Mexico Windpower: Investors enter but court sows uncertainty

Project finance activity in the Mexican wind and solar markets rocketed last year – but growth in the wind market is steady rather than spectacular.

Next week, the Mexican Wind Energy Association (AMDEE) and the Global Wind Energy Council are set to host their Mexico Windpower conference in Mexico City.

This comes at an interesting time for the Mexican wind industry. Bloomberg New Energy Finance reported last month that large project finance deals for wind and solar farms grew by a stunning 516% year-on-year to $6.2bn in 2017.

That isn’t only a wind figure, but it does show that there is a wave of investment into renewables projects in Mexico from which wind developers are benefiting. We should not underestimate the significance of this, given that that government only opened Mexico’s power system to private investors in 2013.

BNEF also raised the possibility that Mexico could overtake Brazil as the second most active renewables market in the Americas, after the US, in 2018. The BNEF statistics show that renewables project finance deals in Brazil in 2017 totalled $6.2bn too – exactly the same level as Mexico – with an annual rise of 10%.

So will Mexico overtake Brazil? It is an intriguing possibility – but, as far as wind is concerned, we still expect to see more growth in Brazil in the coming year.

First, this financial activity is not yet showing through in completed wind farms. Last year, wind farms with total headline capacity of 478MW were completed in Mexico to take total installed capacity to 4GW. In Brazil, the wind market grew to total installed capacity of 12.8GW after annual installations of 2GW.

Second, that $6.2bn investment figure for Mexican renewables in 2017 hides the fact that we can’t think of many large wind project finance deals reported last year.

A quick look in our deals database uncovers the $1.2bn close at the Eolica del Sur last May; the $600m close for Zuma’s 424MW Reynosa; and a $220m debt deal at Cubico’s 250MW El Mezquite, in which Cubico is also set to invest around $100m.

This represents good progress from the $1bn of wind farm project finance deals that the Global Wind Energy Council reported for 2015 and $900m for 2016. But it also highlights that solar is playing an important role in green growth too. We need to remember that the 516% growth quoted by BNEF takes into account solar deals too.

Indeed, the comparative importance of wind and solar is evident in Mexico’s 2016 and 2017 renewables auction results.

Wind developers picked up a solid 43% and 47% of available support in 2016 and 2017 tenders respectively, but more support went to solar both times. Companies including Enel, Engie and Ienova are winning vital government backing – Enel is planning to build wind farms totalling 593MW in Mexico, for example – but growth is steady rather than spectacular.

As a result, we expect wind farm completions and investments in Mexico to trail Brazil in 2018; and Mexico's leaders need to inject more momentum if the country is to hit a target of bringing $23.6bn investment into wind between 2017 and 2020.

That’s to be expected: Mexico is still developing a support system where Brazil has one that is up-and running – and, crucially, Brazil has kept attracting money through its recession.

And finally, we may not see all of the wind schemes that achieved project finance in 2017 resulting in completed schemes. Crucially, the Mexican Supreme Court last month ordered a halt to work on the 396MW Eolica del Sur, because it decided that the local Zapotec community had not been properly consulted about it.

Developers Macquarie and Mitsubishi started building the much-delayed project in November. This is after the court received the case against the project in September from 17 national and international human rights organisations, which also said that the development could cause environmental damage that would affect local people.

We still see a good chance that work on the scheme will re-start but, if Eolica del Sur is cancelled, then it would be a blow for the market and again highlight some of the teething problems that come with the establishment of a new market.