Regulation and disinterest in renewables alienate investors in Mexico’s power sector: Moody’s

Reform of Electricity industry law (LIE), promoted in 2021 by the president Andrés Manuel López Obrador in order to strengthen the state-owned Comision Federal de Electricidad (CFE) alienated investors domestic and foreign.

This Tuesday the rating agency based in New York (USA), Moody’s Corporation, reported by a report which sees no increase in investments private sector in the Mexican electricity sector in next three years, due to a series of controversial changes to the regulatory framework in the industry, which could affect some existing contracts.

“The recent measures adopted by the federal government to modify the regulatory framework of the Mexican energy sector could have a negative impact on some existing contracts; therefore, we do not expect an increase in private investment in the electricity sector over the next three years “

The LIE has even generated huge rejection among investors, while opponents accuse that violates competition and violates international treaties, was frozen in court and suspended his claim for the time being.

In this regard, López Obrador recently stated that, if necessary, could present constitutional reforms to Congress and mentioned the possibility that we must give more support for CFE against private companies.

Moody’s also referred to the Business plan of the CFE, which plans to invest nearly 382,000 million pesos (USD 18,790 million) until 2026 in projects, mainly production, although it also includes a part of transmission and distribution and, to a lesser extent, in telecommunications.

“This strategy involves financial and execution risks”, Moody’s said in its report, adding that there is uncertainty on the way in which it will finance 30% of the initiatives of its plan and that given the expected lack of private investment due to the evolution of the legal framework, “it is probable” that the CFE should increase your debt for these projects.

“If half of the investments that the private sector is supposed to finance (15% of total investment) is financed by debt, we expect the debt ratio to increase to around 66.7% by 2024, compared to 61.7% registered in 2020 “

Another factor that has kept investments away is environmental problems and that they are increasingly important to creditors, so that the absence of a clear policy from Mexico and the CFE towards renewable energies, in addition to reducing carbon emissions, this would imply a less market access of debt.

“International carbon policies, including clean energy goals, are likely to require additional investment, which could lead to higher leverage, a negative credit factor.”

Although the American firm pointed out that the disinterestedness of the Crown Corporation for Clean Energy Sources will not have any short-term implications (negative Baa1 rating), yes this can cause a risk in the next three to five years.

It should be noted that CFE’s plan for the country’s transition to clean energy is to modernize eight hydropower plants to add a production capacity of 530 MW by 2025 and reduce CO2 emissions by 42% by 2024. .

But such a plan is threatened by droughts and could result in higher costs for the crown corporation. As water scarcity limits hydroelectric power production capacity, this deficit will have to be compensated by other energy sources.

“In addition, we consider that the CFE is confronted with risks resulting from waste and contamination linked to the production of nuclear energy, or through coal and fuel oil”

While many utilities face physical risks from climate change and decarbonization issues, most are able to try to recoup the costs of complying with environmental regulations.

But the government and the company that manages the controversial Manuel Bartlett criticized the renewable energy sector for an alleged exploitation risk for the security of the national electricity system.

KEEP READING: