The Legacy pfa Competitive Market

Q: Where does CRE draw the line to ensure that regulations control the market but do not stifle growth?

A: Decisions at CRE are taken by the seven commissioners after reviewing the projects prepared by staff under the commissioners’ direction, which allows for the introduction of many points of view to address the sector’s needs. To define regulations we often take into consideration international practices and adapt them to local needs. In the case of electricity, we have developed models that are simple yet effective and easy to understand so that we facilitate the entry of new agents into the market. I think this is already rendering some benefits as we can see for example with the large number of new suppliers for qualified services entering the market and with the companies already operating in the short-term generation market.

Q: January 2017 is the MEM‘s one-year anniversary. What are the main lessons learned?

A: Close monitoring was of the utmost importance this first year and we have learned a lot from it. We observed that some adjustments were necessary, which was expected, and certain procedures may require simplification as some players are still getting to know the new rules. Monitoring will have to continue over the coming years. I feel that we have to work even more closely with the industry to help them understand the model and the advantages it can bring to them. We also learned that stable and predictable regulation is crucial to helping new agents make their decisions.

Now there are two different legal schemes: the legacy system and the new legal system. This makes regulating the sector a bit more complex than normal. But to simplify this it is necessary to encourage companies to move toward the new model and to help them fully understand it. This new market may seem more complex but offers companies many more opportunities. There may be more risks but there are more opportunities. The new market also presents much more competition and forces suppliers to offer better products. The transition may be hard for some, as the old regulatory framework may have been too easy and offered few challenges and extra comfort in some cases. On the other hand, there may also be a generational barrier to break. Those who have worked in the sector for many decades may find it difficult or be reluctant to change. I would say that those who adapt fastest to the new model and can innovate will be the ones taking advantage of the new opportunities.

Q: How is CRE preparing for new markets including CELs, capacity balancing, medium-term market and financial transmission rights?

A: CRE has already submitted the criteria for the clean energy market. During 2017 we will be developing an online platform to register the production of clean energy, provide a certification and verify every month the account status of every participant. This platform will be launched in 2018. The regulations for the other markets are being developed by the Ministry of Energy, which is focusing mostly on those for the midterm market, transference of financial rights and the short-term capacity market. While all are important, the auction for financial transmission rights needs to be developed quickly because it will be the key instrument that suppliers will use to protect themselves from short-term price fluctuations throughout the energy market locations. This will allow them to offer clients competitive prices. During the first few months of 2017 these manuals will be finished and handed to us.

Q: How successful have tenders for basic and qualified supply been?

A: Long-term auctions for basic supply were largely successful due to a combination of factors, the certainty of the contracts awarded, especially their length, the fact that CFE Suministro Básico is the off-taker, which will continue to serve a large part of all energy sales, the continuing cost reductions in clean technologies, as well as other favorable conditions in the capital markets such as low interest rates available to the private sector. The Mexican market is different to others worldwide because of the long-term tenders, which have been extremely helpful to attract investment, proving the importance of long-term instruments. For qualified supply, meaning large electricity-consuming companies, they will handle their own energy purchases if they see better conditions than the current tariffs in basic supply. As prices become more competitive I would expect private companies in this qualified segment to reach out to renewable suppliers on their own. Qualified users are different from basic users, as the first can switch to better suppliers at will. As competition rises, qualified users will increasingly choose alternatives, if may be not only for cost but for the added benefits such as services and certifications that renewable energy suppliers bring. So far basic service represents about 65 percent of energy consumption, while qualified users make up the rest.

Q: How will the tender prices impact electricity tariffs?

A: There will be an impact on tariffs but that will only be in the mid-to-long term. When the clean energy requirements were established in the Energy Transition Law, the question was if the cost to comply with these clean energy targets was going to be too high because some clean energy technologies were not yet seen as cost-competitive. However, we are seeing that the cost of renewable energy is increasingly approaching traditional energy sources and sometimes it is even lower. What this says is that the cost of complying with the clean energy targets will be less than expected and electricity tariffs will not be pushed up as it was forecast.

Tariffs include generation, transmission, distribution and other service costs. Generation represents about 60 percent of the final cost but these costs are not easy to predict or reduce as they are heavily dependent on the price of the energy source, such as oil and natural gas, which are both expected to rise slightly in the coming years. The market is still fairly young for competition forces to reduce the cost of current generation for basic supply. It will take some time. The good news is that the cost of clean energy targets will be lower than expected.

Q: What are your main projects for 2017 and what will be your legacy?

A: 2017 will be a transition year as we will be handed many of SENER’s functions. We will monitor the energy market, finish some instruments and be responsible for maintaining and modifying regulations when needed. We are preparing for the new tenders and developing the new regulations for distributed generation, which will be launched early in 2017. We also expect that smaller users like home owners or small companies will also begin using the options offered by the Reform. As options increase, users big and small will find their energy supply options diversified.