Sebastián Leal, Javier Garza, Joaquin Leal
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Breaking Ground in Electricity Market

Wed, 02/22/2017 - 17:33

Q: What was the motivation to launch SUMEX before market regulations were fully defined?

A: 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 us to satisfy the energy demand of our clients while offering short-term hedging contracts. SUMEX was created to bring these solutions to the Mexican energy market. The power industry is complex but we have found that qualified suppliers have the most attractive business opportunities in the recently created market. Qualified suppliers can put the most advanced technologies into a customer’s 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 analyzing 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 push 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 was awarded several assets and land 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 their electric meters, which will be performed in partnership with different technological suppliers.

We realized that we needed to form strategic alliances and partnerships 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 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 sales 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 place great importance on training our staff, offering five- day courses on the functioning of the electricity market. We are also working to educate our customers about new market features. Education is now the most important aspect for moving the industry forward.

Q: What strategies is SUMEX using to mitigate market risks?

A: SUMEX’s strength comes from our analytical team that has a deep market understanding and sound mathematical models for forecasting the behavior of local marginal prices (PML). 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 forecast, by looking at CFE’s decommissioning plans or expected demand growth, for instance. Our analytics team looks at these external variables and includes them our 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: Which other market participants can benefit from partnering with SUMEX?

A: Our status as a qualified supplier allows us to represent generators in the market, an added value we also bring to the industry. Generators can take up to one year to register to represent themselves in the market. Completing transactions through a qualified user can reduce this time and increase the profitability of their projects. Generators also benefit from contracting our services because we handle all the regulatory processes and provide customer services, which tend to be complex for non-specialized companies. This is a separate business line we created to simplify the participation of generators in the market.

We have seen an inflow of US energy traders, many of which have over 15 years’ experience in the US market. Their core business is to attract clients for electrical utilities. Some have approached us to join efforts in the Mexican market and we have selected the North American Energy Associates Mexico (NAEAM) as our strategic partner for Mexico City and the State of Mexico. NAEAM has around 7,000 clients in the US but we expect to serve many more customers in the metropolitan Mexico City area, which is particularly important due to our agreement with SME and its high incidence of energy losses. NAEAM has great ambitions for Mexico and it already has around 80 sales agents operating in this region. This partnership is mutually beneficial because

NAEAM brings its commercial experience to the table while we bring our knowledge of the Mexican framework. We have established other strategic partnerships with international companies. Most were eager to enter the market but needed a partner that had all the permits and operational structure already in place.

Q: How do you see the business expanding in the next few 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 and adapting our services to 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, valued at around US$1 billion, increases its attractiveness. But most companies need to learn about the market before they can capitalize on these opportunities. We are the only private company able to operate in the market, which is one of our major competitive advantages.

Q: Which indicators will measure SUMEX’s success in the short term?

A: The amount of megawatts/hour supplied and the cost per megawatt-hour. The first is an indicator of the company’s market penetration while the cost reflects the success of our power purchasing strategies and the efficiency of our analytics team. Both aspects are enough to measure our company’s advances in the commercial (MW/h) and operational sides (MX$/MWh). We expect to supply up to 2GW by the end of 2017, following our 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.