Hans Joachim Kohlsdorf
Co-Founder
Energy To Market
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Expert Contributor

Migrating Self-Supply Contracts to the (No Longer so New) WEM

By Hans – Joachim Kohlsdorf | Thu, 11/04/2021 - 15:08

We will never know if, as the private sector, we made a massive strategic mistake over the past three years by not proposing any solutions to the very real problems of the national electricity system (SEN) and for an orderly transition from self-supply contracts based on laws from the 1990s to the wholesale electricity market, created in 2014.

The protection from changes gained through amparos (habeas corpus) today seem to be pyrrhic victories. Some union leaders, power producers and businessmen were incensed and refused to yield an iota to the two previous changes proposed by the government, despite us all being aware of the problems that afflict our grid and with the subsidies implied within these contracts. Many technology companies, industrial players and conscientious power producers built renewable power plants with state-of-the-art technology in a responsible manner. To them, the excess acted out through “simulated” self-supply based on permits granted roughly after 2010 did not seem right but they preferred to remain silent and not speak their minds through their associations. Most of these and other associations in the energy sector did not acknowledge any responsibility regarding these real issues. A technical and objective proposal on how to resolve real problems is still lacking today.

Toward the end of 2012, discussions began on the basis of a Constitutional reform to open the energy sector to private investment. In 2014, this Constitutional reform was implemented. Even though secondary laws and detailed regulatory norms were not yet in place, the general framework was already clear to all those involved in the sector. Let me briefly recall that moment seven years ago, when the Constitutional reform was approved and rightly applauded by all the  private sector.

The previous regulation of the energy sector, essentially established in the second half of the ‘90s, had come to an end. It was predicted that the entire energy sector would focus on taking advantage of new opportunities. This was mostly the case: very interesting new projects were created (as were other, not so interesting or not adequately located projects).

What Were We Missing?

The lack of private sector initiative to begin an orderly migration toward the Electricity Industry Law (LIE) process highlights the fact that the reform had not included any mandatory deadlines regarding the migration of permits and contracts stemming from laws before the LIE’s inception. We were missing full clarity that, though contracts that existed prior to the reform would be respected, they could neither be extended nor modified. A good number of the current appeals and lawsuits come from an interest group attempting to avoid the application of the 2014 Energy Reform to them.

We now face the strange situation of having a group of important companies that want to maintain the regulation of the 1990s and a public sector that would like to return to the 1970s. This confrontation and lobbying activity of many sector associations has created significant collateral damage: our technological regulations do not reflect the important technological advances in the electricity sector and we are stuck with an outdated grid code for both generators and end users. Sadly, we need to add that not even 10 percent of Mexico’s companies comply with this code, which was published in 2016 and is mandatory. Interconnecting a renewable energy plant into the grid in Mexico must comply with standards that would be unacceptable in a country like Honduras. That is right: Honduras (a thousand apologies to my Honduran friends), not Germany, France or Australia.

The self-supply generators, as well as the chambers and associations that supported them and the government, blocked any attempt at a negotiated solution. They also made life very difficult for companies that, facing the expiration of their self-supply contracts, wanted to leave the framework. In retrospect, it is surprising to see the absolute denial of any proposal for an orderly and transparent transition from self-supply contracts to the LIE. The issue of technological updating is almost as sad, in addition to the fact that generators blocked technological modernization, the electric manufacturers, which sell solutions that support power quality, did not speak up either. Chambers such as the National Chamber of Electrical Manufacturers (CANAME) did not present a single proposal for modernization that would strengthen the production of modern electrical equipment in Mexico.

Here are some recommendations to include in an agile migration process to the LIE and to try to negotiate a balanced solution for all those involved:

  1. Extensions or changes should no longer be granted to current contracts.
  2. Offtakers must be able to exit self-supply contracts quickly and easily once the agreed deadlines and commitments with power producers expire.
  3. Legacy generators (autoabasto) must have the obligation to accompany users in this process in an agile manner.
  4. The industrial chambers must support their members, if they want to get out of expiring contracts. Let us remember that in many cases the energy sold by self-supply generators is very expensive. For the end users, the benefit comes from not paying current transmission and distribution rates and from the fact that CFE backs up the intermittency of renewable energy through the “energy bank,” at no cost.
  5. CRE must terminate contracts for self-supply users who wish to do so and facilitate the migration to become Qualified Users in accordance with the current regulation, giving appropriate instructions to both CENACE and the intermediation generator, CFE.
  6. The intermediation generator must redirect the energy that is released to the Wholesale Electricity Market (WEM).
  7. CENACE can support this process by speeding up the self-supply contract migration  toward the LIE.
  8. The process of partial migration from self-supply power plant generation to the LIE should be encouraged and facilitated.
  9. “Genuine” self-supply contracts should not suffer the consequences of excesses committed by “simulated” self-supply. Independently of the migration from the 1990s regulation to the regulation defined seven years ago, the authorities must demand and the chambers must motivate their affiliates to at least comply with all regulations that were enacted since the 2014 Energy Reform.
  10. CFE must initiate a process of renewing and signing updated connection contracts with companies, especially those seeking to get out of self-supply.
  11. CFE and CENACE must demand that all companies, even if they do not want to migrate to the LIE, comply with the grid code, as well as with measurement and connectivity manuals. A normal and standard process in almost all countries in the world.
  12. CRE can initiate a process of verification regarding compliance with the grid code and consider collecting fines from companies that do not yet comply.

20th Century Tech or Modernization?

Unfortunately, we do not have a formal chamber in the energy sector that brings together all these issues and has the capacity to understand technological advances and promote their rapid implementation in Mexico. We have a large number of associations, not all of them dedicated to driving the adoption of modern regulatory norms.

Because I am a firm believer that the best initiatives that benefit our countries must come from a responsible and intelligent private sector, I believe that our associations can lead a process of orderly but mandatory adoption of the technological advancements of the past 20 years. Only then can we guarantee the competitiveness of our companies and the creation of a modern technological offer, hopefully together with manufacturers and software specialists within Mexico. This way we would also create job opportunities for engineering students.

Please excuse some of the “generalizations” stated above. Allow me to moderate this impression. At E2M Energy to Market, we are aware that there are many honorable exceptions to the grievances described before:

  • We do have power plants located correctly regarding areas of high electricity consumption and the capacity of the transmission network.
  • We do have power plants that meet high technological standards and that have made investments to be "grid friendly," as they say in the US.
  • We do have real self-supply power producers, such as sugar mills, paper producers and agro-industrial companies.
  • We do have significant investment from some industrial players to comply with the grid code, as well as other investment that helps stabilize the grid.
  • We do already see clear initiatives from some industrial chambers to promote the adoption of 21st century technology. I would particularly like to highlight CANACINTRA’s initiative to facilitate compliance with the grid code.
  • There are some consultants that correctly advise their customers regarding compliance with the grid code.

I understand that the media and a good part of the energy industry, me included, are absolutely opposed to the radical modifications to the Constitution that have been presented to Congress. But I sincerely hope that we will urgently try to come up with creative solutions to the real problems in the energy sector. The first publications made by the major industrial chambers and entities as prestigious as the Mexican Institute for Competitiveness (IMCO) still do not reflect this alternative path.

Photo by:   Hans Kohlsdorf