Mexico Is On The Brink Of A Solar Boom | Ep281: Alberto Estefan

Bryony Worthington
So it should be boom times for solar, is that how it feels on the ground?

Alberto Estefan
It does feel like that a bit. And kind of anecdotally, if you go and stay at a hotel in Mexico City, you'll feel a bit of buzz, which is a lot of people coming into the market, looking to get these projects off the ground. It feels a bit like it was about 10 years ago with long-term auctions in 2016, 2017, that was really sort of a second wave of the scaling of the renewable deployment in Mexico, it feels a bit like that. Earlier this year in a first round of these mixed scheme projects, the total award was around 7 gigawatts. So 7,000 megawatts, that's over $10 billion of capex for those projects to be built.

BW
Hello, I'm Bryony Worthington, and this is Cleaning Up. My guest this week is Alberto Estefan, Managing Director for Energy Infrastructure at Actis, a firm that invests in clean energy projects around the world. Alberto has been tracking developments in the Latin America region for over a decade, and I wanted to ask him, are we about to see a big solar boom in countries like Mexico as the world discovers that this is the cleanest source and most secure source of energy. Please welcome Alberto Estefan to Cleaning Up.

Alberto, thank you so much for joining us here on Cleaning Up, I'm going to start with our first question, which we always ask our guests, please introduce yourself in your own words.

AE
So happy to be here, thank you for the time, Bryony. So my name is Alberto Estefan, I'm a Energy Infrastructure Strategy for Latin America. I've been with the firm around 12 years now, and within our investment strategy in the region, we basically back and build and grow power generation businesses across the different jurisdictions within our global remit, and like I said before, my focus in particular is Latin America.

BW
And that sort of time with Actis has quite a few different presidents, both in Mexico and in the US, and it's been quite an interesting time. Have you noticed sort of any large scale trends, and perhaps also, it'd be really great if we could start to understand a little bit about the Latin America economy in which countries you're most focused on?

AE
Yeah, sure. So Latin America is a relevant footprint within our global strategy between 30% to 40% of the capital that we allocate globally, we invested in Latin America. And this has to do with the fact that this is a region of the world where private sector participation in the infrastructure space more broadly, but in the power space in particular, is very prevalent. This was a part of the world that was a pioneer in the liberalisation of the power sector, actually the first power market to be liberalised globally was Chile in 1982, and that was a model that was exported to the rest of the region. And so Peru, Colombia, Brazil, eventually Mexico with its own nuances that we can go into. And I would just say that because of this long track record of private sector participation in this space, it punches above its weight a bit in terms of the investable opportunity set where you compare it to other parts of the world from a kind of a simply GDP or population perspective. And so a large opportunity set clearly dominated over the past few years by the scaling of the renewable opportunity, which has come in different ways. And so it's from an investment perspective, which is a key focus at Actis, it provides both the opportunity to invest behind the growth of the sector, but then also a large stock of assets that we can operate and execute our operational improvement investment thesis behind those.

BW
And how, I mean, obviously people are making judgments about how investable countries are, and I think there might be a perception that there's quite a lot of political volatility in the region. But there are countries, as you say, like Chile, who remain pretty stable and have quite a westernised investable environment with strong policies. How would you, if someone's being a bit sceptical about the region, how do you sell it to investors?

AE
I guess the conviction that we have behind some of these markets has to do on the one hand with the supply demand fundamentals. And so take a place like Mexico, over the past 10 years, our demand has grown 25%, this is 3 times the pace that you observed over that same period of time in the US. And this is in a context where this is demand that is not driven by the AI boom or data centres. This is structural demand growth on the back of industrialisation, on the back of urbanisation, on the back of nearshoring. These are long-term secular trends that fuel demand over large cycles. And ultimately, these fundamentals prove very resilient from the perspective of the value proposition that a credible investor can bring to some of these geographies from the perspective of being long-term owners, serious investors that will operate responsibly on these assets. And so I think that's the most defensive element in terms of the value that we believe that we bring to these countries.

In a context then where the way that we invest is through long-term cash flow visibility. And so I think different to what you see in many more mature markets, in the markets where we invest, we're investing behind long-term contracts most of the time. And so take the case of Mexico again, so I hope we have the opportunity to speak about what's going on in Mexico in more detail, but just to say for now that this new renewable wave that we see coming from a capex cycle perspective is being anchored by 25-year contracts with a quasi-sovereign investment-grade counterpart. And that is pretty robust, and it is these types of contractual mechanisms that we see across our geographies that we'd like to invest behind and that we think sets them apart from the opportunity set in more mature markets where you're taking other commercial risks, if not the political one.

