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July 2015 Mexico: Prepare to Launch Is it still hurry up and wait or is the race to build new power projects finally underway in Mexico? New power market rules are expected in final form soon. The country revamped its electricity sector to great fanfare at the end of 2013. Raquel Bierzwinsky, a partner in the Chadbourne New York and Mexico City offices, and Sean McCoy, an international counsel in the Chadbourne Mexico City office, talked to Keith Martin about the potential opportuni- ties in Mexico at the Chadbourne global energy & finance conference in June. MR. MARTIN: Many of us in this audience have been following Mexico. We know the constitution was amended in late 2013 to open up the power sector to private competition. We also know that implementing legislation was finally enacted last year, but that is not enough because you still need guidelines to implement the implementing legislation. Sean McCoy, when are those guidelines expected? MR. McCOY: This July, hopefully. IN THIS ISSUE MR. MARTIN: You have a draft of them that came out in February, I believe. MR. McCOY: Yes. A draft was issued in February by the Ministry of Energy and was pub- 1 Mexico: Prepare to Launch lished for public comment in an effort to improve the rules. The idea is to publish an official 5 New Financing Trends version after revising them to take into account the public comments. 15 New Trends: Developer MR. MARTIN: Let’s review the new opportunities that will be created for independent Perspective generators. I know you have written a fair amount about this over the last two years. I have 29 Rooftop Solar Outside the US pulled some of this out of your writings. Let me see if I have this straight. Independent gen- 34 Analyzing Solar erators will be able to sell electricity, but only at wholesale and basically / continued page 2 Rooftop Portfolios 38 Corporate PPAs 45 Yield Co-Induced Highs A TAX EXTENDERS BILL may start to move through the US Congress this month. 53 Community Solar: The Next Big Thing? Wind companies are looking for more time to start construction of new 59 The Partnership Flip projects to qualify for production tax credits. Such projects had to be under Guidelines and Solar construction by December 2014. Solar companies hope to convert a 61 DOE Loan Guarantees Return December 2016 deadline to complete solar projects to qualify for a 30% 64 Energy Storage Economics investment tax credit into a deadline merely to start construction. Senator Orrin Hatch (R-Utah), who heads the Senate tax-writing 70 Line Drawing for MLPs committee, said on July 7 that he may ask his committee to vote on a tax 73 Time for Desalination Plants? extenders bill as early as July 15. Democrats on the committee want to 77 China Launches Multilateral extend expired or expiring tax breaks by two years to spare Congress from Infrastructure Bank IN OTHER NEWS IN OTHER having to deal with extenders again until 2017 when / continued page 3 81 Seeking Investments 86 Environmental Update This publication may constitute attorney advertising in some jurisdictions. Mexico October Auction continued from page 1 MR. MARTIN: There will also still be the option to sell electricity directly to the CFE. CENACE –- the national independent system to the CFE, the national utility. Is that correct, or can they also operator — plans to hold a capacity auction later this year. Sean make retail sales? McCoy, when is the auction expected? How much capacity do MS. BIERZWINSKY: They will be able to make retail sales. The you expect to be up for auction? new legislation allows independent power producers to enter MR. McCOY: The auctions are planned for October. How much into bilateral power purchase agreements to sell electricity. The capacity is not clear. Details remain to be worked out, but it is key point is that specific categories of consumers will be able to clear that CFE needs to replace 10,000 megawatts of existing enter into PPAs. Consumers must have at least a minimum load capacity. The new generation will be mainly set up in central before they can purchase from the market directly or enter bilat- Mexico, which is one of the main industrial areas in the country. eral PPAs. Beginning in August of this year, the minimum load is Basically, that is the main area in which new generating facilities two megawatts. It will drop to one megawatt next year and, are expected to be built. thereafter, the Ministry of Energy will determine whether that MR. MARTIN: So 10,000 megawatts in total are expected to goes down further. be auctioned, but some small increment of that will be this fall, MR. MARTIN: So if a factory has at least a two-megawatt load, perhaps in October. Do we know how long the power contracts as of this August, it can enter into a direct contract with an inde- with CFE will run? pendent generator to buy electricity. If it has at least a one- MS. BIERZWINSKY: There are two options. There is a medium- megawatt load, it can do so, but must wait until August 2016. term contract for gas-fired power plants, which right now under MS. BIERZWINSKY: That is correct. the rules is three years but we expect the final rules to set it at five years, and then there is a 10-year contract. We have heard from a lot of renewable energy developers in Mexico that they are not content with just 10-year A growing class of commercial customers PPAs. Obviously there is no fuel risk for them, so they would like in Mexico will be able to buy electricity to go to at least to 15 or 20 years, from independent generators. if possible. MR. MARTIN: What if one wanted to build a merchant power plant? Is there a national power pool where this electricity can be sold? MR. MARTIN: Are there any restrictions on the contract terms MS. BIERZWINSKY: Yes. That is part of what is new in Mexico. or can they be whatever the parties negotiate? There was no national power pool until the new legislation was MS. BIERZWINSKY: They can be whatever the parties enacted, so now there will be one. There is a newly-created negotiate. independent system operator that will run a wholesale electricity MR. MARTIN: What about the electricity price? Can it be what- market. That market will start operating for day-ahead sales on ever the parties work out? December 31, 2015 and for same-day sales on January 1, 2016. MS. BIERZWINSKY: Yes, more or less whatever the parties work MR. MARTIN: How confident are you the government will stick out on price. I think that the model will continue to be similar to to these timelines? what we have seen in the past, which will be based off the MR. McCOY: That is the key question. The government is rethink- market price with perhaps some discount. ing how fast it makes sense to implement the reforms, but it has 2 PROJECT FINANCE NEWSWIRE JULY 2015 Congress may be looking at a broader rewrite of stuck to all of its deadlines to date, and I believe the wholesale the corporate income tax code. The committee power pool will start operating next year as scheduled. must decide what can be included — for example, MS. BIERZWINSKY: I am pretty certain the government will whether to limit the bill only to tax benefits that stick to the timeline. have already expired — how long to extend and MR. MARTIN: So a high degree of confidence from both of you. whether to add offsets to pay the cost before the Will private intermediaries be able to trade electricity? tax extenders bill can make progress. MR. McCOY: Yes. That is the basic idea. Before the energy Any move to deal with extenders this summer reform, there was only a state utility company, CFE. Now the would be a break from recent practice. In 2014, idea is to increase the pool of suppliers in order to lower electric- Congress waited until three weeks before year ity rates. end, leaving companies little time to act on the MS. BIERZWINSKY: I think that is one of the great opportunities extensions and, in some cases, wastefully throw- in the new market because no one has the experience or the ing incentives retroactively at companies that technology currently to do this in Mexico. We have discussed this were supposed to induce the companies to do a lot internally. Whoever has that experience and can go to things that they had already done. Mexico and do that successfully right now — not wait several Meanwhile, production tax credits for wind years until the market is fully developed – will do well. If you are farms continue to take flak from House Republicans interested and able, I think this is the right time to offer those as battle lines form around a possible extension. services in Mexico. The US allows owners of new wind, biomass, MR. MARTIN: The national grid will remain in government geothermal, landfill gas, incremental hydroelectric hands under a new agency called CENACE. and ocean energy projects to claim production tax MR. McCOY: Yes. credits on the electricity sold to third parties from MR. MARTIN: All independent generators will have to have an such projects for the first 10 years after the projects interconnection agreement with CENACE. How easy will it be to are put in service. Production tax credits can also get such interconnection agreements? be claimed for producing “refined coal,” which MR.

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