Eduardo Meraz
View from the Top

A New Market is Born

Wed, 02/21/2018 - 09:36

Q: What expectations do you have for the Mexican energy market in 2018?

A: 2018 is the year where the energy market will consolidate. It all started with the first long-term electricity auction in November 2015. followed by the short-term market, launched in January 2016. CENACE has been working from the outset toward a variety of milestones set for 2018, including the execution of the first midterm electricity auction, contract signing for the assigned projects during the third long-term electricity auction, implementing all the aspects surrounding the short-term market and finally, executing the first auction regarding financial transmission rights. The latter should happen during 4Q18 due to the complexity it represents. Achieving all these landmarks will mean all mechanisms contemplated in the reform for the market will be ready to properly work.

Q: What was the biggest challenge for the implementation of the Mexican energy market?

A: The biggest challenge we had to overcome was timing. In less than a year and a half, Mexico had to create a completely new market, which on a global average usually takes four to seven years. The creation of the software that runs the market was a continuous improvement process that needed a deadline and constant communication between regulators and developers. Working with INEEL was an important part of this process. CENACE was also in charge of the creation of the auctions’ core software. Having an in-house development of this kind has been extremely useful and speaks volumes about Mexico's capabilities in the development of technology. Talking about Mexican talent, we are also working with IPN, which acts as a third party that verifies the results of the auction. For that, IPN developed another piece of software to check our results. As is well-known, the results were positive and the projects were correctly awarded.

Q: How was the creation of the Clearing House handled by CENACE?

A: The model of the Clearing House created for the auctions is completely new on a global level. Clearing Houses all over the world are used to mitigate risks in terms no longer than three years. For Mexico, our Clearing House has to cover risks for 15-20 years. All of the international firms that we hired to advise our activities showed their surprise, but at the same time their interest. Although CENACE has the ability to manage the Clearing House per the law, we chose to hire a specialized third party because it is a purely financial activity that does not fit with our core. Of course, we retain responsibility for its functionality. If at any moment we do not see it working as it should, we have the capacity to intervene and call for a new tender so that a new third party takes charge of the operation while we manage the interim phase. Some international experts who offered their advice also think that applying this model to finance projects for longer terms is interesting, as it would offer more certainty to the projects under development. 

Q: What is hindering the development of more transmission projects?

A: The transmission grid requires expensive mega projects that are not easy to manage, or even to auction. The Oaxaca transmission line auction has gone through delays not because CFE or the Ministry of Energy are putting up barriers, but because it involves extremely high costs and a great deal of legal struggles. But Congress has overcome the issues and the auction is about to begin. Future projects to auction will be worked out in other ways, meaning that they will materialize faster. This is important for interconnection. Many people state that interconnections are being managed in a very slow and inefficient way, but the truth is that the problem is more technical than that. The grid is not capable of handling all the capacity to be interconnected. Considering that there are certain regions where projects are stockpiling and more permits are being requested, the grid is becoming saturated. Fortunately, as in every process, we are becoming more agile and knowledgeable, and with stronger transmission and generation projects Mexico will become more competitive.