Rising Regulatory Risk Halts Mexican Private Power Investments
Fitch Ratings-Monterrey-28 May 2020: The guidelines announced on May 15th by the Mexican Ministry of Energy (SENER) as a way to preserve grid reliability and safety, may restrict and ultimately undermine private energy investment, strengthening the market share and voice of state-owned utility Comision Federal de Electricidad (CFE, rated BBB-/Stable), according to Fitch Ratings.
SENER’s operation agreement reinforces previous measures announced on April 29th by the Mexican Independent System Operator (CENACE) to suspend pre-operational tests for intermittent power plants and alter the number of must-run units. The agreements are not intended to modify the 2014 Electricity Industry Law (LIE, Ley de la Industria Electrica); however, these actions could destabilize the competitive landscape promoted under the LIE and elevate the regulatory risk for private investment in the country.
Together, these agreements could have negative credit implications for privately-owned electricity generators exposed to dispatch, curtailment, and merchant risk, for both new and existing facilities operating under the current regulatory framework. In addition, SENER’s operation agreement introduces new costs to cover novel ancillary services, which will increase backup capacity remuneration and will likely affect renewable power plants. In the next few months, the CENACE and the Energy Regulatory Commission (CRE) will prepare new manuals and procedures to make SENER’s policy fully effective. Fitch expects legal actions being taken by the different affected companies to delay the operational entry of these agreements. However, uncertainty around the regulatory framework will retroactively affect existing power plants and may limit private investment in the Mexican power market.
Despite the potential negative credit implications for project finance power assets, Fitch does not anticipate any related rating actions within its corporate finance power generation portfolio. Infraestructura Energetica Nova, S. A. B. de C. V. y Subsidiarias (BBB/Stable) benefits from adequate business diversification and solid capital structure, and Cometa Energia (BBB-/Stable) does not have renewable projects dispatching in the SEN.
Under SENER’s new agreement, baseload plants may be required to increase power generation to provide reliable dispatch and protect the grid against intermittent power generation. Because of this, the agreement may favor thermal assets owned mainly by CFE, prioritizing their dispatch over more efficient plants. CENACE will now have discretionary power to dispatch out-of-merit plants arbitrarily or unpredictably, potentially displacing non-CFE generation projects that would otherwise be dispatched, reducing revenues and negatively impacting their credit quality.