Sector reforms and renewables projects energise Hidalgo economy

With its existing power plants and related infrastructure and scope for further development, energy has been named as one of four strategic sectors identified by the Secretariat of Economic Development (Secretaría de Desarrollo Económico, SEDECO) as a focus for the economic development of Hidalgo.

The thermoelectric plant in Tula and the hydroelectric station in Zimapán help rank the state as the fifth-largest energy producer in Mexico. Add in an impressive gas pipeline network, the closest refinery to Mexico City, exceptional climatic conditions for solar energy and the largest consumer market in Latin America on its doorstep, and it becomes clear that few – if any – states are as well positioned as Hidalgo to take advantage of Mexico’s energy reform.

The Energy Opportunity

Now that reforms have opened up private investment in the sector and liberated the pricing regime, the state can look to attract investors, increase energy output and diversify energy sources (see Energy chapter). The fact that Hidalgo consumes less than half of the energy it produces adds to its attraction as an investment destination for energy providers and producers.

“Hidalgo has an opportunity to be an energy provider, exporting to the rest of the grid,” Andrés Manning, director-general of the Hidalgo State Energy Commission (Comisión Estatal de Fomento y Ahorro de Energía, CEFAEN), told OBG.

Indeed, SEDECO recognised that as the transformation of the energy industry picks up pace, the state will have “a primordial role for the economic functioning of the region.”

Spotting the potential, the state government proposed two state energy laws to take advantage of the federal regulation. As SEDECO described in the presentation of the new law, they provide a “legal framework to attract more than $650m of investment to the sector and generate more accessible energy for the people and companies of Hidalgo.”

The state Congress approved both laws in March 2018, and the authorities expect that being able to guarantee better access to energy will increase the state’s competitiveness, bringing in business. When that happens, demand for energy should rise further.

“To avoid bottlenecks in Hidalgo’s economic growth, it is necessary to have a framework that allows for opportune energy supply at a good price,” the SEDECO report on the legislation said.

Though, on aggregate, Hidalgo produces more energy than it consumes, the need to raise output could become urgent as new industrial investments from the likes of Grupo Modelo are secured.

To ensure it is prepared to meet the needs of potential heavy energy users in the future, CEFAEN has been talking to the National Centre for Energy Control about how to deal with rising demand.

Taking Advantage

While the state’s natural geographical advantages – being close to ports and Mexico City – mean it is well positioned to produce low-cost energy, logistics and infrastructure also contribute to it enjoying very competitive prices.

Key among these infrastructural advantages is the presence of the state-owned Petróleos Mexicanos (Pemex) refinery in Tula, which is connected to the Gulf port of Tuxpan via one of the most important gas pipelines in Mexico. Added to this, generation plants in Tula and Zimapán offer electricity supplies.

“Hidalgo should really expect to have some of the cheapest energy prices in Mexico,” Francisco Javier Fuentes, director-general of consulting firm Energía Regional, which focuses on helping local governments make the most of energy reform, told OBG.

As states compete to gain influence and maintain their competitiveness in the changing energy market, authorities are increasingly looking to develop strategies to support existing facilities and generate new infrastructure. This will ultimately lower costs and diversify energy retailers, according to Fuentes.

“Hidalgo’s aim with the new laws are clear: to have the cheapest energy in Mexico,” Fuentes told OBG.

The energy reform, therefore, has presented Hidalgo with a unique opportunity. But the state must still rise to meet certain challenges.

For petrol and diesel, the state government wants to increase the pipeline and terminal infrastructure to lower costs, and diversify sales points to generate greater competition. In liquid petroleum gas, the priority is to optimise supply and bring in more competition, while for natural gas the focus is on making the most of the existing pipelines running from Tuxpan-Tula and Tula-Villa de Reyes. In electricity, the transmission networks is at risk of saturation, according to the government. The state has also announced its intentions to develop competitive contracts for clean energy supplies.

Energy Agency

Meeting these challenges will require plenty of investment, to which end the state passed legislation that establishes a new state energy agency to lead the investment charge. Though project authorisations often come from federal authorities, energy projects occur in states and municipalities with local laws, such as construction permits, which require local approval. This can create a challenging environment for prospective investors, burdens that the new agency seeks to alleviate.

The energy agency law aimed specifically to enhance the assistance investors will receive by converting CEFAEN into the State Energy Agency, a new decentralised state organism. The creation of this agency aims to give new projects a soft landing as they prepare to commence operations in Hidalgo.

This is increasingly important after several projects across Mexico that were made possible by the federal reform encountered opposition from local communities – including Sempra Energy’s Tuxpan-Texas pipeline. Sector stakeholders have argued that some of these issues could have been avoided had more clarity been available locally. “Now we will be able to ensure that all new projects are properly accompanied by the state government,” Manning told OBG.

Another advantage highlighted by Fuentes is that the agency can promote projects and coordinate interested investments. “Until now, investors would have to be knocking on a lot of doors to ensure they got all the correct permits,” he said. “Under this law, they just speak to a single agency, which can also help to create alliances with different companies to get projects off the ground.”

The new agency’s reach is wider than CEFAEN’s, and includes: participating in consortia via public-private partnerships; carrying out economic activities and identifying financing; constructing energy-related public works; proposing subsidies, supports and incentives; managing, structuring and attracting investment; and coordinating with other entities.

“Other states such as Jalisco and Veracruz have created similar agencies, but in Hidalgo the new law gives the agency greater reach and legal force,” Fuentes said of the breadth of the body’s remit.

