Mexico Energy - September 2014

I nves tm en t oppo rtunities in th e ne w e ra

Private Investment Expected to Total $161 Billion

Building a Solid Foundation The Implementation of the Energy Reform Vol. 1 No. 7 September 2014

Working with Clean Energy

Business Opportunities in Mexico’s Energy Sector

1st Mexico Energy and Business Forum Presented by Mexico Energy and Business Magazine Dallas, Texas November 10, 2014

8 am- 2:30 pm InterContinental Dallas (Addison) 15201 Dallas Parkway Dallas, TX, 75001

Find out the latest developments in Mexico’s energy sector and take part in the official launching of Mexico Energy and Business Magazine.

Our panel of US and Mexico experts will provide information on business opportunities, research findings and highlight the major breakthroughs, as well as challenges facing the sector today.

Mexican lawmakers and senators will explain the latest regulatory and legislative laws approved by Mexico’s Congress.

We hope you join us and take part in these unprecedented growing business opportunities in today’s Mexican energy sector.

For more information, please contact: José Escobedo Dallas, (214) 206-4966 ext 227 jescobedo@latinoleaders.com Javier Senderos Mexico City, Sales P&E (52) 559136-5100 jsenderos@petroleoenergia.com

Letter from the Editor

M

Mexico is open for business, the markets anticipate change, competition is expected to be fierce and the implementation of the Energy Reform begins to take shape. While private and foreign sectors prepare to invest in Mexico’s growing energy industry, Mexican lawmakers are fine-tuning the last details of a reform that is expected to be as big as NAFTA. In “Mexico counting on huge private investment in energy,” Ernesto Marcos, a former Pemex chief financial officer, offers a projection on the total private investment in Mexico’s energy sector in the coming years. His research, published by Franklin Templeton Investments, shows the number may reach $161 billion between 2014 and 2020.

In order to achieve this, in “Energy reform will unleash Mexico’s economy,” Mexico’s Economy Secretary Ildefonso Guajardo says the country must keep up with the global transformations in energy. He says Mexico should focus on the technical knowledge and expertise needed to unlock its energy potential and strengthen its economy.

For the September issue, we take our readers inside the Ministry of Energy (Sener) and profile three government officials who labored strenuously during the legislative process of the Energy Reform on projects that should bring in billions of dollars in investments to Mexico’s energy sector. The key concepts here are transparency, power transformation and the potential for renewable energies.

In “Mexico’s New Power Industry Law: Implications for Clean Energy,” requirements for a clean energy roll-out in Mexico are presented, focusing on generation, transmission and distribution, and trading of electrical power.

Shelly Shetty, Senior Director of Fitch’s Latin America Sovereign Group, was recently quoted in reference to the dividends Mexico may see from investments and economic activity in the Energy Reform. “The magnitude of the impact will depend on the prudent and timely implementation of the reform, as well as the extent to which the private sector takes advantage of the new opportunities provided by the energy sector’s liberalization,” she said.

Well said, Shelly. Well said indeed.

Mexico Energy and Business Magazine Volume 7 september 2014 Publishers

Managing editor

Reporters

Photography

Editor in Chief Co-editor

Translations:

Art and Design

Administration Treasury Circulation/Distribution Sales Sales and Public Relations Sales and Advertising

Director Operations Sistems Public Relations Auditions Distribution

Raúl Ferráez & Jorge Ferráez José Manuel Escobedo

Maribel Zavala and José Tepezano Maritza López

Milton Méndez Maribel Zavala Rivas

Pamela Rogers

Fernando Izquierdo Romero Rodrigo Valderrama Viveros Carlos Cuevas Martínez Luis Enrique González Piceno Cathy Lopez Claudia Garcia Bejarano Carlos Anchondo Gabriel Torres Origel Javier Senderos Francisco Abad Carlos Pozos

Diego Amauri Plaza Alex Prida Miguel Ángel Muñoz Karen Arriaga Iván Castelán Raúl Hernández

DALLAS 15443 Knoll Trail, Suite 210, 75248 Dallas, TX, USA Tel: (214) 206-4966 Fax: (214) 206-4970 MÉXICO

Sincerely,

José Manuel Escobedo Reachi Managing Editor jescobedo@latinoleaders.com (214)- 206-4966 ext. 227

Insurgentes Sur 1898 Siglum 12, Col. Florida. Delegación Álvaro Obregón C.P. 01020, México D.F. Tel. 91365100 NEW YORK 4 Lexington Ave. Suite 1A New York, NY 10010 Tel: 646-641-5068

CIRCULACIÓN CERTIFICADA POR EL INSTITUTO VERIFICADOR DE MEDIOS Registro No. 248/02

2

September 2014 Mxe Mexico Energy and Business Magazine

ISSN-1665-8205 Copyright © 2003 - Derechos Reservados All Rights Reserved.

Petróleo & Energía” es ® Marca Registrada Hecho en México - Printed in Mexico

INDEX SEPTEMBER 2014

12 Energy reform will unleash Mexico’s economy: Ildefonso Guajardo, Mexico’s Economy Secretary says the country must catch up with the global transformations in energy and the technical knowledge and expertise needed to unlock its energy potential and strengthen its economy. Guajardo explains as Mexico makes this historic change, the government has important roles to play in the provision of infrastructure, regulation and incentives.

