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Mexico

Mexico

Big player with an eye to California -- Sempra enters via Mexico

Sempra Energy -- a US behemoth with revenues of nearly $12 billion last year -- is joining the North American wind market as a developer and owner/operator of wind plants. Together with long time California wind company Cannon Power Corp it has bought the project rights to an initial 250 MW in Baja, Mexico. The modest start by Sempra, which operates out of San Diego, marks the end of a run of wind asset acquisitions in North America by large European companies. The company is expected to go on to much bigger things in wind power.

Sempra will own the 250 MW La Rumorosa project and sell all the power generated north to the US, having secured a 20-year purchase agreement with Southern California Edison (SCE). La Rumorosa will tap into the 500 kV Southwest Power Link transmission line owned by San Diego Gas & Electric (a Sempra Energy affiliate) and located less than a mile away.

The SCE deal represents the first long term power purchase agreement to import wind energy from Mexico into the US. Since the wind plant is located outside the US, the project is not eligible for wind's federal production tax credit (PTC), which can be worth as much as one-third of the investment sum. Instead, the project benefits from a one-year tax depreciation law in Mexico that Cannon's managing director Gary Hardke says is worth less than the PTC but enough that it makes the deal worthwhile.

Like the PTC in the US, the tax depreciation requires the owner of the wind plant to have significant taxable income in Mexico, which Sempra has through its formidable natural gas power plant fleet in Mexico. Hardke describes Sempra as having "one of the largest presences in Mexico of any foreign corporation."

Tax advantage

Sempra Generation's president, Michael Allman, says Sempra will be able to take the tax deduction on most of the capital expenditures on the project within the first year of operation. Another benefit to Mexico's tax measure is that, unlike the PTC in the US, the law does not have a sunset date requiring lawmaker action to extend it into the future. It is a stable policy for this project, further expansions, and other projects in Mexico.

Allman says he "hopes" Sempra will go beyond the purchase of La Rumorosa and further into the wind market. He adds that the La Rumorosa site has potential for as much as 1000 MW of wind and Sempra will pursue further contracts with California utilities for wind up to that level. Hardke says interconnection studies are underway to verify there is adequate room on the nearby transmission line for the initial 250 MW project with no wire upgrade. Both Sempra and Cannon are optimistic about making an additional 750 MW a reality. To achieve that, Cannon plans on building a 230 to 500 kV substation on the Mexico side to carry up to 1100 MW.

California bait

Beyond a potential expansion at La Rumorosa, Allman says: "We are looking for other opportunities generally in our region -- let's call it the Western, Pacific Southwest, Northern Mexico region. We may consider some projects depending on a number of things...it wouldn't surprise me at all if in couple years we have additional projects in the wings."

Sempra's tax burden in Mexico may play a strong role in the company's initial push into wind, but its larger interest is driven by California's renewables portfolio standard (RPS), which legislates for a minimum of 20% renewables in the supply portfolio by 2010. "[Sempra] has gotten the message loud and clear from California regulators -- both the RPS side and on the greenhouse gas side -- that the regulators are serious about seeing a high level of renewables in California," says Cannon's Hardke.

Matt Freedman with The Utility Reform Network (TURN), a lobby group, agrees. "Sempra is looking at the market and saying: well, the RPS is here to stay, demand is ramping up for renewables, and we've got a pretty reliable market to sell our power to. It's that kind of certainty that is providing the right climate for long term commitments from developers. That's a demonstration that the RPS program is working."

Freedman wonders what sort of corporate player Sempra will be in the wind market. "Sempra Generation has the contract with the California Department of Water Resources that has been maligned for being a complete rip-off. They have been one of the bad actors in the California energy crisis -- some of us will not forget that. That being said, we're not holding their wind projects against them. The more players in market from the sell side, the better -- we're always happy to see competition for wind power supply."

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