César Hernández
Deputy Minister
Ministry of Electricity
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View from the Top

Energy Reform Past Point of No Return

Wed, 02/22/2017 - 14:39

Q: To what extent has the first year of the spot market fulfilled the Ministry’s expectations?

A: The electricity market was expected to grow gradually since its inception and it will become increasingly open as it matures. Other countries took up to five years to develop a short-term electricity market. We did it in two. The market began operations with only three participants and finished 2016 with more than 10, including some private qualified suppliers. We expect the market to gain more participants throughout 2017 and have all the characteristics it was designed to have incorporated by the end of that year.

Q: What will be the main drivers of electricity tariffs under the new market landscape?

A: The market is designed to stimulate competition so it operates under a model where cheaper energy is sold first, favoring models and technologies that generate energy at lower costs. In the long term we believe these models will bring electricity costs down through the incorporation of new technologies and the displacement of older plants. Competition will generate incentives to improve services or lower costs but this is a market process and thus price determination is not under the control of any regulatory entity.

This new scheme will also cause electricity prices to fluctuate depending on demand during the year. In periods when there is significant demand, prices will rise and vice versa. However, final users are often protected from these fluctuations so they do not perceive them. In other countries, we have seen that energy markets begin to show up to 25 percent lower tariffs after three to five years.

Q: What advances have been made toward the launching of the CELs market in 2018?

A: The creation of a regulatory system to allow the efficient use of this instrument has been the greatest advance. CELs were foreseen since the constitutional reform of 2013. Our role is to issue the regulations that will ensure these certificates work as expected. We have already established the requirements that will be imposed on industry participants that are obligated to obtain CELs in the first and second year of this market. We defined 5 percent as the mandatory percentage of clean energy that these players must comply with in the first year and 5.8 percent for the second. In March 2017 we will determine the requirements for 2020. We need to have all the regulatory mechanisms ready for 2018 when the law will be implemented but we are on the right path. In the end, CELs are not new in the world. This certification mechanism is the Mexican version of an international system called Renewable Portfolio Standard (RPS), which has already proven to be effective in other parts of the world.

Q: How is the Ministry of Energy preparing the field to ensure continuity in the Reform’s implementation?

A: The changes made in the electricity sector are irreversible at this point. We have already passed the point of no return. The process is so advanced that it would be more difficult to stop it than to continue going forward. The Ministry of Energy’s goal is to leave all the market rules ready for the market to continue its development naturally. CRE will eventually take full responsibility for this but up to now it has been a joint effort and the Ministry has taken this process seriously. We expect to have all the crucial financial and regulatory instruments in place by the end of 2017.

The major challenge for 2017 is to continue operating under these new regulations as they imply a paradigm change. The Mexican electricity industry operated under a monopolistic model for more than 70 years and it now has to get used to a brand-new model focused on competitiveness and structural separation. We must not forget that many of the market mechanisms did not exist in Mexico before. It is a new field for all of us. The results have been positive so far but it is not an easy process.