Mexico’s Wholesale Electricity Market Still Needs to Mature

Q: How did Nexus Energía Mexico experience growth in 2021?

A: Despite the adverse circumstances facing the Mexican energy market, 2021 was a very good year for Nexus Energia Mexico. The company kept on growing as the appetite of industries to decarbonize is bigger than ever. Nexus Energía is a specialist in Wholesale Electricity Markets (WEMs) that offers solutions for digitalization and optimization of energy sales and purchases. We partner with our clients to allow them to achieve their sustainability goals. Nexus Energia Mexico has two lines of business: the management of energy sales in the WEM and the operation as a qualified supplier. In the management line, we consolidated our customer portfolio, offering value-added solutions through the study of price forecasts. In the second line of business, focused on qualified supply (QS), we also continued to grow. This line of business represented our second phase of development, yielding great results. In 1Q22, Nexus Energía broke even, mostly because the QS area took off.

Q: How has Nexus Energía México confronted the slowdown in renewable energy generation?

A: We manage 1.5TWh of renewable energy. We also have entered several PPAs, allowing us to purchase the surpluses of various power plants that we manage. Additionally, we have managed to accredit both Clean Energy Certificates (CELs) and International Renewable Energy Certificate (I-REC) mechanisms for our clients. We have accredited 500,000 I-RECs from several solar and wind power plants in 2021. This has allowed us to get more involved in these voluntary-participation markets, making them a solution for the industry in the fight against greenhouse gas emissions while promoting new renewable energy projects. In this way, we have been able to promote sustainable generation despite the government policies during the past four years. The CELs were a positive mechanism that benefited the decarbonization of the country without subsidies. However, we still do not know what the guidelines for the coming years will be. In the absence of clear regulation and incentives from the federal administration to promote clean consumption and the development of new renewable energy generation projects, Nexus supports this market for CEL compensation through voluntary markets.

Q: How has the Mexican WEM changed over the past four years?

A: The WEM is a mechanism that was opened to provide transparency to all energy consumers as well as to foster competition and economic efficiency in the energy matrix. Contrary to the policy established in the past administration, where dispatch preference was granted to those producing power at a lower price, the government has attempted to prioritize the dispatch of CFE power plants since 2019.

As part of this new policy, we have seen an increase in hydroelectric power production. These levels of hydro are beyond what environmental planning requires and may have negative consequences given the significant droughts affecting many parts of Mexico.

The current operation of the WEM is not ideal, as it favors costly, inefficient and polluting plants, affecting the country's economic competitiveness. These issues occurring within the WEM have politicized its operation to oppose competitiveness and efficiency, which has not allowed this market to mature at the pace provided by the law. Moreover, many renewable energy plants have been shut down in recent years, causing higher energy costs and leading to an environmental crisis in Mexico City.

The WEM is also facing high energy prices caused by national and international events. Fuel prices skyrocketed due to the Russian invasion to Ukraine, increasing the costs of combined cycle power plants in Mexico. At a national level, the energy prices increased substantially after the rejection of the proposed constitutional energy reform. The current operation of the WEM is not ideal as it favors costly, inefficient and polluting plants, affecting the country's economic competitiveness. The WEM’s operation is highly political, hindering competitiveness and efficiency of the market. It still needs to mature and it is far from the expectations set forth in the regulatory framework of the initial energy reform.

Q: How has the Supreme Court's vote in favor of the reactivation of the Electricity Industry Law (LIE) impacted Nexus Energía México's operation?

A: The Supreme Court analyzed the constitutionality of the 2021 reform to the LIE and did not declare it unconstitutional. However, the ministers' vote allowed the LIE to be evaluated on a case-by-case basis and its amparos to be resolved in federal courts. Despite the Supreme Court’s vote, as of today, the LIE remains suspended due to more than 100 amparos file by different players. So, the electricity dispatch continues to operate based on the 2014 Energy Reform’s regulation.  

There are risks associated with the regulatory uncertainty generated by the constant change of rules and procedures for amparos. The main risk lies in the judicial interpretation of the laws and regulations. Another risk is that the judicial defense will create two parallel markets, with different processes between the protected companies that will operate under the 2014 framework and those affected by the regulatory changes imposed by this administration. The economic impact of this would be exponential.

Q: How has the uncertainty within the Mexican energy market affected Nexus’ expansion plans in the country?

A: The current economic and political environment surrounding the energy sector has not affected the company. Even with the negative impact of the constitutional reform bill, Nexus' international consortium is reinforcing its bet on Mexico. Our company reached breakeven in 1Q22, with sales of MX$82 million (US$4.2 million). Fifty percent of this turnover comes from our energy management business, which is our initial line of business. The other half comes from our energy commercialization. We are beginning to reach the level of maturity in the market that we desire. The WEM is just beginning to take shape, only about 5 percent of the market in all of Mexico is in the WEM, so there are still many opportunities for growth.

Nexus Energía México is an integral Spanish service provider in the Wholesale Electricity Market. It specializes in qualified suppliers, as well as energy management services for renewable energy generators.