Francisco Valdés
Cervantes Sainz
View from the Top

New Elements and Missing Pieces in the Electricity Market

Wed, 02/24/2016 - 12:27

Q: What are the most important elements in the Law of the Electricity industry?

A: The legal framework is entirely new in the sense that it shifts the way private investment is made in the electricity sector, changing the way projects are now being developed. Essentially, this new scheme motivates the whole industry to find any kind of investor, whether you are a producer, a seller, or a full service company. From now on, players will be operating as if in a wholesale market.

Regarding the energy market, now there is no obligation for acquisition of services from CFE, since every company can participate in all segments of the value chain. Similarly, there is a third and independent party who will decide how to proceed regarding the distribution of electricity. CRE will have the duty of finding an interconnection point, indicating the kind of facilities that have to be built in order to interconnect a power source to the grid, and determining the number of delivery points allowed under an interconnection agreement. Basically, the main change is that CFE will no longer have control over these matters. Instead, the industry will have an independent arbitrator who will set the rules and define the way an interconnection has to be performed.

Q: Which areas do you believe need to be addressed before the wholesale electricity market is launched?

A: The rules open three different areas: capacity, energy, and clean energy certificates. The more complex is the capacity market, which is designed to prevent shutdowns in the system. The tender’s structure has to be defined in order to deliver certainty to basic-supply providers. It is also unclear how the market of clean energy certificates will function, when the certificates are going to be issued or at what price, and if the acquisition will be a fiscal obligation or not. Likewise, we do not know if the market guidelines will provide a specific alternative to the current energy banking scheme.

At the moment, the Ministry of Energy is analysing the methodologies that will best fit the national scenario, exploring additional incentives for the production of renewables. The Minister of Energy has sent the first draft to the Federal Commission of Regulatory Improvement (COFEMER), where interested parties are allowed to review the draft and provide specific comments or suggestions on how the market should be working.

Q: How will private parties engage in the commercialization of electricity?

A: Companies can operate through three alternatives that were not available before the approval of the new legislation. The first option is to enter through a bilateral contract, in which two different parties agree to terms and conditions to either buy or sell electricity. Another approach is to participate in tenders, and the third one is to sell directly in the spot market. The bilateral contracts are similar to the off-taker model, but CENACE will play an important role in distributing the production contemplated in the contract. At the end, the physical transaction is made through the national grid, which CENACE operates, and at the same time this regulator dictates which facility the electricity needs to be dispatched from and in what order. If a company signs a bilateral agreement, it will set a selling price for its off-taker. Afterwards, the enterprise will have to declare to CENACE its bilateral agreement operation.

Ultimately, CENACE will finalize the settlement between these two parties at the market price of each specific hour of any given day. The difference will arise when, for instance, the market establishes that on a certain day at 11pm, the price of energy was US$10 per megawatt-hour and you set the price with your off-taker at US$12. The US$2 should be the difference between what CENACE is going to collect from the off-taker and what it is going to pay the producer. The challenge comes when the remaining US$2 are to be sold through a mechanism that needs to be agreed exclusively between both parties, without any participation of the authorities.

Q: What makes Cervantes Sainz more suited to help clients in the electricity sector than its competitors?

A: I acted as an Executive Secretary at CRE for five years, and during this period I was involved in discussions and decisions related to project developments, including renewables. We have a strong professional relationship with the authorities in the sector, including the Ministry of Energy, the Ministry of Finance, and CRE. Furthermore, the most important role we have played is being a legal advisor of the Mexican Business Council. Our firm is wellpositioned, and we have been approached by potential investors and several clients working under the legacy scheme that are studying whether to switch to the new scheme or not.