August 8, 2018

Energy Companies Involved in Mexico Should Review PPAs, Project Finance Contracts

Holland & Knight Alert
Jose Antonio Prado | Alejandro Landa Thierry | Carlos Ochoa | Alberto Esenaro

Before Mexico's energy reform of 2013, private companies had a limited participation in the electricity market. Among other opportunities, power generation was particularly attractive due to the fact that self-supply and co-generation projects were anchored on guaranteed demand, secured with a power purchase agreement (PPA) and structured with a project finance model.

The previous Law of Electricity Public Service (Ley del Servicio Público de la Energía Eléctrica, or LSPEE) included certain regulatory restrictions to such projects. However, the new Law of Electricity Industry (Ley de la Industria Eléctrica, or LIE) has been published with the purpose of organizing a new open market allowing grandfathered models to coexist.

Regulatory predictability in the mid-term allows the project finance model to secure constant cash flows to repay financing. However, self-supply and co-generation projects were agreed between private parties, and thus subject to changes as a consequence of acts of government or changes in utilities legislation.

As the new administration of President-Elect Andrés Manuel López Obrador starts on Dec. 1, 2018, changes in energy policy are expected by investors and participants in the electricity market. Below are some events and regulation to consider in ongoing energy investments.

  • In December 2017, Mexico's Energy Commission (Comisión Reguladora de Energía, or CRE) authorized off-takers to exclude load centers from permits and interconnection contracts without requiring the authorization of the permit holder, which in the case of project finance is often a special purpose vehicle (SPV).
  • During 2017 and 2018, the CRE has been modifying the tariff formula for basic supply, transportation and distribution services. However, the final methodology for the new formula is still in the approval process and expected to be published before the first quarter of 2019. In many cases, tariffs have an impact on PPA payments.
  • The incoming administration has being outlining its new policy for electricity, which includes enhancing and increasing the generation capacity of Comisión Federal de Electricidad (CFE), as well as giving priority to hydroelectric projects. (See Holland & Knight's alert, "Mexico's President-Elect Outlines New Administration's Energy Strategy," Aug. 1, 2018.)

It is common that PPAs and project finance documents contain language and tariff calculation to reduce the impact of any change of policy. However, in consideration of the current and upcoming changes that are expected, it is advisable for energy companies to review all legal and financial documentation and structures in order to assess coverage, impacts and benefits on their businesses during the next six years, as well as to ensure the life span of PPAs and project finance arrangements.

Holland & Knight's energy law attorneys have extensive experience on advising sponsors, off-takers and financial institutions in all stages of power generation projects, PPAs and project finance in Mexico's electricity sector. For more information, contact Holland & Knight's Mexico City office.


   

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.


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