Emerging Fuel Supply Issues in Mexican IPP Project Financing

Abstract

The environment for Mexican finance has improved substantially to the point where the country enjoys an investment-grade sovereign credit rating and private lenders increasingly are willing to lend without any coverage from ECAs or multilateral entities. The energy sector generally has risen with the economy as a whole and a largely successful IPP program continues to evolve. However, there are indications that structural gas sector reforms and contractual risk management in IPPs' gas purchases from PEMEX affiliates may not be keeping pace with reform in other areas. To the extent that IPP projects bear disproportionate fuel-supply risks, lenders will need to protect their interests through more onerous financing terms and greater sponsor support. As a consequence, power from IPPs may become more expensive, reducing the potential benefits of IPP power in Mexico.