Key Ingredients Still Missing in Electricity MarketMon, 02/25/2019 - 17:34
With a soaring number of players, diversified product and service options and competitive prices, the ingredients are in place for a successful energy trading market in Mexico. But Alejandro Blanco, Co-Founder of Tradeon Energy, says some key ingredients are still missing for the market to grow to maturity. “The fundamental problem is that players require hedging contracts to operate but have limited capacity to sell their retail products,” Blanco says. “It helps little that they often overlook the need to get involved in the wholesale hedging market, which provides access to Capacity Bilateral Transactions (TBPot), Energy Bilateral Transactions (TBFin), CELs and financial derivatives, such as swaps.” He says this means the conditions required for new qualified suppliers to be competitive are absent. “Without a strong retail segment requiring hedging and bilateral contracts, wholesale cannot prosper.”
After Ektria, a subsidiary of Fisterra Energy, released the first swap prices at the end of 2016, Tradeon, which offers brokerage and consultancy services to every stakeholder throughout the value chain, followed in its footsteps in facilitating these transactions. In March 2018, it launched a platform specialized in comprehensive brokerage services that offers the possibility of making 100 percent financial transactions instantaneously, flexibly and effectively with various market participants. “Most players lack any type of credit history,” says Blanco. “The idea behind our platform is to provide a single-point access for bilateral transactions. This can help lighten the load of additional operational requirements that market participants face in order to compete with CFE: substituting registry procedures, warranties, collaterals, new systems, new meters and transformers. At the same time, it smooths the purchase of generation from power producers and secures financial coverage and daily trading operations with competitive financial swaps.”
Hedging requires contracts and Tradeon is working to implement a universal contract framework for energy and derivatives transactions. “Mexico has made significant advances in that particular regard when looking at its natural gas sector,” he says. “It already uses international reference contracts such as the US NAESB Base Contract.” The electricity sector has yet to adopt equivalent standards and local players are accustomed to PPAs drafted under pre-reform Mexican regulation, significantly different from ISDA-based contracts as an example. Blanco says Tradeon is working with a wide range of entities, especially the members of the Association of Energy Traders (ACE) to provide an equivalent or adapted agreement, following the completion of the first transactions based on ISDA, but it requires critical and complex coordination efforts among local and international players.
Based on its interactions with market participants, Blanco estimates that financial transmission rights as projected by CENACE will remain unavailable in the near term and will need a great deal of assistance from private entities in order to function appropriately. “As an alternative while things get implemented, we integrated node differentials into our platform to reflect electricity regions used as reference for the first midterm electricity auction, against specific distributed nodes,” he explains. “We now provide a user-friendly local marginal price differential index accounting for energy, congestion and losses, covering 13 nodes.” He anticipates this will change as enough players enter the market to pinpoint nodes and hubs where the lion’s share of coverage transactions will take place. The platform also accounts for CELs, incorporating the anchoring effect over CEL value as the long-term electricity auctions were the only reference in the past. However, Blanco says the company’s platform includes a five-year CEL curve to help provide liquidity and delivery certainty, providing quarterly CEL prices, and the independent market monitor is now using the company’s curve as a reference. Tradeon Energy was able to provide an additional reference from the results of the second edition of its online trade simulation platform called Tradeon Games. “Added to the usual swaps, we included spreads, georeferenced nodes and the 5 percent CEL requirement,” Blanco says. “This exercise showcased the difficulty of placing a fixed price over the value of a single CEL in a scenario where power producers want to sell at spot market prices and qualified suppliers want to purchase at auction price levels, hampering CEL transaction liquidity.”