Speaker 1[MUSIC] Welcome to Energy Unplugged, the go-to podcast on global energy transition. I'm Laura Picardo, advisory lead for the Mexican market at Aurora Energy Research. Today, we are heading to Mexico. We are actually recording this podcast from Mexico City. In the last years, we have seen a turning inflection point in the power market in this country. After several years of limited deployment of renewables, we have seen that a new chapter is coming in Mexico. New investment mechanisms are blooming, also accompanied by a restructuring of the regulatory structure of the power market in Mexico. Particularly interesting, it's that besides the renewable capacity that it's being incentivized in this market, it is actually accompanied as well by battery energy storage systems. This is a requirement, a mandatory requirement from the TSO or transmission system operator of the market. Today here to unpack the reality of the market in Mexico, we are with William Ute from Cubico Sustainable Investments. [MUSIC] >> Hi, Will. Thank you very much for joining us today here. >>
Speaker 2Thanks for having me, Laura. I'm really excited to be here. >>
Speaker 1Great. I know you're a manager for origination and execution in Cubico. You joined Cubico six years ago, but one and a half years ago, you decided to move to Mexico in order to grow the strategy of Cubico in the Latin American countries. William, you moved here in a very particularly interesting moment, just in the moment when the market started to change. What was your perception about the Mexican power market before landing here and afterwards? >>
Speaker 2It was perfect timing, right Laura? It was part by design, I think, and then also part by look how it's all fallen into place. Needless to say, Mexico is such a culturally, geographically, gastronomically rich country that when I was offered the opportunity to move here it was incredibly exciting, and I didn't need too many seconds to think about it, and it's proved such as well, and the team have given me a fantastic wholesome welcome. In terms of the power markets, it's been fascinating. What I did know that Mexico is on the precipice about to go through this step change. I think what surprised me is how quickly it's gone through this step change and how quickly the activity is restarted. >>
Speaker 1Definitely. Just actually as a quick reminder for the audience that are perhaps not that familiarized with Mexico. In the last one and a half years, we've seen a complete restructuring of the power market, right? In 2025, the new electricity law has been published along with the binding planning of the government in order to incentivize and boost more than 38 gigawatts of renewables until 2030. So very ambitious. Yes, very ambitious plan. Besides that, we also see as we mentioned that the collocation of battery energy storage systems are mandatory with the renewables, and this is also including a new regulation for the battery. So all these changes have just become true in the last one and a half years. >> Exactly. >> Yeah, because actually Cuvico started operations in Mexico in 2015. So Cuvico lived the full transformation of Mexico from the starting when the 2014 reforms did start to liberalize the market in Mexico, having new tenders, then afterwards with the government of AMLO, where we saw a slowdown of renewables from 2018-24 and now again the booming of renewables. So how has Cuvico cruised all these new events? >>
Speaker 2There's been a few changes along the way. >> Yes. >> Cuvico is really proud of our long-standing commitment to the Mexican market. It's one of the countries we've been in and had a presence in since our inception, like you say, in 2015. We completed the development of some projects we had then, successfully took them through the second auction and constructed those. They've been operational since 2018-2019. Then like you say, from 28 onwards, the market went through a period of slowdown. We had a strategic rethink about our commitment to the Mexican market and decided to stay present, focus on our projects that were in operations then, drive operational excellence in those projects. Our teams in Mexico City, on the sites in Aguascalientes and Nuevo Leon, have done a fantastic job and continue to do a fantastic job of managing those assets. In the meantime, we also took a strategic look at the market. Mexico has very, very strong fundamentals. So despite that stagnation, there's incredibly good solar and wind resource in the country. Structurally, there's a demand deficit and there is a need for new megawatts. Be those clean, there's a preference for clean, but there is a need for additional electrons in the system. Also importantly, from a macro perspective, Mexico has remained very attractive. It's an OECD economy, it's investment grade, and the electricity market here largely functions in USD. So those fundamentals kept us in the market. From about 2022 onwards, we decided to start making our steps, hoping for this moment to come now. So we decided to stay. We had the backing of our management in London and our shareholders in Canada, and then made a little step with the acquisition of a development pipeline and its small team, a couple of option agreements. Since then, we've been working to embed those projects in-house, the development and progress them through to this state today. I'm very happy to now say that having been through the tender of the mixed investment process, five of our projects have been awarded, which is a great achievement and very exciting for Cubico.
Speaker 1Yes, indeed. Congratulations for all these acquisitions. All the risk that you took the last years is now seeing the benefits of it, right? So for those that are not familiarized with the mixed investment schemes, perhaps it's useful to have a brief context on what that means, right? So the mixed investment schemes is a mechanism, a new mechanism pushed and incentivized by the government, in which a private developer and the state-owned company, CFE, partner together in order to incentivize the renewable projects, not only renewables, but also with batteries co-located, right? So as William, you were saying, congratulations. You have, as far as I remember, of top of my head, 400 megawatts of solar, 300 megawatts of wind and 500 megawatt hours of storage.
