Mexico Makes Rapid Progress on Energy Reform

Barely a year after Mexico launched a wholesale market with retail competition as part of a wide-scale reform of its power sector, the country has managed to implement a transparent system that is attracting investment. Mexico has also expanded its grid and deployed notable amounts of renewables that are producing power at unprecedented low prices, a key Ministry of Energy official said during a December 2 event hosted by two research centers at the University of Houston Law Center.

Dr. César Emiliano Hernández Ochoa, undersecretary of electricity of the Mexican Ministry of Energy (Secretaría de Energía, SENER), told attendees at the Center for U.S. and Mexican Law and the Environment, Energy and Natural Resources Center that the country began contemplating energy reforms after its entrance into the North American Free Trade Agreement in 1994, when it more freely welcomed foreign investment and trade opportunities. But it also grappled with reliability challenges spurred by rising demand and crumbling infrastructure, including inefficient power plants. It also suffered from soaring electricity prices: Average electric rates during the first quarter of 2013 were 25% higher than in the U.S.—and if subsidies were stripped, prices were 73% higher, said Hernández.

In December 2012, after a decade of contemplated electric sector reforms by the conservative National Action Party, President Enrique Peña Nieto of the nationalistic Partido Revolucionario Institucional (PRI) assumed the Mexican presidency, and Mexico’s Congress enacted a series of reform-enabling constitutional amendments in December 2013. (Secondary, clarifying legislation was passed in August 2014.) By November 2014, CENACE, a regulatory body that was a department of government-operated electric utility Comisión Federal de Electricidad (CFE), had been restructured to become an independent authority tasked with operation of a wholesale electricity market. And, in January 2016, the government launched the wholesale electricity market.

By the end of 2016, the country had held two auctions in which private companies made bids to sell power under long-term contracts to CFE starting in 2018. The two auctions alone have incentivized $6.6 billion of total investments, including new projects in 15 states, much from a diverse mix of foreign companies, Hernández said. A third auction is planned for April 2017.

So far, the country has also set up hourly cost-based energy and ancillary services, yearly capacity markets (administered by the government), clean energy certificates, and financial transmission rights. Hernández noted that Mexico’s government consulted with many stakeholders and outside firms to plan how it would embark on transforming its traditional industry model into a competitive market, and it took into account best practices from countries around the world that had taken similar steps. For example, nodal prices for spot energy markets were modeled on Argentina, Chile, Ireland, Russia, Singapore, and New Zealand, but also U.S. markets such as PJM and the Electric Reliability Council of Texas. Capacity market features were borrowed from the UK, Ireland, Russia, Colombia, and parts of the U.S. The Clean Energy Certificate program with clean portfolio requirements came partly from Italy, the UK, Australia, Chile, and India.

The government was determined to achieve several goals with the reform: It sought to improve competitiveness of industry and commerce, increase the disposable income of the population in general, and create opportunities to export low-cost power, Hernández said. Analysis yielded projections that reform could reduce system costs by 29.5%, and it pinpointed a glaring need to cut energy losses in the network, as well as to increase fuel optimization to help slash electricity rates.

As set out, the reform appeared complicated and ambitious, he added. SENER sought transparency of market demands, calling for authorities to invest in technology to improve databases, metering, and accounting. It also assumed that competition would drive more efficient practices. For instance, “If true costs are identified, prices and rates would be set without distortions,” said Hernández.

SENER envisioned a flexible market that would spur new services “tailored to the needs of the consumer,” foster new generation technologies and financial products, as well as attract and develop local human capital and development. This was critical to attract investment—both domestic and foreign—necessary to deploy the 57 GW of generation capacity that SENER projects Mexico will need through 2030. Such development will cost up to $131.6 billion between now and 2030, SENER estimates, including $98.7 billion for generation and $15 billion for transmission lines, which for the first time will be allowed with private financing.

Another mammoth challenge SENER faced was transforming CFE—a vertically integrated state agency that retained a historic monopoly on the power industrial chain, from generation to delivery—into a profit-making competitor within the market. In January 2016, SENER officially unbundled CFE by function: generation, transmission, distribution, basic supply, commercialization, and procurement of primary inputs. It also established five different generation companies (and another subsidiary to administer power purchase agreement contracts) under CFE, as well as 16 distribution units and a transmission subsidiary, though these will remain under state control (Figure 3). A key aim was to make CFE “profitable, but have it not impede a profitable market,” said Hernández.

PWR_010117_GM_Fig3

3. The breakup. Mexico is in the process of restructuring Comisión Federal de Electricidad (CFE), Mexico’s monopolistic state-owned utility, distributing assets to five generation companies and a sixth subsidiary to administer power purchase agreements around the country. A government official in December said that, while still owned by CFE, the companies would have “Chinese walls”—no coordination between competitive segments and separate marketing—as well as specialized supervision of each activity and clear information about the performance of each company. Courtesy: SENER

“Now we are past the point of return,” he said. The reforms are well underway, and the country is seeing some unprecedented changes. Before the reform, Mexico’s grid was patchy. While 98.5% of the national population is electrified, 1.8 million Mexicans still lack access to power. Today, the grid has 65.4 GW of generation capacity, nearly 35.6% of which is combined cycle natural gas. About 19.7% is fuel oil and gas steam capacity, and about 9% is from coal.

However, 26% is now from clean energy, including hydro, wind, geothermal, solar, nuclear, and biomass. That puts a country that is rich in solar, wind, and geothermal resources closer to its clean energy capacity goals of 35% in 2024, 40% in 2035, and 50% in 2050. Forecasts are astounding: By 2030, SENER projects that Mexico will have effectively tripled its clean energy capacity and increased its combined cycle gas-fired capacity by 75%. Solar has been particularly successful in Mexico’s auctions, winning 74% of contracts in the first and 54% in the second, followed closely by wind power. “Solar was practically nonexistent in Mexico before the auctions,” Hernández noted.

The challenge that remains is to create supporting infrastructure, including a natural gas market. “The 2015 to 2019 five-year expansion of the natural gas transportation system will capitalize on our strategic position through 13 projects,” he said. Plans are also underway to complete three high-voltage direct-current transmission lines and a number of reinforcements over the next five years to reduce congestion. “Through investment and expansion, the transmission network will guarantee the delivery of cheap and clean resources to the regions of high demand,” Hernández said.

One area of focus continues to be cross-border interconnections with the U.S., Hernández noted, though he did not address how plans may change with the incoming Trump administration, which has promised to reassess existing trade policies. Currently, Mexico-U.S. trade occurs in two main regions: Baja California/California and Tamaulipas-Coahuila/Texas, with five interconnections of 1,096 MW in permanent operation and eight interconnections (788 MW) for emergency backup. As Mexico evaluates participation in the California ISO imbalance market, SENER projects that new interconnections of 6,000 MW could produce an annual net savings of between $125 million to $300 million.

Sonal Patel, associate editor (@POWERmagazine, @sonalcpatel)