How Will Mexico’s Wholesale Electricity Market Develop Further?

Mexico’s wholesale electricity market (WEM) was born out of the country’s 2014 Energy Reform. It promised to open up opportunities for businesses and bring benefits to consumers. However, regulatory uncertainty has halted the WEM’s growth. To stimulate sustainable economic growth, reliable access to clean energy is required. The question, therefore, is how the market will develop from here, as experts argue that the WEM remains essential if Mexico is to decarbonize its industry and boost its competitiveness.

“Change is a constant in our industry. These changes, however, have certainly been an obstacle to the development of the WEM, and the vision we shared in 2014 does not conform to the reality we are confronted with today,” said Alfredo Zárate, Partner, Leader Electricity and Public Services, KPMG. “Nevertheless, we must be proactive as well as innovative and keep putting our proposals on the table. The alteration to the Clean Energy Certificates (CELs) has poured cold water on many of our plans in the renewable energy sector. Regardless, we must reconfigure our way of doing business and recoup some of the investment that was lost. We need to analyze different aspects of the electricity industry law (LIE) and see where the opportunities are,” he added.

Rising prices are bothering the WEM, to the point that they cannot be ignored. Daniel Herrman, Country Manager, DNV, sketched out the context that defines the pricing balance between supply and demand, commodity prices and transmission restrictions. “We have seen an increase in prices since the COVID-19 pandemic. This is expected to continue over the next two years due to price increases in commodities and the gap between supply and demand for energy services. Moreover, continuing geopolitical uncertainty combined with high inflation rates will continue to drive commodity prices up.” 

Herrman also noted that the post-pandemic market recovered quickly, a welcome trend that is expected to continue. However, Mexico’s installed capacity has stayed the same, causing stress on the system and price increases. “We have also seen many renewable energy projects face delays and cancellations, which could affect our ability to meet demand in the near future,” explained Hermann. Regarding commodity prices, he noted that Mexico is a thermal energy-minded market, where more than 60 percent of electricity generation comes from combined cycles. “There is a clear correlation between electricity prices in Mexico and natural gas price indexes in the US such as Henry Hub. Regardless of the high production levels in the US, factors such as the current demand for natural gas in Europe and the closure of many wells during the pandemic are causing prices to increase.”

Herrman explained that Mexico is a node-based market, with over 2,000 nodes spread across the country, each maintaining different prices. “We must consider the spread-out geographical location of these nodes. In the Northeast, we see lower prices, while in Yucatan prices are much higher. This is due to the characteristics of each node. In the north of the country, some nodes export electricity, but when congestion becomes a factor it is not so easy to send electricity to the center of the country where demand is higher,” he said, adding that demand does not match what is on offer in Mexico for this reason. “In the peninsula, electricity is imported, and transmission restrictions result in elevated prices,” said Edmond Grieger, Partner, von Wobeser y Sierra, who concurred that the segmentation of nodes plays a huge role in the WEM. “To have a viable electricity system, integral planning is key,” concluded Grieger.

Lilián Alves, Director of Business Development, Mitsui and Co. Infrastructure Solutions, pointed toward the impact that gas prices have on the market. “Mitsui examines the market as both a power producer and a qualified supplier. The stress we are seeing in the market does not come from just one commodity,” she explained. Even though Mexico’s WEM is young, “the level of resilience it has shown in the face of extreme weather conditions such as hurricanes and the Texas Freeze, as well as a major global crisis, is striking. These events have also opened our eyes as to where regulation could be improved. When the war started in Ukraine, the impact was not all that immediate. However, since then gas prices have doubled from US$4/MMbtu to US$8/MMbtu. We are expecting this figure to drop down to around US$5/MMbtu by 2024, but in the short term it will remain elevated.”

As prices continue to balloon, commodity traders will need to absorb the risk. “This risk perception is factored into the higher prices we are paying. As we approach the winter in the US again, we need to consider the effect this will have on prices. Of course, there are strategies out there to manage this, such as using hedges to buttress the market,” Alves said. 

Regarding transmission restrictions, Alves argued to consider supply and demand individually at every one of the 2,000 nodes to determine which areas already have an excess of capacity and which require firm capacity: “Recent emergencies were not factored in when the regulations were written up. Now that these events once thought of as extreme are becoming more regular, we need to consider adopting power subzones to better administer crisis management.”

José Buganza, CEO, Enegence, noted that the WEM is lacking solid transmission. “Today, we are not getting the required investment in Mexico because we lack energy capacity.  There is a huge appetite out there for investment in industrial parks, but investors' efforts are frustrated because they have no access to energy,” he said. Buganza concurred that commodity prices will continue to be a problem for the market, “since demand keeps on growing and supply has been impeded. Even when commodity prices stabilize again, prices will continue to be pressured. It takes time to build up infrastructure and we simply do not have the capacity at the moment. Even if we take new regulatory measures tomorrow it will be five years before we start seeing results because the process is slow.”

Mexico is also developing an emissions trading system (ETS), but Buganza explained the obstacles in the way. “Mexico completed phase one, and then the ETS was halted because the two biggest companies that belong to the state were not ready to comply with the obligations.” Nevertheless, Mexico cannot put the ETS off much longer, said Buganza, because major Mexican businesses have signed international contracts which will be broken if they are not carbon neutral by 2030. “Therefore, the next seven to ten years promise dynamic changes as businesses adopt cost-effective green energy supply,” he said.

Alves agreed that the energy sector must play a leading role in the efforts to reduce emissions. “It would be negligent of us not to discuss emission reductions, considering that the energy market in Mexico is responsible for 70 percent of the country’s emissions,” she said, adding that Mexico must invent methods to reduce this percentage. “In that sense, we have already taken steps forward. CRE published a report this month detailing how we already have 300,000 solar distributed generation (DG) interconnection contracts under 0.5MW and now we are going for 2MW,” Alves added, though this development is insufficient for Mexico’s vast industrial offtaker base. Nevertheless, DG is an optimal solution for them because it enables cheap, clean power production close to where it is used. Keep pushing these alternatives,” urged Alves, a point that Buganza underscored. “This will reduce prices for consumers due to the high efficiency of these solutions,” he said.

Herrman emphasized the need to address legal ambiguities and foster more confidence for investors if the private sector is to play a front-running role in the energy transition. “It is clear CFE alone will not be able to satisfy the growing demand for electricity in Mexico. A clear example of this is what we have seen in Baja California, which has lacked the necessary capacity and infrastructure for years. If we are to double installed capacity from 90GW to 180GW, we need to facilitate private investment in technologies and renewable energy projects,” he said, adding that “we can take a page out of the US’ book by promoting private sector innovation in offshore wind and green hydrogen projects.”