18 Transparency above all:

Lourdes Melgar Palacios, Undersecretary of Hydrocarbons from the Ministry of Energy says work on the implementation stage has just begun. That is, transitioning from a closed model to one based on competition and a high degree of transparency.

24 Transforming Mexico’s Power Sector: Sector

Behind the scenes :

The work of the Ministry of Energy would not be the same without the support of three leaders who labored tirelessly during the legislative process of the Energy Reform on projects that would symbolize billions of investments for Mexico. Here we present their stories, (Melgar, Hernández and Beltrán) and the arduous work that took place behind the stage.

06 Business Updates 10 Mexico counting on huge private investment

in energy: Mexico’s energy reform is all about boosting investment and thus production. But the million-dollar question is: just how much investment will flood in, and to what type of resource, when fields are put on the block starting from next year? According to industry leaders total private investment in energy may reach $161 billion between 2014 and 2020.

4

September 2014 Mxe Mexico Energy and Business Magazine

efficiency and cost reduction of Mexico’s electricity sector cannot happen without technologically transforming the network. This means modernizing old power plants with evolutionary combined cycles of gas and incorporating renewable energies in power generation. To accomplish this, César Hernández Ochoa, Undersecretary of Electricity from Ministry of Energy explains how it can be done.

32 A renewable Mexico: Planning is not an easy task and less so in a sector that changes every day. However, Leonardo Beltrán Rodríguez, Undersecretary of Planning and Energy Transition is very clear about the future of Mexico’s energy – and says that thanks to the Energy Reform, investments close to 25 billion dollars in renewable energies are expected.

36 Mexico’s New Power Industry Law:

Implications for Clean Energy: While the press has focused its attention primarily on the Reform’s implications for Mexico’s petroleum and natural gas sectors, Mexico’s power market will also undergo considerable changes in the coming years as a result of the Reform, and these power market changes will, in turn, hold implications for clean energy roll-out in Mexico.

Here we present them.

Business Updates

Business updates Mexico Energy and Business

21st U.S.-Mexico Border Energy Forum to highlight Mexico’s Energy Reform Mexico’s energy reform will be a central theme as top corporate executives and government officials meet to discuss energy infrastructure, transport and finance at the 21st annual U.S.-Mexico Border Energy Forum, Oct. 15-17 at the Presidente Intercontinental Hotel in Monterrey, Nuevo León.

The North American Development Bank and Border Environment Cooperation Commission spearhead the conference’s Organizing Committee along with the Texas General Land Office, the founding agency; the U.SMexico Chamber of Commerce, and the Energy Council.

The Border Energy Forum is a collaborative effort among the 10 states along the U.S.-Mexico border. The original idea was to gather 50 people each from the United States and Mexico once a year to exchange information about the best ways to produce and consume energy in our fast-growing region, forge new partnerships and work together on economic development and environmental protection. The forum now draws an annual crowd surpassing 300, usually evenly divided between Americans and Mexicans. The forum has become a cornerstone of energy policy and program development for the region.

Although the Forum strives to put forward the latest topics affecting energy development and its impact on the environment and economic development on both sides of the border, this year the dominant topic by far will be Mexico’s Energy Reform.

A host committee includes the Comisión Federal de Electricidad, Fundación PROFIME, Secretaría de Desarrollo Sustentable de Nuevo León, Universidad Autónoma de Nuevo León, Secretaría de Desarrollo Económico de Nuevo León, Oficina de Convenciones y Visitantes de Monterrey, Instituto para la Protección Ambiental, CAINTRA Nuevo León, Fideicomiso para el Ahorro de Energía Eléctrica, and the Instituto Tecnológico y de Estudios Superiores de Monterrey.

6

September 2014 Mxe Mexico Energy and Business Magazine

The Forum alternates each year between U.S. and Mexican cities along the border. Last year’s forum was held in San Antonio. It has been held at least once in each of the ten U.S. and Mexican border states.

The Land Office coordinates the forum in collaboration with many public-and-private-sector organizations. The forum is a non-profit event made possible through sponsorships and grants.

For more information, please visit www.borderenergyforum.org.

Oaxaca will have a new wind park The Spanish company Acciona made public that in October it will begin construction, together with private investors Actis and Comexhiro, the “Ingenio” wind park, of 49.5 MW in the Istmo de Tehuantepec, Oaxaca.

Valued at $111 million dollars, the project will contain 33 wind turbines AW of 1.5 MW and be maintained for 15 years.

Business Updates

Received 515 applications for power generation

The “Ingenio” will produce enough clean energy to power approximately 125,000 households in Mexico, while avoiding the emission to the atmosphere of 206,000 metric tons of carbon dioxide (CO2). This is the second project in Mexico for Acciona after it signed a consortium agreement in April with Fisterra Energy, Cemex, and other private investors.

A magnifying glass on Pemex’s and the CFE’s taxes To meet the tax obligations that Petróleos Mexicanos and the Federal Electricity Commission will have as state productive companies, Mexico’s Tax Administration Service created a new and exclusive area to verify that their deadlines and requirements are met just like other taxpayers in 2015. The recently approved legislation stipulates that Pemex no longer depends on the Ministry of Finance and the Federal Electricity Commission (CFE) on the Ministry of Energy.

