In the world of business, identifying and seizing the right opportunities is essential for companies that are determined to succeed. With all the reforms that the country is currently undergoing, Mexico is full of possibilities for those players that are smart enough to spot them. In this regard, one of the most interesting is the electricity sector. While power generation continues to attract most of the attention, investors are starting to realize the huge potential that electricity transmission and distribution projects have.

Estimated investments needed in power generation, distribution, and transmission projects (Source: PwC).

Estimated investments needed in power generation, distribution, and transmission projects (Source: PwC).

According to Eduardo Reyes, Head of the Energy and Infrastructure Department at PwC, the electricity transmission network used to grow 1% annually before the approval of the Energy Reform. This pace was not enough to catch up with the electricity demand, which was growing at an annual rate of 3%. This situation has caused an overload in the transmission lines’ capacity, which might get worse with the interconnection of new renewable energy projects to the grid if no actions are taken. The Ministry of Energy forecasts that the demand for electricity will grow 3.5% annually. To provide the transmission and distribution infrastructure needed to cover the future demand, the Development Program of the National Electricity System (PRODESEN) estimates that more than US$31,710 million will be invested in this sector.

The Law of the Electricity Industry states that the Mexican State is in charge of planning the expansion of the national grid trough CENACE, the Technical System Operator. Moreover, CENACE is entrusted with the responsibility of operating the National Electric System as well as managing the wholesale market. Since transmission and distribution activities are considered of public interest, these will continue to be operated by CFE, a now productive enterprise of the State. Still, private parties are allowed to form partnerships or enter into agreements with CFE to participate in the financing, installation, management, operation and maintenance, and expansion of transmission and distribution infrastructure.

In this sense, CENACE is entitled to acquire transmission services from a third party through long-term capacity contracts. Under this scheme, transmission and distribution companies will get a fixed tariff for their services during a specified period. According to Luis Miguel Labardini, an energy expert from law firm Marcos y Asociados, this scheme will result advantageous for companies winning the contracts, as it will not represent any market risk. As previously mentioned, CFE will keep control of transmission and distribution operations, but this will not be an obstacle for private companies in getting attractive and safe returns of investments in this area.

According to the Ministry of Energy, the first tender for transmission projects will take place during the second trimester of 2016. The tendered project entails to a 1,200 km direct transmission line connecting the southeast and the central regions of the country, with a capacity of 3,000 MW. With the attractive features that this sector offers to private investors, it is expected that an important number of companies will be interested in participating in the tender. The development of this project will be closely followed by several actors, as it will be an example of what private companies might expect to achieve under the new regulatory scheme.

Sources: PwC, PwC, Reforma (print edition 04/01/16)

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