The Future of Self-Supply Contracts

The past few months have brought unending confusion to large energy off-takers under self-supply contracts, or “autoabasto” as the term is referred to in Spanish. Despite it being a favorable decision when companies signed these supply deals, regulatory uncertainty has translated into higher costs for consumers under this scheme. Currently, large energy off-takers must strategically consider all options, possibilities and scenarios to gain more visibility, negotiation power, and control of energy budgets. As of now, there is not much future for self-supply contracts.

First, let me explain the main reasons behind the political push against this scheme.

1) Transmission and distribution wheeling tariffs are “subsidized.” This mechanism was implemented to incentivize renewable energy developers to invest in Mexico regardless of where demand was located. The financial aid was meant to drive optimal generation by taking advantage of areas where renewable resources were present regardless of whether it was farmland or near a city. This effort helped the country move toward its sustainability goals.

2) “Ejidos,” or areas of communal land that could be agricultural or uncultivated, make up over 50 percent of Mexico’s territory; therefore, many of these projects are located within the ejido communities, which are profiting from these developments. There is a misconception of ejido communities being taken advantage of. Usually, these territories are far away from developed areas; therefore, they are made up of low-income communities and live in very poor conditions. The majority of these projects have made them micro-entrepreneurs who profit out of the solar or wind generation located on these parcels of land.

3) Because the grid´s infrastructure is CFE’s property by law, off-takers in any supply scheme must pay to use the infrastructure. However, self-supply is the only supply scheme where CFE must also provide back-up power at CFE Basic Supply rates for any supply that does not get flown in by a private generator. CFE insists that this is unfair, since this generates additional costs for them. 

Because CFE´s well-being is of utmost priority to the current administration, the political ideology against self-supply contracts will probably continue. The arguments around the topic began even before Morena won the presidential election, and over the past months while in power, the administration has tried numerous times to eliminate the competitiveness of this supply scheme. Increasing T&D charges by up to 775 percent, freezing permits, blocking the addition of load points or the expansion of meter consumption are all actions that have threatened the self-supply scheme.  Of course, legal action has been taken by numerous companies that have been adversely affected by these initiatives and in some circumstances, have been directly attacked. 

There has been direct confrontation of well-known companies in Mexico that participate under this supply scheme. Due to misinformation on how the mechanisms around self-supply work, these media hits are resulting in bad press since these large energy consumers are being portrayed as evading the law by paying a fraction of the energy bill that actually corresponds to them. The savings created by these companies come from efficient generation, renewable energy technology, mutually agreed-upon terms and conditions and transmission and distribution “benefits.” Nothing positive is coming out of legal battles, as the constant change in rules has created uncertainty among large energy consumers, increased operating costs and negatively impacted the view of Mexico among potential investors. To fully understand the actions that should be implemented by off-takers, we must evaluate the different scenarios. First, we need to consider what would happen to generation permits. Will generators be forced to migrate into the Wholesale Electricity Market (MEM)? Will this be a long transition due to permitting or will regulators aid the process to accelerate their participation in the market? Another scenario could be having generators willingly start to migrate to avoid regulatory risk.

During this unknown period of time, what will happen to off-takers active in these contracts? They could be forced to consume 100 percent CFE Basic Supply during the transition process, which would mean a strong budget increase, since many off-takers are currently enjoying up to 40 percent savings against the regulated rate. Consumers alternatively could be forced to migrate into the market simultaneously. Today, we have no visibility as to the time frames around this transition process and whether qualified users would be registered quicker than generators in the MEM. If qualified users are registered quicker, there could be cost implications if there is no qualified supplier assigned in a timely manner. As you can see, there is much uncertainty around what could happen and what consumers participating in self-supply contracts could be faced with in the near future.

Another aspect worth noting is the lack of capacity in the MEM to satisfy all users in self-supply contracts. If regulatory actions are suddenly taken, then demand will surge and instead of a buyers-market like what we’re seeing now, we’ll be transitioning into a seller’s market. Prices will tend to go up, especially for renewables, since consumer tendencies are being driven by more sustainable practices, especially among multinationals and large national businesses.

Navigating the Mexico energy market is no easy endeavor but with the right advice you can reduce your costs, mitigate your risks and secure improved reliability. As consultants, Acclaim Energy has been evaluating a number of strategies for self-supply off-takers based on specific profiles, contract terms and market conditions. Amid the confusion around the future of self-supply contracts, we have found many ways to accommodate corporate concerns and goals by solving the puzzle and implementing creatively structured and economically beneficial strategies.