What impact will Mexico’s energy reform have on the renewable sector?
Changes in the energy sector have been going on for some years now. The regulation process started at the end of the last administration and has strengthened investment opportunities in the energy sector in Mexico.
We have been working on this since 1992, when the law was reformed and allowed private energy generation in our country. We are first-movers in cogeneration solutions and that works to our advantage. We welcome the structural reforms of the last three years, especially the energy regulation issue, which enables developing energy projects in Mexico. High costs of electricity and low fuel prices have turned an almost unexplored and underdeveloped market into an exciting prospect market.
We are investing in improving solutions for our customers, not only regarding savings, but for emissions reductions and reliability as well. We, as developers, invest our own resources in these solutions, which leads us to vigorous growth. It is a big chance for national companies, as well as foreign ones.
Renewable energies have huge potential in Mexico, yet this is not a consolidated sector due to a lack of an integral policy. What does the sector need to bloom?
I think there's a lack of government support on the tax rate issue. For instance, in Europe encouragements towards renewable energies exist, such as tax breaks, differentiated tariff rates, support through grants, etc. In Mexico we've taken very small steps in this direction. This could be good or bad; bad because it doesn’t allow us to grow at a faster pace and we end up competing against utility prices. The only competitive advantage we have is to offer discounts below utility prices. This is what matters to most. Although we have some advantages in terms of accelerated depreciation for imports of certain equipment, and in some cases even exemptions; we have no other support, or they are minimal. I think this is what has slowed down these projects.
The current driver in Mexico is high electricity rates, which has made renewables attractive. We see this not only in large renewable power plants, such as wind or hydraulic, but also on the solar cells market development, which has had a rapid takeoff in recent months. This has led to big and small projects - even for domestic use - which previously had an unattractive financial return because we were talking about 20 or 30 years, to have their payback in a few years’ time. We have also been favoured by lower costs of solar panels, pressured by those manufactured in China. Everyone is looking to lower energy costs, and one way to achieve it is by using these alternatives, where we have private investment, especially in generation. The attractive side of it is its low rates, lower than the ones paid to the Federal Electricity Commission (CFE).
CFE is a loss-making public company, with big labour liabilities, high production costs due to obsolescence and low productivity with high trade union costs. Mexico’s Government, wisely, instead of diverting social programmes resources or investing on infrastructure and power plants, is seeking private sector investment for auto generation. With this, the government is released of the financial burden, in order to continue supporting other needs, such as the energy demand of the domestic and business sectors, which could hardly be provided for by a renewable energy system or self-sufficiency.
You have worked closely with Nuevo Leon government to perform renewable projects, how do you see the collaboration between the private sector and the government?
We have a project that is now ten years old and at the time was unique in Mexico. We made a public-private partnership at state level when there was no history of it nationwide. The Public-Private Partnership Law was published at the end of the administration of former President Calderón.
has seen three local governor changes, several municipal administration changes, and our public-private partnership continues to be strong and will continue because it benefits everyone. Ours is a win-win project. The private investors win; the government wins with the energy discounts we offer and, above all, the environment wins, as we are reducing greenhouse gases emission.
I think these types of public-private partnerships are the future. Hillary Clinton, former US Secretary of State, came to Monterrey and said it as well: public-private partnerships are the future of Mexico and the world. Government does not have enough resources to invest in many areas and this is why we need structural reforms – so private investors and government can partner together in order to develop strategic sectors such as energy, telecommunications and medical, among others; in order to grow fast and sustainably. I believe that public-private partnerships are here to stay and will make our country grow.
How has the recent global crisis affect the industry, in terms of gas prices?
We have a carbon credit trade project with the Danish Government through the Clean Development Mechanism (CDM) for emission reduction. We know that the Danish government, among other European countries, have withdrawn their funds to continue financing emission reduction projects worldwide.
The European crisis has closed some important markets for products and services transactions. On the other hand, we should point out that the Latin American market has strengthened and we must see it as an opportunity for growth. European companies who didn’t see Mexico as an attractive market are now changing their mind-set. We have growth, investment opportunities, financing and a developing market, while there is none of this in Europe. Mexico is full of potential; we need to seize the moment.
At SEISA we value the competition, so customers can compare which company will carry out their cogeneration or self-sufficiency system. We have recently had talks with Spanish wind power companies to create alliances in order to combine SEISA’s experience in Mexico with their intellectual capital and know how; and seek collaboration opportunities.
What kind of opportunities could British investors find in the renewables sector in Mexico?
In SEISA we have great experience with the UK. Our first partner in our biogas energy project, back in 2000, was British. He was our technologist, who developed the local project with the Nuevo Leon government. History shows that British are pioneers in the use of landfill gas for electricity generation; and we capitalised on this company’s ability and experience. I admire the British especially for their ability to develop technology solutions, and their access to capital for investment.
There are good co-investment opportunities in Mexico for Britain as well as other countries. We must make the most of our local experiences and develop in collaboration energy projects, or any other kind. The British Consulate in Monterrey is very active in this regard, constantly looking for commercial opportunities, which I think are important to find and work together to flourish.
How important are strategic alliances in SEISA’s business model?
