Hard Budget Hit Coming for Self-Supply Consumers

Confusion has taken over the industry amid so many changes. These alterations in policies, market rules and increases in tariffs are subject to interpretation by different market participants. Consumers especially will be seeing harsh hits on their budgets if they are currently under a self-supply (autoabasto/legado) contract. In their world, the confusion will be accentuated by the many opinions that lawyers, their generators and other consumers share. Amid the uncertainty, it is crucial to gather information, justify strategy and manage the situation proactively and immediately. Here is how. 

WHY DID THIS CHANGE TAKE PLACE?

Self-supply projects were developed under pre-energy reform rules. These projects carried incentives to drive investment to Mexico’s electricity market. One of those benefits was the reduced wheeling charges that allowed developers to set renewable energy assets in areas where natural resources could be taken advantage of for generation, despite the different delivery locations of the end-user’s facilities. This benefit made the self-supply option extremely competitive against the CFE Basic Supply tariff. In this scheme, consumers receive a large portion of their electricity supply from the private generator and a smaller percentage still from CFE Basic Supply. Any energy not available from the generator, is also supplied by CFE back up at CFE Basic Supply prices. 

CFE believes this is an unfair market practice, especially since they must provide back-up to cover renewable generation intermittence. Besides this, they argue that transmission and distribution costs are much more attractive in this scheme compared to the regulated wheeling charges applied to CFE Basic Supply and Wholesale Electricity Market (MEM) transactions. 

WHAT IS THE IMPACT ON CONSUMERS?  

The Energy Regulatory Commission (CRE) has approved increases in transmission and distribution costs and can be calculated at around 446 percent for high tension meters, 497 percent for medium tension meters and 775 percent for low tension meters receiving supply from renewable generation or efficient cogeneration sources. Increases for conventional generation in self supply have not yet been published but will be known soon. Each meter will have its own tariff depending on tension and location, and T&D increases might be passed through at different percentages if not entirely. Therefore, calculating full potential impact on budgets will be interesting and especially challenging when an end-user has a large number of meters. In many cases, self-supply contracts are long-term PPAs with at times thousands of load centers connected for one company. 

The impact on budgets will be determined depending on how the contract terms are set up and the type of product sold to the consumer. For example, there are companies that Acclaim Energy is supporting that have enjoyed 30-40 percent savings against the CFE tariff and now, with these changes, will be compressing their savings to 12 percent. Others that we know of signed contracts with commercial mechanisms that not only limit savings, but rather make them pay above the CFE tariff under certain conditions. For those cases, and companies with smaller benefits in their self-supply contracts, it is possible that these 446-775 percent increases in T&D charges will drive their budgets off the charts. 

These changes can be quantified and projected with the information we have today in order to understand the potential budget impact and start building a strategy around it. July 1 marked the start of the application of increases, and therefore, generators and consumers will have these changes reflected on the bills they will receive at the beginning of August. 

HOW SHOULD MY COMPANY GO ABOUT THIS INCREASE?

Each situation is different; however, in most cases, CFE bills the generator and the generator transfers this cost to consumers, whereby consumers end up harshly hit. The first step will be to calculate this budget impact internally or through a consultant that can provide unbiased and fully knowledgeable calculations and guidance.  

After understanding the economic impact, the company must turn to the contract. There may be previously negotiated contractual mechanisms to protect either side from any T&D increases. This is a clause that must be looked at. Others are also considering the Change in Law clause that could possibly act as a negotiation provoker, while others will sit down and agree upon sharing the impact to some degree. Companies will need expert opinions on the evaluation of these possibilities.

Upon understanding the company’s financial commitments around this situation, the company can either justify initiating a legal process for protection or sitting back and accepting the changes. It is recommended that any legal process be coordinated between the consumer and the generator even though both must protect themselves individually. It is evident that each side will protect their own benefits and so consumers must be proactive in reacting strategically to this situation. 

CAN MY COMPANY MITIGATE THE BUDGET HIT?

It is likely that a company will not be able to mitigate the increase in budget in the short term. If suspensions are not granted after a lawsuit (amparo) has been presented, then lawyers will continue efforts to achieve success. This is a process that could possibly take over a year. In the meantime, consumers will probably have to pay the increases.  
There is another option to try to mitigate the impact in the short term. Contract audits can be done to identify possible areas of optimization, detecting opportunities and risk. Optimizing different elements within a contract can result in an indirect mitigation against the increases in T&D tariffs. Many of these self-supply contracts were signed years ago, therefore an audit is a healthy way to maintain a relationship between parties, gain visibility to areas of opportunity and get more budget control.

Consumers must be vigilant, proactive and wise in decision-making around this situation. Their budgets are being hit hard, but amid this stormy situation, there comes opportunity to revisit the contract, to analyze, to project and to optimize different elements that could help mitigate the increase in transmission and distribution costs.