Providing Know-How and Experience at the Negotiation TableBy Cas Biekmann | Mon, 05/24/2021 - 12:29
Q: What are the main challenges commercial and industrial (C&I) clients encounter when they address energy costs while boosting sustainability?
A: These are indeed hectic and challenging times. Consumers are affected by feelings of uncertainty, goaded by regulatory changes in the energy sector. The biggest change was the highly anticipated modification to the Electricity Industry Law (LIE). There was rampant speculation about a return to the pre-2014 Energy Reform landscape, where CFE had a monopoly to supply on energy. When the bill to alter the LIE arrived, it was not as harsh as some feared, even though it did represent big changes. Some of these had already been put into practice through minor measures. Nevertheless, customers are skeptical of change and dislike uncertainty, especially during the highly unusual and disruptive 2020. Companies reacted by delaying investments and, instead, focused on cost-saving.
For medium to large energy users, the investment needed for metering equipment is minor compared to the savings that result.
Q: How can Epscon help commercial and industrial clients in their mission to negotiate cheaper and cleaner energy?
A: We offer commercial, technical and regulatory support. Our core added value is our know-how in the negotiation of power purchase agreements (PPAs). PPAs are in many ways quite complex documents. To properly negotiate a PPA, you need to have an in-depth understanding of the regulation, understand the changes that have occurred and have technical knowledge about how the power industry works and what constraints are in place. Most importantly, companies need to have commercial know-how regarding practices in the market and what to expect when dealing with potential suppliers in regard to payment and contract terms. Force-majeure clauses and breaches are crucial as well.
Many off-takers are unfamiliar with PPAs and there is a large knowledge gap. In contrast, it is the core business for the suppliers. They are very knowledgeable about the common practices and the details related to contracts. The leverage off-takers have in these negotiations is therefore small. Epscon’s knowledge levels the playing field by providing the full information with complete impartiality.
Q: How do you assess the situation regarding supply and demand in Mexico’s electricity market?
A: The electricity market finds itself in a dynamic situation. If we look at the market a few years ago, the situation was completely different, although the balance was similar. Many new power plants entered into operation because of CENACE’s actions toward CFE. Mexico was seen as a top country for investment. At the same time, the market was very young. The Wholesale Electricity Market (WEM) only began in 2016 with just a few functioning operators, despite the fact that the previous self-supply scheme still existed separately. The new and somewhat unknown market inspired a certain fear regarding related risks. At the same time, power producers and investors were optimistic and eager to develop new projects, some of which are still coming online today. In any case, supply in the market continued to build.
At the end of 2018, a major shift occurred when the fourth CENACE auction was canceled. This represented a red flag for investors. Nevertheless, the power plants that were already standing continued to add to the installed capacity in the WEM available to private consumers. At the same time, fewer projects were developed. Greenfield projects stopped pretty much entirely. In 2021, we are still benefiting from the wave of new capacity planned years ago. This puts us in a particular situation where we have a great deal of energy supply available today. For our customers, this means that there are many options to choose from.
Qualified users were a bit hesitant at first because they did not know what to expect. Then they heard the about the success stories from their peers who had ventured into the electricity market and signed a PPA. With the current uncertainty, consumers are once again hesitant to enter. Many consumers are interested in the potential savings, but at the same time there is still a great deal of fear. There is a great deal of good availability coming from suppliers, but this situation will not last forever. Since power plants are not being developed, this will of course mean that in two or three years we can expect a period where very few options will be available until development picks up again.
Q: How do you advise customers to sign PPAs or perhaps venture into the spot market?
A: We normally advise against using the spot market, explaining the potential risks and benefits in the process. The spot market is attractive during the current period because it is dominated by low market prices. But at the same time, it is difficult to predict whether prices will bounce back in the near future because of the current uncertainty. If they do, it would be devastating for companies that are not sufficiently covered. Some of our customers are willing to take that risk, but we aim to make this a fully informed decision for them. Large, sophisticated companies can manage the risk but for smaller companies, for whom electricity costs are among their biggest expenses, the risk might be unbearable.
In regard to PPAs, the term of contracts varies a great deal between companies. Some look to regulatory developments or general uncertainties regarding business and decide that they have no clue as to what might happen next year. As a consequence, they are unwilling to commit for the long term. The uncertainty regarding their own operations drives them toward shorter-term contracts. In terms of demand, there is little middle ground. Companies either want to go short term or arrange it so that they can see the benefits of longer contracts that range from five to 10 years. Overall, we do not see this situation of oversupply lasting more than two years, so now is the time for off-takers to enter.
Q: Where does Epscon see opportunity in 2021?
A: There is a great deal going on in the market. Our most common service is the Request For Proposal (RFP) process for companies that are either looking to switch from CFE’s supply or have already signed a PPA and want to perhaps explore other options. We help these companies understand what options are available and suggest options they might want to investigate. At the end of the day, the customer decides who to invite and we support them across the entire process, providing them with information when uncertainties arise. Negotiating the actual PPA is the most important part. Regardless of what was agreed in the RFP, you will need to live with what was signed in the actual contract. In times of uncertainty, like now, it is crucial to spend a great deal of effort on the negotiation of a solid contract that contains mechanisms that deal with regulatory changes and force majeure, for instance. Options to exit are equally important.
EPSCON is a consulting firm that helps medium to large companies become off-takers and procure cheaper, more sustainable energy. It has negotiated over 60 contracts for a capacity of over 700MW.