Providing Certainty in a Volatile Energy Market

Q: How does Enegence’s multidisciplinary expertise and use of data and AI give the company a competitive edge in the consultancy market?

A: When Enegence was constituted, it was mainly focused on offering our clients regulatory, operational, strategy and consulting services related to the wholesale electricity market. Since then, the company has evolved, adapting technologies, and creating software needed to analyze and generate market intelligence and an operational platform for our clients. This added-value service has allowed us to help our clients make their operations safer, more efficient, and more cost-effective — an important capability in commodity markets such as electricity. In other words, our multidisciplinary background coupled with SMART, our intelligence and operational software, provides our clients with the tools needed to make informed business decisions that reduce costs and increase their likelihood for survival in such a competitive market.

Q: How does Enegence’s SMART software provide greater market visibility in such a volatile market?

A: In the wholesale electricity market, energy (locational marginal prices or LMPs) and capacity prices, are volatile. To forecast prices accurately, our SMART software must take into account infrastructure, for example in transmission of energy and generation capacity, as well as statistical and technical data, likegeneration parameters. The data needs to be regularly adjusted with updated information of the Mexican power system, so that our software can forecast long-term LMPs and capacity prices within the first standard deviation.

Also, it is important to consider that currently there are infrastructure uncertainties, such as the lack of visibility about new generation projects and the expansion of transmission lines, as well as others that could result from the latest energy reform bill, for example cancelling the self-supply scheme that needs to be considered when forecasting prices. Nevertheless, knowing and understanding these constraints are essential because the more information we are able to feed in, the better approach to certainty SMART will have in different scenarios. 

Q:  How is Enegence advising clients in relation to the uncertainty in the sector and how does that influence end users’ decisions?

A: We are advising our end-user clients that have a Qualified User profile to make the transition from either the basic service supply or self-supply to the Wholesale Electricity Market for two main reasons. Currently, if end-users are not receiving energy from a Qualified Supplier, then they must be sourcing energy either from the self-supply scheme, which mostly predates the Energy Industry Law (LIE) issued in August 2014, or from the basic service supply provided by CFE Basic Service Supplier scheme. In the former option, there is a regime called an interconnected legacy contract which is now facing scrutiny and a transition process under the latest version of the energy reform currently under revision by Congress. The bilateral modifications outlined in the reform, if passed, are seemingly intended to force end users with a Qualified User profile into the Wholesale Electricity Market anyway.

Alternatively, the basic service supply  provided by CFE Basic Service Supplier entails a regulated tariff with no opportunity to negotiate bilateral contracts among end users and CFE Basic Service Supplier. Under this scheme, the state energy company charges a set price calculated by CRE following a publicly available methodology. The underlying caveat is that the regulatory tariff calculated by CRE is wholly contingent on CFE’s cost of operation and cost of generation, which has steadily increased due to remaining inefficiencies and higher input costs. Moreover, if the Federal Revenue Office disagrees with the CRE’s calculated tariff, it can bypass the agency’s authority and stipulate a new tariff for any tariff group it desires. This is a risk that reduces electricity price viability at a time when energy prices are expected to rise.

It is important to mention that even if the energy reform bill passes, it is very unlikely that end users are left without energy. At most, they would receive Basic Service Supply or a similar scheme because energy would be provided by CFE anyways under a regulated tariff. Overall, these consequences serve as incentives for companies to enter the Wholesale Electricity Market.

Q: Domestic electricity tariffs remain high despite the introduction of more efficient power plants. What is the root cause of this?

A: The two main driving factors that keep domestic electricity tariffs elevated is the cost of generation and variable costs, which mainly include engine efficiency and the cost of running operations as the economy's basic service provider. Together, these two variables point to internal inefficiencies, which are responsible for high domestic electricity tariffs.

To address this issue, CFE must begin contracting power plants with higher technology efficiency. So far, however, the state company has not shown interest in this solution, considering only to increase CFE generation capacity at existing and inefficient plants which will not bring down prices in the short or medium run.

Q: Enegence has said it is taking part in the development of an Emission Trading System (ETS) whose aim is to cut down CO2 emissions. What is the company’s role in this effort?

A: Enegence was hired to develop Mexico’s guidelines for the ETS’ monitoring system, whose main function is to ensure that market participants of the ETS are not abusing their power positions to drive the price of emissions up or down in their favor. This oversight is particularly important in an energy market where state producers, CFE and PEMEX, are also among the highest carbon emission polluters.

Enegence was also hired to develop the market stability mechanisms for Mexico’s ETS pilot program to provide the guidelines for the design of the ETS. As part of our task, we worked on fine-tuning market stability mechanisms that will maintain both emission allowances and carbon credit prices under certain thresholds using different economic mechanisms such as cost containment reserves, emissions containment reserves, hard floors and ceilings. The objective is to strike a balance that works to incentivize innovation that reduces carbon emissions without hindering local and foreign investment.

With these parameters identified, the next step is to move on to software development, which we expect to begin during 1Q22.