Received 515 applications for power generation By mid-August, there were 515 applications from private investors with an interest in power genera8

September 2014 Mxe Mexico Energy and Business Magazine

tion, confirmed Francisco Javier Salazar Díez, president of the Energy Regulatory Commission (CRE). In a press conference, he added that the applications were being analyzed, and that although they were made to the sector before the Energy Reform they would be eligible to be considered for permissions in the new market.

Salazar Díez stated that the majority of the applications were for renewable energy, focused on power generation projects in solar photovoltaic, some in mini hydroelectric, and wind and biomass projects.

Mexichem competes with the CFE in energy sales Antonio Carrillo, General Director of Mexichem, announced that the company, in addition to selling chemicals, will start selling electricity in the future.

Carrillo added that with the implementation of the Energy Reform electric energy sales will be a good business in the short term. For now, the company has two cogeneration projects, one plant in Pajaritos, in Veracruz, and another project that is being developed in association with Pemex at the Cactus plant in Tabasco.

Mexico counting on huge private investment in energy INVESTMENT MAY REACH $161 BILLION BETWEEN 2014 AND 2020 Mexico’s energy reform is all about boosting investment and thus production. But the million-dollar question is: just how much investment will flood in, and to what type of resource, when fields are put on the block starting from next year?

E

rnesto Marcos, a former CFO of Pemex, the Mexican state company, has hazarded what looks like the first comprehensive guess.

His estimates, which Franklin Templeton Investments publishes in a note to clients, reckon that Mexico can count on $29bn in private investment in energy in 2018, the end of the administration of Enrique Peña Nieto, equivalent to 1.9 per cent of GDP. In 2020, the investment total could be $50bn, or 3 per cent of GDP, he reckons. Total private investment in energy may reach $161bn between 2014 and 2020.

How will the investment be broken down per sector?

Mexico, after all, has a wealth of opportunities, including shale plays that are the geological continuation of US formations, and deep-water riches. But shale faces significant challenges including lack of water and infrastructure, and being located in areas prone to drug cartel violence that will add security concerns.

10

September 2014 Mxe Mexico Energy and Business Magazine

Hydrocarbons in the depths of the Gulf of Mexico will take big investment and many years to extract.

Shale, not unsurprisingly, is expected to get off to a slow start with investment of $1bn next year. But it could gather pace speedily to $3bn in 2017, $6bn in 2018, $9bn in 2019 and $12bn in 2020, when Marcos’ consultancy, Marcos & Asociados, expects it to account for more than a fifth of all private energy investment in Mexico.

Investment in deep-water prospects is also expected to hit $6bn by the end of this administration, increasing to $9bn by 2020. The slightly slower pace underscores how much of a long-term investment deep-water is.

Most investment next year is likely in mature fields and gas pipelines. Gas processing is expected to take off from 2018, while mature fields and refinery modernizations will attract some $6bn each in 2020, according to the forecast.

So with Mexico’s economy set to grow still below initial expectations – the government is forecasting 3.7 per cent for

Here are Marcos & Asociados’ estimates in full:

next year – just how much will all this hydrocarbons investment boost the economy?

Significantly, Franklin Templeton says:

We still do not have a macroeconomic model that will translate this additional investment into growth for the Mexican economy. However, similar experiences of liberalising the energy sector in Brazil and Colombia indicate a multiplier effect from the additional investment of at least 1:1 on GDP. We also have to take into account that these estimates do not include additional investment from the opening up of the electricity sector. This implies that an estimate of a level of growth of another 2 per cent of GDP from 2018 onwards would be reasonable.

Of course, Pemex, the state oil company that is losing its monopoly, will continue to be a major player: Its investment budget from 2014-2020 alone is $209bn.

Put that together with private investment and Mexico’s

12

September 2014 Mxe Mexico Energy and Business Magazine

Source: Franklin Templeton Investments

hydrocarbons sector is expected to suck in a whopping $370bn by 2020.

Fasten your seatbelts then. Mexico’s energy sector looks like being an exciting ride.

Beyondbrics – FT.com Jude Webber

Ildefonso Guajardo Mexico’s Economy Secretary

With the legislation now in place, the work must begin. Mexico must catch up with the global transformations in energy and the technical knowledge and expertise needed to unlock our energy future.

14

September 2014 Mxe Mexico Energy and Business Magazine

Mar keting energético

MANOLO GUTIÉRREZ Proximity Cordinator mgutierrez@lideresmexicanos.com www.ferraezconecta.com

Maribel Zavala and José Tepezano

Maritza López

The Implementation

Period Begins The work of the Ministry of Energy would not be the same without the support of three leaders who labored tirelessly during the legislative process of the Energy Reform on projects that would symbolize millions of investments for Mexico in the new productive state companies, as well as Petróleos Mexicanos and the Federal Electricity Commission, in addition to private sector projects.

D

espite the large amount of work and a tight agenda, the three Undersecretaries took time to talk with Petróleo&Energía from their offices on Insurgentes Avenue in Mexico City.

