Bringing Geothermal into the Energy Mix

Q: To what extent have you advanced to become a qualified supplier in the new energy market?

A: We have made great advancements on our energy trading plans, but it has been challenging to launch a definitive project as there are still regulations pending. We have already acquired the necessary permits from CRE to be a qualified supplier but we are still waiting for CENACE to define the final market rules. It is a difficult process but we see a lot of potential in it so we will continue with our plan to enter the wholesale electricity market. Most private companies are in a similar situation, but we expect the market to take off eventually. We have the resources and capabilities for a successful entry, but we need certainty regarding market regulations before proceeding. As a strategy to reach off-takers, we are offering self-supply plans with permits acquired under the previous regulatory framework. We have two self-supply projects under construction and they can migrate to the new regulations at any time. Self-supply projects act as a bridge to the new market, which is an advantage for both our clients and us.

Q: What are the differentiating factors that will allow qualified suppliers to succeed in the market?

A: Prices will continue to be a major factor for off-takers to select from different qualified suppliers. However, companies must be aware that low prices alone are not always the best option in the long run. Most industries require longterm PPAs, so they need to analyze how energy prices will fluctuate to decide the cost-effectiveness of a particular offer. We see a need for evaluation methodologies and tools that off-takers could use to analyze these variables. Electricity tariffs are still influenced by factors unrelated to technical issues, which will be unsustainable in the long run, and companies must consider this when making long-term decisions about their energy supply. Customer service will also become increasingly important in the coming years. Customer experience was often overlooked as the industry used to be a monopoly, particularly regarding information transparency and sharing. Now it will be a differentiating factor as consumers become more aware of their energy usage.

Q: What other areas of opportunity have you identified in the Mexican power sector?

A: We see great potential in energy forecasting and the use of thermography for energy applications. The evaluation of market dynamics and the identification of energy use in different industries will differentiate successful companies from the rest. All electric utilities sell the same product, a flow of moving electrons, so differentiating factors will be related to aspects such as quality customer service. In this new landscape, customer data regarding electricity usage will be crucial for companies wanting to have a competitive advantage. We have the software and hardware needed to perform these tasks. Our group is one of the companies in Mexico investing the most in data storage devices. We also see a barrier in this sector as most Mexican companies do not have real-time metering devices. The Law of the Electricity Industry says that private investment in electricity transmission and distribution infrastructure is only allowed under certain conditions with CFE or its subsidiaries. We would be highly interested in investing more in this sector, but we are discouraged by the existing constraints.

Q: What investments has Grupo Dragón already made in electricity transmission and distribution?

A: We have allocated US$215.5 million to a smart grid project. It focuses on advanced metering devices and is one of the largest initiatives in Mexico in this regard. We are working with CFE on this project as stated by Mexican law, which says that private players must establish joint ventures with the state-owned company for transmission and distribution initiatives. We have identified a number of business opportunities for improving the Mexican electricity network and we consider advanced energy metering as a suitable starting point. Efficient and accurate interpretation of energy data is one of Grupo Dragón’s strengths, as we have over six years more experience in this area than our competitors.

Q: What type of projects would you develop if private investment in transmission and distribution was fully liberalized?

A: Distribution represents the largest business opportunity from our standpoint as there is a need to educate large electricity consumers about best energy practices. Electric utilities could offer service packages, selling electricity supply with a demand management approach. Utilities could advise customers of the most suitable times to perform energy-intensive processes, rewarding them for following their guidelines. We would also like to invest in the modernization of the power distribution network, a sector that could benefit enormously from private investment. Having more efficient grid lines would reduce the number of technical losses, bringing economic savings to the country and avoiding power blackouts. Also, it would avoid the presence of voltage voids in the network, which can seriously damage sensitive equipment.

Q: How are you collaborating with CENACE to tackle challenges with the Mexican power network?

A: CENACE has technical capabilities that exceed our own. More than helping it, we are collaborating with the grid’s operator to enable communication between regulatory entities, the government and private industry. Our most important role is to support CENACE in adapting the best practices it has learned from other markets to the Mexican context, contributing to its successful implementation. There used to be a lack of communication between public entities and the private sector, a situation we want to avoid in the new market.

Q: What allowed Grupo Dragón to win the first private concession for a geothermal project in Mexico?

A: It is impossible to complete a geothermal project in less than five years as it requires large investments and long exploratory and drilling periods. The same situation happens in all countries with geothermal resources. It is not a challenge exclusive to Mexico. Our project has been operating for one year, meaning it was planned at least six years ago. Because of this, when we acquired our permits, the project was under the self-supply scheme from the previous regulatory framework. The old regulation required geothermal projects to have a water concession from CONAGUA, which was later transformed to geothermal. This transition period brought uncertainty to our project because we were not sure that our previously-acquired permit would migrate to the new law. We managed to change our concession, which was fortunate as we already had made major investments. We bet strongly on geothermal because we considered it a promising and clean energy technology in spite of the risks involved. This all happened before the Energy Reform.

We do not consider the new regulations to be particularly advantageous for geothermal development. On the contrary, they complicated the bureaucratic processes for us. We had the advantage of being the only private company participating in the sector at that time, which allowed us to establish a direct dialogue with the government and ease the transition process. The outcome would have been completely different in the wind energy industry, where several private companies were already operating. In the long term, however, we do not exclude the possibility of new geothermal developments benefiting from the new regulations.

Q: Would you be interested in participating in Round One for geothermal energy and why?

A: As the first company developing a fully private geothermal project in the country, we are highly interested in expanding in the sector. Besides private investment, we are willing to collaborate with CFE in the development of new geothermal projects. As a Mexican company, we feel strongly committed to creating new job opportunities while contributing to the protection of the environment, and geothermal projects comply with both requirements. We have a team of valuable professionals that are happy to work in a Mexican company that is carrying out innovative projects. Grupo Dragón is mostly made up of Mexican employees, which also sets us apart from other renewable energy companies.

Q: What are the advantages and challenges of being a fully Mexican company in a sector dominated by international players?

A: An increasing number of Mexican professionals have gained experience working with international companies. Mexicans are exceptionally creative, which is important for engineering-related activities and is something not all nationalities share. Mexico’s young professionals are hungry for success, an aspect that companies with ambitious initiatives, such as Grupo Dragón, appreciate. Being a Mexican company allows us to understand the country’s idiosyncrasies, which is needed to design the best solutions according to the national context. I have mostly found advantages in employing Mexican professionals. Grupo Dragón was founded seven years ago and we are now a reference in the sector. We are pioneers in geothermal and smart grid development in Mexico and this success has been mainly possible thanks to our committed Mexican workforce.

Grupo Dragón is a Mexico City-based electricity solutions company with proven expertise in the generation, operation and maintenance of large-scale renewable energy projects, as well as efficiency consulting services, among others.