We are an orthodox and conservative family business, yet in recent times we have tried to promote strategic alliances through which we can exchange mutual experiences to develop joint projects. We don’t usually seek partnerships; however, we understand that if we want to grow, and do it quickly, we’ll have to form alliances, seek synergies and find schemes which can provide two-way capital, experience and/or skills, either through service, support or knowledge. Eventually we could seek some sort of co-investment.
What does SEISA look for in a potential partner?
We are currently supporting Grupo Cydsa in their cogeneration, because they have just acquired a Rolls Royce turbine, first of its kind in Mexico, which is a great challenge. We are giving general consulting support, making the most of SEISA’s experience and knowledge through our Technical Group in order to supervise and support Cydsa’s work in its Veracruz plant.
We also have a very strong partnership with Kawasaki. We use their turbines in our cogeneration, but we are trying to develop a new range of products for the Mexican market, so we are analysing other alternatives as well in order to know if we should continue with the Japanese or seek new partnerships with other companies. Rolls Royce is a well-known company, not only in the automotive industry, but also in aeronautics and power generation, which is why we are also taking them into consideration. We are currently analysing our best option to bring these products to Mexico, and which company we should sit down with and negotiate.
I think that the UK is technologically more advanced than Mexico. They have a lot to offer, whether it is equipment, products, services, etc. we can even establish a two-way alliance with mutual benefits for both.
SEISA is a pioneer in cogeneration in Mexico, what have been your main challenges throughout the years?
The main challenge we face has been the lack of knowledge surrounding cogeneration; this is something we still have to work on as a country. Developing a project where your venture capital provides savings to third parties over a process that takes 10 or 15 years, is not an easy task. There is always a certain degree of uncertainty; this may be because of the type of customers we deal with, since they are not high-risk players; so a great deal must be done in terms of convincing them.
One of our biggest challenges was settling on the idea and taking it as a mutual risk project in the long term. Another big challenge we faced was the mid-90’s devaluation, which impacted on virtually all imported equipment and was ultimately reflected on the costs of project developments. Then came the rise of natural gas price and its impact on the sector; although we now think that prices will remain relatively stable and low for the next 15 years thanks to shale gas.
It has been a complex process. We have been in the business for 20 years now, and although it has not been easy, we think the outlook for growth is hopeful and optimistic for all involved in the energy sector in Mexico.
Can you tell us about the cogeneration packages and the three models you offer: turn-key, outsourcing and leasing?
The industry is generally looking for someone to risk his money for you; for it is well known that other people’s money is cheaper. The big players have understood that if they venture capital, financial return is short term. But generally, due to expensive and complex funding, one tends to look for third parties. This also allows you to focus on your core business. This is our most developed model, outsourcing.
We have also leasing projects with companies who have understood its importance. It’s good to have someone come and take care of things for you; but if you are willing to take risks in the energy sector, leasing gives you the chance to take advantage of the prevailing gas and electric conditions. Net present value is higher in this model. Not everyone participates, but some companies are certainly doing it.
We have only two turn-key clients; one in Mexico City and the other in Colombia. They bought our equipment and we helped install it. They contracted the long-term service agreement, which is long-term maintenance.
Those are the three models we have. We had one called Integral Energy Service, in which we took the risks of gas costs and the client kept part of the savings. We don’t offer it anymore, since our clients prefer the savings division due to current gas stability and low costs.
We still have to think about the financing issue. When we talk about leasing, the bank is interested because a payment guarantee exists. But when it comes to savings, banks are fearful because of gas price fluctuation in recent times. I’m sure this will disappear as the stability of gas and electricity rates will make banks look at these projects as a great opportunity to fund.
The fact that our clients don’t have to invest in expensive equipment and can concentrate and focus investment on their chore business is something very attractive.
There are not many companies in Mexico that do what we do, I would say that SEISA is the only one; more so when foreign companies, many of them European, have no money to invest on third parties or risk their resources on a long-term payback. Financing exists in Europe, the money is there and rates are not very high; getting access to it is the hard part.
What final message would you like to convey to our readers?
We are the first movers in the market and we are still in business, despite the crises the country has seen. We always honour our contracts; even when natural gas was at $13 USD we never doubted. We have endured through difficult years; we have the experience, not only to develop any project, but to operate and maintain them as well. You won’t find many companies that operate power plants in Mexico, not with our expertise.
We are a group of engineers who specialise in energy; their backgrounds and experience are with giants such as Iberdrola. We have a lot of experience in what we do. And what we do, we do very well.
We are a family group; however our reputation in the industry is consolidated. Our customers recommend us to others, including their competitors. We play an important role in the industry; our clients tell their competitors: "Go to SEISA and have them help you with cogeneration". This is what we do, and even though our customers have certain competitive advantages with our cogenerations, they recommend us to their competitors. As they say, “we are competitors, but we need to solve common problems working together”.
We’ve been doing this for 20 years. We are the ones you can trust. Our sister companies are in charge of cogeneration equipment packaging and the design and construction of heat recovery equipment. As you see we offer integrated systems. We have three companies in the US and we sell their products and services in Mexico. We want to invest in the energy sector, as we have been doing so far throughout the years.