La Cámara de Compensación, Mexico’s new renewable energy clearinghouse

Summary: As Mexico’s third renewable energy auction looms, a significant change is taking place as part of its energy reforms: the offtaker is changing from a single established government entity, CFE, to a new clearinghouse with many buyers. Will investors learn to love their new counterparty? A brief analysis of the new Cámara’s structure and purpose.

About the publisherCarlos St. James is a leading advisor to energy investors, bankers and developers in emerging markets at Wood Group. He is also a board member of the Latin American & Caribbean Council on Renewable Energy (LAC-CORE) and publishes the Latin American Energy Review to help generate debate on the industry’s issues. His upcoming speaking engagements include:


Changes in Mexico’s upcoming third power auction may allow for a pause in the downward pricing trend seen last year (average price on the first auction was $53 per megawatt-hour (MWh); average of the second, $37/MWh). Pricing differentials for geographic areas may be enhanced a little (akin to the first auction), and there may be a new push for baseload renewables to complement intermittents like solar PV and wind: the outlook for biogas, biomass, geothermal, small hydro and waste-to-energy may be on the rise in coming auctions. (For a review of what took place in the first two auctions, please see Making sense of Mexico’s renewable energy auctions.)

But perhaps the most significant difference is the emergence of new buyers and a system that acts as a clearinghouse for it all.

Energy reform takes aim at the independent system operator

The country’s energy reforms are pushing to make its power market more sophisticated and efficient, and nowhere is this more apparent than in the creation of an independent system operator (ISO) that will have traits similar to those in the United States. (The U.S. has more than half a dozen ISOs, plus even more Regional Transmission Organizations). More on this below.

Mexico’s national center for energy control (CENACE) is the current ISO for the entire national grid and will remain in that role, allowing market participants to buy and sell power just like in the long term power purchase agreements (PPAs) of the auctions it administers.

In the first two auctions last year CENACE had only one offtaker: the government-owned utility, Comisión Federal de Electricidad (CFE). The new clearinghouse, the Cámara de Compensación (“CdeC”), allows this exchange to now take place with multiple private and public sector buyers. It will:

  • ensure delivery of the products sold under the PPAs. There will be one single PPA signed by each seller and by each buyer, and in each case the counterparty will be the CdeC itself;
  • manage — but may not guarantee — the risk of buyer non-payment, primarily by managing the credit quality of the participants on the buyer side;
  • manage all payments in a centralized manner;
  • house and manage all the guarantees and reserve funds;
  • approve and administer any amendments to PPAs, which will be applied to all PPAs equally across the board.

So what does all this mean?

Beginning with Auction 3 this year, the offtaker will no longer be CFE but rather the CdeC itself, who as middleman ensures that generators all deal with the same average credit risk.

So what about that risk? Before, with CFE as counterparty, a generator knew who they were dealing with: CFE has a soft guarantee from the Mexican government; its long term obligations have been reviewed by rating agencies and deemed investment grade. There’s a long history there. Bankers and investors can measure that risk.

But the new CdeC will not be rated – at least not initially. The CdeC will perform a credit analysis on each offtaker and pool the risk. Buyers will fall info four categories, each with different risk profiles. It will include multinational blue chips operating in Mexico — but also much smaller firms. It will be CdeC’s job to ensure adequate overall credit quality, and importantly, to persuade the marketplace that the risk is acceptable and measureable. It will probably distance itself from any perceived sovereign guarantee.

From now on, the PPA’s risk will not be a specific company but the Mexican electric market as a whole. To put it in a regional context, Mexico’s new clearinghouse will be closer to Chile’s PMGD market (a twist on distributed generation whereby you supply energy to the grid with periodic repricings, and where offtaker risk is the electric market as a whole) than to the traditional Latin America structure of selling to the government utility.

The CdeC will have a safety net in the form of a reserve fund into which all parties will pay to give it liquidity, and will also house the performance guarantees from each party (if I have this right, bid bonds will have to be posted along the lines of $90,500/offer; $19,600/MW; and $4.50/CEL).

The tenor conflict

Thus far the above is a reasonable market-based solution and its success depends on proper execution by the government. But we have not addressed the single most important conflict in setting up the clearinghouse: the mismatch in desired tenors. Herein lies the CdeC’s core value.

Generators want and need long term PPAs. Long enough to pay off debt: ideally 15 years. But offtakers typically do not want to commit to fixed pricing for longer than three years – five at most.

The Mexican government may initially make it mandatory for offtakers to sign PPAs of a longer tenor while at the same time open the door for much shorter PPAs: three year terms are already being promoted. But in the upcoming third auction the clearinghouse will likely be comprised overwhelmingly of CFE as offtaker with fifteen year PPAs so as to minimize any jarring to markets (and pricing) and facilitate the overall transition – coupled with a smaller bunch of shorter term PPAs, all of them of good credit risk. This will bring down the weighted average tenor to somewhere below 15 years.

Each subsequent auction will probably have less CFE in it plus shorter average tenors.

But how will this serve generators, who need the longest possible commitments? For this we look to the U.S. electric market, which has figured it out.

The Mexican clearinghouse is more likely to end up looking something like the PJM Interconnection than, say, ERCOT (the Electric Reliability Council of Texas). Bear with me for a moment. PJM and ERCOT are organizations that manage the flow of electric power in different parts of the United States. As mentioned above, ERCOT is an independent system operator (ISO); JPM is a regional transmission organization (RTO); they play comparable roles for our purposes here. (A tip of the hat to Que Advisors, LLC who pointed some of this out to me. Any errors are my own, though.)

While ERCOT has a scarcity pricing model and is perhaps more radical (spot prices can really shoot through the roof! – how very Texan of it), the PJM (named after its initial markets of Pennsylvania, New Jersey and Maryland but now comprising 20 states) has a cost-based pricing model – probably more acceptable in Mexico.

Either way, while in the U.S. market only some municipalities and utilities ever seek fifteen year PPAs, they are typically much shorter-term agreements than in Latin America. But the financial markets are sophisticated enough to allow for hedging of this. The standard is closer to three years. Those shorter term PPAs, once signed, can be discounted and used to build a power plant in a finance scheme that is closer to factoring than it is to project finance.

This in and of itself is not the end of the world. What it does, however, is open the door to the development of more complex financial hedging mechanisms that allow generators to still keep bankers and investors happy. One likely corollary effect is that generators in Mexico will have to hold more cash on their balance sheets. You are likely to also see the rise of energy marketing & trading firms such as Tenaska or EDF (the latter has approximately 28 GW under management in the U.S. market alone). Once a market floor is established and there is stability and confidence in a market with a series of shorter-term rotating PPAs, the inherent merchant risk at the tail end of bank loan repayments can be reduced to acceptable levels. This is why the CdeC is very likely to introduce changes gradually, so the market can absorb and buffer risks while the energy trading sector builds some local muscle. There will be a lot of money to be made at that end if you know what you’re doing.


Mexico’s clearinghouse will create the most sophisticated power market in Latin America and — once kinks are worked out — will establish it as the benchmark for the entire region. Countries like Argentina, in search for a replacement for their own uncreditworthy CAMMESA, should take note.

One last thing: I may be wrong about much of this. There are still a whole lot of unknowns and a lot of simultaneously moving parts. Do your own homework as info emerges — and hire great professionals to guide you through the process.


© Latin American Energy Review 2017

This report has been prepared by Carlos St. James for The Latin American Energy Review. The views expressed on this site are his own and do not reflect the views of Wood Group, its affiliates or business partners. This report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. It is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The report is based on information obtained from sources believed to be reliable but is not guaranteed as being accurate, nor is it a complete statement or summary of the securities, markets or developments referred to in the report. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Any opinions expressed herewith are subject to change without notice and The Latin American Energy Review is not under any obligation to update or keep current the information contained herein. The Latin American Energy Review accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this report. Additional information will be made available upon request.



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