BW
Yeah, I can see how those de-risking policies are super important, and perhaps that's the thing you need to watch, right, is the policy environment that supports those commercial contracts, which are enforceable, that gives you that security. But just thinking about Mexico in a little bit more detail, because I know that's geography that you have quite a strong position in, it is very dependent on its neighbour to the north. Mexico's economy has been driven by exporting into the US, and whilst nearshoring was a trend that was perhaps relocating everything back to the so-called Western Hemisphere, we've had an even greater focus now on nearshoring into the US itself under the current presidency. So how tied is the Mexican economy to those positions, the trade positions that the US takes, which have turned out to be quite volatile?

AE
It is true that Mexico is extremely tied to the US and the economic cycle in the US. It has become the US largest trading partner over the past 10 years over Canada and China. But interestingly, the China plus one narrative that we saw sort of in the first Trump administration–

BW
Just pause there, what does China plus one mean?

AE
So China plus one is this notion that the replacement of Chinese imports from other geographies, and so this played out, for example, in other countries of Southeast Asia, like Vietnam, but importantly, Mexico as well. So it is the notion that there are other countries with a large manufacturing base that would replace China in this context where the US looked to diversify away from Chinese imports. And we saw that play out sort of in the first Trump administration, and then we saw it play out again in this second one, which is interesting and was a concern or a doubt that people had, whether this dynamic that Mexico was able to benefit from a few years ago was going to play out again. And today, it's very interesting to see, for example, the dynamism in the manufacturing space in Mexico behind the IT hardware space.

And so while a few years back, we saw a boom in the auto manufacturing sector, which has been a key driver of exports for Mexico over the past 20 years, as of late, Mexico has benefited from the AI wave in a derivative or secondary mechanism through IT hardware. So just to say that we continue to see the export sector as one that is kind of pulling ahead and lifting a bit the economy that has proved true over the past few years and we continue to see that dynamic play out. But just to say, clearly very tied to the US, not only from an export perspective, but actually in the energy sector from an input perspective as well in that Mexico today generates nearly 60% of its electricity with natural gas. And natural gas in Mexico today is largely imported from the US, nearly 75% of its natural gas consumption is piped down from the south of the US. And so clearly a very interlinked kind of economy in different respects.

BW
Yeah, just before we get onto that kind of broader energy discussion and interdependence, you're talking there about manufacturing serving US markets. We just did a really interesting episode with Robert Capuano from the Olinia project in Mexico, which is this state-backed new entrant car company, so kind of an experiment in whether that can actually survive in a fairly cutthroat business. But what it really made me realise was that Mexico's own domestic market is pretty substantial. I mean, as a country, I think it's kind of got the equivalent GDP of something like Spain now. So is there a sense of nearshoring or reshoring within Mexico itself that Mexico is finding a sort of sense of newfound confidence that it can serve its own markets? Or that that's something that Sheinbaum is trying to achieve is that kind of more domestically focused and less dependent on trade. Do you see that trend?

AE
I do see that, and clearly the consumer story within Mexico itself is a key kind of long-term growth driver. Knowing that if you think about the demographic composition of a country like Mexico, it's a young country with a growing middle class, and so the consumer story locally from a long-term perspective I think is one that will be a key driver of the economy. What I would say though is in the 1990s and even a bit before that, Mexico took a bet on integrating itself in the global trade environment and through the global trade mechanisms, and so it's one of the countries with the most free trade agreements, it has sort of liberalised and opened its economy. And so I think the export sector will continue to be also a key kind of driver of economic growth longer term.

BW
So let's go in a little bit into the energy composition of the country, you mentioned this rather large importation of natural gas. I assume that's because Mexico's own reserves of fossil fuels are somewhat limited, or is it just that the US is providing very good terms and is keen on delivering cheap gas to its neighbours? Is there just a lack of domestic gas, is that part of the equation?

