Raquel Bierzwinsky
Chadbourne & Parke

Map of the Emerging Electricity Market

Wed, 02/24/2016 - 12:10

The new electricity market has certainly raised doubts among the players in the sector. Raquel Bierzwinsky, Counsel at Chadbourne & Parke, sheds light on different aspects of how the market will operate and what companies can expect. Regarding power generation and renewables, Bierzwinsky says the point to bear in mind is that a wholesale energy market is being created. Previously, the market had been partially open and gave the opportunity to several market players to participate in different ways, albeit not fully. “Now the market is going from semi-open to fully open and all players will be able to participate, sell to a spot market, and some generators will even be able to sell directly to qualified users through PPAs.”

The sector is moving from a market regulated and controlled by the government to a model akin to those of the US with the Regional Transmission Operators, and Chile and Spain, where there is an independent system operator. Many financial elements will be added to the market, so instead of being a pure capacity generation exchange market, like Mexico’s current model, now the market will have the more typical financial elements seen in open markets around the world. These include financial transmission rights, the way that the tariffs and pricing for power will be calculated, and several other elements that are new to Mexico. Bierzwinsky says that in this new landscape, with the exception of those already operating in open markets, most players will have to learn from scratch.

Another key item, which also applies to the oil and gas sector, is that the major energy utility in Mexico, CFE, is in the process of becoming a productive enterprise of the State. “This means it will have to become a competitor, and it will have to basically reorganize itself to become an entity with an independent budget and corporate governance. That will be a significant challenge for CFE because it will have to reinvent itself,” comments Bierzwinsky, and points out that the Law of the Electricity Industry prohibits vertical integration. Companies can be integrated horizontally, meaning that they can have a holding company that can own a generator, a supplier, a power marketer, or that can enter joint ventures for transmission and distribution. The vertical integration rule applies to CFE, meaning that on its own it cannot remain the single multipurpose entity, but rather it will have to divest itself into different units.

CFE will still remain the sole provider of transmission and distribution services with a few caveats. For instance, the fact that CFE does not have the funding to build the required infrastructure is well-known. Therefore, the law allows transmission and distribution companies, including CFE and its subsidiaries, to enter joint ventures to perform these services. Bierzwinsky says private companies are also allowed to build and operate transmission and distribution lines but CFE will ultimately control and bill for those services. In terms of distribution, CFE will continue to be the sole provider of services to residential users and qualified users, who are those that from 2014 to August of 2015 have load points or off-take needs under 3MW. That requirement will subsequently go down to 2MW, and the following year to 1MW. She points out that the grid will be operated by CENACE, an independent system operator. “The idea is that if CFE is going to become a competitor, it should not have control of the grid.”

In terms of generation, the government wants the price of electricity to eventually reduce, particularly for the general industry, so that the country can be more competitive. According to Bierzwinsky, this will take time for several reasons; more generation capacity has to be built, as well as more transmission capacity to wheel the power to the consumption points. Nonetheless, the government purposely did not include any specific benefits or subsidies for the renewable industry, thus everyone is going to have to compete.

Bierzwinsky foresees investments in thermal conventional power plants because she believes these are more viable competitors in the open market. Bierzwinsky points out that the law does not use the word “renewable”; instead it mentions clean energies and it provides a long list of technologies that can provide clean energy as a source that will be able to compete, including wind, solar, hydro, geothermal, clean coal, and others.

Given that there are no subsidies for clean energies, the only benefit that the law provides for these energy sources are clean energy certificates. The government is giving a three-year period for the open market to get established and for players to get used to a wholesale electricity market and the trading of the certificates. It is not an immediate obligation. This is another element that is significant for renewables. The law respects granted permits to the extent that a market player, who had a permit under the old law or had applied for a permit and paid the necessary fees prior to August 11 2014, will be able to operate under the old regulation for the term of the permit. “All these players that are already operating have the right to continue doing so, as forcing existing players to suddenly switch would destabilize the market,” explains Bierzwinsky. Players who have one of these permits have to consider two things. First of all, permit holders that were not in operation had until October 9 2014 to notify CRE if they wanted to continue to pursue their project under the permit. Companies that did not do so forfeited their right.

The law also states that permit holders have until December 31 2016, to provide evidence that they have financing for the entire project or that they have already laid out 30% of project costs. Bierzwinsky explains that the objective is to weed out projects that applied for a permit just for the sake of having one under the old rules, but still do not have the means to build and operate their project.

The legacy projects have the right to enter an interconnection agreement for 20 years under the old rules and interconnect according to the old conditions. “This is significant for renewable projects because those that already have a permit for self-supply or are on the small producer scheme, which means they sell directly to CFE at the node price, and already have a PPA, do not have an obligation to participate in the wholesale market with everyone else. I think those projects will continue to be successful because these rules have not changed.”

Bierzwinsky highlights that the law allows players with a legacy permit to switch to one of the new generation permits. “Players have five years to determine if they want to continue operating under the new market or if they want to revert to the old permit. This gives companies a chance to trial the new market, providing more certainty to renewable power companies because they will be able to rely on the existing interconnection rules for renewable power projects.” Those rules provide several benefits, such as a stamp tax wheeling tariff, meaning that there is a set price for the wheeling of the power regardless of location or distance. Renewable energy projects can certainly benefit from this, as they tend to be located far from the load points.