Ramón Moreno
Mitsui Power Americas
Expert Contributor

Lost in Transition

By Ramón Moreno | Thu, 08/27/2020 - 14:09

In 2014, the Edison Electric Institute (EEI) warned that distributed generation could do to utilities what the internet had done to newspapers. Today, the solar distributed market in the US is very active. Sunrun has just announced the acquisition of Vivint Solar in a US$3.2 billion deal, which will make the company a leading actor with 15-20 percent US market share. At present, however, the contribution of distributed solar to total US power consumption is still just below 1 percent. 

Changes never happen as predicted, and luckily for most of the utilities, the pace of this transformation is slow enough for companies to adapt. But the change is happening, and it has already left a few victims. The utilization factor of combined cycles in Spain, initially built to operate on base load, was below 15 percent in 2018. This year, seven coal power plants, almost half of the total in the Spanish grid, will be shut down as their operation is no longer economically viable. The situation is similar in Texas. Even with extremely low gas prices and energy-price only driving most of the deals, power generation in ERCOT with coal is declining quickly while wind power represents almost 20 percent of total production. 

The energy transition toward a decarbonized future is here, driven by technology, cost and environmental concerns. But policy plays a critical role in the speed and success of such a transition. According to Fatih Birol, head of the International Energy Agency, government decisions guide about 70 percent of the world’s spending on energy. And policy is hardly ever a consequence of technocratic decisions but a political cocktail where culture and beliefs play a big role. 

Mexico is no exception to this. The process of opening the electricity sector to private investment started in 1992 and reached its peak seven years ago with the Energy Reform. A slow but relentless process that has led to 80 percent of new generation capacity installed in the country in the last three decades coming through private investment. The 2014 Electricity Law, together with the Energy Transition Law, represented a full opening to a competitive market that provided price signals, economic incentives and a clear decarbonization road map that the country needed to modernize quickly its power system for the benefit of Mexican citizens. Maybe too much, too fast. Very rapidly, it attracted a significant level of investment to the country but excitement is now in a fast cool-down mode since the current government took power. The Energy Reform, less than a decade from its creation, is now under constant scrutiny and its continuity is under question.  

Is this a terrible thing? Well, first of all, this is not a story that is unique to Mexico. Energy is a hot topic in every country. It has driven world appetite for war in the last century and it has always caught the eye of politicians. In the US, where several power systems co-exist, the opening process to power markets took time to gain the confidence of public opinion, and opposition from utilities has been a well-known matter all along. Debate on liberalization of the electricity systems is still vivid is some US states. Hawaii, for example, has demonstrated the success of a properly managed, centralized utility model that helps the energy transition. Glass half full, we could think that the current situation in Mexico is not a step back, but a normal overshooting or a necessary bend in the sinuous path to a clean, efficient, reliable power system. What will that system look like? Nobody knows, but the solution needs to consider more than just technical and economic factors. What it does need is a broad, deep consensus, as well as the institutional framework to maintain it.

Photo by:   Ramón Moreno