Mexico Power Report Q1 2013

BMI View: Whilst we continue to hold the view that gas generation will remain dominant in Mexico,supported by existing capacity and access to cheap gas, we note that this quarter has seen someinteresting developments in the hydropower sector. Most notably, the Federal Electricity Commission(CFE) sold MXN13.5bn (some US$1.05bn) in bonds on the domestic market to finance construction ofthe La Yesca hydroelectric power plant in September 2012. With regard to consumption, we continue toanticipate a fairly robust 3.07% year-on-year (y-o-y) average growth for power consumption in 2012,but we caution that a moderation is likely in 2013.

Despite the fact that Mexico's economy is expected to remain in positive territory, our Country Riskservice believes that the country’s headline growth will slow gradually throughout H212 on the back of amoderation in both the secondary and tertiary sectors. Hence we anticipate that a robust 3.07% y-o-ygrowth for power consumption in 2012, will give way to a slightly less positive 2.93 in 2013. That said, astill relatively positive long term outlook underpins our forecasts for a fairly robust 2.74% y-o-y averagegrowth of Mexico's power consumption between 2013 and 2021. A trend further supported byconsiderations concerning the country's low per capita consumption and relatively high energy intensity.

With Mexico relatively well placed compared to some of its regional peers in terms of its powergenerating infrastructure, we reiterate our view that, while new investments will be necessary to substituteageing capacity and meet growing demand, attempts to diversify the energy mix will be a key componentand driver of capacity expansion and refurbishment programmes. From this perspective, we notice that:

Mexico's adoption of both CO2 emissions and renewable electricity generation targets in 2012has cemented the country's desire to develop its renewables industry. The country has madesignificant headway in the expansion, as a number of large developments come online and theproject pipeline continues to strengthen. However, we maintain our assessment that if Mexico isto meet the ambitious targets outlined by the legislation, a comprehensive regulatory frameworkwill need to be put in place in order to sustain the level of investment, and thus, growth in thesector.

Despite some persisting difficulties in the sub-sector, a few selected hydropower projects aregaining traction in the country, with the CFE selling MXN13.5bn in bonds on the domesticmarket to finance construction of the La Yesca hydroelectric power plant in September 2012. LaYesca is part of the Santiago Hydroelectric System, which includes 27 projects with potentialgenerating capacity of 4,300MW and will rank No. 3 in electricity generation after theAguamilpa-Solidaridad and El Cajon power plants.

That said, the country currently relies on thermal sources for over 75% of its electricitygeneration, making any significant capacity diversification programme a time-consuming andcostly endeavour. From this perspective, it is hardly surprising that the country continues to bekeen to focus on gas-fired power plant construction, and the picture is unlikely to changesubstantially over our forecast period (2012-2021).