In the following pages we inform you of their functions and what they are currently focusing on so that the recently approved Energy Reform has a firm foundation and achieves its desired objectives.

Lourdes Melgar Palacios, the Undersecretary of Hydrocarbons for the Mexican Ministry of Energy, discusses how the recently approved changes are being carried out in an orderly manner yet with a certain urgency to deliver immediate benefits to all Mexicans.

Melgar identifies the current stage as part of the implementation. That is, transitioning from a closed model to one based on competition and a high degree of transparency.

César Hernández Ochoa, the Undersecretary of Electricity for the Mexican Ministry of Energy, advocates for a technology transformation beginning with transmission networks, or power grids, and continuing with transformers, cabling, meters, among others. He states that there is a “level playing field”

16

September 2014 Mxe Mexico Energy and Business Magazine

Undersecretaries from left to right: César Hernández Ochoa, Lourdes Melgar Palacios and Leonardo Beltrán Rodríguez from the Ministry of Energy.

for all competitors that are interested in investing in the national electric sector.

He adds that “the Electricity Industry Act has many strategies that will facilitate the integration of clean energy. In the future, we are going to see more gas generation, more clean energy generation.”

Leonardo Beltrán Rodríguez, the Undersecretary of Planning and Energy Transition for the Mexican Ministry of Energy, details actions to follow in the next 10 to 15 years to reach the established goals despite the changing scenario of energy.

He highlights the perspective of solid growth, “for the energy sector the very implication that it contributes to economic growth in general is precisely what is going to create an important demand for energy.”

Maribel Zavala and José Tepezano

Maritza López

Lourdes Melgar Palacios Undersecretary of Hydrocarbons, Ministry of Energy

Transparency

A bov e A l l Now that the secondary laws have been enacted, the implementation period begins.

For Lourdes Melgar Palacios, Undersecretary of Hydrocarbons for the Ministry of Energy, there is an urgency to reverse the drop in petroleum production, lower electric and natural gas tariffs and provide transparency to the industry, investors and the Mexican people.

F

rom her offices on Insurgentes Avenue in Mexico City, Melgar tells Petróleo&Energía that the federal government is pushing the benefits of the energy aperture in an orderly way, because it promises to do it right.

Transparency Melgar explains that the sector opening represents an opportunity for other companies, national as well as foreign, to work closely with Pemex through its bidding processes as part of Round One, which focuses on increasing certified reserves and oil and gas production throughout Mexico.

“First, the model has a high degree of transparency and accountability; we are not establishing a system that exists in other countries. However, we have studied the experience of other countries. For example when you are assigning an oil contract, negotiations take place, and you arrive at a mutual decision.

18

September 2014 Mxe Mexico Energy and Business Magazine

On the theme of transparency, Melgar adds that “any citizen can follow the contract process because the information will be made public. For example, from the moment that the bidding process is opened, you will be able to follow on the web the results and the chosen bidder. From month to month, information will be published on how the contract is evolving.”

What makes Mexico’s model standout are the public bidding processes. There will be auctions, and the contract that will be assigned will be one that has gone through the prequalification process and can offer Mexico the greatest benefits.”

Melgar affirms that it is important to emphasize that prequalification will serve to verify that the company, or consortium of companies, can pull together the technical requirements for oil production in “X” area or zone of the country.

She also mentions that there is an important opportunity to bring the best technologies and the best practices, including safeguards for industrial security. “For example with the participation of the leading companies in the deep-water and ultra-deepwater production in the Gulf of Mexico, where we know that today Pemex does not have the capacity to be a sole producer, if you pass the prequalification on the international standards for best practices, you enter the bidding process, and whoever offers the greatest benefit will be offered the contract.”

On the theme of transparency, Melgar adds that “any citizen can follow the contract process because the information will be made public. For example, from the moment that the bidding process is opened, you will be able to follow on the web the results and the chosen bidder. From month to month, information will be published on how the contract is evolving.”

Within the petroleum model put forth in Mexico, Melgar highlights that best international practices were followed, such as the establishment of the Mexican Petroleum Fund for Stabilization and Development.

“We were inspired by the Norwegian model, without a doubt, and also the Chilean model on copper production.

But what we did was establish that all petroleum revenue will go directly to the Petroleum Fund and the National Hydrocarbon Commission will conduct 20

September 2014 Mxe Mexico Energy and Business Magazine

timely audits. The Secretariat of Finance and Public Credit (SHCP) will audit production costs and what qualifies or not for reimbursement. All oil revenues go directly into the Petroleum Fund, located within the Banco de México and will be administered by the Administration Council with members including the Treasury Secretary, the Energy Secretary, the Banco de México Governor, and four independent directors. I believe that this will provide considerable reassurance and peace of mind.”

The four independent directors will be ratified by the Senate from a shortlist proposed by the Executive Office.

Behind the Scenes

During the months prior to the enactment of the Secondary Laws, Melgar and her staff were busy taking certain steps and necessary measures in order to implement a successful constitutional reform.

“Everyone was conscious of the importance of having a very clear model in mind of what they wanted before developing the constitutional reform, which made up the distinct elements of the new model. This permitted us to ensure a total congruence among the established 21 transitory laws, and the content of the secondary legislation,” Melgar says.

