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28 November 2019

Mexican left-wing leader blocks $9 billion in renewables

What happens to renewables when a President is elected on the promise of “I will make my country great again?” Well it depends if you are in the US, then you get President Trump and support for fossil fuels. If instead you are in Mexico you end up with AMLO or Andres Manuel Lopez Obrador, and you get deals favoring Mexican companies – in both cases, you get a slowdown in renewables.

Despite his left wing stance, AMLO’s regime has meant some crazy home prejudiced legislation. Now a rule change in how “clean energy certificates,” or CLEs are allocated, which are virtually bankable, has been brought in to escape decisions made by the last Mexican government. AMLO has decided to allow state owned nuclear and hydroelectric plants to participate in the certificate scheme alongside genuine renewables. Those plants have no outstanding debt on capex and may undercut the renewables market, which has significant capex to claw back. Suddenly half of the renewables investments in Mexico could be worthless, unable to meet their investment returns. Naturally the companies involved have sued in a Mexican court.

The story broke in Reuters last week, but few of the companies involved in the suit wanted to be named, although what came out of the Mexican Association of Wind Energy (AMDEE) said it represents a range of companies which has been taken to include General Electric, Enel, Abengoa, Engie, E.ON and IEnova.

When we look at our database of deals for the past two years, Rethink Energy has been able to identify 33 deals which add up to 4.6 GW of capacity. Of course the certificates don’t only apply to deals for the past few years, so the total amount of capacity and money at jeopardy could be far higher.

AMLO’s argument is that his government wants a bigger state role in energy policy, and he claimed the certificates put the national power utility, the Federal Electricity Commission (CFE), at a disadvantage.

The idea barely holds water since CFE is the offtaker in many of these deals. The new president says that he wants a strong renewables base to work towards his obligations under the Paris climate accord, but now wants to allow CFE to have such certificates, which can be traded openly, for its hydro and nuclear generation. In those cases the capex has been paid for by past governments and all that will achieve is some extra cash for the national supplier, effectively a subsidy to fight off renewables – to the disadvantage of capex heavy projects like wind and solar. The government said that speculation in CLEs had led to an increase in electricity rates, clearly not the case unless someone has their hand in the cookie jar.

This row follows on the heels of a separate dispute earlier this summer to renegotiate seven natural gas pipeline contracts awarded by the previous administration.

Enel seems most at risk with over 900 MW of capacity signed during 2018, but none since. While Spain’s X-Elio has 628 MW of solar capacity under threat, in deals mostly cut during 2019. While major developers such as EDF and Engie are in there, their exposure is far smaller, as is AES which as far as we can see just has one 306 MW onshore wind deal in the firing line.

But while the wind side of the equation seems to have made itself known legally, solar deals are just as prominent with some cut directly through panel suppliers Jinko and Canadian solar and those companies have the market power to create market havoc if not correctly compensated

Mexico’s previous government created this market in CELs and placed an obligation on energy firms to obtain a certain amount of electricity from such sources.

Many of the companies have now filed “amparo” suits, which are suits which protect individuals and companies from capricious actions of the state, a special legal action for Mexico. The aim is to overturn the decision with $billions at stake, one source suggesting $9 billion, with the result likely that many of these firms will exit the Mexican market if they get no joy, potentially driving up the cost of power throughout Mexico.

The sector has been up in arms since AMLO cancelled 7 GW of planned solar and wind auctions shortly after taking power in late 2018.