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Proprietary and Confidential — External Use Only
1 Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges � Brian Weihs
Proprietary and Confidential — External Use Only
Mexico Energy Reform &The New Electrical Energy Market
Brian Weihs, Managing Director & Head of Mexico, Kroll
February 21, 2016
New Opportunities & Challenges
Proprietary and Confidential — External Use Only
2 Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges � Brian Weihs
Mexico Energy Reform – Opportunities & Challenges
� Mexico’s Energy Reform
� Electrical Energy Reform
� Current Status of the Electrical Energy Reform
� Electrical Energy Investments
� Compliance Challenges
� Land Rights Issues
� Key Compliance Takeaways
Outline
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Proprietary and Confidential — External Use Only
3 Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges � Brian Weihs
Mexico’s Energy Reform� Includes oil, gas and electrical energy
� Previously monopolized by state enterprises – Pemex (oil and gas) and CFE (electrical)
� The reform opened significant aspects of these industries to private enterprise and converted Pemex and CFE into commercial enterprises
� Driven by inadequate investment by the state monopolies, inefficiency of development and production, and high energy prices to industry
� Key elements: (1) separation of functions (regulation and production/distribution), (2) incentivize competition, (3) transparency
� Required constitutional reform, secondary legislation, creation of new state agencies.
Proprietary and Confidential — External Use Only
4 Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges � Brian Weihs
Electrical Energy Reform� Why focus on electrical energy?
� Private investment in generation, to compete with CFE
� CENACE controls the National Electrical System and designs expansion of networks
� CFE builds and operates the networks (can contract private investors)
� Secretary of Finance (SCHP) sets consumer rates and CFE supplies consumer and commercial customers
� Wholesale and industrial supply open to market and rates set by market
� Clean Energy Certificates
� Renewable energy micro-producers can sell their energy
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Proprietary and Confidential — External Use Only
5 Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges � Brian Weihs
Structure of Reformed Electrical Energy Market
Proprietary and Confidential — External Use Only
6 Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges � Brian Weihs
Current Status of the Electrical Energy Reform� CFE restructured (10 new subsidiaries)
� CENACE restructured and strengthened
� CRE continues as regulator (licensing, rates)
� Spot market opened on January 31
� Existing market players are the usual suspects – CFE and Fenix (JV operated by Electrical Union)
� SENER anticipates a year before the market matures
� Analysts anticipate several years
� Difficulties in licensing, uncertainty about regulations
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Proprietary and Confidential — External Use Only
7 Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges � Brian Weihs
What is driving electrical energy investments?Expansion of gas supply, demand for electrical energy
Proprietary and Confidential — External Use Only
8 Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges � Brian Weihs
Renewable energy potentialFeasible generation scenarios to 2018 according to CENACE pre-
feasibility studies
*Graphic from PwC/CESPEDES Study Oct 2015
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Proprietary and Confidential — External Use Only
9 Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges � Brian Weihs
Compliance Challenges
� Continued allegations of corruption in large public bids
� Increased scrutiny
� New Transparency requirements in energy reform and in General
� New National Anti-Corruption System
� New anti-corruption prosecutor (not yet appointed)
� NAS not yet implemented – details unclear
� Application to state and municipalities - theoretical
� Same public entities
� Limited additional scrutiny
Bid Processes
Contracting processes
Proprietary and Confidential — External Use Only
10 Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges � Brian Weihs
Compliance Challenges (cont’d)
� Land rights and community issues
� State and municipal issues (licenses, taxes, land-use, etc.)
� Local partners
� Security
� Uncertainty and lack of clarity
� New obligations and enforcement
� New or revamped regulators
Local Issues
Regulatory issues
6
Proprietary and Confidential — External Use Only
11 Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges � Brian Weihs
Land rights issues� Numerous energy projects delayed or stopped by community and land issues
� La Parota hydroelectric project
� San Antonio hydroelectric project and others near Puebla
� Mareña wind project (Oaxaca)
� Morelos gas pipeline
� Challenges
� Land tenure and communal land possession (ejidos)
� Manipulation of land rights/prices
� Dependence on local partners
� Unclear processes
� International requirements of community consultation
Proprietary and Confidential — External Use Only
12 Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges � Brian Weihs
Key Takeaways for Compliance
� In-depth understanding of project challenges
� Regulatory
� Key partners, participants and stakeholders
� Local environment
� Detailed mapping of compliance requirements
� Risk factors related to partners, participants and stakeholdersHolistic (challenges above)
� Implementation of compliance program from Day One (first contact)
� Expert advice and support
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Proprietary and Confidential — External Use Only
13 Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges � Brian Weihs
Brian Weihs
Managing Director - Mexico
T +52 55 5279 7250
Thank You!