The time was ticking. Melgar recalls working long hours because the constitutional decree mandated work on Round Zero and deadlines to meet.

“When we received the application from Pemex on March 21, we immediately started working with the National Hydrocarbons Commission to start reviewing it and making decisions. We were very aware of the urgency to give assurances to Pemex over which areas it would come out ahead with. By August 13th we met the deadline and accomplished this work.”

“While we were moving forward in the area of approving the secondary laws, there was a discussion taking place

in the Congress. We have also been advancing in other areas such as contract negotiations, shallow waters - everything that has anything to do with the industrial transformation of the oil industry, natural gas, and so on.”

One step at a time Melgar adds they are currently working on the implementation stage. That is, transitioning from a closed model to one based on competition and a high degree of transparency. “I say we have not suffered from a crisis of power shortages – although this is something we have to be very careful about during the transition.

In the hydrocarbons sector, which is what I am responsible for, implementing the Reform means taking firm steps without a doubt.”

“We have also been advancing in other areas such as contract negotiations, shallow waters - everything that has anything to do with the industrial transformation of the oil industry, natural gas, and so on.”

Melgar assures that the idea is that Pemex can at least continue producing 2.5 million barrels a day. “The federal government has established a goal to produce 3 million barrels at the end of this administration, which means 500,000 barrels will have to come from another source.

This would naturally be other industry participants that can either be national or foreign, or they could even be partnerships in which Pemex or other stakeholders participate.”

Melgar, who earned a doctorate in Political Economics from the Massachusetts Institute of Technology says “in 22

September 2014 Mxe Mexico Energy and Business Magazine

the Round Zero stipulations we are giving to Pemex what is necessary at least for the next 20 years to secure a level of production of 2.5 million barrels a day. If we evaluate this in terms of 1P reserves, what we see is that Pemex maintains its place among the primary world oil producers. Thus we are consolidating Pemex’s position as a dominant actor within the oil industry.”

Finally, Melgar points out that this historic opening is attached to sustainability, the protection of the environment, and human rights, and emphasizes social issues.

“We are aware that the oil and gas industry has to cooperate with communities and is a model which shares its benefits with communities.”

Maribel Zavala and José Tepezano

Transforming

Mexico’s Power Sector Sector efficiency and cost reduction of Mexico’s electricity sector cannot happen without technologically transforming the network. This means modernizing old power plants with evolutionary combined cycles of gas and incorporating renewable energies in power generation. To accomplish this it requires also a modern infrastructure, substituting cabling and meters and providing the distribution network communication capacity to be intelligent networks.

F

or César Hernández Ochoa, Undersecretary of Electricity, an important strategy to reducing costs is to “replace inefficient power plants – that use expensive and contaminating combustible – for more efficient, modern power plants that use

natural gas.”

“What matters in this technological movement is the potential of clean, renewable energies that have not been incorporated and that we hope will be in the years to come. The Electricity Industry Act has many strategies that will facilitate the integration of clean energy. Overall we are going to see more gas and clean energy generation,” Hernández remarks to Petróleo&Energía.

“There is a potential for power generation that exists but is not being used,” continues Hernández, who holds a law degree. “All refineries and petrochemical plants generate heat and vapor that can be used to generate 24

September 2014 Mxe Mexico Energy and Business Magazine

César Hernández Ochoa, Undersecretary of Electricity

“We are committed to building a level playing field in competition with fair rules and a commitment from this Ministry that no one will abuse their market power.

We have safeguards in place against any anticompetitive practices.

In addition all investors, public or private, should be assured that they will encounter impartial and strong referees.” parties, such as the industries in the region, and so on.”

The Undersecretary of Electricity considers it totally logical that Pemex is moving toward the business of power generation, using cogeneration processes, just as the CFE is moving toward the transport and commercialization of gas, because synergies were already in place.

Hernández emphasizes that for this to take place, distribution networks need to be modernized to reduce losses, substitute cabling and meters, and equip distribution networks with communication capacity so that they become intelligent networks.

“These types of measures will also reduce costs and are two of the most important considerations. This is because we are organizing the industry on the basis of the new Electricity Industry Act in a more flexible way with more liberty for private firms to enter and leave.

This will facilitate innovation, but it will also create more competition, which, in turn, will lower costs and provide a better service for our consumers,” adds Hernández.

On the question of whether nuclear energy will play a part in the new framework, Hernández responds that while nuclear energy “has been key in reducing greenhouse gas emissions, the only thing I have heard in this context is the recent recertification of Laguna Verde.

In the future there will be a need to review any initiatives that are presented. Currently there are no concrete proposals to generate new nuclear power plants.”

Regulations in October

electricity.” Hernández says these energies are lost into the atmosphere never to be used again.

Regarding the Federal Commission of Electricity (CFE), of which Hernández was Secretary of the Governing Board, he says that in other countries it is very common that electric companies get involved in the business of gas because there are very important synergies. “To anchor a pipeline, there is nothing like having a power plant that uses gas to generate electricity. A large part of pipeline capacity will be reserved to distribute gas to the plant. Any remaining percentage can be sold to third 26

September 2014 Mxe Mexico Energy and Business Magazine

Meanwhile, the Undersecretary of Electricity adds that next month the regulations of the electricity industry will be released with the objective of providing market certainty to investors.