AE
So I think it's a combination of both, which is on the one hand, yes it is true that oil and gas production in Mexico has come down a bit over the past 10/15 years, and this is a trend that the national company is looking to reverse. But then this is happening in a broader, in a global context, and in particular, kind of the shale revolution in the US, which provides with plentiful, abundant and the cheapest source of natural gas worldwide. And Mexico having a long border with the US, it made a bet to build a very significant gas transport infrastructure about 10 to 15 years ago. And so there's a well-established now network of pipelines that are bringing cheap natural gas into Mexico, and so this has had a very significant impact in the energy landscape locally for the country.

On the one hand, from an emissions perspective, this fuel switching from oil and coal in the power sector to natural gas has translated into significant emissions reductions. If you think about it from the perspective of the CO2 intensity of the power sector, we estimate that between 2000 and 2025, this fuel switching basically had the impact of reducing the equivalent emissions of taking all the cars out of the roads in a place like Belgium. That's kind of a bit of the magnitude of the impact of having done this fuel switching from an emissions perspective. And then from an economic perspective, if you look at power prices in the wholesale market in Mexico, natural gas is the marginal price setter. And so what this means is you'll see average prices somewhere between $35 and $45 per megawatt hour. This is significantly below what it would cost to generate electricity on the back of a diesel or coal.

So both from an emissions and an economic perspective, this fuel switching has had a very significant impact in the energy sector in Mexico and in the power space in particular. And I guess there's a trade-off, if you will, which is the dependence that Mexico has today of natural gas from the US in a context of a reordering of the global trade rules and the geopolitics around it.

BW
Yeah, Mark Carney's rupture of the world order that we're living through. But just going back to that exact question about energy security, it does seem like maybe 15 years ago, natural gas was a definite way of getting out of those inefficient, old, dirty power infrastructure. And you've not just got a benefit in terms of the fuel being less carbon intense, but you also got an efficiency of the newer plant being built, which would have had an efficiency boost. But it does come at an environmental price and an energy security price, partly because natural gas from the US is not famous for being low carbon because of its methane, associated methane emissions can be relatively high. And then you've got this question of the reliability of those contracts going forward, which can be a lever, right? A political lever on a country. And I suppose now that we're here in 2026, probably the cheapest kilowatt hour that Mexico can produce given its geography is solar plus batteries, right? And so, how is Actis responding to that? The new economy of energy is the cheapest kilowatt is solar plus batteries. And that's got an energy security gain in that you're not reliant on continual purchases of fuel, so talk to us a little bit about solar and batteries in the context of Mexico.

AE
Yes absolutely, so on the back of the demand narrative and story that I was leaning to before, there is a significant need to expand the generation system in Mexico because this demand growth has not been met by a commensurate growth in generation capacity. And so what we have experienced in Mexico over the past few years are reserve margins that are basically at historic lows with rationing and blackouts in certain parts of the country in specific episodes. And so there is a large capex cycle that we see coming over the next 10 years. The system plan calls for basically a doubling of generation capacity, over the next 5 years to 2030, the plan is for 30 gigawatts to be built. Most of that will be renewables, so wind and solar with batteries. And so we see the early innings of a capex cycle, these 30 gigawatts would correspond to, call it $40 plus billion of investment.

BW
Sorry to interrupt, but could you give us a context of like, what's the total gigawatt capacity of the Mexican grid? Like what does that 30 to 40 gigawatts really represent in terms of proportion of the market?

AE
So today, generation capacity in Mexico is around 90 gigawatts. And so these 30 gigawatts is growing by a third over the next 5 years to 2030. And then a doubling of the current installed base today over the next 15 years to the end of the 2030s.

BW
Yeah, and Sheinbaum set a target to increase the proportion of that that's clean, right? That's zero emissions, so there's an obvious decision to try and pivot to this cleaner. And the way they're doing that is letting contracts to private actors, right? Because CFE, the state owned utility, has recently opened up their market rate to a greater proportion of private investment, is that right? So you're being given a certain proportion to play into now, which would have otherwise had to go through the state owned utility. And that's relatively recent?

