Mexican state utility CFE issued new guidelines recently clarifying how generation and storage projects developed by CFE jointly with private investors will be structured and awarded.

These projects are known as mixed development projects and consist of two types of projects: long-term production projects and mixed investment projects.

A long-term production project is one that a private sponsor develops and finances with an obligation to sell the entire electricity output and associated products from the project exclusively to CFE. These projects are similar to the independent power producer (IPP) projects developed in Mexico in the 1990s and 2000s, except that, upon termination of the long-term output contract, CFE may now choose to acquire the project at no cost.

A mixed investment project is one in which CFE participates directly or through affiliates, trusts or other vehicles and must directly or indirectly hold at least 54% of the equity of the project company. Its capital contributions may be in cash or in kind and may include permits and authorizations, real estate, and assets or intangible rights. Even pre-development expenses may be counted toward its ownership interest in the project. It will be difficult for CFE to amass a 54% equity interest in a project without contributing actual cash. However, we understand that to achieve the 54%, CFE is open to structures that may include special classes of equity that have limited economic and voting rights.

Under the mixed investment scheme, CFE has a preferential right to acquire the energy output and associated products of the project, but it is not obligated to do so. Any power plant under this scheme may sell the energy output not acquired by CFE to third parties through the wholesale electricity market, but with CFE as its representative.

While the guidelines provide greater clarity on the overall framework for mixed development projects, key bankability and risk allocation terms will ultimately need to be assessed on a project-by-project basis. Critical commercial and financing considerations are expected to be defined in the tender document and corresponding form of agreement for each project.

For mixed investment structures, key structure details are expected to be included in the form of joint venture agreement for each project. The JV agreement will be drafted by CFE but negotiated with the private developer. The form of agreement will address the type of special-purpose vehicle that will develop and operate the project, its equity structure, corporate governance principles, capital contributions and funding schedules, sources of financing, rates of return, investment and operational goals, capital and operational expenditures, financing costs, asset transfers, termination events, risk allocation during construction and operation, destination of the assets upon termination of the contract, change in law and dispute resolution mechanisms.

While the guidelines do not address the contract provisions pertaining to governing law or submission to jurisdiction for dispute resolution, we assume that the governing law of the contracts will necessarily be Mexican law, while leaving room for more neutral dispute resolution arrangements, including international arbitration.

The guidelines do not address certain risks that will have to be addressed in the specific contracts. For example, for mixed investment contracts, the timing and manner in which CFE’s in-kind participation will be formalized during or after construction, CFE’s divestment and termination scenarios, and how to address the inherent conflict of interest if CFE becomes the offtaker while being a majority partner in (or potential operator of) the project.

Under the guidelines, CFE must create a "mixed development group," composed of senior CFE officials and representatives from the Energy and Finance ministries, that will evaluate project feasibility, prepare the relevant documentation and recommend the selection process to use for each project. The group's recommendations are subject to CFE board approval.

Once a project is approved by CFE’s board, then CFE will initiate a selection process. These processes are governed exclusively by the new guidelines, and CFE’s standard procurement rules do not apply.

Public tenders are the default method for selecting private partners for mixed development projects. Bidders submitting qualifying offers may, at CFE’s discretion, be invited to improve their economic proposals up to two times without modifying technical terms, a mechanism designed to enhance price competition.

On an exceptional basis and under specific circumstances, CFE may also award projects using three other processes that include selective invitations, competitive processes focused on a limited number of invitees and direct awards. The specific circumstances include a situations where grid reliability, sustainability and security are at risk; operational synergies to maximize production, reduce costs, optimize resources and improve revenues; the early termination of an awarded contract for a project; a failed tender; or the migration of legacy IPP projects into the new mixed development framework.

A project may be directly awarded by CFE where a private developer controls essential project assets such as land, permits, key equipment or concessions.

CFE may bid out projects under different scenarios. It may identify a specific project it wants or require specific generation or storage capacity in one or more regions of the country and allow private developers to propose solutions. Recent statements made by Mexican President Claudia Sheinbaum indicate the second option is likely to be CFE’s preferred method to award projects. Requests for projects may also include the migration of legacy IPP projects governed under the former "Law of the Public Service of Electric Energy" into the mixed development project structure under the new "Electric Sector Law."

Selection timelines are intended to be relatively short, generally capped at approximately 45 days for direct awards, 50 days for competitive procedures, 80 days for restricted invitations and up to 120 days for broader invitation processes, each subject to a one-time limited extension.