“The regulations will detail the relationship between consumers and basic services, firms, administrators, and over all, how this relationship will develop in the future.

Also it will provide rules on operating guidelines and clean energy certificates,” he states.

However, Hernández considers important to point out what is not included in the regulations, such as the other regulatory instrument – the market rules.

These are very complex and should emerge from a consensus among all participants that enter the market,

“The greatest challenge will be to strengthen the build-up of the electricity market, which is being planned by the electricity industry. This market

should guarantee that the CFE will continue to be a strong and competitive leader yet at the same time develop a vigorous private industry - and among all stakeholders, we offer the best and cheapest electric service possible to our consumers.” such as the CFE and private firms, and even the Ministry of Energy (SENER) and the Federal Commission of Electricity.

“At the end of this year the document will be available for public comment; what will be released will be the operation of the wholesale electricity market and this will come later,” he adds.

Hernández provides some details. “The market rules are one instrument that is written in the Electricity Industry Act that has two parts: one is called market foundations and the other is called operational provisions. Basically what this instrument dictates is how you buy and sell energy in the wholesale electricity market.”

28

September 2014 Mxe Mexico Energy and Business Magazine

To understand the concept, Hernández says “the wholesale electricity market – and use a simile that is not exact, but gives the idea of how it functions - it is like a bag of energy values, where you buy energy at today’s prices or yesterday’s, it is a kind of a market spot, in other words. The operation of a market such as this one has to have a series of important regulations – on how compensations between generators will work and see how this fits the physical process of electricity dispatch.”

All of this is confounded by the complicated theme of financial exchanges. This is an instrument type that needs more time to be developed and has to include the opinions of all participants – worldwide that is how it works - , they are complicated documents, but this is what permits electricity markets to operate well,” affirms Hernández.

Subsidies On the politics of continuing rate subsidies, Hernández responds that, without a doubt, the idea is that they lower rates, do not increase them, so whatever support to maintain lower rates will be sustained.

“When the market opens and contracts are initiated with cogenerators, the largest consumers who are able to participate directly in the market will have the option to choose and will select the lowest rates. It will be an initial benefit for them.

In the case of residential consumers, if they are with the CFE – remember that it will acquire energy from competitive suppliers through an auction process – they will try to get the cheapest energy. This will be a strong incentive to reduce costs and is how the competitive process will develop. That is, consumers will chose their provider directly, the one that offers the best service and residential rates,” concludes Hernández.

The only key that opens business opportunities in the energy and petroleum sector in Mexico and the United States Watch the video

For membership information please visit:

www.potentiaclub.com

For the past 10 years, Petróleo&Energía magazine (P&E) has been acknowledged as the leading publication for the energy sector in Mexico. Our clients and readers’ businesses have been strengthening as a result of this recognition. This is why we decided to take that extra step, instead of having eight monthly publications a year we will now have eleven.

Also, during the year we will be increasing our distribution volume, which currently stands at 25,000 copies. This will allow us to expand our coverage. Our readers can also benefit from our web page and our exclusive business community called POTENTIA. Other benefits include: • The 5th luncheon/banquet honoring the 1OO leaders in the energy sector in Mexico. (March 4).

• Two Petróleo&Energía forums throughout the year.

• The 1st. International Mexico Energy and Business forum (July2) Dallas, Texas.

• Our editorial staff reports on over 20 forums, congresses and exhibitions, both in Mexico and abroad.

• The newly created agency, Ferráez Conecta, provides PR services to companies in the energy industry, as well as organizing conferences and conventions for businesses and agencies. For two consecutive years Ferráez Conecta has organized BP’s conference of worldwide results.

• Mexico Energy and Business Magazine “Investment opportunities in the new era,” is an English monthly digital magazine specializing in today’s Mexican energy sector. The publication is aimed at international investors and leaders in the industry that would like to do business in Mexico by providing them information on current issues, business updates, legislative regulations and investment opportunities.

Welcome

Our sister publications include:

Sales: jsenderos@petroleoenergia.com fabad@petroleoenergia.com cpozos@petroleoenergia.com

www.petroleoenergia.com

Editorial: mmendez@petroleoenergia.com coeditor@petroleoenergia.com For Media Kit information please visit: www.dropbox.com/sh/v95cz7uc1qzs28w/SI0S7vEYkS

Leonardo Beltrán Rodríguez Undersecretary of Planning and Energy Transition, Ministry of Energy Maribel Zavala y José Tepezano

Maritza López

Planning a

R e n e wa b l e M e x i co Planning is not an easy task and less so in a sector that changes every day. However, Leonardo Beltrán Rodríguez is very clear about the future of Mexico’s energy - at least for the next decade. That is the reason why he affirms so emphatically that, thanks to the Energy Reform, all of the factors are on the table to attract 20 to 25 billion dollars in investments, primarily in renewable energy.