AE
Yeah, that's right. So kind of the history of private sector participation in the Mexican space has ebbed and flowed. Mexico was a latecomer to this trend of liberalisation, because for historic reasons, the state owned participation in the energy space is very central to the political identity in Mexico across party lines I would say, since the first half of the 20th century. And so Mexico was a latecomer to liberalisation in the space. And there was an energy reform in 2013 that looked to allow for competition, mainly in the generation space. Part of that reform was partially rolled back and over the years, but there's still significant space for the private sector to participate. And in particular, the Sheinbaum administration has pivoted its policy direction to really enable private capital and mobilise private capital in this new capex cycle. And so if you think about these 30 gigawatts to be built over the next 5 years, there's going to be mainly 3 mechanisms through which this will happen. On the one hand, the national utility CFE will continue to build assets on its own balance sheet, and by the way, they're thinking about creative ways to tap the capital markets through their own activity set but in essence, they'll do it on their balance sheet.

The second mechanism is for the private sector to develop their own projects and to secure their own commercial solution privately, that is with private offtakers. And then there's a third route, which is for the private sector to participate jointly with CFE through what is called the mixed scheme, in which CFE provides a 25-year power purchase agreement to anchor these projects commercially. And the way that this has been done is on the back of rounds where the private sector will basically tender development projects and the CFE will award these power purchase agreements depending on where they see the need for new projects to be developed and so forth. But always in this commercial construct where it is taking a 25-year power purchase agreement in US dollars, inflation indexed, and with CFE as a counterparty, which is a quasi sovereign investment grade rated entity. And so that from the mindset of an infrastructure investor like ourselves is very appealing because it gives commercial viability to the deployment of renewables at scale, which is what we like to do in our global investment footprint.

BW
And you mentioned there about tethering it to the dollar, does that help minimise foreign exchange risk? Because that's always a cited reason why countries don't get investment is just that extra risk, but they've managed to find a policy to sort that out?

AE
That's right. Across Latin America, but globally, you will have some countries where the energy sector is dollarised, and so this is a case of places like Chile or Peru. It is the case of Mexico as well, which makes it also a key characteristic and a key feature that makes it attractive for a global investor like ourselves.

BW
So really, if you add all that up, you've got a growing economy with some great fundamentals in terms of its demographics, fantastic policy environment hopefully with these de-risked long-term contracts, a wedge of the markets being opened up and the geography of Mexico being probably one of the world's best places for insulation, the amount of solar you can generate. So it should be boom times for solar, is that how it feels on the ground or is it still quite tentative and slow? Because the economy isn't growing as fast as it was in recent years. So yeah, does it feel like there's a kind of solar rush happening? Can you see that on the ground?

AE
It does feel like that a bit. And kind of anecdotally, if you go and stay at a hotel in Mexico City, you'll feel a bit of the buzz, which is a lot of people coming in market, looking to get these projects off the ground. It feels a bit like it was about 10 years ago with long-term auctions in 2016, 2017, that was really sort of a second wave of the scaling of the renewable deployment in Mexico. It feels a bit like that. Earlier this year in a first round of these mixed scheme projects, the total award was around 7 gigawatts. So 7,000 megawatts, that's over $10 billion of capex for those projects to be built. And so you have definitely a lot of interest from global and local investors who are looking at this opportunity. It is the early innings, the first projects should start construction sort of as early as the end of this year. And that's a bit kind of the proof that some are looking to see that these projects actually progress towards financial close and notice to proceed and actually get built, which is clearly our expectation as well.

BW
And you're happy as Actis being in that frontier and proving it can be done, right? That's the role you like to play.

AE
That's right. Mexico has been an important investment destination for us, we've set up 5 power generation businesses in that market. We've recently launched this fifth one. This is a company called Yeltica Energy. Kind of the playbook that we've had over the past 20 years of our energy infrastructure strategy is one that is quite repeatable, which is we set up or back management teams in the scaling and growing of power generation platforms. Sometimes we do this on the back of an existing asset base, sometimes we do it starting from zero. In this case, we're starting a new business from zero.

And so we've put together a pipeline of development projects, we've set up a team from scratch working with a team that has worked with us successfully in the past and looking to deploy a greenfield strategy in which we're targeting to build over 2 gigawatts. And so if you think about the 30 gigawatts to be built over the next 5 years, around two thirds of that will be in the renewable space, so call it 20 gigawatts. Our objective is to take around a 10% market share of those 20 gigawatts to be built over the next five years. So we're starting with a C portfolio where we already have awards for three projects over 300 megawatts, but participating at a significantly higher scale in subsequent rounds in order to contract those 2 gigawatts and get those built over the next 3 to 5 years.

