Federal government supports private investment to boost energy output in the State of Hidalgo

Hidalgo has long served an important role in the production and distribution of energy, being a net exporter to other regions of Mexico. The state is well served with energy infrastructure and possesses strong transport connectivity to the rest of the country. Furthermore, the local administration has established energy as one of its main strategic sectors for development, and has been proactive in attracting both domestic and international investment, notably in the renewables segment. While changes in national policy have brought uncertainty to the sector, the state finds itself well placed to take advantage of the opportunities available.

Energy Provider

Playing host to a range of significant energy infrastructure facilities and intersected by oil and gas pipelines, Hidalgo is the fifth-largest energy-producing state in Mexico. The country’s largest oil refinery is located in Tula, a city in the west of the state, along with a major thermoelectric plant. Furthermore, a hydroelectric plant is located in Zimapán, damming the Moctezuma River. These facilities ensure the state operates with an energy surplus, becoming a net exporter, a role supported by Hidalgo’s close proximity to Mexico City and well-developed offering of transmission lines.

While increasing private investment in the state and an expected uptick in regional economic activity appear likely to boost demand within Hidalgo, these investments also appear set to expand supply. One of the most important new facilities is the Juandhó combined-cycle power station in the municipality of Tetepango, work on which broke ground in December 2018. Upon completion, the facility – which is being developed by domestic company Akraan, with the support of the German industrial conglomerate Siemens – will have a daily capacity of 650 MW, enough to satisfy all of Hidalgo’s current energy needs. The plant is expected to generate around 1100 jobs and attract MXN10bn ($517.1m) in private investment.

There has also been an increase in investment in the renewables segment, with the opening of the Guajiro solar project in the municipality of Nopala de Villagran in June 2019. The facility, which is contracted under a long-term power purchase agreement with Mexico’s Federal Electricity Commission (Comisión Federal de Electricidad, CFE), was developed by the Chile-headquartered solar generation platform Atlas Renewable Energy – which is backed by the emerging markets private equity firm Actis – who purchased the contract from the US green-energy firm SunPower. Atlas Renewable Energy invested over $118m in the project, with an additional $88.5m in financing coming from the state export-import investment bank Bancomext. The state’s new solar park is expected to generate 300 GWh per annum, generating clean energy to more than 120,000 families each year, while saving more than 215,000 tonnes of annual CO emissions. In addition to these new developments, as of early 2019 the state had signed contracts for a pipeline of new energy projects with a total value of MXN34bn ($1.8bn).

New Opportunities

In January 2019 Mexico faced temporary fuel shortages following attempts by the administration of President Andrés Manuel López Obrador, better known by his acronym AMLO, to tackle theft from pipelines. While the state-owned hydrocarbons company Petróleos Mexicanos struggled to maintain supply in the face of these disruptions, the US-based multinational ExxonMobil chose to bypass the national pipeline network and deliver fuel via rail through a deal with Kansas City Southern de México and the US logistics firm Bulkmatic.

These events highlight the important, expanded role the private sector can play in both the storage and distribution of oil and gas, a role traditionally reserved in Mexico for state-owned firms. “Simply put, if more private investment in storage and transport of fuel had taken place, January’s crisis would not have happened,” José Luis Romo Cruz, secretary of public policy of Hidalgo, told OBG.

Recognising this potential, the administration of Omar Fayad Meneses, the current governor of Hidalgo, has been proactive in attracting investment in the energy sector, in terms of both power stations and fuel. In June 2018 Bulkmatic announced that Tula would be the site of its newest fuel storage facility, where the company already operates two terminals.

“Tula is in a great strategic location to store energy for the Mexico City metropolitan area, Hidalgo and other neighbouring states,” Francisco Melo Valdés, commercial director for chemicals and hydrocarbons at Bulkmatic, told OBG. “The region offers great connectivity in terms of trains and roads, as well as proximity to oil and gas pipelines and refineries.”

Recent Reforms 

In order to facilitate investment in the sector and improve the local business environment, the local authorities undertook two major reforms of the state’s energy laws in March 2018. The first of these entailed reformulating the Hidalgo State Energy Commission into the State Energy Agency (Agencia Estatal de Energía, AEE), a more decentralised public body. The new agency has expanded powers to assist private companies interested in investing in the energy sector, including through public-private partnerships (PPPs), along with powers to propose and manage subsidies and other incentives for energy investors. “Not many states have taken such extensive measures as Hidalgo,” Andrés Manning, head of the AEE, told OBG. “We cooperate with companies looking to invest in the energy sector, managing their arrival and facilitating communications with municipalities as well the federal government.” Manning added that, “This is important because energy projects have run into trouble in the past due to lack of prior agreements with municipalities.” The second reform, called the Law for Promotion of Sustainable Energy Development, provides a legal framework to govern the state’s business environment in the sector. This includes the establishment of rules governing communication between the state and municipalities in order to better streamline procedures and facilitate development in the sector.

Competitive Advantage 

These legislative changes leave Hidalgo well placed to take advantage of the opportunities that have emerged following the liberalisation of the national energy system. Mexico’s energy reforms began with changes to the country’s constitution in 2013, which enabled private and foreign investment across the whole energy value chain. Not only did these reforms open the door for entities other than state-owned companies to generate and transport energy, it also removed subsidies from the CFE and left energy prices to market forces.