T

he Undersecretary of Planning and Energy Transition is very direct and confident that the message that he would like to send to private investors is that thanks to President Enrique Peña’s 11 consolidated reforms, the right conditions are now in place to grow Mexico’s GDP. “This offers a view of solid growth, and for the energy sector the very implication that it has economic growth in general is precisely what is going to create an important demand for energy,” says Beltrán “The Energy Reform creates the foundation to take advantage of Mexico’s potential but it also opens the opportunity for firms, particularly from the private sector, to develop their activities across the value chain in the energy sector.”

Beltrán adds that this will result in multiplying resources. “We have the opportunity to take advantage of untapped resources: wind resources, solar, geothermal, biomass, and so on. But with the certainty that it is within a legal framework that offers the Reform with absolute clarity.”

A graduate of the Harvard Kennedy School’s with a master’s in Public Administration in International Development, he believes that there is an opportunity that private investments will reach between $20 32

September 2014 Mxe Mexico Energy and Business Magazine

and $25 billion dollars by the end of President Peña’s administration.

Because in addition “we have a public policy that establishes that, at the end of the six-year term, one out of every four megawatts produced will be from renewable energy.”

Transparency and Simplicity In addition to the above, the Undersecretary does not discount other aspects that will favor the sector’s business climate, such as information and the national inventory of renewable energies that are already slated.

“Investors need to know which regions have the greatest potential, depending on resource allocation, and that administratively there are already processes in place to simplify and make permitting more transparent.”

With a certain pride in what he has accomplished, Beltrán highlights that at the beginning of Peña’s administration an energy permit took 630 days. “The objective is that the time it takes to issue a permit will be reduced by one fourth and it will take approximately 430 days.”

The Undersecretary adds that they are also working on creating a one-stop shop for renewable energies “that has to do with, above all, transparency – another important

element of the Reform – now it will be an internet platform where an individual can file electronic permits online.”

“Secondly, the procedural process will be simplified, specifically the permit process.

It will be possible to follow the permitting process online and eliminate having to go to an office or several offices and cut down on paper. It will track the interactions that exist among different offices. It will be a very unique web-based application for submitting and tracking permits.”

“They invested $1.6 billion pesos in innovation centers for geothermal, solar energy, and wind energy. It is the largest investment in Mexico’s history dedicated to the research and development of renewable energies.”

Sustainability On the subject of whether renewable energies were placed on the back burner during the Energy Reform discussions, Beltrán responds with an absolute no, to the contrary, sustainability was intertwined in the new framework.

“For example, on the part of hydrocarbons, the National Agency for Industrial Security and Environmental Protection (ANSIPMA) was created to regulate the industry, first

and foremost, safeguarding the greater good, that is, the individual, the workers, and of course the environment.”

On the part of power, they are also being careful about atmospheric emissions. “The utilization of different combustibles for power generation and their effects on the environment and society is related to the creation of certificates of clean energy. The portfolio of power generation has an obligation to incorporate clean energy and hence will give us a very diversified portfolio but one with a smaller ecological footprint,” assures the Undersecretary.

Geothermal Energy One of the points that Beltrán highlights is that the recent passing of the Geothermal Energy Act will clarify the legal framework to develop the industry and also assures the sustainability of geothermal resources, as he explains, such as the heat at the center of the earth that is used in power generation.

The Ministry of Energy designed a mechanism for risk reduction in the exploratory stage of geothermal resources with the help of the Inter-American Development Bank (IDB) and international assurances.

“Mexico is the world’s fourth largest producer of geothermal power. Thus, with such a large reserve and having developed so much technical knowledge, and knowing that we have taken advantage of less than a tenth of what we have, the resource has a very positive future.”

“Having a policy to mitigate exploration risk is much more efficient so that firms can develop their activities of resource characterization. The private sector now has the certainty to know which are the areas where they will 34

September 2014 Mxe Mexico Energy and Business Magazine

be able to invest and develop their activities within the national renewable energy resource,” says Beltrán.

This will be reinforced later by the creation of the Mexican Center for Geothermal Energy Innovation (CeMIE-Geo), in which, according to Beltrán, they are channeling an investment close to $1.1 billion pesos, “dedicated exclusively to the research and development of geothermal energy.”

“Along coastal areas there are geothermal fields that, let’s say, are basically holes in the marine subsoil that have vapor emanations which also allow you to take advantage of heat emissions to generate electricity.”

“We have a research group that is dedicated to geothermal issues, but we have also made large investments in very important resources. The total investment that has been designated for projects of the innovation centers for geothermal, solar energy, and wind energy is around $1.6 billion pesos. It is the largest investment in the history of our country, dedicated to the research and development of renewable energy.”

Beltran highlights Mexico’s great renewable potential.

“To meet the 25 percent goal of generating renewable energy, there has to be a push in the development, especially in wind and later in cogeneration, of leveraging heat processes in industrial processes, such as in steel production or in refining operations.”

“Depending on the different studies written on the subject, there are experts who say that we have between 2,500 to 10,000 megawatts (MW) of cogeneration potential.

What does this mean? 2,500 MW constitute around 5 percent of the total capacity of the public service power generation - then really it is a large amount of resources,” concludes the official from the Ministry of Energy.

