An investment decision model for renawable projects in the Mexican. Regulatory Framework

Abstract

The purpose of this thesis is to analyze the undergoing liberalization process of the Mexican power sector and understand how the deregulation of the generation activity impacts investment decisions. In addition, a financial spreadsheet model is presented as the traditional methodology to evaluate investment opportunities under such context. Finally, a system dynamics (SD) model is proposed to investigate what contributions it can add on top of the traditional approach. The reason for this research goes beyond analyzing the Mexican power sector, by providing a robust model to support decision makers. The thesis is composed of eight chapters, each of them dealing with different aspects of an investment decision context, including the regulatory environment, forms of financing projects, power plant technologies, financial models widely adopted by the market and SD modeling methodology. The first chapter is introductory and defines basic terminology and methodology used in the thesis. Chapter Two examines relevant studies carried out about the Mexican energy reform, project finance of energy projects in developing countries and system dynamics models used for energy projects evaluations. Due to the recent liberalization process, not much has been developed about Mexico and no relevant papers targeting the use of system dynamics from a single investor perspective were identified. Chapter Three goes deep investigating the main aspects of the Mexican power sector deregulation, especially focusing on the generation activity. In the last section of the chapter, an overview of the first power auction and PPA terms are presented and used as base case to develop the financial models highlighted in the following chapters. In order to provide financial models with realistic approaches, chapter Four concentrates on elaborating a theoretical solar power plant project, detailing the technology adopted, expected investment expenses and operating costs in the context of Mexico. All the data presented is used as inputs to both models. In chapters Five and Six, the traditional financial spreadsheet and SD models are discussed, respectively. Both models are equivalent and provide the same outputs such as the equity IRR, assumed in the thesis as the main parameters investors use to support their decisions. Chapter Seven is dedicated to the results and findings of the proposed SD model, including several sensitivity analyses performed that would be difficult to be developed, under same circumstances, in the spreadsheet methodology. Conclusions are drawn in chapter Eight. The main objectives of the thesis are first to highlight the complexities present in the Mexican PPA terms that increase the level of uncertainty decision makers have to deal with. Secondly, discuss how the traditional modeling approach addresses such uncertainties and, in most of the cases, conclude it is not able to provide a statistical representative range of outputs, which would improve investors’ evaluations. The PPA’s complexities and lack of statistical tools may make room to erroneous decisions, leading projects to not be materialized. Finally, the proposed SD model confirms the hypothesis that there are alternatives able to enhance the decision making process, especially running as many scenarios as needed be to convince investors they are better supported.