In November 2017, Abraaj announced the development of a 500 MW natural gas-fired power generation platform in Mexico. In this Deal View, we speak to Abraaj Managing Director Eduardo Cortina on why he is optimistic about the energy sector in Mexico and the key ingredients to a successful power plant development.
Q: Eduardo, you’re local to the markets you invest in, having grown up and lived in the region. Talk to us about what you are observing on-the-ground in Mexico.
Eduardo Cortina: First of all, I think it is very important to be local when investing in markets like Mexico. My colleagues and I live here and have built long-term relationships locally. Thus, we understand the challenges and opportunities that exist, and can genuinely help make an impact for both businesses and societies. For example, one of the key drivers for our energy investment is the recognition of the challenges faced by transmission grid operators to maintain electric reliability. This platform that we are building will ensure reliability on the grid and so consumers will have sustainable, efficient power supply.
Mexico is a core market for Abraaj. From a macro perspective, private consumption is growing on the back of a rising middle class, and this in turn is helping move the economy upward. There are many strong entrepreneurial local businesses in fast growing consumer facing sectors. At the same time, private equity continues to be underpenetrated and there is an opportunity to provide capital and actively drive value to help these businesses scale regionally.
Q: And how about the energy sector specifically? What drove a power generation platform investment?
Eduardo Cortina: We see tremendous growth in the energy sector, underpinned by an increasing demand for power from growing cities. If you look at the numbers, power consumption reached 319TWh in 2016, representing a 3.2% increase compared to the previous year. Average annual growth in demand is expected to reach close to 3% yearly for the next 15 years. And that’s just the demand lens. To meet expected demand, the Mexican Secretariat of Energy estimates that 55 GW of additional capacity is needed.
Recently, the government put in place favorable policies and reforms to encourage private sector participation in the power sector, for example, incentivizing investments through an open market. Since the creation of the wholesale power market, we observe compelling opportunities for private sector players like ourselves to invest.
We are highly committed to growing the Mexican power sector, as evidenced by the 500MW power generation platform that we are developing in the country.
Q: What makes this power generation platform unique, and can you tell us more about the first phase?
Eduardo Cortina: We just closed first phase of a 500 MW natural gas-fired power generation platform. The first phase is a greenfield 111 MW natural gas-fired power plant in Chihuahua. The plant will be one of the first to come into operation under Mexico’s new power sector framework.
The plant is strategically located in the northern state of Chihuahua, which is a key manufacturing hub in the country. We have access to natural gas from the US at competitive prices through a natural gas pipeline infrastructure. This provides us with a competitive advantage in ensuring fast, reliable power production. Efficient technology has also been put in place to ensure the plant is well positioned to compete in the new power market.
The plant is expected to commence operations at the beginning of 2019, and will enjoy a first-mover advantage in Mexico’s new wholesale power market.
Q: This is a transaction by the private equity line of business, but the deal team pulled in energy expertise across the firm. Tell us about this sector-focused approach and synergy.
Eduardo Cortina: That’s correct, this is a company that will manage an energy platform. I see this as one of the greatest advantages and dynamism of a global firm with local on-ground presence – we leverage the sector expertise of colleagues in other parts of the world to actively drive knowledge and value add to our platform. So, when we have an energy focused transaction like this, we leverage the know-how and operational expertise of our clean energy team and combine that with local knowledge on ground, so we can successfully build our platform to supply efficient and sustainable power for the Chihuahua state at competitive rates.
Read the press announcement of the transaction here.