Mexico’s New Power Implications for Industry Law: Clean Energy

June 2014 Mxe Mexico Energy and Business Magazine

On August 11, 2014, Mexican President Enrique Peña Nieto enacted secondary energy reform legislation, thus concluding a legislative process to overhaul Mexico’s energy sector that stems from a December 20, 2013 decree modifying several energy-related provisions contemplated under the Mexican constitution, a topic about which Nexant has blogged in the past. While the press has focused its attention primarily on the Reform’s implications for Mexico’s petroleum and natural gas sectors, Mexico’s power market will also undergo considerable changes in the coming years as a result of the Reform, and these power market changes will, in turn, hold implications for clean energy roll-out in Mexico. With the enactment of the Energy Reform’s secondary legislation, principally the Power Industry Law, it is now possible to better understand the nature of these power sector and clean energy implications.

36

36

The Power Industry Law is perhaps the piece of secondary energy reform legislation that holds the greatest implications for change in the Mexican power sector and clean energy related thereto. This Law focuses on (i) generation, (ii) transmission and distribution, and (iii) trading of electrical power. Nexant discusses below how the Power Industry Law aims to change the Mexican power market in these three areas: Generation. The Power Industry Law further opens power generation to the participation of private actors, establishing a legal framework aimed at ensuring fair competition between public and private power generators and guaranteeing these public and private generators access to power transmission and distribution infrastructure September 2014 Mxe Mexico Energy and Business Magazine

under non-discriminatory rules. This opening looks, in part, to draw greater levels of private investment to solar and wind energy project development in areas of Mexico that present attractive solar and wind resources.

Transmission and Distribution. While the December 2013 constitutional changes clearly establish that the planning and control of the Mexican power market, in addition to power transmission and distribution, will correspond solely to the Mexican government, the Power Industry Law sets forth the rules under which the state may contract through private actors for the financing, installation, maintenance, management, operation, expansion, modernization, monitoring and conservation of power transmission and distribution infrastructure. Additionally, as a

result of the energy reform, an impartial body autonomous of the Federal Electricity Commission (Comisión Federal de Electricidad (CFE)) will perform such power market planning as an independent system operator (ISO), thus ostensibly affording many clean energy generators greater cost-based access to the Mexican power market.

market or through long-term contracts with freely-negotiated prices. Such private trader participation in the Mexican power market provides a larger and more diverse market (i) onto which clean power generators may sell the electricity they produce, and (ii) from which power consumers may buy such clean electricity.

The Peña Nieto government has thus far marketed the Energy Reform as a way to reduce energy costs for both businesses and consumers.

Trading. The Power Industry Law also allows for the participation of private traders to participate in the Mexican power market. Such private power traders may engage generators and certain qualified consumers (i.e., >3 MW, initially) to buy and sell electricity either on the spot

The Law also provides for a Clean Energy Certificate (CEC) system, under which the Secretary of Energía (Secretaría de Energía (SE)) will set a percent threshold for annual cleanto-conventional energy production, and power suppliers and qualified consumers uphold such threshold by purchasing CECs from clean power

generators. The Peña Nieto Administration claims that the CEC system will ensure demand for the energy renewable power projects produce, and will provide these projects the income required to recover the investment made in them.

While the Power Industry Law is not the only piece of Energy Reform secondary legislation that holds implications for the power sector and related clean power roll-out in Mexico, it is the law that likely represents the most fundamental change for the Mexican power market moving forward.

However, other pieces of secondary legislation will also peripherally affect Mexican (clean) power: (i) the Coordinated Regulatory Bodies Law, which aims to fortify the power sector regulator, i.e., Energy Regulatory Commission (Comisión Reguladora de Energía (CRE)) and give it technical, budgetary and operational autonomy to better fit a more competitive Mexican power market in which private actors will now participate, (ii) the General Law on Public Debt, which affords the CFE greater budgetary autonomy, thus facilitating CFE’s engagement with private (clean) power generators; (iii) the Foreign Investment Law, which allows for foreign investment in power generation and trading activities and, through contracts with the government, in power transmission and distribution, (iv) the Geothermal Energy Law, which aims to regulate the prospecting, exploration and exploitation of geothermal resources for energy 38

September 2014 Mxe Mexico Energy and Business Magazine

development in order to generate electricity, among other uses.

The Peña Nieto government has thus far marketed the Energy Reform as a way to reduce energy costs for both businesses and consumers. With respect to the power sector, that several pieces of the related secondary legislation now allow private actors to participate in power generation, transmission and distribution, and trading certainly sets the stage for electricity rate reductions and also augurs well for increasing clean energy’s share of the Mexican power market. Nonetheless, how effectively Mexico’s future ISO affords cost-based access to (clean) power generators remains unclear; Mexico’s Executive Branch issued on August 28, 2014 a decree creating the ISO and establishing its organization, operations and powers, and CFE has until late-November to transfer to this ISO all the human, material and financial resources necessary for effective power market planning.

Consequently, the new reformed Mexican power sector will not begin to truly take shape until mid- to late2015, and any private clean energy investment boom in such sector will likely occur thereafter. * This article was originally published on the Nexant Blog.

By JUSTIN MILLER Justin Miller is a Clean Energy Consultant within Nexant’s Energy and Chemical Advisory Services Unit. Based in Washington, DC, he provides economic, financial and policy analysis for ongoing renewable energy projects in Latin America, and manages relationships with local subcontractors.