Francisco Barnés
Former Commissioner
View from the Top

CFE Working to Leave Past Problems Behind

Wed, 02/24/2016 - 16:22

Q: Given all the expenses entailed in the sector’s changes, do you believe electricity will become cheaper?

A: Nowadays, electricity is more expensive in Mexico than in the US because Mexico has different technologies and uses different fuels. Ten years ago, the cost of fuel oil was equivalent to the cost of natural gas in terms of energy units, but today, fuel oil is four times more expensive. The market will accelerate the substitution of fuel oil in electricity generating plants or risk losing competitiveness. If CFE wants to maintain constant generation capacity and compete with qualified users as a supplier of electricity, it will need cheap sources of electricity. To achieve this, CFE is currently working to substitute the use of fuel oil in existing plants as soon as possible. All the units able to operate with natural gas instead of fuel oil for the next couple of years must rapidly be transformed into combined cycle plants. The timeframe for this process under a competition-driven market is much more drastic. The State-owned enterprises will no longer see their budgets constrained by the Ministry of Economy, which used to reject certain projects in the energy sector.

Another aspect that will reduce electricity costs is that losses in the transmission system are unacceptable under a market that demands efficiency. In order to set tariffs, we must initially map existing tariffs and existing losses. However, CRE has to impose a strict timeframe for CFE to correct losses or absorb them in its budget and the utility company is aware of this. Although this was previously impossible, CRE will not accept that the costs generated by stolen electricity is passed on to other users, so CFE will have to address this much more assertively than in the past. CFE needs to learn how to reduce the economic losses that result from technical issues and energy theft, or the Ministry of Energy will award the transmission and distribution segment to a more efficient player.

Q: What options does CFE have for reducing losses in the grid in an economically viable way?

A: Marginal increments in modern grids are achieved through the use of smart grids. Smart grids could optimize this process in Mexico, but this would imply replacing all the systems in cities such as Mexico City and its metropolitan area. These regions were previously supplied by Luz y Fuerza del Centro, which was not known for its efficiency. CFE has done well in reducing losses in metropolitan areas, although this has not happened as quickly as expected. CFE has certain distribution areas with performance levels that are as efficient as the best distribution systems in Latin America. If CFE can do this using old technology without investments in smart grids, this can be rolled out across the whole country.

Nevertheless, some of these losses are not technical, and the most significant ones come from medium and large companies siphoning electricity illegally in metropolitan areas. As for impoverished households that use electricity without paying, subsidies are important. These subsidies have to be targeted and their legal use has to be guaranteed so that CFE can recover electricity costs. Subsidizing a large part of the population will act as a tool for social development. All global governments, including the US, have used this tool during certain stages of development. There is a difference between subsidizing disadvantaged populations and large companies. Certain major agricultural companies that use modern irrigation processes have electricity and water subsidized when smaller producers should be the ones receiving financial aid. The Reform will force us to make those difficult political decisions because CFE has to be a productive enterprise.

Q: Given the difficulties faced by the utility, are the expectations placed on CFE realistic?

A: CFE is addressing its problems with remarkable efficiency. Even before the Reform, CFE was guaranteed access to natural gas, meaning that in a short time CFE will be able to substitute fuel oil. This will happen independently from implementation of the market rules, and will take place over the coming years as pipelines are built. This process will be important in reducing tariffs in the country. In addition, CFE is moving quickly in reducing technical losses in the system, which is fortunate since CENACE will only administer the operation of the system, meaning that the ultimate responsibility falls on CFE. Therefore, we will now have a regulator to establish a framework and determine if it is possible for CFE to meet a set of targets in a given timeframe.