Hans Joachim Kohlsdorf
Energy To Market
Expert Contributor

Energy Bill: Are We Stuck in the 20th Century?

By Hans – Joachim Kohlsdorf | Wed, 05/12/2021 - 13:06

The Energy Bill has been published and as expected, protection requests (amparos) started raining down due to the unconstitutional nature of the bill. With good reason, definite  suspension of the bill was obtained.

Let us leave aside the grievances for the moment to address other questions; namely, have any of the parties involved made concrete proposals on how to solve the problems that our electrical grid presents today? More importantly, are any institutions or groups of people thinking constructively about how to take advantage of the tremendous technological advances that have been made since the Energy Reform was launched in 2014. Should we embrace them or will we stay in the past?

Let's look at the three parties involved, with the central focus being the 2014 Electricity Reform and the wholesale electricity market: the private market for generation, sale, purchase and consumption of electricity between companies.

On the one hand, we have the contracts with generation permits prior to the Electricity Reform and the large users that buy energy from them. These are the legacies, or the misnamed self-suppliers. They defend themselves like a distressed cat to ensure the reform of seven years ago does not apply to them.

On the other hand, the 4T (Fourth Transformation) government argues that legacy projects and their customers (the main enemy) receive exaggerated subsidies that along with several other factors weaken CFE and are effectively causing instability in the country's power grid.

That's right, two important groups are against the reform enacted in 2014: the country's large generating and consuming companies and the 4T government. It’s difficult to decide which group is more conservative since both are pursuing a status quo that existed in the previous century.

I believe that we are at a time when we must present concrete proposals and try to solve the real problems of our electric grid and simultaneously define a modern approach for CFE that will protect the country's legacy over the long term. But let's take it one step at a time.

Ideas for Companies Operating Under Pre-Energy Bill Laws

Companies that are already operating can present a migration plan to the new market by analyzing the original validity of their permits to sell energy to their partners' authorized users prior to the reform. There are several aspects to consider.

There are thousands of small loads for which the LIE regulations are too complex. These loads, similar to the modernization of residential meters, can operate with a modern and very economical metering and IP communication system. Several suppliers that operate under the new law have the technological platforms and APPs that can translate the information in an agile way to standards of information management perfectly available and economical at the beginning of the third decade of the 21st century.

The projects of the last century, and even some of those prior to 2010, required a specific regulatory framework to attract investment in the sector at the time and allow companies to be supplied with energy at competitive prices. The support consisted of reduced transmission and distribution tariffs and backup and power through the energy bank. These are measures that the current government considers subsidies.

Without these conditions, Mexico would never have been able to generate the electricity needed to overcome the 1994 crisis. But let us take everything forward to 2014 and look at the costs of the generators that participated in the three auctions under the new regulations. Generation costs have fallen dramatically and can definitely coexist with the tariffs and costs defined in the LIE. Do the legacy projects that were not yet operating in 2014 require the application of the specific and disproportionate measures of the 1990s? Probably not, and if they want to receive them, who should pay for them, the participants of the wholesale electricity market or the Treasury using taxpayers' money?

Generators and consumers with legacy contracts should present the challenges they face and propose measures to solve them:

  • Maintaining outdated technology standards without investing in modernization can be considered abuse.
  • Calling for the construction of new transmission lines to evacuate power generated in places where it should never have been generated in such quantities is clearly a mistake.
  • Regions with large surpluses of low-cost electricity should look for buyers and investors who want to put their businesses in those areas to take advantage of abundant and cheap energy.

Ideas to Strengthen CFE

Traditional public and private electric utilities around the world are experiencing major challenges. Technological changes are driving on-site generation with tremendous power as electricity requirements grow. Increasingly powerful applications using artificial intelligence, the Internet of Things, large data centers and electric mobility are just a few examples. Here in Mexico, this trend to distributed generation is further fueled by the abundant availability of cheap natural gas.

What is the cost of leveraging traditional electric system backup for times when on-site generation is insufficient or when weather reduces wind and solar generation? And who should pay for it?

Our tariff model, even after the 2014 reform, basically has not changed since the last century; the names and the way of calculation yes, but not the concepts. Let me start with a second question: the cost should be taken by those who participate in the market, large and small generators and users.

The reason is obvious, if we continue as we are today, where the cost is largely picked up by CFE, the private sector has no incentive to invest in efficiency and modernization. The best examples are solar panels that shut down when the grid fails, massive noncompliance with a very undemanding grid code and the absence (due to lack of customers) of domestic production of batteries, inverters and software. Of course, there are many more examples of "outdated" expenditures: diesel backup generators, voltage regulators, UPSs, etc.

What we should do, for example, in the area of tariffs:

  • In the deregulated market, we must change, through CENACE, the cost of power and backup provided by the grid to a scheme that considers consumption peaks and the variability of renewable generation and consumption itself. Today, a generator is charged about MX$100 per MW/h delivered to the grid. Are we interested in the quality and variability of this energy? NO! Are we interested in improving the quality of what we generate or consume? NO! Are we investing in batteries, software, inverters, harmonic reduction equipment, regenerative energy use? NO!

Market participants, generators and users must assume this cost.  This will  create incentives to modernize facilities. Meeting the new standards and supporting grid stabilization would represent an important source of additional revenue for generators.

Who receives these payments? CFE and all those participants who contribute power and stability. Modernizing the electricity system thus becomes a virtuous circle.