Speaker 2Absolutely. Yeah, it's no small feat to get that online in time.
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Speaker 1So you're one of the biggest winners in this mixed investment scheme. So can you tell us a bit how do they look like on how the investment is structured? How is it the operational development as well from the project going forward?
Speaker 2Sure. So this, I think, is a pioneering structure, certainly for Mexico and I think probably most in the region. Like you say, it's a long-term partnership. It's a joint venture between CFE as the state-owned utility here in Mexico and a series of private developers, in my case, Cubico. And we've entered this joint venture. It's a long-term agreement of 25 years. So it's really a strategic partnership between us. And with that, we provide the projects. We're developing the projects. We will construct the projects and finance the projects through our own equity and through external funding sources as well. Meanwhile, CFE contribute towards the projects planning and permitting as part of their role within the government and most significantly, CFE contribute a 25-year off-take, guaranteed off-take of 70% of the energy and the associated products with it.
Speaker 1That's interesting because also talking to a different market participants, there are different interpretations on how this investment will be structured. So you're saying that is a 70-30% split of the generation. Others think it's from the project. Others think it's only from renewable. So how are you dealing with all this uncertainty? Because if there are diverse opinions, I guess you have to be very solid on the opinion you have and go forward. So how are you dealing with that?
Speaker 2Absolutely. It's a challenge. I think it's a challenge of what we were talking about before, the market moving so quickly here in Mexico. Everybody is running to understand the nuances of the regulation. As the regulation comes out, quite often coming out simultaneously between different parts. And so you've got to make a difference between the regulation within the DAGs on the best side, but also then the mixed investments. So we're fortunate at Cubico to have a fantastic team here across the commercial side, the technical side, the legal side as well. We're supported by a fantastic set of advisors that help us understand all of the different structures and how we believe the off-take will work between the different products, between the battery and between the renewables plan, et cetera. So I think we're comfortable how we've decided to structure it, and I think it's a consequence of all of these changes in the market. We'll see players with a diverse set of opinions, and soon, I think, as they come to fruition these projects, we'll see a convergence of how this structure will take shape.
Speaker 1Amazing. I understand you are having a solid support, as you were saying, throughout all the different departments and inside of the projects. However, the uncertainty is real, right? And perhaps not all developers or the lenders have the full perspective as Cubico can have. So what would you think or say that the lenders should look at? What are their main concerns in order to finance these kind of investments?
Speaker 2I think another part on the uncertainty that others face is Cubico has really benefited going through this scheme for having made that commitment back in 2018, again in 2022, to remain present. So we're very close to the market with the set of advisors, and those relationships have really helped form our understanding of the structure and the scheme. From a lender's perspective, and this has been central to the establishment of the mixed investment scheme, I know it's been front and center of CFE in the government's mind when they've put this scheme together, is ensuring it's bankable. We are talking multi-gigawatts deployment in renewables in Mexico in the immediate future, and you need a lot of financial capacity within the market to fund all of this, both on the equity side, also on the debt side as well. And so I'm pleased to say that the lenders, be those local banks, international project finance banks, development banks, export credit agencies, they're all very positive about the scheme. It's an incredibly attractive scheme from their perspective. We're talking about long-term contracted offtake with a state-backed utility that's investment grade. Those opportunities don't come around too often, and so it's very attractive. The pricing is very competitive. I think there's liquidity there for this first round of projects in ample amounts. And what we're seeing is actually pricing on the debt side getting close to where you would see it in more established renewables markets like Chile, et cetera, which I think is a really good sign that the markets, taking a look at the structure, found it very attractive and is excited to deploy capital in Mexico again.
Speaker 1Yes, definitely. Now that you refer to Chile, I would like to understand, because Chile is a great example about that, first came the renewable deployment, afterwards the battery in order to solve all the curtailment, all the challenges that a system with a high solar penetration can have. Actually, Mexico is not taking that piece of action. It's deploying directly renewable projects with storage, including this mixed investment. So would you say that this is rather a transitional mechanism for the Mexican power market to be consolidated, or is it rather a fundamental investment decision that will stay along the journey in Mexico?
Speaker 2That's a good question. It's worth noting, as you said at the beginning, there's a couple of different schemes that have been unveiled in Mexico recently. So at the beginning of the year, we had a first tender which was actually for fully private projects. So there's certainly a role for private projects in this market today, and then more recently we've had the mixed investment tender. The private projects tender was very successful, three gigawatts awarded in January, February this year, and then the mixed investment tender also very successful in June, July this year. I think the mixed investment structure is here to stay. Like I said, I think it's a pioneering mechanism for the government to form long-term partnerships with private developers, leveraging the skills and the experience and the capital that the likes of Cubico have, alongside the structure and the market position that CFE has here in Mexico, to have a growth in renewables and deliver electrons to the country's electricity system, which is in need of that.
