In an excerpt from his exclusive interview with Mexico Energy & Sustainability Review 2016/17, Cecilia Alvarado, Associate at Goodrich, Riquelme & Asociados, discusses the main features of the Mexican new electricity market, as well as the main challenges that the country will face improving its competitiveness in this sector.
Q: How has the Energy Reform created new structures to make renewable energy projects attractive to international investors?
A: The Energy Reform is promoting major changes in the country to eradicate monopolies in the oil and gas, as well as the electricity sectors. Particularly in the electricity industry, generation, transmission, distribution, and supply used to be carried out exclusively by CFE. In the case of electricity generation, private actors could participate under certain regimes, such as self-supply, cogeneration, or the small power producer scheme. Nonetheless, these were the only ways in which private companies could generate and consume their own energy, and it did not allow them to trade electricity. Now, the country has a liberalized market in which CFE remains the main player, which makes its structure even more complex. Although CFE has already undergone through a legal separation, in practice, it might take years to end its monopoly of the market.
Moreover, it is important to highlight that the purpose of the electricity reform is not to promote clean energies but to reduce prices. The Mexican market is based on the Pennsylvania, Jersey, Maryland (PJM) model, which corresponds to a pricing market. At the moment, the only available incentives for renewables present in the Mexican market are the Clean Energy Certificates (CELs) mechanism, as well as the distributed generation scheme, which includes net metering, but that is only applicable for projects under 0.5 MW. Likewise, the Wholesale Electricity Market includes another mechanism to incentivize participation in renewable energy projects in the market, which are the long term auctions to subscribe long-term Power Purchase Agreements for clean energy, capacity (potencia) and CELs.
Q: How is Goodrich, Riquelme & Asociados helping the government to improve the new market structure?
A: We have been lobbying with the authorities and players from the private sector about different topics, taking advantage of our expertise and knowledge of the industry’s concerns, particularly those of clients that are not familiar with the functioning of the PJM model and the particularities of the Mexican system. Currently, we are carrying out some lobbying work to encourage the integration of renewable energy in the market, instead of the current focus on conventional and natural gas-based technologies. In this regard, we have already raised the private sector concerns to SENER, CRE and CENACE, and these bodies have received our comments with open minds.
Q: Can you explain the different modalities in which private actors can participate in the new market?
A: Currently, the main private players in the market are generators, suppliers (basic and qualified), qualified users participants of the market, and traders. So far, electricity generation has been fully liberalized, while supply is divided among basic and qualified suppliers, and transmission and distribution activities remain under the State’s control but the participation of private entities is allowed. In the case of basic suppliers, CFE remains the sole provider as there are many obligations imposed on this market that make it unattractive to private investors. Qualified suppliers, on the other hand, emerged as a new figure to designate electricity providers serving qualified users, which are those with an aggregated consumption amount above a certain threshold, currently set at 2 MW although this will be lowered to 1 MW in August. Qualified users can participate directly in the market, or their consumption centers can be represented by qualified suppliers, and the latter is expected to be the preferred option as energy trading is not the core activity of most qualified users. Finally, the traders are actors that do not represent any power plant or load centers (they do not represent physical assets) and act only as facilitators between the other market participants. Nonetheless, we do not expect to see many traders in the near future as qualified suppliers will mostly act as traders in the new market.
Q: What are the main challenges that the Mexican energy industry will face in the upcoming years, and how is Goodrich, Riquelme & Asociados helping in this process?
A: The country is not accustomed to having a liberalized market, and the old energy trading schemes have deep roots in the national mindset. At the time, the main challenges are to develop the market completely and incentivize private actors to participate in it. Otherwise, Mexico will not be able to achieve its climate change and clean energy targets, as CFE alone is not capable of performing this enterprise. Moreover, without competition, the country will face enormous challenges in offering low cost and efficient energy, which is the key objective of the Energy Reform. In this way, the major challenge is to transform Mexico into a competitive country for the private sector and eliminate the current monopoly. It is expected that the complete transformation of the market will take up to 20 years as it is not possible to eliminate a monopoly in a short period, but we are confident that the country has the adequate foundations to grow in the right direction and that the government is working hard to understand the needs of the private sector and include its concerns in the new electricity market. To help with this transition, we are creating dialogues between the private sector and the authorities to facilitate the negotiations between both parties, and we are raising our voice to ensure that Mexico becomes more competitive in the upcoming years. The country has great potential to develop renewable energy and not only natural gas-based projects. The Wholesale Electricity Market lacks certain instruments that would be desirable, but nevertheless, it is a fairly competitive market. In general, the work performed by the authorities in the last 18 months is admirable, and they are really open to listening to the industry in order to continue improving the current framework.
Exclusive interview with Cecilia Alvarado, Associate at Goodrich, Riquelme & Asociados.
This is an exclusive preview of the 2016/17 edition of Mexico Energy & Sustainability Review. If you want to get all the information, plus other relevant insights regarding this industry, get your copy of Mexico Energy & Sustainability Review 2015/16.