What you need to know about Mexico's Iberdrola asset purchase

Mexico's purchase of 13 Iberdrola power plants for US$6bn will involve the transfer of 77.6% of the company's assets in the country to a trust fund with public and private participation.

The deal was unveiled on Tuesday by the Mexican authorities and Iberdrola's top executives.

According to the Spanish firm, 8.54GW of capacity will change hands through the transaction, made up of 12 combined cycle plants and one 103MW wind farm, La Venta III in Oaxaca state.

The purchase includes 5GW of assets older than 16 years with 87% using the legacy independent producer (PIE) contract model. This means they will require permit renovations which could have led to operational hurdles had the permits been withheld, as has been the case for many private operators in Mexico.

The overwhelming majority of the plants are located in Mexico's northern states, including Tamaulipas, Nuevo León, Durango, Sinaloa, and Baja California.

While there is still a lack of key details about the operation's financing structure, the finance ministry said a new trust fund, managed by Mexico Infrastructure Partners (MIP), will own the power plants. The fund will be provided "the majority" of its capital by infrastructure fund Fonadin and other public sector entities, while private financial institutions will also participate.

Federal power utility CFE will become the new operator of the plants, which will continue to sell energy to the utility at prices set in their contracts, the ministry said.

Plants with combined capacity of 7.4GW sell power to CFE under the PIE model, which was grandfathered by the country’s 2014 energy reform. CFE then sells this power in the wholesale market (MEM) at a profit. The plants in question will only be allowed to access MEM directly once their PIE contract has expired. 

The government of President Andrés Manuel López Obrador (AMLO) has long had issues with PIE, considering that the supply contracts had unreasonably high prices. The contracts were created in 1992 to allow Mexican generation to grow rapidly without relinquishing CFE control. 

AMLO and other officials have often threatened to review the terms of all legacy contracts, and this was a key part of the government’s energy reform proposal that was rejected by congress last year.

"PIEs are legally, in accounting terms, and economically part of CFE. It's subsidiary CFE Generación V represents them in the wholesale market, they don't represent themselves," said Oscar Ocampo, an energy expert at competition-focused think tank IMCO in Mexico City.

"They operate under conditions set by CFE, sell their production through long-term contracts to CFE, and their results are part of the firm's assets and liabilities...Strictly speaking, they’re not increasing CFE's generation capacity [through this purchase]," he told BNamericas. 

Iberdrola power plant details

Plants with combined capacity of 1.4GW have active lawsuits against Mexican regulatory bodies due to limits placed on their operations, Iberdrola said. These plants, which are currently paralyzed, are the Topolobampo III, Monterrey III and IV, and Enertek assets.

After the sale, Iberdrola will be left with roughly 1GW of renewables, 1.2GW of combined cycle plants, and 102MW of cogeneration capacity in Mexico, down from 11GW. 

The company will also keep its 6GW renewables pipeline, which has faced development hurdles but could be resumed if Mexico's renewables policy changes in future. The company said the deal would allow it to advance this pipeline "with greater certainty."

It also said that the purchase would "strengthen our relationship with the government and the Mexican regulator," indicating that the possibility to develop its renewables pipeline is expected to improve.

The finance ministry echoed these comments, stating the purchase agreement would be the "start of a new stage in which the private sector, including Iberdrola, is welcome to invest in the development of renewable energy in the country, under the State's tutelage."

According to Iberdrola's assessment, the assets were given an adequate price and the operation has an attractive valuation. It also said that Mexico would remain a strategic market in terms of future investments.

The assets to be sold by Iberdrola to the new fund can be seen in this table:

Asset name	Contract type	Capacity	Startup date	Location	Paralyzed
Tamazunchale II	Private	514	2022	San Luis Potosí	N
Monterrey (III, IV)	Private	477	2002	Nuevo León	Y
Enertek	Private	144	2002	Tamaulipas	Y
Tamazunchale	PIE	1.179	2007	San Luis Potosí	N
Altamira V (Del Golfo)	PIE	1.155	2005	Tamaulipas	N
Altamira III y IV	PIE	1.096	2003	Tamaulipas	N
Topolobampo II	PIE	917	2019	Sinaloa	N
Escobedo	PIE	878	2018	Nuevo León	N
Topolobampo III	PIE	766	2023 (E)	Sinaloa	Y
La Laguna	PIE	537	2004	Durango	N
Monterrey (I, II)	PIE	449	2002	Nuevo León	N
Baja California	PIE	324	2017	Baja California	N
La Venta III	PIE	103	2012	Oaxaca	N

Source: BNamericas with Iberdrola data.