Speaker 1Yeah, definitely. Although I would say the mixed investment scheme has had more success than the private investment scheme. Why do you think is that? Is it because of the project development that it was perhaps the first tender, so everyone was kind of hyped about it without doing the maths and the robust financial modelling, or how do you think this can have affected the decisions?
Speaker 2I think, and it's worth for the audience, the initial phase of the mixed investment was four or five times over subscribed. So I think that's a consequence of when you have a market that's stagnated for six years more or less, there's a lot of us in the industry that are very excited and ready to go at this. I think as you saw through the different rounds of the mixed investment scheme, that was whittled down to the projects that are, first of all, most strategically located. One of the big benefits of the mixed investment scheme and the private scheme overall is the Mexican government's strategic planning. I think that's really important and a good lesson. They've taken a planning forward approach to development and not just started to tender where projects are located but not near a load source. And so then they've gone through different criteria about how advanced they are, and I think that's whittled down to those projects that are strategically located and most advanced. And then thirdly, with the most competitive commercials, which is where we play our role on the cubico side within the commercial team, is making sure that we've got a project that is commercially viable for us and commercially attractive for CFE.
Speaker 1Yes, that's amazing. Actually, we touched already upon the risks and opportunities at the project level, based on the strategic and the commercial position of each of the projects. I wanted also to ask you your opinion, William, on which do you think are the key risks and opportunities, but more at the system level for the Mexican power market as a whole?
Speaker 2As a whole, I think, first of all, I would say the execution of these projects that have been recently awarded. I think that's the number one risk and challenge in the immediate term is for the industry as a whole. For us as a developer and IPP, for CFE as the state-owned utility, for other governmental agencies, our suppliers and contractors across the main equipment, BOP, lending side, the whole sector now has to rise to this challenge to deploy these megawatts very, very rapidly. We're talking, and it's one of the positives of the scheme and this mixed investment tender, but the timelines are incredibly tight. Our first project, which is 117 megawatt co-located PV and bez in Altamira, in Tamaulipas, that is expected to be starting construction in December this year. And then the other four projects that we've got are April next year, so it's an incredibly compressed timeline. And delivering on that, executing on that as an industry is, I think, the biggest challenge. If we then look to the longer term, I think there's two other areas. First of all, the transmission system needs to keep a pace. The batteries and the inclusion of batteries, and for the audience to help understand, a battery here is part of your grid studies, so it's mandatory inclusion in your renewable site. It's also not maybe what you see in other markets where it's co-located, but not necessarily hybridized and they kind of function as two separate assets. This is genuinely one asset, one point of interconnection, one metering system in the mixed investment scheme. So it's incredibly integrated. That will really help with localized and regionalized system management, the intermittency of our resource, but also managing some congestion in the local systems. But what batteries don't negate is the necessity to invest in the whole transmission system and make sure that the country is connected, particularly in a market like Mexico, which is nodal. So that's really important. And then my third one that I think is really imperative for the whole industry is on the social license. It is something that is very important to Cubico, what we do in our operational projects with our communities, the support and the investment that we give our local communities on our operating projects. It's something that we embed into our development projects right from the beginning and through to realization and construction and operation as they'll become. And I think unless you bring those local communities along and invest in those in a long-term, sustainable and impactful way, then you're not going to have had a success of what this whole transition could have brought to Mexico.
Speaker 1Definitely, because actually the local community support could be one way a risk or an opportunity, right? Especially in the Mexican country in which local communities are very diverse, very fragmented and can really be a blockade for projects. As we have seen as well some of the projects going down because of local community defense or protection. So definitely I think this is a very relevant point on the Mexican market. As well as you were saying about the batteries being part of the grid and also in order to avoid or reduce the congestion in the grid, I would say or add there and let me know if you agree with me me, that's something interesting in the Mexican market. as well, that Mexico is learning by doing on how to manage all the renewable generation, how to mitigate the variability with the batteries and all these points are just a learning curve for the Mexican market. That's why as well we were mentioning that there were so many uncertainties on how the investment will be structured, how the batteries will be operated. So I would say this is same way, right? It can be a risk and either opportunity for Mexico.
Speaker 2There's two sides to many many coins, many pesos here I would say because it's one of the great challenges. It's also where we see the opportunity in the market and why it's interesting, why personally it's exciting to be here working, is that freshness and how new many of these regulations are. We're still understanding them at the same time as trying to implement our investments and realize projects.
