CONTINGENT LINES FOR RENEWABLE ENERGY

The Financing Program for Investment and Risk Management in Gas and Clean Energy Projects ( ME-L1172 ) provides support to Bancomext (Mexico’s National Bank for Foreign Trade) for the financial structuring of clean energy generation projects. Special risks associated with such projects are relatively new to Mexico (and to the LAC region in general) and the local baking system’s capacity to model and understand them is very incipient.

A profound Energy Reform started in Mexico in 2014 and the impacts of this on the financial markets and clean energy developments (and other generation) are yet to be realized. The elimination of entry barriers to the power generation market is bound to bring benefits in the form of a better-functioning system and increased use of cleaner energy sources. But despite these developments, the new competition framework also introduces some significant challenges. With an ongoing liberalization of the electricity market, one of the most critical consequences of the recent reform, the risks for power generation projects become larger and discourage further investment. On one hand, uncertainty about post-reform price trends poses an additional barrier to the development of clean energy projects, by increasing the risk that revenues will shrink because of a potential fall in prices on the spot market. Second, the new market is expected to see an increase in the number of users that qualify for bilateral contracts (“off-takers”), and this introduces a greater risk with respect to those users’ capacity to honor their energy purchase commitments to the power producers. There is no doubt that the variability in prices and in the quality of the off-takers poses incremental risks that further inhibit project financing under suitable conditions, and could affect the incentives for such investments, which face important risks inherent to the very nature of the projects (climatic variability, construction and operating risks, etc.). In this context, the active role of development banks becomes more relevant.

The program will facilitate the development of a tool that shall serve as an aid to model market risk and evaluate projects. Moreover, the program will promote the implementation of a contingent subordinated debt product to help mitigate the uncertainty about the evolution of electricity prices post creation of the wholesale electricity market in Mexico. This financial mechanism allows for covering repayment risk derived from price movements, providing an innovative alternative for developers and financiers to address the financial barrier that generation projects face.

Based on its solid relationship with the IDB, Bancomext will be channeling program resources to eligible projects for up to US$ 200 million, in the form of direct loans and contingent loans to cover market risks (including the price and off-taker risks, which in the case of Mexico may negatively impact the expected cash flow of projects due to unforeseen market developments). This will result in the installation of more than 400MW of clean energy and 1 million tons of CO2 reduced annually. With support from the program, the local banking system will be able to secure financing of projects with the future cash flows of each project, avoiding the concentration of risk and increasing the portfolio of financing instruments, offering a more comprehensive financial solution package to energy projects.

Project Evaluation Tool

  • Minimun Price (Project Viability)
  • Amount of Coverage/Credit Line
  • Cost of Coverage/Credit Line

By implementing a range of financial and risk management instruments locally, the program complements the opportunities that the Mexican government’s reform has opened to private actors to participate more actively in the electricity sector. This in turn will help to meet the country’s electricity demand in the medium term, as well as bring positive externalities not only for those involved with investments in generation, but also to consumers that can benefit from the opportunities offered by a more competitive and efficient electricity sector.

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