Qualified Supply Ability Contributes to Long-term Growth

Q: How did Northland Power come to operate as a qualified supplier in the Mexican Wholesale Electricity Market (WEM)?

A: As many know, Mexican legislation does not allow power producers to directly sell energy to final users. Northland Power, whose core is to develop power generation projects, own and operate facilities for the long run, saw the need to market its products in the WEM. In order to be present along the entire energy value chain, Northland Power decided to have its own qualified supplier (QS), Northland Power Energía, which started operations in March 2020. Until August, the company was mainly working to build the right team with the right people, establishing governance, selecting the energy trading risk management software (ETRM) and preparing its teams. In September, we started marketing for the 130MW La Lucha solar farm. However, as a QS we need more products such as: power, energy and clean energy certificates. Our mandate therefore is to arrange this: to build a strong portfolio that has in it all the mandatory products that are competitive enough in the long run to help Northland grow in the Mexican market.

Even though Northland Energía is a new company, the people who operate it are not new to the energy market. Combined, we have over 20 years of experience with the Electric Industry Law (LIE) and have had the opportunity to participate in negotiations representing more than 1.6GW. Most of this comes from combined cycle technology. We also negotiated more than 1.1GW worth of supply contracts and some of us worked on CFE’s power producing and QS arms. We have been involved in Mexico’s electricity market from the very start, which means the company has the experience to understand what is really happening in the sector.

Q: How is Northland Power Energía looking to complement its energy supply?

A: Mexico’s energy market is geared toward the short term. This is because there is a lack of power, meaning actual assets that are competitive enough. Since we are an affiliate of Northland Power, we are able to use Northland’s size and reputation as an advantage to get better prices regarding competitive power purchase agreements. In short, we will sign PPAs to obtain the three products with the best price and conditions that are possible today.

Q: What were the biggest challenges Northland Power Energía had to overcome to become operational as a QS?

A: There were three main challenges. The first, as the other qualified suppliers that operate within the WEM, we are facing a lack of liquidity in the market, also that the WEM is still new and people are still learning about it. Second, the disruption to planning from COVID-19. We planned to enter into operation in May 2020, but the regulatory entities were in trouble and off schedule due to the pandemic. Third, migrating clients. This is a very difficult challenge because many of them do not comply with the grid code. This should be addressed first and sometimes this takes a lot of time and needs to be done thoroughly. Even though this is a requirement for everybody which injects or extracts energy from the national grid and that it was enacted in April 2018, we still find loads that are not yet in compliance. Nevertheless, if you want to migrate a client to the new market, it might take from eight months to a year because you need to start from scratch.

Q: What characterizes the company’s strategy as a new player in Mexico’s WEM?

A: We offer monthly rates that are based on individual requirements, which vary per customer due to their different load profiles and needs. We do not have, and we don’t intend to have a shelf product. Everything we sell is tailor-made. You might think that two companies that belong to the same industry would have similar requirements, but their needs change based on behavior, location, market context and appetite for risk, among other factors. For example: right now, we are seeing low local marginal pricing (LMP) take effect. Furthermore, we are expecting a rather low power market clearance because there is a great deal of idle capacity that is not being used, the national interconnected system is around 20GW long. This allows for the best prices from the customer’s perspective. You can hardly claim there is something out there that could produce energy, power and CELs at around US $30MW/h which is the expected bundled price for 2020 and recover the internal rate of return at the same time. The levelized cost of energy (LCOE) of the different actual generation technologies is simply not there at the moment for that to happen, so taking advantage of these market prices becomes very attractive for building competitive-low-risk-tariffs.

The market is telling us it does not need more capacity additions right now, which is among the reasons we have low prices today. We will see this situation prevail for at least the next three years. Demand is not growing that fast, after all. So, Northland Power Energía has decided to use this, at least some percentage of the market, knowing that we will not regret to make this recommendation to our clients later. Currently, volatility is super low. Prices are depressed and you can take advantage of that. This is one of the advantages of our company: we create supply strategies and want our customers to actually benefit from our knowledge while solving their particular problems.

Q: How did demand versus installed capacity evolve in 2020?

A: We did see problems when COVID-19 first hit Mexico. Demand was depressed and consequently it was not growing at the same rate as it did years before. However, in October, the situation already looked very different. Now, demand is growing, although it is expected that it will grow slower than before. We expect 2021 to be similar, with a slower than usual growth in demand. Demand was one of the pieces that led us to low prices. Older power plants have not been retired, we saw more energy enter the mix, we have had around 8,000MW of efficient, new combined cycle power technology enter into operation since 2018, with some of that a result of CFE’s last auctions and some new ones built under the LIE and publicly financed works. The long-term energy auctions are making great progress as well, having reached over 5,000MW of the promised 7,000MW, according to the energy ministry, mostly in clean energy, gas and fuel prices are and are expected to still be in 2021 very low, and around 60 percent of Mexico’s power generation uses gas alone and as a consequence, this has been driving down prices and we believe this effect will last until 2024.

Q: How is the company working to support electricity end-users?

A: Even though we have substantial energy generation capacity, transmission has stayed almost the same. We are also seeing transmission problems among the end users we work with. In some areas of the country, CFE is no longer able to offer connection capacity to the loads. We are working hard with Northland’s development arm to offer solutions to end users to address this lack of connection capacity. Currently, we are working on products to help them overcome these burdens. We are not an average QS. We deliver supply solutions through the development of strategies, while providing turnkey projects so that companies can continue their work.

Q: What are the company’s goals regarding the WEM in 2021?

A: Since December 2020, we have been seeing a great deal of movement. COVID-19 slowed us down but people are eager to get back to work. The transitional stage has already passed. Qualified users, CENACE, private companies and CRE needed time to adapt, but we believe that 2021 will be a great year because of this enthusiasm. People are looking for cheaper and better energy, so we predict that a great deal of movement will occur and Mexico as a country as well as Northland Power Energía will benefit from this. Overall, our goal is to reach as most MW of supply as we can.

Northland Power Energía operates as a qualified supplier in Mexico’s electricity market. It is a part of Northland Power, which develops, builds, owns and operates renewable energy infrastructure assets in North America and Europe, among other regions.