Many ‘Firsts’ As Energy Reform UnfoldsMon, 02/25/2019 - 16:12
Q: What is Iberdrola’s main contribution to Mexico’s energy transition and what are the main challenges ahead?
A: Iberdrola has been working in Mexico for 20 years and we have a long-term view of our bet in the country, which translates to constant operational growth. We are going through a key turning point in the energy and electricity sectors. We understand that our best contribution in this scenario is to participate in all the initiatives promoted by the Energy Reform. For example, before we could sell to industrial clients under a self-sufficiency scheme but the new market opened-up the wholesale electricity market and we were the first private electricity company to sell to a private customer in Baja California with Soriana supermarkets. We also were the first to announce a combined cycle specially built to operate in a wholesale market, the first facility of its kind to be built in Mexico. Also, we participated from the beginning in the long-term auctions as sellers and when the possibility to join as a buyer was opened in 2017, we jumped in as the first private company.
Mexico has a significant electricity market which is growing. The sector will require a great investment in transmission, generation and distribution infrastructure of approximately US$100 billion over a 15-year period. When you combine a big market with high industrial demand and increasing industrial investment, you need to create a tool to allow the joint public-private collaboration to face market challenges and meet demand. We must keep working to fulfill the ambitions of the Energy Reform. For example, some aspects will require process re-engineering to adapt to the results from the first four years. Another challenge is having more market participants, such as qualified users. Transmission is another objective to overcome in obtaining more even prices across the country. While the reform has been very successful for renewable generation, investment for baseload energy must be further fostered. In short, there is a clear need to cope with the sector’s future demand and meeting it will only be achieved through close collation of all the actors involved.
Q: What midterm role will natural gas have in energy generation in Mexico?
A: Mexico has approximately 75,000MW installed capacity, as of 2017 data. These continue to incorporate generation from diesel, coal and fuel oil. If we look 15 years ahead, it is clear that the energy matrix will need to include other outputs to meet demand growth, which is around 3 percent annually. This requires building new plants and the rehabilitation and substitution of old ones to ensure eco-friendly and sustainable generation. The goal is to shift to a more economic and environmentally-competitive energy. Also, I think that Mexico is the most competitive region in the world for natural gas, given gas availability in the south of the US and Mexico’s own production. While the latter is not being exploited to its fullest yet, the country has great reserves and potential. These conditions lead Iberdrola to believe that natural gas prices will perform steadily for the next 15 to 10 years. Gas should gradually substitute other sources such as diesel, coal and fuel oil.
Q: What is Iberdrola’s growth strategy in Mexico?
A: The previous model of selling to industrial clients under a self-sufficiency scheme was oriented to big consumers with a sophisticated structure, including an electrical department, and demanding a tailor-made solution. The implementation of the reform in 2014 liberalized procurement to clients of even 1MW of installed capacity. This changed the paradigm under which we operated and hence we needed to adapt and change our strategy to cater to smaller clients. For example, within our commercial team, we created a special division called MeDem to oversee SMEs. Any energy strategy must be aligned with the country’s energy policy in the long term. Our strategy visualizes commercial activity and client portfolio growth as foundations. Commercial growth must be backed up by generation growth. As the Ministry of Energy’s discourse is that Mexico needs more gas and renewable generation over the next 15 years, Iberdrola has been focusing on these during its 20 years in the country. We have operational wind parks and gas generation with combined cycles. This strategy fits the country’s forecasted demand.
Our 2018-2022 Strategic Plan will focus on finishing the eight projects we currently have under construction, that is, four combined gas cycles, two wind parks and two PV facilities. We plan a US$2.8 billion investment in the country to conclude said projects and to develop other 2,000MW output. We will keep betting on gas and renewable energies. Our aim is to foster and transfer a competitive energy price in Mexico so the country can, in turn, be more competitive in international markets. Nowadays we have over 2,000 supply spots and our guidance been to reach 8,000 by 2022. This implies a different commercial plan, starting from our resources. In 2014 our sales team numbered fewer than 10 people to manage 40 big clients. By the end of 2018 our commercial team had grown to 100 people and by 2022 it should increase to 200 people.
Q: What is Iberdrola’s assessment of the Mexican Energy Association's performance and goals?
A: The Mexican Energy Association (AME) has been in place for over 20 years and convenes the main gas generation companies in the country, totaling an accumulated energy worth of US$25 billion. AME was not created with the goal of representing gas generation, but as the years passed, other agencies were created for wind, hydraulic and solar energy, among others. About three years ago, AME members saw the need to refocus the association’s activities to represent the interest of gas generators. Since AME was reoriented, it has continued growing and engaging new members. In the two years that I will be acting as President, the goal is to focus on the aspects that are particular to gas generation, such IPP contracts improvement. As Iberdrola, our role is to keep working for the strengthening of the association, always aligned with its goals. The idea is not to promote any disruptive actions but to further travel the path that was defined two years ago. The association will keep gaining relevance in defending the interests of gas generation and playing a key role in the Mexican energy sector as 50 percent of the power demand in the country is covered by gas generation.
Q: What is your assessment of the design of the Clearing House?
A: The Clearing House represents a milestone for the sector as it enables private companies to act as buyers in long-term auctions. The success of the first auction is proof of the good work that the chamber has undertaken as two private companies, Iberdrola one of them, joined to buy significant volumes. Also, another five companies pre-qualified in the auction, demonstrating how it has succeeded in appealing to private companies. As for the Chamber’s efficiency, I think we have yet to wait until 2020, once the energy from 2017’s auction starts to be commercialized. While there are some areas of improvement, I think that in general terms it has been a hit and opened a channel for private companies to participate with less risk.
Q: Iberdrola's goal is to be the energy company of the future. How are you working to achieve this?
A: The company’s vision is that the world increasingly requires energy to meet a higher quality of life for the people. Energy must provide intelligent solutions. This is translated into our Mexican business through a cleaner generation; we will continue to build wind and solar farms, with a customer-service approach. We design a tailor-made solution to meet all our clients’ needs and aim to be close to our customer to bring the right solutions. In the end, when you combine a customer approach such as ours with digitalization, you get the smartness that we promise to deliver. For example, we are working with BMW in San Luis Potosi to supply electric energy to its new plant. We will develop a Smart solar solution specifically for its needs, seeking to yield a different added value for it. Our strategy as a company is clear: we will keep betting on renewable energies but also on gas generation as long as the country needs it. As the world is changing, we understand the need for a customer approach so we offer industrial plans to fit each client.
The differential added value that our company has is also characterized by a long-term vision. This means that when we carry out any business, we undertake it envisioning that it has to work in the long term by yielding benefits to the country. We also focus on building strong relationships to last. Over 95 percent of our clients renew their contracts with Iberdrola as they witness the added value we can give. We also keep close and collaborative relationships with the country’s administration and with our own staff. I am proud to say that we even have second generations of Mexican employees, which make up 99 percent of our workforce in Mexico. We also bet on CSR and invest over US$1 billion in social projects in the country, mainly in education and infrastructure programs in the areas in which we operate.
Q: What would be your recommendations for the new administration to enhance the energy model in Mexico?
A: Any energy strategy must consider the conditions in Mexico, which has a growing energy market and I think that can continue to expand at a faster pace. There is a big demand and I am convinced that the aim is to meet it in a more sustainable, efficient and eco-friendly way. This goal drives the industry to develop more competitive generation, to build more transmission lines to avoid traffic jams and to foster renewables. If the new administration pursues initiatives aligned with this goal, it will be a hit.