Walmart de México: Investing in Renewable Energy

Series: Global Network for Advanced Management in conjunction with EGADE (Tecnológico de Monterrey)
Format: Raw, online case
Topics: Finance, Economics, Public Policy, Global Business, Energy, Sustainability
Initial date of publication: March 2012
Geographic setting of case: Mexico
Access:  Available to educational institutions by emailing case.comments@yale.edu. Teaching Note available to faculty at accredited business schools.

Overview: When Walmart de México y Centroamérica decided to buy the power generated by the Electrica del Valle de México’s (EVM) wind farm, EVM’s struggling project received a significant boost. While the proposed wind farm was located in an area with abundant wind resources, absent a creditworthy off-taker the project would not have been able to line up financing. With Walmart de México’s 15-year PPA (Power Purchase Agreement) in hand, the developers were able to gain financial backing, buy and erect the turbines, and begin generating electricity by 2010.

For Walmart de México, becoming the wind farm’s off-taker accomplished a number of important objectives. EVM guaranteed electricity at below the rates charged by Mexico’s state-controlled utility, shaving costs for the famously thrifty retailer. In addition, the project allowed Walmart de México to get closer to some of its sustainability goals. The wind farm would supply electricity to 348 Walmart de México facilities in central Mexico, providing 18% of the electricity Walmart de México consumed in Mexico in 2010.

The wind farm was just one part of the efforts Walmart de México was undertaking in the sustainability area. The company had pledged to meet ambitious goals, looking to reduce waste in its and its suppliers' operations. In the energy area, the company was hoping to receive 50% of its energy from renewable sources by 2015, even in a period of rapid growth, increasing its square footage in Mexico by 12% in 2012 alone.  All told, the efforts of Walmart de México had made it the world’s leading retailer in the area of sustainability—a distinction the company hoped to build on.

The success of the EVM wind farm had ignited Manuel Gómez Peña’s thinking about further renewable energy projects. Gómez, Walmart de México’s Director of Sustainability, was considering ways the project financing structure might be further adapted to allow Walmart de México to participate in and benefit from other projects. Gómez was also considering the mix of renewable energy sources. In addition to wind, solar and mini-hydroelectric projects were possibilities that Walmart de México could consider.

Any project that Walmart de México undertook had to work in concert with Mexico’s electricity grid and rate-making structure. Mexico’s political leadership had announced a commitment to electricity from renewable energy sources, to move the country away from its traditional reliance on natural gas and oil. Mexico’s government-controlled electricity utility had simplified the transmission rates for renewable energy and had constructed a few projects of its own. However, there were no special feed-in-tariffs for renewable energy and only a few tax incentives for the construction of renewable energy projects. Furthermore, there was a dearth of independent project developers with the resources and expertise to build large-scale projects.

Gómez also had to take into account Walmart de México’s capabilities and focus. While the company had made sustainability a priority, corporate officials were loathe to take on projects that took them too far from the company’s central activity of retailing. The company’s investment group analyzed sustainability projects on the same basis as any other project, concentrating on return on investment.
Gómez believed that the situation called for creative thinking. How could the company leverage its sterling credit rating to get renewable energy projects off the ground? For the EVM wind farm, Walmart de México's equity investment was minimal, just sufficient to meet the requirements for Mexico's self-supply tariff. Should the company take a larger equity position in further energy projects, rather than simply serving as an off-taker? What technologies should Walmart de México employ to achieve its renewable energy goals? Should the company hold a portfolio of projects or just concentrate on one technology? How could Walmart de México expand the program outside of Mexico to the other central American countries in which it operated?  Was there a way to include suppliers into a renewable program?