Sustainable Energy Development

The second energy law, called the Law for Promotion of Sustainable Energy Development, creates a framework for communication between the state and its municipalities. Aiming to align the aims of different arms of government, the law defines SEDECO and the municipalities as authorities, and establishes “transversal strategies” in terms of project development.

According to Fuentes, the new laws generate a legal framework for an understandable and clear business environment, which he expects will speed up projects. Moreover, he told OBG other states are likely to replicate the law, making Hidalgo a model for future energy sustainability across the country.

Transportation & Storage

Like the other sectors that the state government is promoting, one major advantage for the energy sector in Hidalgo is the proximity to Mexico City, which represents almost never-ending demand for energy.

Add to this that the pipeline from Tuxpan, the largest port for Mexican imports, ends in Hidalgo, and it is clear why private companies are already eyeing up opportunities for what is effectively a newly opened segment of the logistics sector.

“There is great potential for storage facilities to meet the demand of the Mexico City metropolitan area, and this is what we are pursuing,” Manning told OBG, adding that the energy reform has opened up good business opportunities in this area.

US logistics firm Bulkmatic became the first private company to enter the local fuel storage market when it announced plans for a hydrocarbons terminal in Atitalaquia – complete with a railway spur connected to Kansas City Southern de México’s network. The company will invest MXN1bn ($54m) in the facility, which will be located 70 km from Mexico City and next to Pemex’s refinery. The terminal will have a capacity of 690,000 barrels and is slated to begin operations in the first half of 2019, the firm said.

Local conglomerate Grupo UNNE and global firm Hutchison Ports, which together own the Intermodal Logistics Terminal of Hidalgo (TILH) in Tula, are also looking to take advantage of the reforms with a fuel transfer terminal at the TILH, due to be open by the end of 2018. UNNE, which already accounts for 14% of Pemex’s logistical operations, is considering opening three further fuel storage terminals: one at the TILH, another on the Pacific, and a third on the Gulf. “This would allow us to build a network connecting both coasts with the centre of Mexico,” Noé Paredes, head of Grupo Corporativo UNNE, told OBG.

The TILH’s versatility is particularly useful here, according to Paredes. “We can receive – via railway, road or pipeline – products for distribution,” he told OBG. “There are not many terminals in Hidalgo that can do that, and it simplifies the process.”

Renewable Potential

As of early 2018, Hidalgo’s energy generation capacity stood at 2651.2 MW, of which 13% came from clean sources. SEDECO points out that while non-renewable sources are being exploited more quickly than renewables can substitute them at the global level, in Hidalgo the potential for both solar and wind energy is larger than production of other fuels.

A presentation prepared by SEDECO shows the federal Ministry of Energy estimates that Hidalgo would be able to install solar capacity of up to 4948 MW – 1.9 times what it is currently generating from all sources. Wind farms, meanwhile, could provide capacity of 1871 MW, 0.7 times the state’s output.

Encouraging clean energy ties in with two of the state government’s broader aims, namely putting science and technology at the centre of economic development and establishing Latin America’s first cluster of electric vehicles in Hidalgo. Alongside the two energy laws, the government also proposed a law governing special economic zones with an eye towards promoting this high-potential cluster.

Hidalgo is particularly competitive in solar energy because large swathes of the state are at higher altitudes, meaning temperatures stay lower and panels work more effectively. A significant amount of land receives more than 5.7 hours of sun per day, without reaching unduly high temperatures This means Hidalgo could compete with a state like Sonora, in the north-west of Mexico, which has been identified as having huge potential for solar energy. Sonora receives more sun than Hidalgo, but is also far hotter. Furthermore, Hidalgo’s location is another key advantage compared to Sonora, which is not close to any major Mexican cities.

In keeping with the theme, Grupo Modelo’s proposed brewery – the state’s flagship investment achievement – has pledged to having its plants running 100% on renewable energy by 2025. The Apan-based brewery will have the “most advanced” technology in terms of sustainability, water usage and energy use, according to Grupo Modelo press statements about its new investment.

In terms of wind, a study from many years ago had for a time dashed any hopes that Hidalgo harboured of developing wind farms, as it argued that winds in the state, though strong, were not constant enough to be suitable. However, a more recent study has said that the measures were not taken at a high enough altitude to rule out wind as a power source.

Atlas Investment

Hidalgo’s renewable energy plans received a huge lift in late March 2018, just two weeks after the local Congress approved the energy law. Atlas Renewable Energy, which is backed by emerging markets private equity firm Actis, acquired the Guajiro solar project in the municipality of Nopala de Villagran from SunPower. The company is proposing to build a plant capable of generating 100 GWh of solar electricity per year on a 410-ha site.

Expected to generate 200 jobs, the Atlas investment will save more than 215,000 tonnes of CO year, according to the government – equivalent to the emissions of 46,000 cars.

Guajiro, which is due to begin operating in the second half of 2019, is contracted under a long-term power purchase agreement with Mexico’s Federal Electricity Commission. It had been awarded to SunPower in the National Centre for Energy Control’s first electricity auction after the federal reforms.

Big Plans

The government has big plans, and looks to have all the conditions to achieve them. Indeed, Fuentes told OBG that Hidalgo’s aim to have the cheapest energy prices in the country is realistic. For that to become a reality will require Hidalgo to make the most of the energy reforms and take advantage of its price competitiveness, energy generation capacity and privileged logistics.

SEDECO’s vision for 2030 is to encourage hydrocarbons exploration in the Huasteca and Otomí-Tepehua region, while the state also wants to host Mexico’s leading clean energy cluster given its clear advantages for solar energy, something that, though feasible in the long term, is for now just a plan.