In an excerpt from his exclusive interview with Mexico Energy Review 2017, Sebastián and Joaquín Leal and Javier Garza, founding partners of SUMEX talk about their ambitions and strategies to break ground as the first qualified supplier obtaining CENACE’s permits to operate in the Mexican wholesale electricity market.
Q: What motivated you to open SUMEX and start operations before the market regulations were fully defined?
A: The limitations in the previous regulatory framework had driven companies to establish long-term agreements with generators without considering technological evolution, which is a constraint for the industry’s development. We believe that portfolio diversification is where the real business opportunities are as it allows satisfying the clients’ energy demand while offering short-term hedging contracts. SUMEX was created with the idea to bring these solutions to the Mexican energy market. The power industry is complex, but we identified that qualified suppliers had the most attractive business opportunities in the recently created market. Qualified suppliers can bring the most advanced technologies to the customers’ hands contrary to generators, which tie off-takers to a single technology.
The Mexican power market has risks but it also offers great business opportunities. We first wanted to invest in power generation projects, but we decided to become a qualified supplier after we analyzed the advantages and disadvantages of the existent market figures. The main factor driving us to create a private qualified supplier was the possibility to offer short-term contracts, which are best suited to the needs of Mexican off-takers.
Q: What kind of partnerships has SUMEX established to impulse its business in Mexico?
A: We have an ongoing collaboration with the National Institute of Electricity and Clean Energies (INEEL), which was the entity in charge of developing the electricity market platform. INEEL has strong expertise in the energy market and the modeling of physical networks and energy flows, which is beneficial for our company’s ambitions. We are also collaborating with the former Mexican Electrical Workers’ Union (SME), which inherited several assets and lands from the extinct Luz y Fuerza del Centro and formed a new energy company together with a Portuguese firm. Our plan is to establish long-term contracts with them, selling the power from SME’s facilities that correspond to clean energy technologies. We also have an agreement with SME to modernize electric meters, which will be performed in partnership with different technological suppliers.
We realized that we needed to form strategic alliances and partnerships in order to compete with a company the size of CFE, which has around 100,000 employees. Our main partners at the moment are SME and INEEL, which have the knowledge and long-time experience in the Mexican energy industry. We have also established strategic alliances with different commercial partners that have brought over 200 selling agents to the project, which we expect will rise to 500. Qualified users account for 70 percent of the electricity sold in the market, so we need to have enough specialized people to cover this large market. For this reason, we give great importance to training our staff, offering five-day courses about the electricity market functioning. We are also working to educate our customers about the new market features. Education is now the most important aspect for moving the industry forward.
Q: What are SUMEX’s strategies to mitigate the current market risks?
A: SUMEX’s strength comes from our analytical team that has an in-depth market understanding and sound mathematical models to forecast local marginal prices (PML) behavior. It is nearly impossible to predict how PMLs will behave in the long-term, but we can analyze several factors to do an accurate enough forecasting, for instance, by looking at CFE’s decommissioning plans or expected demand growth. Our analysis team looks and includes these external variables into our internal model to give us the information we need to prepare adequate offers to our clients. This team also benefits from the alliances we have with experts in energy markets and forecasting such as INEEL or Woodhouse Lorente Ludlow, the law firm in charge of shaping the market regulations. Our expert partners provide a second opinion to all our business decisions, ensuring they translate into benefits for our clients.
Q: What are SUMEX’s competitive advantages in comparison with other market participants?
A: SUMEX distinguishes itself for its tailor-made and client-centered services. We understand our clients’ needs prior to setting a tariff, not the other way around. We see ourselves as a boutique energy company offering services beyond electricity supply like energy efficiency solutions. Client interaction is crucial for our company, so we want our customers to know that SUMEX is there to help them.
Reliability is another value we offer to the market. We have identified some companies doing business in the market without having the required megawatts to back up their contracts. We have presented a number of guarantees for each of our customers in the wholesale electricity market, which are part of the estimated aggregate liabilities set in the market basis and are also an indicator of SUMEX’s financial capabilities. In addition, few companies have human resources as qualified as SUMEX, which is another element increasing our customers’ trust.
Q: How do you foresee your business expanding in the upcoming years?
A: We have commercial offices in Jalisco, San Luis Potosi, the State of Mexico and Mexico City, and we are in the process of opening offices in Yucatan, Michoacan, Chihuahua, and Baja California. We are expanding our business based on the number of contracts we have, adapting our services to the local conditions. We see great interest from private companies to enter the market. The power industry offers countless business opportunities, and the scale of Mexico’s market increases its attractiveness as it is valued at around US$1 billion. But most companies need to learn about the market before being able to capitalize on these opportunities.
We are the only private company able to operate in the market, which is one of our major competitive advantages. We will continue being the private company with the longer presence in the market once more participants join, helping us maintaining our leadership.
Q: Which indicators will you use to measure SUMEX’s success in the short-term?
A: The amount of megawatts supplied and the cost per megawatt-hour. The first is an indicator of the company’s market penetration while the cost reflects success of our power purchasing strategies and the efficiency of our analytical team. Both aspects are enough to measure our company’s advances in the commercial (MW) and operational sides (MX$/MWh). We expect to supply up to 2GW by the end of 2017, following our current commercial strategy in which our partners play a strategic role. We have grown at a faster pace than expected, going from 20 to 200 employees in three months, and we hope to continue a similar trend in the future.
Exclusive interview with Sebastián and Joaquín Leal and Javier Garza, founding partners of SUMEX
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