Michael Liebreich
Cleaning Up is proud to be supported by its Leadership Circle. The members are Actis, Alcazar Energy, Arup, Climate Imperative Foundation, Copenhagen Infrastructure Partners, Cygnum Capital, Davidson Kempner, EcoPragma Capital, EDP, Eurelectric, KKR, Mitsubishi Heavy Industries, National Grid, Octopus Energy, Quadrature Climate Foundation, Schneider Electric, SDCL and Wärtsilä. For more information on the Leadership Circle, please visit cleaningup.live. To keep up with all that's going on at Cleaning Up, sign up for our free newsletter, which gives the latest on the episodes we're recording, events we're hosting and stories we're watching. To sign up for the newsletter, visit cleaningup.live.

BW
In doing my research, I would love to ask you why you're taking this build a new company approach, when you kind of had a company, you owned Zuma Energy and that was one of the largest renewables operators and owners in Mexico and you divested of that a few years ago. What was the thinking behind that, why divest in that period?

AE
Yes, so it has to do with who we are, which is we are a private equity infrastructure manager that manages closed-end funds. And so our mandate is to grow these businesses, eventually divest and obtain liquidity from that investment and return that capital to our investors. And we do this across fund cycles. And so what we like to do is set these business up to a point where they have a scale, they have a diversified asset base, they have operating assets with long-term contracted cash flows in place. They have a built to suit management team and they have a growth narrative. And for global institutional investors, then looking to gain a footprint in some of these markets, they look at an active business as one that has all these features plus a sustainability agenda, best practices from a governance perspective. And so it gives them the confidence that they can have exposure to infrastructure in some of these markets through an active company that has all these features that make it attractive to global institutional capital. And so we kind of do this cycle over time.

BW
Repeatedly. And in a sense, that's the best use of your capital, right? Is to sort of go in, build something where there's a bit more of a risk tolerance and then sell to a slightly less risk tolerant. In this case, I think you sold it to a Chinese company who bought the assets. And so it's kind of interesting that you're, yeah, that is your role and you've managed to make your investors happy by having that liquidity event. So then the system repeats itself, so it's a good model.

AE
That's right. That's right. And we do that through greenfield strategy, so that is businesses that have a large bias towards growing or building new assets. But we also do it on a brownfield basis. We sometimes identify deep value opportunities in operating portfolios where we can bring our expertise to optimise the cashflow profile of those businesses through operational improvements, new commercial opportunities, incremental growth, the optimisation of the capital structure and so we have kind of, we play on both sides, greenfield and brownfield and that has been the case of Mexico where out of these 5 platforms, 3 of those have been more of a build strategy while other 2 have been more of a buy strategy.

BW
Yeah. And it's both green and brown in two senses, it's building into new sites, but it's also, there's obviously gas, your portfolio is both gas and renewables, but do you see yourself pivoting out of gas? I mean, we should go back to this question of the economics of gas because we've just had a bit of a global energy crisis where prices have been rising. Is that side of the business now less attractive given all the things we talked about in terms of energy security and that now solar is cheaper?

AE
We do believe that gas continues to have a role to play. And if you think of a place like Mexico, yes, you will have the growth of the generation space driven by wind, solar and batteries, however, the intermittency still needs to be addressed. And at least for now, we continue to see natural gas as the most efficient source of dispatchable firm energy. And what we've observed is that the value proposition that you bring on the one hand to the matrix itself is very relevant through natural gas. But then also from a commercial perspective, the value proposition of being able to provide to your customer a 24/7 type offering that combines firm dispatchable power through natural gas and cost efficient generation through intermittent renewable sources, that is the winning proposition today. I think that will continue to evolve. And as solar plus batteries become more competitive over time, that picture could look a bit different in the future, but for the foreseeable future, we do see a very important role for natural gas in that it'll be kind of the backup or the baseload element in different generation systems, including the Mexican one.

BW
I mean, your business is really in the utility scale solar. But just as we talked about this solar rush, we've seen less resource rich countries like Pakistan, who've really pivoted hard out of their gas contracts into a distributed form of solar, and the rooftop solar plus batteries at a sort of distributed level does seem to be a phenomenon that's taking quite a lot of demand growth out of the system rate. People are starting to off grid themselves, go behind the meter, sort out their own energy security, their own pricing, and enabled by the availability of these very cheap technologies. So do you see that in Mexico, that there's been this distributed solar boom as well?

