Concerns ease over Mexican power sector reform, but threat to investment remains – analysts

Concerns over proposed constitutional reforms to Mexico's electric power sector have begun to ease, with debate on the initiative now postponed to 2022 at least.

But even if the reforms never pass, some analysts see that damage has already been done to investor sentiment and think the sector is unlikely to fully recover, particularly for private sector renewables, until the administration succeeds at some kind of reform or its efforts come to an end in 2024. 

“The reality is our base scenario has the reform not happening,” said Adrián Garza, Moody's VP and senior analyst for the Mexican electric power sector, in an interview with BNamericas.

“We still need to see whether they make adjustments and see what happens, but as it is now, we see it as very unlikely," said Garza.

Luis Gonzalí, VP and co-director of investments at Franklin Templeton, shared a similar view, “We don't think they’ll cancel it. I think it's going to die little by little,” he said speaking to BNamericas on Friday.

“And while that’s positive in the sense that it won’t happen, neither do we view that as super-positive since it implies the risk is still lingering out there, and that does nothing to help investor sentiment," said Gonzalí.

RISK SCENARIOS

Gonzalí presented the following Franklin Templeton summary of risk scenarios in Mexico on everything from COVID-19 to the electric power reforms in an event on Thursday.

Source: Franklin Templeton

With respect to the reforms, the negative scenario, which Franklin Templeton gives a 10% chance of occurring, is that the bill passes as it is in 2022, which Gonzalí said would have massive negative implications for private players in the electric power sector and renewables in particular. 

In the middle scenario (40%), Franklin Templeton sees the opposition and Morena – the party of President Andrés Manuel López Obrador (AMLO) – reaching a compromise with concessions that result in a less extreme version of the reform package passing either in 2022 or beyond.

“[Morena] could get certain concessions from the opposition, that is, pass a kind of light reform where the opposition makes concessions and something not so harmful ends up happening, but with some constitutional changes,” Gonzalí told BNamericas on Friday in a follow up to Thursday’s event. 

Morena could also threaten to push the reform again further down the road in order to win concessions on other points, perhaps at the electoral or social level, with the opposition conceding, “just as long as the reform isn’t passed,” he added. 

The positive case (50%), which Gonzalí sees as the most likely outcome, is that the legislation is postponed indefinitely, with legislators on both side kicking the can down the street until AMLO leaves office in 2024.

Asked by BNamericas whether the issue could remain a threat through the end of AMLO’s term in 2024, Gonzalí said, “More than a threat, … it would undermine the investment environment in the country, and that's what we see as something of concern.” 

PERSISTENT COMPLAINTS 

Even without this reform package, the government will likely continue to seek two central changes related to renewables and state-owned utility CFE, Garza explained.  

“The truth is that, time and time, again what the government’s been complaining about are the self-supply schemes [CFE basic supply contracts], which are shams,” said Garza. 

Rather than following the spirit of a self-supply contract, such as a car manufacturer powering a plant with its solar farm next door, companies using the contracts, devised on the sidelines of the 2013-2014 energy reforms, have set up something of a parallel electricity sales market, where power might be produced on one side of the country and delivered to a client on the another, with CFE left to handle any portage or distribution costs.

The other problem, Garza said, is intermittency, an issue that has begun to plague grid operators worldwide with accelerating contributions from wind and solar generation. 

Regardless, he said, Moody’s does not see the administration getting these issues resolved, at least not via the current reform package.

“If something were to end up getting passed, then we’d have to see exactly what concrete measures are taken, if it’s something very specific or more generalized, and from there we can determine its impact, as it’s very likely we’d have to look at it on a case-by-case basis,” said Garza.

“The message we’ve tried to convey in a variety of reports is that beyond the impacts that [the reforms] could have on our rated companies, which to date have not been much, the real impact is occurring on the investment climate, on the appetite that there could be on the part of the private sector to invest more in renewable energies,” said Garza. 

“The problem is that time continues to pass and that there's still uncertainty … what it has done is create a problem later, where the investment that was stopped today will translate into greater needs tomorrow, and it's very likely that it means greater costs for the country,” said Garza.