Qualified Supply Savings Plummet

Years ago, when the Wholesale Electricity Market (WEM) supply scheme was launched, C&I companies could save up to 30% in costs compared to CFE Basic Supply tariffs. Since then, savings have been the primary driver for C&I consumers to migrate from the traditional electricity supply to become Qualified Users. As electricity markets have evolved and external dependencies have become relevant to large consumers, the WEM has imposed changes to Qualified Suppliers' costs and consumers' budgets. As a C&I consumer, it is therefore crucial to understand these market behaviors in order to make informed decisions, maximize savings and mitigate risk. 

The Qualified Supply scheme has several cost components that are either fixed or variable, based on market prices, risk allocation, regulation, and market rules. Qualified Users depend on the ability of Qualified Suppliers to be competitive and they in turn depend on generators, who have costs related to operational efficiencies and commodity prices. 

In February 2023, CENACE determined the 100 critical hours for the previous year and imposed historical price increases for the capacity component that would be taken by either Qualified Users or Qualified Suppliers, depending on their pre-established contractual commitments. This tariff component has recently had the greatest cost impact. The market experienced increases in capacity prices of up to 30%, which in turn caused savings to plummet and, in some cases, disappear. 

Inflation has also impacted base energy prices, which have risen to around 7% in recent years. Although gas prices have been at historic lows in recent months, the previous season experienced significant price increases that decreased or eliminated savings for Qualified Users that were exposed to Local Marginal Prices (LMP), had a heat-rate component or a natural gas price component in their electricity tariff composition. In this regard, many generators have been unable to maintain previously competitive prices due to the impact of COVID-19 and global market changes. As a result, Qualified Suppliers have recently signed their hedging contracts (back-to-back deals) at less favorable terms, which in turn is reflected in higher prices to the end C&I user. 

From another perspective, CFE Basic Supply has not directly reflected its cost increases in their tariffs, which artificially reduces the savings for Qualified Users as well, since the regulated tariff is used as a base comparison. 

These significant changes and price surges have put pressure on Qualified Suppliers to meet their financial obligations and has forced some to either close or sell their businesses. This obviously provokes market players to act with greater precaution as they navigate the WEM and close transactions. 

In addition, demand in the WEM has increased as companies, both international and local, continue to be driven by the need to reduce costs, especially considering that energy is one of the Top 3 to 5 expenses for a company. Sustainability and ESG reporting has also been an alternate driver that has convinced organizations to incorporate renewable energy supply to reduce CO2 emissions. By adding renewables to their portfolio through the Qualified Supply scheme, a company may be able to reduce a significant amount of Scope 2 emissions. 

Due to the increase in demand, many utilities and suppliers have very limited supply of renewable energy in their portfolio and have therefore increased prices to reflect the short-term supply and demand needs of the market. Until new generation permits are issued and granted, renewable energy supply and savings will continue to decline. In line with sustainability reporting, Qualified Users are increasingly requesting the purchase of International Renewable Energy Certificates (IRECs), which, although represented as a small price component, increases the overall price of energy supply. 

The International Energy Agency's (IEA) World Energy Outlook 2021 report predicted that renewable energy will be the fastest-growing source of energy over the next decade. Renewable energy generation capacity is expected to grow by more than 50% by 2030, with solar and wind leading the way. Most of Acclaim Energy's clients in Mexico require renewable energy. As energy consultants, through our processes and support, our portfolio of clients in Mexico are eliminating 1.9 tons of CO2 emissions per year, the equivalent of removing half a million vehicles from the road or powering 212,000 homes with renewable energy. The impact that companies make through their energy acquisition strategies is quite significant. 

Today, many companies are signing their second supply contract in the WEM. Now that they have gained experience, recognized the complexity of the market dynamics and how budgets can be impacted based on the risks assumed, Qualified Users have an opportunity to ensure a full understanding of how different scenarios can impact their energy costs and sustainability goals. For those who are new acquiring electricity supply in the WEM, it is crucial to obtain expert support to provide guidance on decision-making, scenario building, analysis, negotiation, and contract management. With the market currently offering 10-15% savings over the CFE Basic Supply tariff, the opportunity is there for companies to embrace and optimize their energy portfolio.