Mexico: embracing the market through renewables

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In previous posts and articles I have argued that the success of Mexico’s electricity reform lies in restraining CFE’s incumbent market position resulting from its former status as electricity monopoly. The electricity reform officially opened up with two auctions for renewable energy, in March and September of 2016. In both cases prices were very competitive, but as the sole off-taker, CFE was the only beneficiary. The third auction under way has opened up new possibilities for Qualified Service Suppliers and Qualified Users to participate directly in the market. This should enable at least some consumers to benefit from lower prices from cleaner technology and encourage the renewal of Mexico’s power generation matrix.

 

New Players and new Opportunities

The third renewable electricity auction set to close in November has introduced a series of changes that promise to truly open up the market to competition. Qualified Service Suppliers and Qualified Users are now allowed to participate directly, making bids for energy, capacity and Clean Energy Certificates (see chart above), which are set to start trading in 2018. Qualified Users are those that consume over 5 MW of capacity and 20GWh of energy a year, and include mining, paper, steel and automotive firms. Qualified Service Suppliers are companies that commercialize all three products and act as intermediaries in the wholesale and auction markets for large consumers with a capacity demand greater than 1 MW.

As of July of this year, 20 companies had signed contracts with CENACE, the system operator, to be Qualified Service Suppliers, and 5 of those have already started operating in the wholesale market: Sumex, who was the first in line, followed by CFE, Iberdrola, Orden Cardinal (Orca) and American Light and Power MX. Hella Automotive México is the only company signed up to be a qualified user, with the ability to bid directly in auctions (Source: CENACE).

Special discounts: move over CFE

Generators, large users, and independent producers are flocking to the new opportunities opened up in the electricity market. Spurred by the increase in prices from CFE (see chart below), many large users are contemplating abandoning the utility to purchase their energy from Qualified Suppliers, such as Sumex, which currently offers a discount of 5-15% over CFE tariffs.

Title: Average CFE tariffs, medium and high tension, 2013-2017 (Pesos/KWh) Source: Expansión. 28-jun-2017, http://expansion.mx/opinion/2017/06/27/opinion-el-momento-correcto-para-consumidores-en-el-mercado-electrico-mayorista

Those who for  many years supplied their own energy needs as independent producers, like Walmart, are now seeking to take advantage of the price differentials between wholesale prices and CFE tariffs. They are making plans to expand their generating capacity and sell the excess they do not consume. Because of the complexity of operating in the day-ahead and hourly sport markets, industries that self-generate electricity but whose main economic activity lies elsewhere, are coming to Qualified Service Suppliers to operate in the market on their behalf. The expectation is that this segment of the market will expand rapidly. If this happens successfully, Mexico stands to become a model for the region, where many countries deregulated their electricity systems but fell short of the promise of establishing electricity brokers that would allow consumers to access the benefits of market competition.

 

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