The 2024 target is a clean energy target, and the difference is worth money

A CFO evaluating an onsite generation project or a migration to qualified supply in Mexico in August 2018 needed one legal fact stated correctly, because it changes which technologies qualify. The Ley de Transición Energética, published in the Diario Oficial de la Federación on 24 December 2015, sets in its Transitorio Tercero a minimum clean energy participation in electricity generation of 25% by 2018, 30% by 2021 and 35% by 2024. Clean is not the same as renewable.

Under Article 3, fracción XXII of the Ley de la Industria Eléctrica, energías limpias include nuclear generation, efficient cogeneration meeting CRE criteria, biogas capture and the gasification of urban and agricultural waste, alongside wind, solar, hydro, geothermal and biomass. For an industrial site with a steady thermal load, that is the whole point. A cogeneration plant that meets CRE's efficiency criteria sits inside the national target and can earn Certificados de Energía Limpia. A plant manager who has been told the target is a renewables target will screen out the option that most often pencils on a manufacturing site.

The 35% figure is widely repeated as a renewables target, and the 2018 milestone is often quoted as 24%. Both are wrong. The statutory figures are the ones above, and they come from the Ley de Transición Energética rather than from the Ley General de Cambio Climático, which is the other instrument the target is loosely attributed to.

The obligation your plant may inherit when it migrates

Financing conversations in Mexico usually start on the supply side. The demand side carries an obligation that shows up directly in a supply price. Under the LIE, Participantes Obligados must acquire Certificados de Energía Limpia in proportion to their consumption, and a Usuario Calificado buying through a Suministrador de Servicios Calificados is inside that group.

SENER set the requirement at 5.8% of consumption for 2019 by aviso published in the DOF on 31 March 2016, and at 7.4% for 2020 by a further aviso published in the DOF on 31 March 2017, with the requirement rising again through 2022. Two consequences follow for a facility comparing offers. First, any qualified supply quote has to be read for whether the CEL cost is included, passed through, or excluded. Second, a facility that generates its own clean energy, including through efficient cogeneration, can produce CELs against its own obligation instead of buying them.

FOTEASE, and what it is not

The Fondo para la Transición Energética y el Aprovechamiento Sustentable de la Energía was created by the 2008 Ley para el Aprovechamiento de Energías Renovables y el Financiamiento de la Transición Energética and continued by the Ley de Transición Energética of December 2015. SENER directs it. Its resources come predominantly from federal budget transfers.

FOTEASE is a policy instrument, not a financing window a manufacturing plant applies to. Its programmes have been directed at public-interest ends, including residential efficiency, rural electrification and research. Fund balances and allocation splits for FOTEASE circulate widely with no reporting date and no source attached, including in coverage of geothermal development. We do not publish them, because we could not tie the circulating figures to a dated SENER report. A number without a reporting date does not belong in a capital budget.

The routes that were actually usable in 2018

Three mechanisms were available to a private industrial buyer, and they are not interchangeable.

Accelerated deduction under the income tax law. Article 34, fracción XIII of the Ley del Impuesto Sobre la Renta allows a 100% deduction in a single fiscal year for machinery and equipment used to generate energy from renewable sources or through efficient cogeneration. The condition that gets missed is the holding requirement: the equipment must remain in operation for at least five consecutive years after the year in which the deduction is taken. A company that deducts in full and then sells, relocates or mothballs the asset inside that window loses the benefit. This is the single largest financial lever available to a Mexican taxpayer installing generation on its own site, and it is not a rebate. It is timing.

Development bank credit. The Inter-American Development Bank structured project ME-L1172, the Programa Financiero para la Inversión y Gestión de Riesgos en Proyectos de Gas y Energía Renovable, with Bancomext as borrower, providing up to USD 200 million in medium and long-term direct credit plus a contingent line covering market risk on renewable projects. That facility reaches an industrial project through Bancomext, not directly, which means the terms your project sees are Bancomext's terms.

Third-party ownership. A power purchase agreement or an equipment lease moves the capital off your balance sheet and the technology risk onto a developer. It also moves the Article 34 deduction to whoever owns the equipment, which is the developer. That trade, in our judgment, is the one most often mispriced. A buyer comparing a self-financed project against a PPA at the same energy price is not comparing like with like unless the tax effect is on both sides of the sheet.

The policy risk behind these financing terms

The financing terms available in mid-2018 were priced against an auction market that had not cleared. SENER published the convocatoria for the fourth long-term auction in March 2018 (pv magazine México, 16 March 2018) and no result had been issued as of this writing. Mexico held its presidential election on 1 July 2018 and the incoming administration takes office on 1 December 2018. Lenders pricing off long-term auction contracts, and developers whose equity case depends on a fourth-auction award, are carrying policy risk that a manufacturing offtaker does not have to carry.

The practical hedge for an industrial buyer is contractual rather than political. A supply contract with a named counterparty, a defined term, a stated CEL treatment and a stated position on transmission and distribution charges survives a change of policy better than a project whose revenue depends on a programme still being designed.

What a lender or developer will ask for

• Twelve months of CFE billing, including demand in kW by period and the tariff class.
• Interval consumption data, ideally at 15-minute resolution, to size generation against the actual load shape.
• A single-line diagram and the connection voltage at the site.
• For cogeneration, the steam or heat load profile, since CRE's efficiency criteria are what make the plant clean for CEL purposes.
• Corporate financial statements and the entity that will hold the asset, which determines who takes the Article 34 deduction.
• Site control documents, since a lease that is shorter than the financing term is a common cause of a declined credit.

Test a project against the financing route before you design it

Mexico Energy Partners reviews onsite generation, cogeneration and qualified supply options against the financing structure that fits the balance sheet, including the tax treatment of ownership and the CEL position in a supply contract. An initial review needs 12 months of CFE billing, interval data where available, and the connection voltage at the site.

Request a project financing and structure review

Related reading: what grid connection required for a new industrial site in 2018, and our energy procurement and utility-scale solar capabilities.