Speaker 1Definitely and if I can add one of the risks or I would like to know if you consider it a risk or not, it's about the competitive landscape in Mexico because it's slightly different to other European markets or other Latin American markets. The competitive landscape is very segmented or fragmented, sorry, in terms that there are many small developers, utilities are not that present. How do you think that can affect system-wise the operation of Mexico?
Speaker 2It's been an interesting transition that we are in the middle of but also seen for the last couple of years. A lot of the large European utilities have decided to step back from the market. I think that is more a reflection of their global macro strategy where I think a lot of them are prioritizing investments in transmission and distribution in networks, be that in Europe or the US. I think it's less a reflection of where Mexico is but I'm sure those stagnant years didn't help that. What you've seen come in its place is this set of players, local developers like you say, who are more focused on realizing projects through to ready to build an NTP and then also a series of global IPPs like Cubico backed by usually long-term sustainable capital, pension funds or private equity and those are the ones that I think we really see coming to the fore. In the mixed investment scheme the government has selected both. I think it goes back to the criteria that I was talking about both but I think you really see the role of perhaps those more institutionally backed IPPs rather than the utilities and I think that goes to the level of specialism and focus that those players like Cubico can bring to a market like Mexico.
Speaker 1Yeah and this brings me to actually to the next question about Cubico. Cubico is present in other regions in Latin America. It's the largest developer in Uruguay and the third largest as well in Colombia. So I wanted to ask you which are the takeaways that Cubico can bring to the Mexican market or how Mexico does compare through all these rest of Latin American markets where you are operational? Are there any key learnings that you can bring to Mexico?
Speaker 2I can't claim to be able to give them too much counsel because I think they know the market better than I do but we're really fortunate to have a strong solid foundation across the region. I think we're one of the most attractive regional platforms operating where we do here in Mexico, Uruguay and Colombia. We of course constantly assess the region to make sure that we're an attractive regional platform for Cubico and for our shareholders and that involves assessing different countries as they go through their ups and downs in the region. I think if you're looking at what's interesting and looking one to Uruguay and two to Chile, I think there's a couple of lessons that you can see. One in Uruguay, Ute, the state-owned utility is I think a really interesting and good model and it's proven itself in the long-term partnership and cooperation between a private developer and the state-owned utility to ensure that that services the needs of Uruguay and then on the other side in Chile I think it's almost a lesson from what they've learned having gone through their peak years of deploying a lot of renewables very quickly perhaps without the understanding of what system impacts that may have in terms of being in a nodal price market with basis risk with insufficient transmission and distribution and having not implemented batteries from the beginning. So I think you can see that in some of the things that Mexico is doing. They're taking the lessons from the region. I know it was as they were been designing these schemes they've been very open to looking and learning from elsewhere and I think you can see that in a few places.
Speaker 1Yeah it's amazing right that we can look at Chile as a nodal market to see how they face all the congestions and also on the transmission side from Uruguay. So we will see and monitor very closely these markets on how they can be a best practice for Mexico and actually now almost closing this episode I wanted also to ask you William you mentioned what Mexico could learn from other Latin American markets what do you think that Mexico can teach one other Latin American countries and second to yourself on you the perception on the power markets.
Speaker 2I love this question because I think a lot of the time people have been asking it the first way around about what Mexico can love. There's a lot to be able to learn from the transmission transition that Mexico's going on now and for me it goes back to what I said at the beginning the speed of change here has been incredible. When you have the political will and those fundamentals that I talked about you can really enact change very very quickly. If we think this administration came in in 2024 late 2024 we're not even in two years into this administration we've gone through constitutional change sectoral new legislation right through to the details of the DAGs that you talked about on the batteries and we've run tenders where we've got circa 10 gigawatts of renewables coming online within a year and a half that's incredible and I think quite often if I compare it back to when I was looking at European markets where the time to develop and realize a project is incredibly long and there's a sense I often feel of helplessness if that's just the way it is and we can't speed it up but what I've learned from Mexico is when you've got all of those categories in there and that political will is really key you can really enact change and the players in the market like cubico like other our peers and everyone else that's in in the industry around projects we can deliver projects and deliver this transition very quickly we just need the structures in place
Speaker 1to to get us there yeah that's fantastic and actually thinking that Mexico is still a gas reliant market but they are doing so much incentivations and so much push and uptake to renewables to change that in so little time that it's very touching to see all the movements that we are having just the last question and keep me honest because we are in Mexico I would like to ask you which is your favorite
Speaker 2taco this this is an impossible question I think oh really I will I will have to go I've got a I've got a guy a guy called memo who every weekend at the bottom of my street he he brings his tacos de babacoa stand to me and I go there religiously to warm the soul with a consummate and take a couple of tacos de babacoa I I think that's got to be my favorite
Speaker 1ritual that's amazing I think I will join you one day of these please thank you very much
Speaker 2William for for joining us thank you very much for having me Laura
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