In late December, Mexican President Andrés Manuel López Obrador announced an agreement with Hydro-Québec to refurbish 60 existing hydroelectric plants. The announcement confirmed President López Obrador’s commitment to revamp the state’s power utility, the Comisión Federal de Electricidad (CFE).
Energy experts warn, however, that the move could signal higher prices for commercial and industrial customers paying the CFE, which would further bolster the business case for these customers to pursue alternative opportunities in the competitive supply market. We spoke with Julian Gibson, Senior Energy Advisor for Enel X North America, about the agreement and what it means for customers in Mexico’s recently liberalized energy markets.
Q: What is your background in Mexico’s energy market?
I joined Enel X after working in the electricity and natural gas markets in the United States and Mexico with NRG Energy, UNS Energy, and NextEra Energy. Since joining Enel X North America, I have led the delivery of our energy advisory services in Mexico, where I currently support companies with aggregate commodity expenditures of over $100 million USD.
Q: What’s your reaction to the President’s plan to increase hydroelectric production?
The announcement suggests that President López Obrador and CFE chief executive Manuel Bartlett Díaz are committed to keeping existing, aging CFE generating stations online, which belies the natural retirement cycle of power plants. As power plants age, there is a temporal inflection point beyond which it becomes less expensive to replace older, inefficient generating units with newer, more efficient ones.
The CFE is also analyzing options to invest in an additional 3,300 MW of new hydroelectric generation, which would provide a more expensive source of capacity than would investment in other technologies, for example combined-cycle gas generators.
Any increase in costs for the CFE will be passed onto customers. So it’s safe to say that these actions will exacerbate the trends we saw in 2018, in which tariff capacity costs reached levels that were nearly five times higher than market capacity costs.
Q: What other implications does this have for Mexico’s energy industry?
We’re seeing some political fallout that may continue for some time. Comisión Reguladora de Energía (CRE) Commissioner Montserrat Ramiro resigned her position last week, the third commissioner to resign since the new administration took power in December. There are rumors that a fourth commissioner may resign, which would paralyze the CRE as four commissioners are required for a legal session.
The resignations at the CRE, which is responsible for independent regulation of several commodities markets, illustrate a tension within the new administration regarding its policies in regulating the energy markets. Market participants of all types are waiting to see what, if any, changes in public policy will be made that establish a regulatory trajectory for the for the next six years.
Q: What other market activity should customers know about?
Centro Nacional de Control de Energía (CENACE), the organization that manages the electrical grid in Mexico, recently canceled the fourth long-term electricity auction that was to be held this year. During the long-term auction, the CFE purchases 15-year contracts for energy and capacity and 20-year contracts for Clean Energy Certificates (CELs).
Canceling the auction will deprive the CFE of a long-term source of firm supply, which will tend to exacerbate volatility in tariff costs and likely push industrial customer tariff rates higher over the long-term. However, this also means that more energy and capacity will become available to suppliers participating in the retail markets, which could result in downward pressure on prices in those markets.
Q: What does this mean for energy users in Mexico?
The takeaway here is that the sub-optimal capital investment decisions by the CFE and the cancellation of the long-term auctions will likely cause further upward pressure on tariff rates, which have already spiked dramatically in the past year.
The scope in which the new administration may act is limited by the fact that a constitutional amendment would be needed to repeal Mexico’s energy market reforms, but decisions on how to manage the CFE’s existing portfolio and future investments will have significant impacts on customer rates.
Ultimately, we expect to see an increasing number of customers migrate from the CFE tariff in favor of less expensive, less volatile options found in the retail supply market and through distributed generation.
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