In early April, Iberdrola México said it was selling 8.539 MW of its assets to Mexico Infrastructure Partners (MIP). Most of the capacity is in the form of combined-cycle plants that operate under the independent power production scheme, along with some wind generation and private combined-cycles that participate in the Mexican wholesale electricity market.
In 2021, the total installed capacity in the country was around 90,000 MW, so the size of the transaction is important. The amount agreed for the transfer of assets, $6 billion, would make it one of the largest investment decisions in the energy sector during the government of President López Obrador.
Since December 2018, the president has made Spain’s Iberdrola one of his main villains. López Obrador for example suggested that Iberdrola has exerted undue influence on Mexico’s energy policy through the hiring of former public officials and influential politicians in the country.
MIP is a manager of infrastructure investment funds in Mexico, Colombia and Peru. Its portfolio of projects includes solar parks, highways, airports, water treatment plants and distribution projects. The gas sector is no stranger to MIP. It has a shareholding in the Energía Mayakan system, the gas pipeline that supplies the Yucatan peninsula. In the search for attractive and sustainable returns for its investors, MIP takes an active approach in the management of its investments so that the operational teams of the companies in which it invests work efficiently and are oriented towards achieving profitability.
Although the acquisition agreement is between private agents, the operation has captured media attention because for the Mexican government it is being touted as a nationalization of the electricity sector. The reason for this peculiar statement is that a public trust, the Fondo Nacional de Infraestructura (Fonadin) created in 2008 during the government of Felipe Calderón, is participating in financing the transaction.
Fonadin’s activities are focused on promoting the participation of public and private capital in infrastructure projects. Their actions may entail the granting of loans, capital contributions or guarantees that encourage the mobilization of private capital in projects with long-term investment horizons. In essence it is a state financial mechanism that assumes risks that market agents are not willing to take.
Despite the lack of clarity about the financial scheme agreed to between MIP and Fonadin, the Mexican government has said Comisión Federal de Electricidad (CFE) will not control 55% of the generation market. In contrast to the repeated accusations against Iberdrola, the government now says it welcomes private sector investment in renewable energy development in Mexico. Energy security improves not by expanding installed capacity but simply by moving ownership of these plants from the private to the public.
For the leader of the Senate and prominent member of the Morena party in power, presidential candidate Ricardo Monreal, the acquisition of these plants is part of Mexico’s efforts to achieve energy sovereignty. For Monreal, one of the potential candidates to succeed AMLO, with the acquisition of Iberdrola’s assets, the country will no longer depend excessively on energy imports.
The fact that these plants burn and will continue to burn gas from Texas is not mentioned. It is obvious that from a technical and energy balance perspective, the simple change of ownership of a group of combined-cycle plants should not have any perceptible effect on the inputs of electric power.
The interaction of the government with Iberdrola, despite the cordiality of recent communications, seems more the result of the end of a dispute, with ideological roots, than the convergence of interests with practical motivations. The trend points to an acceptance of the terms proposed by the government that seeks greater control over the energy sectors. Faced with the risk of ending up with stranded assets, the appropriate real option is to withdraw despite the promise of a market and the presence of solid fundamentals that point to higher expected returns.
It is no coincidence that Iberdrola decided to sell a significant fraction of its plants in Mexico just weeks after announcing its commitment to invest 5.3 billion euros in renewable energy projects in Brazil. However, a rational decision for a company may be a suboptimal result for the industry. On the one hand, the composition of the market does not change. But on the other hand, there is a potential loss of economic welfare because efficient agents are forced to give way to less efficient operators.
The acquisition could set a precedent for a greater participation of the state in the generation of electricity. The lack of transparency regarding the financial structure of the agreement leaves many doubts about the future development of public-private partnerships in the energy sector.
Although the inclusion of MIP in the scheme can be interpreted as a commitment by the Mexican government to work with the private sector, the announcement that CFE will take over the operation of the plants seems contrary to the practices of the investment fund. In its previous projects, MIP has intervened in different ways to ensure efficient operation of its physical assets. Hopefully, the plants continue on with the same operational and financial performance. Given the presence of public resources, it is important that Fonadin clarify the risks it is taking.
The energy balance in the short term will not change because the generation of these plants is baseload power on the grid. The same gas that is imported today to supply these plants will continue to flow at the same rate.
Given that the Mexican electricity market follows a marginalist approach, and therefore the efficiency of a plant does not explain electricity prices, there is no way that this benefits Mexican consumers in any way. Most likely the supply of gas for these plants will come from CFE marketing arm CFEnergía. This could reduce competitiveness. CFE and its subsidiaries will continue to gain market power in the natural gas and electricity industries.
