César Hernández Ochoa
Undersecretary of Electricity
Ministry of Energy
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Electricity Market Pushes Mexico to Cleaner Energy Sources

Wed, 02/24/2016 - 09:22

Q: What progress has been made in the past two years in transitioning from fuel oil to cleaner sources?

A: Over the past two years, both electricity generation from natural gas and renewables have grown by 10% compared with the previous two years, gradually displacing fuel oil. It is a tendency that will continue, and this year we carried out the first exercise in indicative planning for generation. As stated by law, each year we have to indicate the obligatory percentage of CELs that will come into effect in 2018. We set this percentage with the goal of fulfilling the country’s objectives, such as 35% of non-fossil fuel generation by 2024. The sector’s plan includes a goal of 25% for 2018. The expectation for the upcoming years, which is shown in the planning exercise, is to reach the 25% objective in 2018 with the projects that are already under construction or are being reviewed. Currently, we are on track to meet our objective for 2024.

Q: What measures are being taken to expand the role of natural gas in the energy matrix without affecting the participation of renewables?

A: In the indicative planning for generation exercise, it was shown that the most efficient model for a medium-term plan of 15 years consisted of increased use of natural gas and clean energies, mainly renewables. Therefore, rather than competing with each other, both are growing at the expense of the inefficiency of fuel oil generation. Wind energy is expected to evolve the most, with geothermal and solar following closely behind, as well as natural gas combined cycle plants. The policies directed at natural gas include the development of new interconnected pipelines, which has been promoted by CFE and PEMEX. The carbon tax included in the latest Fiscal Reform does not impact natural gas generation, as methane is exempted from this tax. In the case of renewables, there are also fiscal incentives, such as the immediate deductibility of investments in these types of technology. Thus, natural gas does not have the burden of the carbon tax and investments in renewables come with a fiscal incentive. Both are cheap energy sources that will be incorporated at the expense of more expensive, inefficient technologies.

Q: What is the Ministry of Energy doing to guarantee clarity and certainty in the wholesale electricity market?

A: The rules of a wholesale electricity market are naturally complex, but no more so than the rules of a banking system or the stock exchange. Mexico is an emerging economy that has enough capacity in all of its economic sectors to deal with the complexity that is necessary to develop sophisticated products. With this in mind, the launch of a system implies learning the new rules, which is why we are holding seminars and conducting consultation sessions and intense communication with the industry. Evidently, we cannot condense the regulations of complex products to three paragraphs, and at the moment we are working on improving the clarity and the wording of the regulations we are issuing. As the rules develop and players become more comfortable with the new arena, it will become easier to become acquainted with the new regulations. Companies have a regulatory department that knows how each of the elements work, and for users, the complexity of the system does not affect their daily operations.

Q: What are the expected challenges and results of the initial stage of the wholesale electricity market?

A: I think the wholesale market will be a key tool in ensuring a reduction of tariffs, which is the dominant objective in the restructuring of the electricity sector, and this will be achieved through a competition scheme. The wholesale market will generate this competition in all the products related to electricity and in the electricity itself, because this has to be dispatched through marginal costs. This will take place in the nodes and the congestion, which will incentivize players to generate energy where it can be evacuated, as well as in the capacity, since we will have a market that rewards availability in demand peaks, and finally in the incorporation of clean energies through an instrument in which each clean energy generator will compete to become the most efficient. In each of the markets -capacity, electricity, clean energy, and transmission- there will be competition and instruments that reflect international best practices. This is a product and an institutional development that will guarantee that there is a constant pressure on the efficiency of the electric system in economic terms, which should ultimately translate into better tariffs for all users. In my view, this will be the biggest legacy this reform will leave.