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Analysis

Harvesting The Fruits Of The Energy Reform

Mon, 02/25/2019 - 17:19

As of December 2018, there were 72 active participants in the WEM and an additional 68 with an active registration, according to the CENACE. Of the operational participants, 46 are generators, 17 are qualified suppliers, seven are non-supplier commercializers, one is an intermediary generator and one as a basic service supplier. The infant energy market is gradually evolving but as its consolidation takes place several challenges are present.
“At this early stage, Mexico’s WEM requires a constant investment flow and legal certainty for investors. It is a natural stage that other mature markets have also experienced. A positive step forward would be resolving the pending implementation of financial transmission rights to cover congestion risks,” says Andrés Lankenau, Chairman and CEO of Enicon Energy and Infrastructure. Financial rights of transmission act as price coverage in several nodes of the system and offer the right to holders to pay or charge price differentials that arise between the origin node and the destination node. Given the state of the transmission and distribution infrastructure, these are called to play an important role in shielding qualified suppliers from long-term electricity price variations.
The early stage of the WEM poses a supply and demand imbalance risk reflected in qualified supply prices in energy trading operations as power producers want to sell their generation referencing nodal price levels, whereas qualified users on the other end want to purchase energy at long-term electricity auction prices, which are much lower given the aggressive offers registered throughout each auction. On the basic supply side, CRE undertook a series of revisions in the calculation methodology throughout 2018 to determine a market-based, cost-reflective Basic Supply Tariff.
The process has been long and arduous but as the regulator gathers an increasing amount of critical data pertaining to generation, transmission and distribution costs, CRE’s Basic Supply Tariff methodology is rather a continuous revision process than a concluded task. As Rubén López, CEO of Orca Energy, states: “There needs to be an adjustment period when definitive tariffs are finally published to mitigate uncertainty.” In addition, Hans Kohlsdorf, Managing Partner of Energy to Market (E2M), says that “as long as basic supply functions under tariffs that generate sustainable losses to CFE, the distortion in the market will remain because private players do not have the same absorption capacity using CFE’s tariff levels.”
According to Fernando Zendejas, former Deputy Minister of Electricity at the Ministry of Energy, one of the major contributions to the energy industry during the former administration was the creation of the qualified supplier figure. “It is considered a milestone because now consumers can decide if they buy their electricity from CFE Suministro Calificado, sign a long-term contract with another qualified supplier or purchase energy directly in the market. This option provides certainty for long-term investments and a more dynamic and competitive market.”
Trading energy between generators and qualified users is a complicated task, as off-takers need to have a specific team monitoring the company’s energy supply and demand and few companies are able to do that. The importance of introducing a qualified supplier figure is that it bridges this gap. Qualified users constantly search for the best price levels as their price tags do not reach long-term electricity auction levels. “Power producers need to sign 15-year contracts for their renewable energy generation projects to be bankable, while qualified users are looking for shorter terms to guard themselves against unpredictable price variability,” says Juan Guichard, CEO of Ammper Energía. To date, there are 36 registered qualified suppliers in the country. The Mexican Association of Qualified Suppliers was created to ensure the correct participation of this new figure.
Taking advantage of another opportunity untapped by the WEM, power producers are starting to diversify their operations. To be strategically positioned across the industry’s value chain, power producers are choosing to add the qualified supply link to their operations to make the most of what the market has to offer and to secure the commercialization of their energy produced. “No plant has a perfect match of generation and demand, leading to energy deficits and surpluses, which is why the need for commercialization was clear,” says Ramón Basanta, CEO of ATCO Energía. The company is the trading arm of ATCO Servicios y Energía. This strategy is becoming increasingly popular among generators, where companies such as CFE, Iberdrola, Ammper and Enel Green Power figure on this list.