Is Mexico’s Energy Market Ready for CELs?Wed, 02/21/2018 - 15:21
To ensure the success and profitability of Mexico’s upcoming utility-scale projects, it is essential to make sure demand for electricity generated by renewable energy sources will be there once the projects are online. The country’s regulatory authorities responded to this necessity with the design of a secondary energy trading market: the Clean Energy Certificates (CELs). Besides opening up energy trading to the private sector, companies are required to purchase 5 percent of their energy consumption from clean and renewable energy sources. By November 2017, CRE was putting the final touches and undertaking trial rounds for the electronic platform meant for CEL trading. Welcome to the CELs market.
Due to the regulations for CEL requirements from the beginning of 2018, CFE needs to acquire a large amount of CELs to compensate for the energy it still produces using fossil fuels. The CELs are expected to attract tremendous demand when they become available so everyone believes CEL prices will increase dramatically. Eosol’s strategy formed almost in response to the auctions due to the absence of private projects. With our full-equity advantage, clients started knocking on our door. In the last 10 months, we have received more renewable energy development projects than in the six years since our company was established.
The trading mechanism for CELs is purposely designed to attain market equilibrium once they are launched starting 2018. The mechanism’s inherent flexibility allows the required participants to postpone CEL obligations, softening the demand curve, and to delay the accumulation of CELs without having to sell them immediately, in turn softening the offer curve. This flexibility will keep the CELs market from failing. Additionally, when the Energy Transition Law was approved, a transition provision was included for the first four years of the Clean Energy Requirements to deal with a possible insufficient quantity of CELs and to soften the obligations
We believe this new instrument to be a great business opportunity for IGSA. The rules of the game have yet to be clarified enough for CELs to be integrated into our business lines. The reform created the CELs obligation, beginning in 2018, and in so doing created Mexico’s energy trading market. As it stands, several variables have yet to be clearly outlined. Which private players make up the CELs market? Where do I buy them from? How is the CEL spot market designed? How much do they cost? Once these questions are answered, the supply and demand of the CELs market will reach an equilibrium that will make it attractive enough for us to participate in.
The obligation of industrial players to cover their energy demand with a certain number of CELs opens up a new, secondary market for Mexico's energy trading sector, unlocking new ways to foster and generate business. This new instrument can be capitalized both by the companies providing the CELs and for those that need them. SUNCO finds this new market extremely interesting and attractive. We believe it will complement the projects already underway as CELs create a guaranteed demand for the energy produced by renewable energy project as the come online. It will be a twofold stabilizing factor, for projects on one side and for the financing models on the other.
The CELs scheme Mexico implemented is definitely going to incentivize the inclusion of clean energies in the energy mix. This reflects Mexico’s effort to truly use the best practices of other international markets. Another common scheme is the feed-in tariff (FIT), but it has proven to generate an inefficient industry. This was shown by many European companies that opted to use this instrument and were consequently unable to make a competitive enough bid during the Mexican auctions that required CELs. In some instances, it even went as far as market collapse, as these companies were unable to pay for exaggerated FITs.
We are pleased with the government’s ambitious plan to produce 35 percent of the country’s electricity from clean and renewable sources by 2024. Although we are developing our own solar parks, we also advise our clients on how to venture into other renewable technologies, such as wind farms, so they can further promote this new market and all its advantages. We go beyond the CELs’ legal requirements, which will come into effect in 2018, and highlight the importance and the impact these instruments will have on our clients’ business, particularly in terms of corporate social responsibility.
CELs are proving to be quite a relevant and complex product, even if by definition they are probably the simplest commodity on the MEM. We see two key roles played by CELs. The first is already reflected in the long-term auctions for which they were conceived, helping developers gain additional remuneration and certainty to finance and complete their projects, and then a more financial side where these certificates will represent a very liquid and tradable product within the bilateral market. The main bottleneck until now has been tied to DECLARACEL and the uncertainties about the exact settlement and transfer of ownership process through which participants will register their transactions, something that is key for a bilateral and liquid market to function.