Hans Joachim Kohlsdorf
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Energy To Market
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Expert Contributor

Electricity Tariffs: Modernization or Constitutional Changes?

By Hans – Joachim Kohlsdorf | Fri, 01/07/2022 - 09:07

The intention of this article is to present solutions to some of the critical issues in the electricity sector, approaching them from the perspective of the tariff structure, which we are all reminded of at our homes and businesses when our utility sends us the monthly bill.

I am going to keep some basic premises unchanged and build my argumentation on them:

1) Subsidies to the low-income population that consume very little energy should continue to be granted with resources from the Ministry of Finance (SHCP) and not from the electricity market or CFE. I am not convinced that these subsidies should continue for the agricultural irrigation sector.

2) With low energy costs, it is impossible to promote energy efficiency programs, but it is better to subsidize electricity than encourage people to use other, much more polluting fuels.

3) All costs associated with the operation of the market must be assumed by all market players. If someone receives a discount, the other participants must bear that cost.

4) We must treat all players equally. Costs and revenues for energy and capacity must be borne by all participants.

The easiest example to understand are solar panels in homes and small businesses, which offer a great savings opportunity for the user and a business with tremendous growth potential for everyone.

Let us understand the environment and how to further promote these opportunities: panels generate electricity surpluses during the day, CFE receives these KWh and returns the same amount of KWh at night. This method is called “net metering.” The merit of this model is that it triggered the massive installation of solar panels. Continuing with this scheme today, 10 or 15 years later and with much cheaper panels and batteries, represents several problems:

- We already have many panels installed in some areas, generating intermittency in the grid without complementing them with investments in energy quality.

- The National Electric System provides capacity support through CFE at zero cost.

- CFE receives cheap daytime KWh and returns expensive nighttime KWh, without charging the difference.

- The current tariff system takes user consumption as the basis for setting the tariff that applies to your home. If you have panels, the net consumption is taken; that is, the difference between energy generated and consumed and instead of applying the high consumption rate (DAC), the highly-subsidized tariff for humble homes is applied.

- CFE, and therefore the National Electric System, assumes the cost of the tariff subsidy and the non-collection of the capacity required by the loads that install panels.

- If the cost of backup is free, we will never have an incentive to improve the quality of solar installations or to invest in batteries. The curb on technological modernization that we are seeing is an additional indirect cost that we all assume.

Solution: we can take Europe or California as an example and charge for the peak capacity required for a load instead of applying the current fixed charge. We can analyze if the correct cost is MX$1,000 (US$50) or MX$2,000 (US$100) per month, but it is certainly not MX$100 (US$5) or MX$200 (US$10).

Result: selling or financing panels is already a good business and if we create the correct tariff framework, it will receive a much greater boost. It would also be possible to sell batteries through a similar scheme; it is a great opportunity to reduce consumption peaks and improve energy quality. Generating energy will no longer be the only way to save money. Of course, these tariff changes could lead you to think, erroneously, that the solar panel business is going to be impacted negatively.

Let us now turn to the other end: thermal power plants that are available for critical situations but which, due to their high operating cost and their marginal cost of generation, are dispatched very little. We were all grateful in February 2021 that these plants came into operation and prevented even more severe blackouts. These plants are necessary and the national electricity system must allow them to recover their costs, but they should not be generating 365 days a year inefficiently to be able to generate income from energy dispatch. The current tariff structure foresees the payment or charge for availability and capacity: power in the 100 critical hours, the guarantee of income sufficiency and related services. These must generate sufficient income for the backup plants and all users must assume this cost on a monthly basis, according to our maximum capacity requirements. Additionally, these plants can sell price hedges and thus generate even more income without operating 24 hours for 365 days.

The vast majority of these plants are owned by CFE, but even large private emergency generators, currently underutilized, fit into this category and the national electricity system requires them. The solution is not to operate them 24 hours a day, 365 days a year; the solution is to pay these plants a fair price for the support they offer us. This scheme brings an additional benefit: as soon as this backup reaches an adequate cost, our technological solutions, such as more modern inverters, capacitors, batteries and microgrids, will become highly efficient and competitive solutions. This modernization will also help stabilize the entire national electricity system.

One last point. Today, our entire system is based on charging energy and capacity, either generated or consumed. It is not complemented by any bonus or penalty for power quality (our current tariff structure only contemplates a bonus or penalty for the power factor that I will not explain now). It is like charging MX$20 (US$1) for a liter of milk, regardless of whether it is fresh or slightly stale. With certain adjustments to the tariff structure, clear incentives can be provided to improve energy quality. Sure, the imposition of fines for non-compliance is also an alternative, but today, I want to focus on the tariff structure.

Current laws, regulations and tariffs give us many possibilities to correct the problems of the electricity market. Let us take advantage of these opportunities through a technical analysis and define the best solution and guarantee the needed technological modernization. As I recommended at the beginning of this article and as a basis for a healthy debate, any cost that a sector participating in the market does not want to assume should be assumed by the other players and not by SHCP or CFE. In this way, we can guarantee objective and balanced discussions.

Of course, it is not necessary to change the Constitution to correct the imbalances of the electricity sector and it is certainly not necessary to violate the current and valid contracts.

Photo by:   Hans Kholsdorf