TEG II
TEG I was followed later in 2001 by TEG II, a sister plant also sponsored by Sithe on the
same site, at an estimated cost of US$330 million, less than the first plant because of
economies of scale. The offtaker is Pinoles, a Mexican mining and metals company with a
similarly heavy need for electricity in its manufacturing process.
According to Robert Kartheiser, Sithe’s objectives are to replicate a good project with
another blue-chip offtaker for which electricity is a strategic input; to capitalise on economies
of scale; and to achieve a similarly successful loan syndication. Coface will provide compre-
hensive commercial and political risk insurance, and the British agency, the Export Credit
Guarantee Department, will also provide political risk insurance.
Fuel supply issues
One of the most important trends with recent IPPs in Mexico has been delinking PPAs and
fuel supply agreements. With Samalayuca II and Merida III, the CFE not only bought the
plant’s electricity under the PPA but acted as the intermediary for the purchase of fuel from
Pemex. Dino Barajas, an attorney with Milbank, Tweed, Hadley & McCloy in Los Angeles,
explains that, even if the CFE did not supply the fuel, the power plant would receive its capac-
ity payment to cover debt and capital costs.
Developers are now concluding PPAs and fuel supply agreements separately. The major-
ity of their fuel supply agreements are with Pemex, but some plants near the northern border
have US-based fuel suppliers. Further, with recent IPP ventures developers have been
required to submit bids before concluding fuel supply agreements. Bidders win largely on the
basis of the prices quoted in their PPAs, which are based on their best estimates of fuel prices.
Therefore a developer risks fuel price arrangements that turn out to be higher than anticipat-
ed when the electricity price bid was submitted. In addition, an IPP venture now bears the risk
that the CFE will dispatch tomorrow but Pemex or another supplier will not deliver the fuel.
In an article in the Journal of Structured and Project Finance(Fall 2002), John Schuster,
a senior project finance credit director, and Bob Marcum, a project finance loan officer,
explain that as IPPs take on increasing natural gas procurement risk, lenders tend to require
lower project leverage and more sponsor support. IPPs’ fuel-supply agreements with Pemex
are divided between variable or ‘swing’ supply and firm supply on a take-or-pay basis. A
higher proportion of firm supply results in a lower fuel price, which helps the developer to
quote a lower electricity price and win the bid, but also exposes the developer to a higher risk
that the IPP will have to pay for natural gas that it cannot use. Marcum and Schuster recom-
mend that Pemex consider two possible remedies to help IPPs with take-or-pay risks:
•offering different levels of take or pay for different commitment periods, for example, a 30
per cent minimum take on a weekly basis but a higher 60 per cent take on an annual basis
- allowing an averaging process to work over the course of a year to the IPP’s benefit; or
- allowing IPPs, in their ongoing efforts to match fuel nomination with electricity dis-
patch, to be relieved of a certain portion of their take-or-pay obligations with sufficient
advance notice.
Marcum and Schuster also note that natural gas suppliers typically offer two forms of con-
tractual remedies to mitigate delivery performance risks: penalties to cover lost capacity pay-
BAJIO, LA ROSITA AND TEG, MEXICO