How much Has the New Market Lived Up to ExpectationsWed, 02/22/2017 - 18:02
As a direct result of the Energy Reform, the Mexican electricity market experienced a transformation that has caused uncertainty among market participants. The new market is expected to create competition in power production as the sector pulls away from being a monopolistic industry. The intention is to reduce costs and develop new capacity to benefit end users. Still, the unclear regulation has made participants hesitant. With the introduction of new processes, schemes and players, companies such as off- takers, generators and qualified suppliers are striving to understand and adapt to the market.
César Hernández Ochoa
The electricity market was expected to grow gradually since its inception and it will become increasingly open as it matures. 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 that these models will bring electricity costs down through the incorporation of new technologies and the displacement of older plants. Competitivity will generate incentives to improve services or to lower costs, but this is a market process and thus the determination of costs is not under control of any regulatory entity. It 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.
Jaime de la Rosa
The spot market is one of the new components that is developing slowly, which is normal. Most of the market participants are waiting to see how it develops before investing. We expect the level of participation to increase as the market matures. This dynamic will not only benefit generators and suppliers but also CENACE and the grid’s stability. Mexico’s new regulations offer important business opportunities in the spot market, the electricity tenders and bilateral contracts, all in the short, medium and long term, while maintaining some of the old schemes through legacy projects. The new mechanisms will contribute to increasing Mexico’s competitiveness on the global scene and enhance the internal energy security of the country while bringing new players to the market. There is still a long road ahead to arrive at this ideal scenario but the regulations are clearly marking the route we need to follow.
Loic Le Gall
The wholesale electricity market is increasingly more complex, driving market participants to become more sophisticated and adopt efficient IT tools that help them analyze and consider all important indicators for their strategies. It would be prudent, for instance, to forecast and consider the future of natural gas prices. We estimate that natural gas prices could increase 2.5 percent annually during the next 10 years, having a significant impact on Mexico’s electricity tariffs due to the large presence of gas-based technologies in the system. Forecasting the behavior of the spot market and regulated and unregulated tariffs will be one of the greatest challenges for companies operating in the sector.
We expect to see a linear correlation between spot market prices and gas prices. Every energy company has its own gas price forecast but we believe all these forecasts lean toward higher prices. We expect efficient renewable projects will begin to balance spot market prices in the medium and long run. In the short run, former tariffs did not reflect the real generation costs but we expect the spot market to do it better. We also expect a change in the price balance. There was a huge difference before between base and peak tariffs that we expect will diminish as the spot market grows. Industrial users will benefit greatly from this change because they can then avoid the need to stop production at peak hours by having the ability to plan their production according to their logistics needs and not energy prices.
The novelty of the regulations is a challenge for many market participants, including off-takers and generators who have many doubts about how the market will operate. Particularly, the role of the energy trader is surrounded by an aura of mystery, even though most companies have either an excess or lack of electricity they would like to trade in the market. In the coming months, we expect the Mexican market to follow a natural evolution, starting with bilateral transactions to increment trust until the players feel confident enough to trade energy in a semi- standardized market. Particularly, we expect our online trading platform to become a decisive tool as has happened in other markets. So far, we have identified strong interest from private companies to take advantage of our services but a learning process will be needed to attract a larger number of participants.
The law now permits users with aggregated demand over 1MW to enter the market as qualified users so we expect more industrial customers to join soon. Companies with experience in self-supply power production will be the typical off- takers participating in the market at first. As there is not yet a futures market, we expect more bilateral financial contracts to be used as a hedging tool and we also expect qualified suppliers to increase their market share, even though they will be constrained by the presence of CFE in the market. Negative prices will not be present in the market in the short to medium term but we do expect grid instability to become an issue as renewable energy capacity increases. It will not, however, directly impact customers. In the long term, speculative bidding will become increasingly important, adding interesting dynamics to the market.
We must keep in mind that Mexico is deregulating a growing market. Mexico has a distinctive structure that does not fit with North America or Europe, where energy consumption is shrinking. Mexico still needs more energy and it expects to have a growing electricity demand for the next 10 to 15 years. Energy-efficiency programs will mitigate the need for additional energy but the electricity market will continue growing due to the development of the middle class and the population pyramid, which has mostly young people that will soon become active members of society. Mexico’s panorama is a huge opportunity for attracting new investment to the energy industry and E2M has the potential to ease the process for new companies.