AE
So we do see it, not to the extent that we've seen it in other markets, particularly, for example, in Brazil. The growth in Brazil of the distributed generation space has been very significant. It's been interesting to watch as well how that can bring challenges, knowing that Brazil, for example, today is experiencing significant curtailment and a lot of it driven by a very sudden penetration of distributed generation solar. So just to say, we will see distributed generation to continue to take a share, and I think it is part of the solution going forward. But it's not a bulletproof one, and it's one that does bring strain and complexity to power generation systems.

BW
Well, you know, you talk about curtailment there. The challenge is, does the distributed solar curtail utility scale solar because they're happening at the same time of the day, or does it constrain off the gas? And I'm guessing it could constrain off the utility solar if the grid's not managed in a way that prioritises the cleaner generation.

AE
That's right. Which I think speaks to what is a common challenge and opportunity from an investment perspective across many markets, which is transmission. So transmission will be a key enabler of this increased penetration of renewables going forward. Batteries in some ways can mitigate some of the kind of complexity around it, and for example, it's interesting to watch in this part of the world, places like Chile, where battery penetration has been very significant. And over kind of the next year or two, we will see a total battery capacity at north of 8 gigawatts, which has happened very, very fast. And so it will be part of the solution, it's bringing along challenges, opportunities, but interestingly, it is bringing along also different business models and commercial constructs.

And so for example, in Chile today, you have nighttime PPAs, and so these are mostly battery projects that are contracting output through particular hours during the night and charging during the day. And you also start to see 24/7 offerings through solar plus batteries that are starting to be cost competitive relative to natural gas in some places where gas is expensive. And so it'll be, without a doubt, part of the solution and a very interesting development going forward.

BW
And to the extent that the grid becomes the constraint on the utility. How liberalised is the grid market in Mexico, and how easy is it to develop some of these utility scale solar projects, which might be further away from population densities, where the demand is? I mean, that's the benefit of thermal, you can just put it really anywhere and connect it relatively straightforwardly, but renewables requires that parallel grid build out. Is that well managed? Are there good contracts available, is the state owned utility, the transmission part of that planning for this solar boom and allowing those connections to come forward at pace?

AE
Yeah. So for example, as part of this mixed scheme round and tenders, there is a very deliberate grid interconnection and reinforcement work behind what projects are awarded where. And so they're building into the planning and the way in which new projects will be installed, a clear path towards interconnection and grid reliability. Different to other places, again back to example of Chile, it's open season where the impact of a project relative to the transmission constraints of an area are not really taking into consideration in terms of the actual feasibility or permitting of the project itself, not in the way that it's done in Mexico. So I would say in Mexico in particular, what you see is there's a bit more kind of system planning that has straight ups, because at the same time, it probably makes it for a less dynamic market and a less dynamic build out of the necessary infrastructure, but done in a way where you'll probably have less of the issues of curtailment and transmission constraints that you're seeing in other markets.

BW
I'm just, as you're talking, I was just thinking about the UK experiment where fully liberalise everything and then realise, hang on a sec, the market does weird things and we may need a bit more central planning brought back. And that's exactly what we've done now with the systems operator, trying to do a bit more of a top down plan, because otherwise you get these queues of projects that are queuing up to demand and grid projects and battery projects, which you're not really ever sure how many of them are real and what the net effect of permitting them all will be on the system, so it does require a bit more planning so perhaps Mexico can hit the sweet spot there. But going back to your point about transmission, how much transmission is there south of Mexico and north of Mexico on the electricity system? Because we've talked about the big gas pipelines bringing natural gas down from southern states of America. But really in the future, given Mexico's geography, you ought to be sending a lot of clean cheap power northwards. And I guess perhaps neighboring countries too, obviously the geography is very different when you turn to the south, but how much transmission, how much is there a transmission conversation happening at the moment?

