The Market Liquidity AlgorithmMon, 02/25/2019 - 17:44
Q: What is Enicon Energy & Infrastructure’s contribution to the maturation of Mexico’s wholesale electricity market (WEM)?
A: Enicon Energy & Infrastructure contributes by injecting an added sophistication to the WEM’s design. This means providing the capacity to offer structured products that provide certainty and confidence to both power producers and qualified suppliers, which in turn is transferred over to their own clients. Our market participation is primarily financial. Since 2017, Enicon has had operational interactions with major players among Mexico’s border electricity markets: Guatemala’s AMM, the Electric Reliability Council of Texas (ERCOT) and California’s Independent System Operator (CAISO). We are also looking to set a foothold in the electricity infrastructure market to ensure that clean power generation finds its way to the country’s primary consumption points. We are developing products that can structure, among several clients, a competitive hedge that addresses the different price levels of the country’s electricity nodes per zone. These products are based on proven, algorithm-based models, in-depth market studies and price histories to feed market forecasts and projections that could bring clarity to Mexico’s market.
Q: What financial instruments can help develop the sophistication that Mexico’s WEM needs?
A: Before designing and deploying trading-related financial instruments to foster market liquidity, Mexico requires sizable investments across the power generation, transmission and distribution spectrums. Financial instruments can assist in taking well-measured risk positions and distributing them among all participants to be effectively mitigated, generating price certainty and reducing volatility. At this early stage, Mexico’s WEM requires a constant investment flow and legal certainty for investors. It is a natural stage that other more mature markets have also experienced. A positive step forward would be resolving the pending implementation of financial rights of transmission to cover congestion risks.
Q: What is your assessment of Mexico’s first year of CELs?
A: 2018’s CELs transactions showcased the price levels we anticipated, supported by long-term auctions contributing clean energy integration. In the short to midterm, we are convinced the volume of CELs transactions will increase, considering that more clean power generation projects belonging to the auction-winning companies will come online and that more private off-takers will be aware of their CELs obligation. Nonetheless, it is important to mention that there are many CELs transactions, which positively pushes the OTC market.
Q: How is the market reaching an equilibrium between spot market prices and long-term electricity auction prices?
A: It all boils down to liquidity coverage. The real-time, hour-ahead and day-ahead market-price variation dynamics do not adhere or react to the conditions outlined in the auction’s long-term coverage contracts. There needs to be a middle ground where risks can be distributed evenly, according to each stakeholder’s payment capacity and warranty level. Enicon offers electricity coverage to suppliers, providing them with certainty that can be transferred to end users.
Q: What are Enicon’s ambitions pertaining to the development of energy infrastructure?
A: While our core business is energy trading, Mexico is in dire need of a strengthened and extended energy infrastructure. While the focus has been around power generation, bolstered by the country’s long-term electricity auctions, we are interested in contributing to the country’s transmission and distribution infrastructure. Through our group, we cemented a track record in energy infrastructure construction projects. The number of stakeholders involved and the permitting layers of a transmission and distribution project in terms of rights of way and land use make it much more complex than a power generation project. Our local market and cultural background knowledge of the prime regions to develop such projects is our key core competency to reach our objectives for this specific energy infrastructure niche.
Enicon Energy & Infrastructure is the energy trading branch of Grupo Elefante. It includes privately-held subsidiaries with business operations across Mexico. It specializes in retail support, trade marketing services, energy and infrastructure.