Monday, February 18, 2019

Mexico’s Power Market Continues to Gain Strength

By Tom Kleckner

HOUSTON — Mexican policymakers said last week their country is moving steadily in its efforts to inject competition into its electric industry but acknowledged its 2018 presidential campaign is bringing fears of uncertainty.

SENER’s Jeff Pavlovic, managing director of electric industry coordination. | © RTO Insider

Kicking off the Gulf Coast Power Association’s second annual summit on the Mexican market, Jeff Pavlovic, managing director of electric industry coordination for Mexico’s Ministry of Energy (SENER), briefed his audience on the country’s fledgling energy market.

In a matter of years, he said, Mexico has begun a short-term energy and ancillary services market, a capacity balancing market, long-term auctions for energy, capacity and clean-energy certificates, and bilateral transactions. Medium-term auctions are scheduled to be conducted in October and a financial transmission rights auction in November, with the clean energy certificate market beginning next year.

“The fact that we’re getting a bilateral market up and running is a big deal,” Pavlovic said. “We don’t want to centralize decisions … so the development of a bilateral contract market is important.”

He said the FTR manual is up for final approval and will soon be published for all market participants. One change participants will see is in credit requirements, which were previously published at 250 pesos/MWh (about $13.29).

“We heard loud and clear that that was too high and would scare away all participation,” Pavlovic said. “We need to get smarter in the new manual and with a new scheme. Each FTR will be valued on expected value and its variability.”

He took a minute to brag about the volume and diversity of the market’s first two long-term auctions, which resulted in approximately $6.6 billion of total investment. Pavlovic said the auctions acquired solar and wind capacity equal to 171% of the previous 18 years’ additions. In the meantime, SENER continues to transition responsibility for the market to Mexico’s Energy Regulatory Commission (CRE).

“The ministry will eventually hand over the keys to the car to the CRE,” he said. “We tried to move the most volatile rulemakings out of the ministry to the more stable place, which is the CRE. We’ll do it for the next several months because we can do it more quickly, but we will move that to CRE by the end of the year.”

CRE Commissioner Guillermo Zuñiga | Guillermo

It wasn’t that long ago that the Comisión Federal de Electricidad (CFE), the state-owned electric monopoly, dominated every aspect of the market. There are still issues to be worked out, CRE Commissioner Guillermo Zuñiga said.

“One of the main issues is the Tariff,” he said. “We’re working on the costs of the [CFE] legacy plants … and their allocated costs. Subsidies may come later.

“Before reform, subsidies were embedded in CFE’s financial statements. You couldn’t tell the size of the requirements’ subsidies, because it was in the belly of the monopoly. We want transparent subsidies.”

Explaining the Benefits of Market Participation

CFE Calificados, the former monopoly’s qualified supplier, in November completed the market’s first hedge contract with Frontera Mexico Generacion, a subsidiary of power generator Fisterra Energy. It didn’t come easy, resulting from months of work and meetings throughout the country.

CFE Calificados CEO Katya Somohano | © RTO Insider

“We try to educate and explain to the final customer,” said CFE Calificados CEO Katya Somohano, who has helped complete several power purchase agreements. “One of the lessons is to move from fixed contracts to where the customer benefits from a change in gas prices. We’ve been very keen showing that and telling customers how it works.

“We spent about two years going around the country. We spent three to four hours explaining the market and the risks. One of the lessons is to move from fixed contracts to where the customer benefits from a change in gas prices. Experience is something very important. If they make the move, they’ll be in the market for three years, by law. We explain that. The Tariff is at such an [advanced] level that some, not all, customers will be in a better position in the market.”

“Four or five years ago, I would have called the market very regulated with not a lot of opportunities,” said Juan Guichard, director of competitive qualified supplier Ammper Energia. “We have come a long way in a brief amount of time. I see it as an execution of what has been designed. To be here in Houston, talking about the Mexican energy market, is proof of that.”

Political Uncertainty Cast Cloud over Market

During the GCPA’s first summit on the Mexican Market last year in Mexico City, Nick Panes, a senior partner with local consulting firm Control Risks, made predictions about the U.S. presidential election. Like many pundits, he was wrong.

“We’re living with the political reality of certain events that happened last November,” he said, apologetically. “We’re living in a global, bilateral political reality. The key issue for us has always been that planning and careful consideration of the issues one is going to face will help avoid unnecessary delays.”

Panes said the key issues to market success have not changed: legal and regulated risk, community relations, human resources and capital, the rule of law and transparency, and — especially in northern Mexico — security.

“For many years — perhaps justifiably, perhaps not — security has dominated the headlines around Mexico,” he said. “Our line, as last year, is that it does not represent an insurmountable obstacle to investing and operating in Mexico. It is going to be a critical political issue going forward. In certain parts of the country, [security] has deteriorated, and it is likely not to improve going forward into 2018” when Mexico holds its national elections.

Zuma Energía CEO Adrian Katzew | © RTO Insider

Adrian Katzew, CEO of clean-energy developer Zuma Energía, said next year’s election is already creating challenges.

“Those of us with intermittent resources may have to buy certificates in some years because the wind is not blowing,” he said. “We need the system to be healthy. To be healthy, the projects need to become reality. We need certainty. One of my concerns is some of these not be able to mature. [Competitors] will point to the industry and say, ‘See, prices are too cheap. Clean energy can’t be this cheap.’”

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