development engineer who first told him of the region’s potential. They set up towers to test the wind’s potential and organized contracts for land use in 2014. The project ran into difficulty in getting the necessary transmission permits by 2015, which Cummins says was a sign that the energy reforms established were not taken to heart by lower-level officials.

“What has happened under AMLO is that the latent bias against private investors has increased,” Cummins said. “All the guys who were doing the decision-making at the grid operator are gone, and the same guys who were behind the scenes, being obstructionists, have now taken over.”

Attractive power prices in Baja Sur keep Cummins hopeful that the project will move forward, but he says he has completely abandoned projects in Sonora, Zacatecas and Jalisco because of the López Obrador government’s policies unfavorable for both private investment and renewable energy.

Some of this distaste is decades old in Mexico. Domestic control of its energy resources has long been a powerful political symbol, to the point that the 1938 decision to nationalize oil is a federal holiday. This patriotism, combined with the perception that renewable energy is less reliable and more complicated to integrate into the grid, has made it an easy target for criticism by the AMLO administration.

The López Obrador administration is instead talking about fossil fuel solutions, and in June purchased 360,000 tons of coal from Coahuila in a move the administration described as helping the region’s coal miners.

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Energy officials also are floating the idea of investing in more hydroelectricity despite a lack of areas to dam. There is talk in the administration of new nuclear plants to meet promised climate change targets since the legal definition of “clean energy” in Mexico includes nuclear power.

The step back from renewable power is, for most voters, an unexpected consequence of voting for López Obrador, who ran his campaign largely on promises to fight corruption in Mexico. Industry observers say it will be Mexican citizens and companies who pay the price, in this case more than double of average power prices in Texas.

“The main concern I have is what is next for the country — who is going to build the renewable generation plants that we need,” Barrios said.

More barriers

As for Cummins, he says his company will be selective in future opportunities, sticking with the Baja Peninsula because the power prices are four times higher than the rest of the country. He plans to push hard to obtain the environmental and building permits the project needs — but won’t consider investing elsewhere as he expects López Obrador to continue with barriers to competition and foreign investment.

“I don’t think they will back down until there are blackouts,” he said. “They are having to cut or limit people’s services every day in Baja Sur right now, because they just don’t have the power, when we could have been putting in enough power to keep the lights on.”