Power Market Deregulation Transforms Mexico

Mexico’s energy reform, which began in 2013, has opened up key parts of the country’s electricity sector to new market participants, foreign investors, and innovative technology. Prior to the reform, Mexico operated under a traditional, vertically integrated model, with the state-owned Comisión Federal de Electricidad (CFE) responsible for all power supply functions from generation to distribution. But the new organization utilizes a model similar to other wholesale electricity markets used around the world.

The International Energy Agency (IEA) published a report last year, as part of its World Energy Outlook series, predicting that Mexico’s energy reform would substantially boost the nation’s clean energy efforts. The report suggests that more than half of Mexico’s new power generation capacity installed through 2040 will be renewables-based, tapping into the country’s large wind and solar resources. The IEA expects that new investments in renewables will help Mexico reach its goal of producing 35% of its electricity from clean sources by 2024.

“This is not a reform, it’s a revolution on an unprecedented scale,” Dr. Fatih Birol, executive director of the IEA, said in a press release launching the report.

Opportunity Abounds

How will Mexico’s energy reform affect U.S. power companies? That remains to be seen, but it could open a door to new opportunities.

“Any time a national government cedes control of an industry to the private sector, it opens up opportunities—but at the same time, considerable uncertainty,” Michael Hinton, chief strategy and customer officer for the commodity trading and risk management software company Allegro Development, told POWER in an exclusive interview. “Moves such as Mexico’s decision to deregulate the power market involve an extraordinary number of moving parts, and it’s almost a certainty that there will be at least a few bumps in the road.”

Hinton pointed to an agreement designed to promote the reliability and security of the U.S. and Mexican interconnected power systems—signed on January 7, 2017, by the Obama administration’s Secretary of Energy Ernest Moniz and Federal Energy Regulatory Commission Chairman Norman Bay, and Mexico’s Secretary of Energy Pedro Joaquin Coldwell, Energy Regulatory Commission Chair Guillermo Ignacio García Alcocer, and National Center of Energy Control Director General Eduardo Meraz Ateca—as one development that could lead to more cooperation between the two countries.

Of course, a reader couldn’t be faulted for thinking: “Yeah, but that was then, and this is now.” Former Texas Gov. Rick Perry has replaced Secretary Moniz, and the Trump administration has made no bones about its “America-First” policy. However, there is still hope for continued cooperation with Mexico on energy matters.

Secretary Perry met with Coldwell in Mexico City on July 13. Reuters reported that Perry promised to promote cross-border electricity trade and investment during the meeting. “Mexico’s prosperity is inextricably intertwined with our prosperity,” he was quoted as saying during a news conference.

Economic Benefits Predicted

Energy reform is expected to help Mexico prosper. In a report titled Tracking the Progress of Mexico’s Power Sector Reform, which was published last year by the Woodrow Wilson International Center for Scholars’ Mexico Institute—a nonpartisan policy forum chartered by Congress—Alejandro Chanona Robles, who was named director general of planning and international affairs for Mexico’s energy regulatory commission in January, wrote: “Mexico’s Energy Minister has referred to the power sector reform as the ‘economic competitiveness reform.’ Access to reliable and affordable power can give businesses a competitive edge over their rivals, stimulate job creation, and spur economic growth.” The IEA agrees. Its “main scenario” sees the Mexican economy doubling in size by 2040.

However, what’s happening in Mexico is still fairly new and is likely to be a years-long endeavor. Risks are inherent in the process. Yet, the rewards loom large. The IEA estimates that in order for energy reform to be successful, investments of $240 billion will need to be made in Mexico’s power sector through 2040. It says another $130 billion will need to be invested in energy efficiency during that period. Companies north of the border could reap some of the bounty.

“The benefits could emerge in a few forms, for instance, by U.S. companies lending their infrastructure expertise, investing in joint ventures, electricity trading or even offering consulting services based on their experience with deregulation in the United States,” Hinton said.

Pinning Hopes on Natural Gas

Natural gas is expected to play a large role in the power sector transformation. “Inspired by the United States shale boom and the resulting decline in natural gas prices, Mexico is now experiencing its own ‘dash for gas.’ Domestic natural gas production is set to ramp up; transportation and storage infrastructure will be expanded aggressively; natural gas-fired power generation will grow significantly; fuel oil power stations will be repurposed to run on natural gas; and fuel oil will be essentially phased out of energy generation,” Robles wrote.

Furthermore, the Mexican government forecasts that natural gas will fuel 44% of power generation capacity additions through 2030. When Robles compiled his data, CFE was constructing or had tenders out for nine combined cycle power plants with total capacity of 6.2 GW. It was also converting seven power plants from oil to gas.

So who stands to benefit most? “The physical power businesses located along Mexico’s border with the U.S. would have a geographic advantage, at least early on, but the market could develop in fascinating ways as the years continue to pass. If you think about [the North American Electric Reliability Corp.’s] current coverage of Canada and the U.S., it’s not a tremendous reach to imagine the map including a considerable part of Mexico,” Hinton speculated. ■

Aaron Larson is POWER’s executive editor.