Adverse Times Represent an Opportunity for Mexico's Power SystemBy Ramón Moreno | Fri, 05/22/2020 - 09:49
The first sentence of Tolstoy’s “Ana Karenina” is as famous as the book itself: “Happy families are all alike; every unhappy family is unhappy in its own way.” Unfortunately, we are living through times of great anxiety for many families who have been hit by the deadly coronavirus, as well as for those who are losing their way of living due to the resulting economic crisis. This is true now in almost every country, but we could rephrase Tolstoy to say that crisis hits each country “in its own way.” Mexico is no exception.
It has been over a month since the health emergency was enacted in the country. The pandemic is pushing every social and economic sector to adapt as quickly as possible to this unexpected situation. At the same time, the government and businesses are trying to guess what will come next, in this return to “new normal”. Yet, short-term decisions on cash flow or debt cannot be addressed without an understanding of how to generate value in the mid-term and ensure a prosperous future.
The world we knew last year will never come back, but the pandemic that we are struggling with today will also fade away. How soon and what comes next are the big questions. Most projections on GDP growth point to a contraction of 6 to 12 percent. Mexican exports are expected to decrease to a similar level, although the WTO said a few weeks ago that Mexico will recover its export levels in as soon as in one year, faster than any other country in the region. Even if that happens, it is hard to imagine the Mexican economy going back to pre-COVID-19 levels earlier than two or three years down the road.
This is important for the power sector. For most OECD countries, electricity demand has been declining and has uncoupled from GDP growth. However, in Mexico, demand has increased by about 3 percent per year over the last two decades, closely linked to industrial consumption, and it is expected to continue to rise at the same level over the next 15 years. This meant that 70,000MW would have to be added to the system throughout the period 2018-2032. A common rule of thumb is that Mexico's power demand increases 1.5 times the GDP growth rate.
Assuming that connection is still valid, Mexico’s power system landscape will change drastically with the economic crisis, at least in the short term. April posted a year-on-year reduction in power demand of around 10 percent, with a higher impact in the more industrialized northeast region and coast touristic areas. It is reasonable to conclude that this pattern will continue in the following months and that it will be a long way until demand goes back to the levels of 2019.
Even it sounds contradictory, this decline could represent an opportunity rather than a dramatic downturn. Mexico's power system is in the process of modernizing and has evolved significantly in the last few years. Spot market prices are getting closer to those of more mature markets, and commercial and industrial consumers now have access to competitive tariffs from qualified suppliers.
However, to proceed down this path, the system requires a proper foundation that ensures reliability while also facilitating the introduction of new technology. There are three major areas to underpin this process. The first is regulation, which needs to be reviewed on subjects such as access to power grids, spot market sophistication, incentives for new firm capacity, clear rules on energy storage or enabling distributed energy resources, such as community solar energy.
The second is planning, which requires better coordination among the different actors. This means understanding the concerns of the government, consumers, generators, equipment manufacturers, service providers and other stakeholders in the power sector and working toward a common goal.
The third is to reinforce the transmission and distribution network. Technology is evolving rapidly, making renewable projects more and more viable and efficient “fuel savers”. On the other hand, new utility-scale combined cycles are economically difficult to justify due to uncertainty in the pace of cost reduction related to storage, among other factors. Finally, gas price is now in historic minimum levels but could increase in the near future if there is a decrease in associated gas production linked to oil price reduction. These threats and opportunities all point to transmission and distribution network as the fundamental, critical system to reduce electricity tariffs while enhancing power reliability.
Infrastructure systems evolve at a slow pace relative to the accelerated evolution of technology. This is valid almost everywhere, including Mexico. However, a temporary reduction in demand provides an opportunity for the country to strengthen its regulation, planning and power grid. At the end of the day, the production of reliable, affordable, and clean electricity will facilitate the economic development that Mexico is working hard to achieve for the good and happiness of Mexican families.