The Basic Supply Tariffs present similar absurdities; the basic idea is correct: households and Companies  with high electricity consumption should pay higher rates than the popular sectors. If a household with high consumption puts panels on its roof and "nets" it’s night consumption with daytime generation and the net amount falls to the minimum consumption levels of low-income households, should it pay the same subsidized rate? Should having a very high consumption peak at the beginning of the night, when energy is most scarce, be subsidized? Similar to the business sector, we need to propose changes to the tariff structure. CFE should be paid fairly for providing backup when it is most needed.

What would be the positive impact? You know the answer: buy control software for appliances or simply consume less during peak hours and install batteries to prevent having such high consumption peaks. Yes, you are right, if we install batteries and the power goes out, my solar panel does not turn off, it continues to generate.

Examples of new business opportunities for CFE:

  • Push massive coverage of electric vehicle charging stations either directly or through franchises. The installations themselves generate income from energy sales and advertising. In the next five to 10 years, the owners of the locations will probably even pay CFE for having an electric line nearby. Additional advantage: at times of very high consumption in an area, CFE can reduce battery charging and thus stabilize the grid.

By copying cellphone companies, CFE can sell/finance complementary products and solutions such as batteries and investments required to improve the energy efficiency of its customers.

It can also cooperate with private suppliers to provide tailor-made solutions for customers. All major communications companies work with distributors and integrators. The qualified supplier is not a competitor, it is a sales channel for the generators.

Furthermore, CFE can take advantage of the very high technical level of its personnel to sell engineering.

CFE could also internationalize its operations following the good examples of EDF, ENEL and ISA in Colombia. Or the examples of CEMEX, BIMBO, CLARO, NEMAK, etc. that boosted their dominance in Latin America and even globally. Of course, it would need to use innovative products and solutions and not recipes from the last century.

How Other Disagreements Surrounding the Electric Law Reform Can Be Resolved

Retroactive granting of CELs (Clean Energy Certificates) is a great point and rather than locking us all into the status quo, let us remember that our current regime favors new sources of clean generation. In a way, it discriminates against all those who had invested in renewable generation long before 2014, especially CFE. Everything in a market has two components, supply and demand.

Today, we get so heated when discussing the problem of the supply of CELs that we do not stop to think about demand. As in all the previous cases, there is a culture of yelling, "NO, ONLY OVER MY DEAD BODY,” or "with threats there is no negotiation," and many other comments driven more by adrenaline than by reason.

Remember how the obligation to purchase CELs was established: to comply with the Paris agreements to increase clean generation from 21 percent to 35 percent of total consumption, all consumers, through their suppliers, were required to purchase 14 percent of CELs. This created the demand. New clean energy generators generate CELs and can sell them. If the CEL obligation was set to increase renewable generation from 21 percent to 35 percent and now CELs are granted to the 21 percent that were already generating clean energy, the demand must be increased by exactly that amount and the purchase obligation increased from 14 percent to 35 percent. This includes self-supply loads that are currently exempt from purchasing CELs if they are supplied with clean energy. The same objective is thus achieved without discriminating against all those generators that had made a great effort previously.

Power Plant Dispatch Order

The National Supreme Court of Justice (SCJN) declared unconstitutional many of the criteria of last year’s famous "Nahle Decree." But what went almost unnoticed was that it did not overthrow CENACE's responsibility to watch over the stability of the grid. Nor do I recall that CENACE has ever endangered the stability of the system by dispatching plants with a view exclusively to marginal cost of generation. CENACE has always done a very good job and has admirably recovered the system's operability in the face of failures. As we saw during the gas shortage crisis earlier this year, due to the lack of investment in storage by gas distributors and the lack of batteries that would have allowed renewable facilities to continue generating, the old CFE plants still play a very important role. Here, we return to the issue of tariffs.

These plants should still generate income for CFE but not for their continuous operation; they should generate income for their availability and for the security they provide to the electricity system. We saw in the first days of November 2020 and in February this year the important role that these plants still play. Of course, all other participants must pay the right price to have this backup, this redundancy. The simplistic argument that modernizing the grid just costs companies more money is wrong. The impact of outages and supply variations and the current measures companies take to compensate for poor quality are far more costly than complying with the grid code.

The Cancellation of Auctions

CFE is just another competitor in the market. I do not know of private companies that buy energy on a large scale from their competitors because it is cheaper than what they generate. I do not understand why we should demand that CFE do this. But, as in the past, CFE (and for that matter, also PEMEX) continues to be an important promoter of the national industry and with the auctions, it supported the creation of new generation companies in the country. A great step forward has already been taken because approximately 50 percent of the country's generation is in private hands and, as in all businesses, the most efficient and competitive producers will prevail.

The private sector can get together and have a private auction to negotiate more competitive prices. We have already seen a great effort that was probably ahead of its time, but it was not successful. Two years ago, generators, still accustomed to asking for guarantees from a state-owned company, were not able to take advantage of this tool to launch new projects and win over the industrial sector. On an individual basis, however, many of these companies have established successful business models and the financial sector finally also contributed a grain of sand, more so development banks than private banks.

I wish we were only living the dialogue of the deaf. We are worse off, no one presents alternatives to solve the current problems or ideas to take advantage of technological innovation. From the installers of solar panels in homes to the large generators, everyone wants to maintain very low interconnection standards — even Central America has more demanding standards than ours. On the user side, almost no company is complying with the current grid code. We all want someone else to solve the power quality problems that are being caused by those who generate and those who consume electricity.

Photo by:   Hans Kholsdorf