Marcelino Madrigal
Former Commissioner
View from the Top

Preparing Tomorrow’s Energy Infrastructure

Mon, 02/25/2019 - 16:11

Q: How will the first midterm auction results lead to changes in future auctions?
A: Mexico’s electricity market is structured by a wide array of elements. Chief among them, long-term electricity auctions, midterm electricity auctions, the annual capacity market, the day-ahead market and the spot market. These are the primary cogs in Mexico’s electricity market machinery and their operations need to be coordinated. Their objective is to secure a reliable, safe, efficient and environmentally-friendly electricity supply. The long-term market acts as an investment catalyst that is operated efficiently through short and midterm markets. The latter acts as a key link between the auction’s long-term coverage contracts and the spot market. Midterm electricity auctions compensate imbalances in both short-term and long-term coverage.
The midterm electricity auctions were designed to trade energy and power for three-year periods, to be purchased six months in advance by end users who are not sophisticated enough in their energy consumption over long-term periods. A direct result of the first midterm auction was the purchase of 50MW of power. We are in the process of receiving feedback from participants over the design and results of the first midterm electricity auction so we can make the necessary adjustments. My personal consideration is that, given the midterm auction was designed for small-scale off-takers, there is leeway in the design to simplify the process to attract an increasing number of interested parties.
Q: What regulatory advances has CRE achieved for the implementation of financial rights of transmission?
A: The design of Mexico’s electricity spot market is node-based. Financial rights of transmission were designed as an instrument to bring any power producer wishing to transfer its energy to a specific point in the grid closer to a stable price. It does not act as an absolute guarantee of price levels. Rather, it mitigates price variations in the specific location of the energy injection and extraction node.
The financial rights of transmission manuals are public and available. They were prepared and drafted by the Ministry of Energy in coordination with CENACE, prior to being transferred to CRE. The execution of the first financial rights of transmission auction is in the hands of CENACE. The National Electricity Grid’s operator is in the process of training interested parties to participate, subjecting them to a series of preliminary tests to prepare the first financial rights of transmission auctions before the end of 2019. It is the only puzzle piece left of fundamental importance for the qualified supply market.
Financial rights of transmission are a complex instrument but they are not exclusive to Mexico’s market and have a proven track record. In essence, these mechanisms provide the possibility to purchase rights over congestion pricing. This means acquiring the rights, through an auction, obtaining the rights over node price differentials between energy injection and extraction. They essentially act as a shield for power producers and qualified users over electricity price variability over time.
Q: What are the implications of CRE enacting the calculation methodology for financial guarantees for power plant interconnection and load center connection?
A: The Energy Reform issued the criteria for the interconnection of power producers and load centers to the transmission network in 2015. It was a substantial paradigm shift that enabled any power producer to access the grid via CENACE, following the rules established by CRE. It paved the way for IPPs to participate in the long-term electricity auctions and planted the seed of distributed generation across the country.
In the intervening years, we have been able to assess the effects of these criteria, gather feedback from the industry and fine-tune the criteria to continue guaranteeing grid access within a nondiscriminatory procedure and with the appropriate balance of incentive. Guarantees were designed to that effect for the interconnection process. IPPs pay their interconnection procedure and must pour the required investment into the grid to reinforce it. Should these investments fail to be placed in transmission and distribution works, the extra costs would be reflected in the final user’s electricity bills. To avoid this, guarantees ensure the seriousness of the player looking to interconnect to the grid and prevent transferring extra costs to the consumer.
Guarantees charged are sufficiently high to guarantee a player’s seriousness without constituting an entry barrier. In 2015, warranty levels were on the high end as we lacked sufficient samples of grid reinforcement costs. Back then, average grid reinforcement costs averaged US$36,000/MW of capacity. The guarantee figure was consequently abnormally high compared to international markets: US$20,000/MW in California, US$8,000 in England and US$11,000 in Spain, to name a few. With a three-year track record and multiple samples, we re-evaluated and adjusted the methodology and obtained an actual average cost of US$11,000/MW. This methodology is reviewed on a yearly basis to ensure guarantees are on par with grid reinforcement costs.
This guarantee adjustment solved another issue, which was expected to recur as Mexico’s renewable energy projects increase in numbers. In some instances, the installed capacity of a pool of renewable energy projects makes it more efficient for them to connect in the same node. Group interconnection distributes guarantee costs between several stakeholders. So far, no power producers or developers have made use of this scheme because the guarantee level for group interconnection in 2015 was US$130,000/MW. With the guarantee adjustment, we are expecting group interconnection to become more common as the methodology establishes an additional discount for this modality compared to individual interconnection. It is a triple-win scheme considering it decreases guaranteed costs for power producers, avoids extra cost absorption by final users and alleviates CENACE’s workload with a single interconnection study for several power plants. The coming challenge will be to redouble efforts for transmission and distribution investments to be swiftly and effectively deployed by CENACE to manage the grid’s rapid growth.
Q: How is CRE preparing Mexico’s transmission and distribution grid for technological advances?
A: The electricity rates CRE approves for CFE recover the grid’s operation, maintenance and growth costs. CRE has a regulatory mechanism in place where, provided the right rates, CFE, in its role as electricity transmitter and distributor, has the required incentives to improve the grid. Going further, we will be assessing if CFE Transmisión y Distribución has the right incentives to improve and extend the grid. If not, CRE will be exploring the use of its attribution, through tools such as functional and accounting separation for CRE Transmisión y Distribución, to focus solely and primarily on transmission and distribution matters.
On the innovation side, the Ministry of Energy drafted a smart grid plan in 2016, approved by CRE, with information provided from CENACE. CFE’s grid expansion plan therefore includes investments in innovative technologies, such as smart metering. Talking about distributed generation, CRE defined the interconnection rules for this specific technology adapted to the scale of the projects. CFE even launched a portal within its website for users to determine if the grid has the capacity to absorb a distributed generation system in a specific location, residential or other.
CRE is also working on the design of an instrument that eliminates entry barriers for new technologies like energy storage. There are technical safety rules to be drafted and comply with for this technology to prosper. Another more sophisticated rule will determine how this technology interacts with the energy market given its inherently multifaceted nature. Energy storage can contribute with power, energy trading transactions and ancillary services such as frequency response and voltage, and as an energy transmission and distribution asset. We will be closely analyzing these contributions and the monetizing models that could come with it throughout 2019.
Q: What is CRE’s regulatory contribution for the success of large-scale transmission line projects?
A: Transmission line tenders, such as the Baja California—Sonora and Oaxaca—Morelos interconnections, materialize based on a regulatory provision enacted by CRE. It specified the income to be received by a transmission project born from a PPP. Based on the Ministry of Energy’s Transmission Grid Plans, there is a large number of transmission projects that need to be built for Mexico’s committed capacity to be installed to reach critical consumption points. To cater to this urgent necessity, more agile schemes to attract the necessary investments to develop this infrastructure are required.
CRE’s PPP regulatory framework for transmission and distribution infrastructure tenders stipulates that the lowest bidding value is a fixed yearly amount representing the value of the income to be paid to the winning bid. This efficient cost is reflected in the transmission and distribution rates. CRE also made available two contractual schemes, one to be used by CFE and another to be used by the Ministry of Energy. Looking ahead, these public-private participation mechanisms for energy infrastructure will become critical for renewable energy to continue developing in Mexico.