Innovative financing for energy in MexicoSeptember 19, 2022
Arturo Beteta del Río, general manager of Volta Capital, talks to The Energy Year about the company’s approach to financing energy projects in Mexico, the nature of its investors and how it manages risk. Volta Capital is a private investment firm dedicated to helping companies within the energy sector expand.
What is the financial approach and position of Volta Capital in Mexico and beyond?
Volta Capital aims to develop a strong financial arm in energy markets, being experts in this landscape. Founded in 2020, we aim to establish ourselves as a leading company in the field of energy project finance, creating new ways of investing and generating value from electricity. In other words, we are an asset and investment manager dedicated to scaling up firms within the energy sector. Our strategy is driven by our will to deliver positive economic impact and high returns in the short, medium and long term for our investors.
We have an array of affiliate companies under our umbrella covering the electricity value chain. These are Sujio, a qualified energy service supplier; Sujio Generación, a market participant generator; Regulus Energía, a power marketer; Operati, an ERP to control market operations 24/7; HHGM, an EPC firm; and Sun Group, a binational affiliate dedicated to solar projects.
We recently established offices in Houston, which is the energy Mecca. This move stems from the fact that financing energy projects in Mexico is complicated for banks and investors, both private and institutional, today. They don’t understand or feel comfortable with them, nor do they manage them in an agile manner. In Houston in particular, both banks and private equity are used for these projects. We also moved to internationalise the group, which already has a robust structure in Mexico. We plan to replicate this structure in the United States and Central and South America.
What is the nature of the capital you manage and channel into renewable projects?
We are still a young company with plenty of ambitions to realise. Currently, we are still working on single-deal projects. We raise capital to invest in specific generation projects, mainly renewables. We raise both domestic and foreign capital and manage it directly in Mexico or the US, depending on the preference of each investor.
We have a lot of US capital, but the majority of it is of Mexican origin. The latter comes from investors who have decided to take their money out of Mexico to avoid risk given the current political instability in the country. This capital is what is commonly known as “swallow capital.” This is secured through a US vehicle, but the investors continue investing in Mexico. These types of investors like to own a certain proportion of the generation assets, and these assets have an appealing return for them.
In what ways could real-time energy trading enhance the competitiveness of the sector?
There are plenty of things we can learn from other energy markets. For example, in the area of energy trading, Mexico does not operate a real-time market, unlike private energy markets in the US, for example. A real-time market could potentially optimise the Mexican market by making it much more competitive. Basically, trading in real time would follow the same concept of the stock market. However, in Mexico you can only trade with the price offered for the day ahead market.
Real-time trading of electricity could bring many economic opportunities to the sector and market participants. It would increase the monetary flow in the whole market; this increase would mainly benefit generation companies and make it possible to grow the installed capacity and thus generate savings for end users.
What investment structure and risk management tools do you use when investing?
Volta’s business model is centred on three main axes. The first one focuses on the support and development of the companies in which Volta has a stake, that is, its affiliate subsidiaries. The second one is the development or acquisition of new business units, which is done through single deals via SPVs. The third axis concerns new financial product development. This structure allows us to maximise investments to the fullest and guarantee the best returns.
In addition, we can also secure energy-component risk hedges and, where appropriate, a proportion of the PPA [power purchase agreement] could be assured. We can ensure the viability of the project from start to finish because of the structure we have. We hedge against, for example, the volatility of the local marginal energy price, we can do that with the power marketer; and with the qualified energy service supplier we can secure a long-term PPA to ensure the investor’s return; while we can optimise the cost structure of the capex investment through our EPC.
How pertinent are SPVs when developing distributed generation projects?
We have bet on the SPV model due to sheer need and its versatility. The volume of required paperwork for utility-scale projects has always been a headache. And today it’s worse than a headache: the paperwork has come to a complete standstill. We consequently decided to design a model in which we generate distributed generation projects with volumes comparable to utility scale that do not require a generation permit. We do micro-projects but in utility-scale volumes. Our pipeline for development over the next five years is about 500 MW in installed capacity spread across small projects.
Each project entity for this whole series of solar projects is an SPV. They were developed to manage all these projects and generate the necessary synergies with the other companies in the group to ensure the viability of the projects. Therefore, there will be several SPVs subdivided into special series. Each park has a specific series of investment vehicles. A specific SPV is created for a series of projects that are in the same region, for example. Each series has a specific set of investors, and each series’ assets have a particular ownership structure. In this scheme, Volta Capital will be the only financer and corporate manager.
What financial scheme are you using to fund the 150 solar parks you are now developing?
We are now looking into how to finance and develop 150 mini solar parks, each with a capacity less than 0.5 MW. This is a mega-project in itself which requires, of course, financing. Ultimately, the group’s business is in the sale of energy, not the sale of assets. However, the total scale of these projects generates a volume that could be interesting for an investment fund, for example. Therefore, we consider the option of selling these projects if an interesting offer comes along. At the moment, we already have due diligence in process with some funds that showed interest in the model we have applied. We are definitely interested in opening our doors to financial institutions that are interested in partnering with us.
The majority of the capital we have attracted is Mexican capital that migrated, that is, swallow capital. What we are offering investors is a “ticket” worth around USD 120,000. Each project is divided into five tickets. Volta is always a partner in at least one or two of those tickets. In these cases, the landowner can be on another ticket, and the remaining tickets are sold or offered for investment.
The way we first raised capital was through crowdfunding, which gave way to a multi-investor model. However, some investors have told us that they want to invest in five or ten projects. We have several people who have invested with one ticket to experiment. The investors are diverse, but we have plenty of individuals that have capital and want to diversify their investments.
In the short and medium terms, we are looking for investment from investment funds and capital managers. We are now planning four different investment rounds in the next five years, which will lead the group to become the first energy unicorn in the country. We have planned to launch the first round of USD 100 million by the last quarter of this year or the first quarter of 2023.
What interest do you have in attracting local and international investment funds?
We are approaching funds that already have experience in investing in the energy sector. While we started with a crowdfunding strategy, with the volumes we plan to have in the future, crowdfunding would be impractical. It would mean having an enormous number of partners. Ideally, we manage to obtain resources from one or two funds which decide to ally themselves with us to develop the first projects for USD 100 million. This strategy is for the sake of corporate practicality because Volta requires the decision-making power on several issues of each project’s life cycle.
We are looking for investors internationally as well, and this is the main reason we established our offices in Houston. We are even open to creating special investment vehicles which are not Mexican or American. We can design a special vehicle according to the requirements of an investor, a fund or a manager. We need to create many synergies with important players in the financial sector and the electricity sector.
What are the keys that will make Volta Capital the first Mexican energy unicorn?
We have technical know-how, from connecting a cable or a transformer, to conducting financial operations in the wholesale electricity markets. That is our background. Now, when looking forward, we first would like to support the financial consolidation of all the companies in the group and to empower them. Currently our companies are missing many opportunities because they had not had access to capital in the past. Volta intends to mitigate this and take advantage of all the opportunities that come our way.
Secondly, we aim to position the group at an international level, a step we have already begun by putting our boots on the ground in the US, with both Volta’s representation and with our first market participant in the Texas electrical market (ERCOT). Thirdly, we intend to create the first energy unicorn in the country that is 100% Mexican. We have the structure across the entire value chain, the know-how, the team and the tools to achieve this.