AE
So I would say it's not top of the agenda, it's relatively limited. So it does happen, for example, we actually used to own a few projects both on the wind side and in the gas to power side that sold power into CAISO in California from Baja California in Mexico, so it does happen to a limited extent. And there are certain other interconnections across the border. At one point there was actually a plant in South Texas that was selling power down into Mexico, and so these exchanges do happen. But I think it could happen to a larger scale, and it'll be interesting to see how that develops over time. People are thinking, for example, about data centre build out as well and whether some of these large facilities that are facing social opposition and power constraints in the US could set up at scale in Mexico. And so that you could have Mexico as an exporter, not of energy, but of data. And if you start thinking then about the flows, it's interesting to think that while Mexico is importing the gas, is it exporting the electricity or is it exporting the data and kind of these flows in what is ultimately a very interrelated dynamic between Mexico and the US?

BW
Yeah, maybe just to plug my own organisation of Ember, who recently put out a new deck around the integration of those commodities, this sort of electro tech plus information revolution means that, yeah the success of the country now is about electrons. And as you say, it could be flowing in the form of data, it could be flowing in the form of actual electrons, but getting that right, if Mexico can get that right, would be phenomenal. And I'm also just wondering about California about to see a new governor, who may have a much more stronger focus on perhaps those south-southern connections. And, you know, Californian power prices are eye-watering so it should be an opportunity to make a case, I would have thought, for greater integration of those grids.

AE
Yes, absolutely. And yeah, we did build a wind farm, for example, that was selling under a long-term off-take contract with a utility in California. And so those type of cross-border projects, I think will be part of the conversation going forward.

BW
So I suppose, just kind of as we start wrapping up, at the moment, with a sort of slightly unpredictable neighbour to the north, but this domestically set up to hopefully attract a lot of inward investment, is it happening at the pace that it needs to? Or is it still underselling the capabilities? Do you think that these auctions need to keep happening more frequently or is it just this is the fastest we can go? Because it does seem like there's been probably, you know, a little bit of a lag in realising this huge potential Mexico has, given its geography now and its policy environment, and that solve for the capex, the foreign exchange solve. Could it be going faster? It still feels like it's underselling what it's capable of.

AE
So I would say there has been sort of a glut, and there is pent-up demand built into the system, so that if you think about these rounds around the CFE mix schemes and kind of other mechanisms in order to accelerate the permitting and development of new projects, that just started to happen over the past 12 months. And so if we can make these projects real, and then keep the momentum to have continuity in terms of these schemes, I think we're off on a great track. For now, it is the early innings and so priority is to actually get sort of these projects built and the momentum that you'll have to build in order to remobilise for example, the supply chain in Mexico after a period of time where new capex activity came to a very significant slowdown. So we're in the early period of a reactivation of the whole space. So if it continues to happen at the pace that you'd foresee through these type of rounds and you can keep that momentum, I think there's a good shot at achieving the type of targets that the country needs.

BW
And how worried are you that this volatility in trade policy, and specifically I'm thinking here about tariffing of components arriving from China, where all the things we talked about, the solar, the batteries, they're going to be that could unlock this great asset that Mexico has, is reliant on Chinese technology by and large, and it could be fabricated in Mexico, but it's still going, components are going to be coming in, especially on the battery side, and tariffs have been put on, and does that derail it? Does it just add cost, or can you see a path through that? Or how big an impact have these tariffs had on your plans?

AE
Not significant yet. I think in the end, the cost advantage that China has in component manufacturing is so large that we think it'll continue to be the main provider of solar panels and batteries, like you said before, and there's installed capacity is sufficient to provide that to Mexico, and then most of the countries worldwide also depend on Chinese solar panels and batteries, so I think that will continue to be a case. If I think about kind of the risk element around being able to have these deployment of renewables at the scale that the plan is targeting, I think about cost of capital and the interest rate cycle, and what does that mean for project economics, I think about the macro landscape in Mexico, and there is a need for the country to reignite its growth dynamic in order to be kind of sustainable from a fiscal perspective relative to the commitments that the government already has in terms of social programs and other spending that is more sticky.

I think about the execution challenges, both from the perspective of the supply chain and this reactivation that needs to happen, and a qualified workforce and the EPC ecosystem in order to actually deliver the projects at this scale. I think about social and security issues, and the fact that you have to be very attuned to the reality on the ground. We believe that over the past 10 years, we've built that know-how and that license to operate in order to be successful in building projects in different areas of Mexico, but kind of social engagement is key in order to be successful, as well as very robust security protocols and processes. And so there is kind of a broader challenge around execution that we think about all the time and where we spend a lot of our focus in order to make these projects viable and build them successfully.