Following price liberalisation electricity costs rose swiftly across the country, inhibiting growth for many domestic firms. Nevertheless, these changes provided Hidalgo with opportunities, as energy price flexibility gives the state a chance to develop its competitive advantages. Indeed, the state’s rising infrastructure capacity and energy surplus should keep prices low, while the proximity of Hidalgo to areas of high consumption such as Mexico City and the Bajío industrial region provide it with a growing export market. Furthermore, while public sector providers still produce the majority of the state’s energy output, its position as an energy exporter should benefit from the openness of Hidalgo to private sector energy providers.

Renewable Gains

In 2018 Hidalgo’s energy generation capacity stood at 2651.2 MW, of which 13% came from clean energy sources. However, the contribution of renewables to the state’s energy mix is growing, with the new Guajiro solar power plant coming on-line in June 2019. Furthermore, the state benefits from significant renewable energy resources, notably solar and wind. The state is ideal for solar energy generation, combining year-long sunshine of at least 5.7 hours per day, with lower temperatures than other areas owing to its high altitude, which makes the photovoltaic panels more efficient, according to Atlas Renewable Energy. This high altitude also makes the state suitable for wind generation, though this segment remains comparatively underdeveloped, with only one 100-MW wind farm in operation in mid-2019, operated by the private firm Mexican Renewable Energy.

Alongside its resources, the state is also able to leverage its location and pre-existing infrastructure to attract further investment in its renewables segment. “Being so close to Mexico City facilitates the operation of and access to the site,” Camilo Serrano, general manager for Mexico of Atlas Renewable Energy, told OBG. In addition, the Guajiro project is less than 3 km from CFE’s Dañú substation, allowing it to efficiently provide electricity to the national grid.

“Many power generation projects do not materialise because of the distances to transmission lines,” Manning told OBG. “In Hidalgo this is not the case; this means that the state has the ability to become a supplier to the central part of Mexico.”

Policy Shift 

In February 2019 the AMLO administration cancelled the country’s fourth long-term electricity auction, causing uncertainty among investors. This major shift in national policy does not mark the end of private energy generation, nor Hidalgo’s ambition to attract more domestic and international investment. These changes do, however, appear to mean that new power plants will have to seek private clients, rather than secure agreements with the CFE through public energy auctions.

While this shift in policy presents challenges, it also presents opportunities for Hidalgo. The state is well equipped with transmission lines and strategically positioned in the centre of the country, close to the capital and major industrial areas. “Under this new normal without electricity auctions, the proximity and connectivity of a project to where the energy is consumed becomes an even more important consideration,” Serrano told OBG. “Therefore, if you need a large industrial customer for your project, it makes much more sense to be geographically close to them.” Hidalgo is, therefore, an “ideal place” to sell to private parties, Serrano added.

Furthermore, the state has an administration committed to attracting investment and expanding the output of the sector, one that has demonstrated its willingness to operate as a de facto energy broker between private firms. Conscious that energy costs can be a deal-breaker for companies when they are deciding where to invest, Hidalgo is looking to help potential energy providers find consumer partners and sign power purchase agreements. In so doing, the state government hopes to create a virtuous circle, whereby more power plants are established, thereby lowering the cost of electricity for potential investors in the state and thus attracting more companies. Nevertheless, while the Guajiro solar power plant has an installed capacity of 129.5 MW, while the company with the highest consumption of energy in the state uses 28 MW. This highlights that electricity producers wishing to develop new facilities will need to establish several, smaller private contracts if they remain unable to sell directly to the national grid. Therefore, on top of its existing agreement with CFE, Atlas Renewable Energy announced in mid-2019 that it would also seek to secure private clients for its new solar power station. While this risks slowing down the construction of new power stations, Hidalgo appears well placed to gain the greatest benefit from the situation.

Forks Ahead

A further example of a challenge emerging as the result of decisions made on the national level is the issue of transmission lines. In December 2018 the new government announced the end of PPPs for transmitting electricity, despite strong interest from the private sector. As such, transmission remains fully under the administration of the CFE. While the longer-term impact of this policy remains to be seen, the policy change has sparked fears that the supply of new transmission lines will be unable to keep up with demand.

While Hidalgo is currently has well-developed transmission lines, this will need to increase to keep pace with demand. The state may be able to attract energy generation companies and connect them to a sufficient number of clients. However, for these investments to prove successful, electricity will need to be able to be transmitted from the power station to the end consumer. “One thing that concerns us, now that the government is taking on a more centralised role in the energy sector, is whether transmission lines have the capacity to match our pipeline of investments,” Manning told OBG. “However, we are negotiating with the federal government so that their planning in the transmission sector is aligned with the investments arriving in Hidalgo.”

The state may also be set to experience administrative delays as the result of issues with the Energy Regulatory Commission (Comisión Reguladora de Energía, CRE), the government entity responsible for allocating operating licences to both customers and independent power producers, wanting to participate in the wholesale market. The CRE has faced budgetary constraints under the new administration, along with the resignation of four of the body’s seven commissioners since December 2018.

Prospects

While the energy sector faces challenges as a result of decisions made on the national level, Hidalgo appears well positioned to take advantage of the situation. The state’s role as a net energy exporter with developed infrastructure, coupled with its location close to both Mexico City and major industrial areas, provides it with significant opportunities to continue to develop its energy offering. Furthermore, the state remains open to private investment and has committed itself to facilitating deals between energy providers and consumers.

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The Report: Mexico 2019

Hidalgo chapter from The Report: Mexico 2019

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