Private sector steps in after Mexico cancels public power auction

A privately organised power auction in Mexico could give developers a new investment opportunity after a government-backed bidding process was cancelled earlier this year.

The new administration of Mexican president Andrés Manuel López Obrador, who took office in December 2018, has sought to strengthen the country’s state-owned electricity company Comisión Federal de Electricidad by making CFE focus on generating electricity itself, rather than contracting with private developers. The decision to call off a long-anticipated power auction in January was the clearest signal yet that opportunities for the private sector may be shrinking.

Bravos Energia, an energy management services company based in Mexico City founded in 2017 by Jeff Pavlovic and former Mexican energy ministry officials, is seeking to keep the private sector’s interest alive. According to Pavlovic, Bravos Energia’s role is to “facilitate market participation” in Mexico’s power market. To do this, the company is organising its own power auction, alongside electricity auction organiser Aklara.

Pavlovic told Infrastructure Investor that the private auction is not “filling the role” that the government played, which only offered contracts between developers and CFE-sponsored projects. “In our auction, only private, qualified retailers are allowed to buy in,” he said.

“Private buyers are allowed to use private processes to buy their product,” Pavlovic added. “The fact that it’s in a process that lets multiple buyers pool their demand and try to divide up the pieces of many different generator sources isn’t relevant, because this is a private contracting process.”

The auction has not yet officially launched but has released draft documents for potential participants to review. Pavlovic said many of the developers who planned to participate in the Mexican government’s auction have expressed interest in the private process. After nailing down auction rules, he said the goal is to award project contracts by the end of the year.

“What we’re interested in is finding the terms that make participation feasible for as many participants as possible,” Pavlovic said. “If the auctions are successful in matching a large quantity of demand with a large quantity of generation, it will make the market more efficient and help reduce costs for the electric system.”

According to Michael Harrington, a partner specialising in energy at emerging markets fund manager Actis, his firm’s portfolio companies will likely look at participating in Bravos Energia’s auction. He said the privately-organised auction is a “private-sector solution to a couple of concerns in the marketplace.”

“The marketplace is looking for further certainty and asking, ‘What is the government’s direction in terms of doing future auctions?’” Harrington said. “That’s the reason why something like the Bravos Energia auction coming up is met with openness. People look at it and think, ‘Maybe that is something that we can all participate in, in order to advance the needs of the market.’”