BW
And that's why we need interpreters like Actis to know all of these local conditions. As I was reading up about the solar farms in Mexico, you don't read for long before you realise that the desert turtle could be a risk you've got to worry about, right? Because putting into desert environments, people often think they're empty, but sometimes they're not, and there are UNESCO Heritage Sites in Mexico that you've got to be mindful of and local concerns about the biodiversity impacts. So yeah, it's a non-trivial environment in which to operate. But as you say, you've built up years of experience and you've been at the company 14 years, how long has Actis been in Mexico?

AE
So I've been 12 years with Actis, and that's around the time from that Actis has been in Mexico. Overall, the assets we've owned over 7 gigawatts of assets, that more or less corresponds to around 7%-8% of market share from a generation perspective in the assets that we own today, for example. So we've been a significant investor in the power space quite consistently over this period of time, and it is one market that looking forward really is exciting to us, going back to the beginning of this conversation and the supply demand fundamentals in a context of a policy direction that is looking to aggressively mobilise private capital into the space.

BW
At a time when the fundamental economics are tipping towards clean and secure, which is really what makes it fly, we hope. Finally, just as you're following the region, I'd be remiss not to just touch on the fact that we're entering into the summer period with a huge El Nino bearing down upon the region. and it's often I find it quite sad really that we don't cover the South American news cycle, it seems to be squeezed out by everything else that's going on in the world. But is that El Nino showing up politically? Are people talking about the risks that the region's exposed to, or is it just, there's so much else going on it gets suppressed? How does it feel in the region?

AE
No, so it does. And it's important and it has its nuances in different countries. I think about a place like Colombia, and if you think about the energy systems in South America, they have a very large hydro component and therefore a year of droughts can translate into significant spikes in local energy prices and overall fuel availability. And so there will be countries with an oversized impact that translates into economic consequences and therefore also the political manifestations of that. And so it's something clearly to watch, but again, it'll be very focused in some specific countries.

BW
I guess it's the backdrop to energy modeling going forward, right? It's our models from the past are no longer really a very good guide for the future, in that it turns out hydro is one of those more variable elements that we perhaps were able to rely on more, and then you've also got the fluctuating demand of how people respond to heat waves, which is going to be buying more kit to keep themselves cool. And so the climate is showing up now in the energy system in a way that it perhaps hasn't till reasonably recently, I'd say.

AE
Yes. And then in a context where the geopolitical environment also has an impact on fuel transport and availability worldwide.

BW
Yes, yes, all these uncertainties we have to manage. And we only very briefly touched on AI, but I think actually disproportionately we focus on AI as a driver of all of this compared to those other factors that you just alluded to, which are huge geopolitical trade, instability, and climate itself probably deserve a few more column inches. But anyway, it's been a delight to chat to you, Alberto, thank you for making the time. I hope we can meet up in person because I know you're actually based in Austin, Texas, so one of my favourite cities in the US.

AE
That's right. Travelling very often to the region, so it'll be great to meet up in person, either here or whenever your travel takes you to Mexico or South America.

BW
Yeah, great. Well, thank you and hopefully see you in person soon.

AE
Thank you. Thank you, Bryony.

BW
So that was Alberto Estefan, Managing Director for Energy Infrastructure at Actis. As usual, we'll put links in the show notes to the reports and episodes that we mentioned. My thanks to Kendall Smith, our Manager, to Oscar Boyd, our Producer, and to Jamie Oliver, our Editor, and to the rest of the Cleaning Up team and wonderful Leadership Circle members who make these podcasts possible, and thanks to you for listening. Please join us at the same time next week for another episode of Cleaning Up.

ML
Cleaning Up is proud to be supported by its Leadership Circle. The members are Actis, Alcazar Energy, Arup, Climate Imperative Foundation, Copenhagen Infrastructure Partners, Cygnum Capital, Davidson Kempner, EcoPragma Capital, EDP, Eurelectric, KKR, Mitsubishi Heavy Industries, National Grid, Octopus Energy, Quadrature Climate Foundation, Schneider Electric, SDCL and Wärtsilä. For more information on the Leadership Circle, please visit cleaningup.live. If you're enjoying this episode, please hit like, leave a comment, and also recommend it to friends, family, colleagues, and absolutely everyone. To browse our archive of around 300 past episodes and to subscribe to our free newsletter, visit cleaningup.live.