Isolated Supply Scheme Offers OpportunityBy Cas Biekmann | Thu, 10/15/2020 - 12:33
Q: How has Fresh Energy Consulting developed over the years, and what is its main success in the energy sector?
A: Fresh Energy Consulting was founded eight years ago. Its main focus was the commercialization of energy. Before the Energy Reform, commercialization was very much focused on self-supply. Access to this was not simple, and clients had very little knowledge of power market and bilateral PPAs. Therefore, they appreciated the help of a consultant in choosing the best option to meet their needs. Moving forward, we broadened our services regarding regulatory analysis and market intelligence set around the Energy Reform. As a result, our services were very much in demand as the market suddenly became considerably more complex, given the creation of a spot market among other factors. Having better knowledge of international best practices, we started to position ourselves as a consultancy, functioning as the right hand for many companies that did not have their own regulatory departments. Our responsibility was to examine the effects of all these regulatory changes on various company’s operations, as well as where to find new business opportunities. Over time, we adopted new services to meet requests from our clients, transforming into a more comprehensive consultancy firm for the demand and offer segments.
The past eight years, as the market went from regulated to liberalized, have been amazing in terms of opportunities. We have worked with some of the world’s biggest energy companies, as well as with small local family companies, and all kind of energy consumers. We consider it a major success that we have been able to work for all these players along the value chain. It has helped us to acquire a vast and integral knowledge of Mexico’s energy sector, which translates to better services for clients.
Q: How have your services developed as a consequence of the pandemic and policy shifts?
A: Our services regarding commercialization continue to be among the most requested. Within the current context, bilateral contracts like PPAs will be essential generation companies and development of new projects and services. Every week, we have companies asking if we can provide them with PPAs. We help clients to define their strategy regarding commercialization and then look for appropriate niches in the market. Regarding consumers, we also do a lot of private tenders that allow them to contract the energy according to their specific needs in terms of pricing, contract term and even power source.
Regulatory and market analysis remain part of our core business and we continue to help those players that need to know how recent policy developments will impact them. Companies approach us with specific questions because they want a second independent opinion to complement their internal analysis. When the pandemic started, we thought we would have some time to relax but in reality, the opposite is true due to our analytical work related to the new energy policy in place issued by the Federal Government, through the different regulatory measures issued by SENER. In the past few months, we have examined the economic impact, dispatch issues for renewable players, arbitration and amparo-related issues.
Q: Where does the firm see the main issues due to these shifts in policy?
A: It is important to note that all regulation can be improved. But to create functional regulation, you need input from those being regulated. We often see that regulators make broad and ambitious plans from their perspective. Once they implement it in the market, it does not work because they failed to consult the main users of the regulation and players in the market. Unfortunately, this is what we are seeing today un Mexico. Before the change in government, we were still in the implementation stage of the Energy Reform, where we required participation from all players in the sector to be able to make the reform a success. With the change of government, a change of vision regarding the energy sector emerged as well. This presented challenges because the enthusiasm and willingness that existed before faded away in regard to the implementation of the reform and the natural ongoing improvement process of any given regulation. The federal government did not initiate major legislative changes either, which would have reestablished certainty in the sector, by giving clarity to market players on the new rules to be adopted. Now, uncertainty lingers over how the government understands its energy sector and how this vision can be implemented. People can neither advance with projects nor adapt to a new reality, which creates a negative inertia in the market. There needs to be clarity, not only on the macro-level, but also regarding specific implementations and daily operations. If this does not exist, it hampers Mexico’s sustainable growth. Eventually, foreign investment will be needed again. The sector needs the government’s help to establish clear playing rules for this to happen.
Q: How does the company assess the government’s changing approach regarding energy dispatch?
A: One major distinction is worth highlighting. All dispatch models are considered elements regarding system support, which guarantee reliability of the energy system in general. No electric system is perfect, after all, in particular an issue-plagued system like that in Mexico where many support elements are necessary, due to the lack of a robust transmission system. These issues arise for different reasons: weakness of the grid, higher participation of variable elements, drastic seasonal shifts in demand in some areas, among others. The decision concerning what elements are used to support the system is made by CENACE and must be adequate so that the cost to consumers is not affected. The approach still needs to take optimization of costs and an equilibrium of energy sources into account so that offtakers are not affected by higher prices generated by the allocation of more support elements in the energy dispatch.
Today, we are seeing an over-allocation of resources for system support because SENER’s, and therefore CENACE’s reliability parameters have become stricter. The government is rejecting any form of variability in energy output and is working to make it as flat as possible. Therefore, they need to assign more power plants that comply with this requirement. However, this has had an impact on the cost for offtakers. You will not see it reflected in electricity market prices because Mexico’s model allows these costs to be distributed between the market’s participants, outside of the balancing of the spot market’s price. making the marginal price cheaper but the market participation cost increase to recover the “reliability costs” of the support plants.
All these issues have intensified because we saw a bigger incorporation at the beginning of the year of renewable energies to the system. These power plants stem from the last long-term energy auction, which totaled almost 2,000MW of renewable energy. Add this to a shift in energy policy, reduced demand due to the pandemic and a lack of investment in the transmission system and you have the perfect cocktail to alter your dispatch drastically toward favoring reliability over economic dispath, for instance.
Q: Where does Fresh Energy identify the major opportunities for power producers and offtakers in the current energy landscape?
A: The period dominated by high prices in the electricity market is over because of this cocktail of issues in the dispatch. Therefore, it is a good time for market participants to start looking for long-term, stable income through PPAs. Unfortunately, utility-scale projects of more than 50MW are becoming more difficult to develop because of a lack of transmission capacity in the country. In addition, the areas that have the highest resources to make renewable projects a success are quite saturated. Add to this the recent policies that are against further development and the establishing of quotas, and it becomes even less likely.
In this scenario, isolated supply projects are becoming very popular. We are seeing market prices go down, yet a moderate but constant increase in CFE’s basic supply tariffs. This affects around 85 percent of energy consumers. For commercial and industrial offtakers, isolated supply projects become quite competitive. Nonetheless, there are several factors that need to be arranged, such as the commercial structure with offtakers and technical requirements for the required modifications of the off-takers power connection to the grid. Other opportunities include a supply shortage in the peninsulas, or in places where fossil fuels play too strong a role in the energy mix. Furthermore, industrial users like in the pharmaceutical industry require large and reliable amounts of energy. These are the areas in which we have the seen the most activity and interest.
Q: What are the company’s goals for the short to medium term?
A: One goal was to start enhancing our services, such as providing market analysis with digital platforms. Unfortunately, the pandemic has slowed down our investment plans significantly, especially related to expanding the team. Of course, we are able to work efficiently from a distance, but incorporating new people into the team without meeting them in person is especially difficult. In general, investments are more difficult due to the uncertainty in the energy sector, especially for utility-scale renewable energy development. We do not know if the same model for the sector will exist after 2020-2021, so we are taking the time to reassess the opportunities in Mexico’s energy sector. Branching out to other sectors where our team has experience like Central America and Europe is therefore an option for us.
Fresh Energy Consulting is a consulting firm specialized in renewables and electricity markets. The company has over 30 years of experience in wholesale electricity markets and has been in Mexico for 8 years.