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Regulator Strives to Make Market Bankable

Wed, 02/24/2016 - 11:07

Q: Which criteria will be used for dispatching?

A: Dispatching was traditionally centralized; CFE was the only generator and it dispatched according to its criteria. However, it had to deal with IPPs and self-supply generators. CFE created a virtual market offering with its own resources, which competed in a virtual way, but the management was entirely centralized. Now that there is a market, there will be offerings and proposals for purchasing electricity. Whoever comes up with the best proposals will dispatch first or will be the ones successfully entering the market.

The market will have two modalities: a day-in-advance market and a real-time market. The day-in-advance market can be understood as a pre-dispatch model where a request is submitted for electricity requirements in advance. Generators will then offer options on an hourly basis. Once the generation and demand proposals are in place, the market will seek options, thus maximizing benefits.

Q: What is the position of renewables in the new open market landscape?

A: This is where CELs come in. The mechanism relies on day-to-day energy generation and long-term contracts of at least ten years. Generators will offer electricity in the market but they must be backed up with CELs, which will amortize their investments. Generators can access CELs and sell electricity to off-takers, which makes this scheme attractive for renewables.

In Mexico, the clean energy requirements are imposed on the suppliers, not on the generator. Suppliers need to cover a percentage of their demand with CELs, with each CEL being equivalent to 1MWh. To cover this requirement, a supplier will search the market for CELs and clean energy. A generator might be able to supply 2MW and another player might sell two CELs that help the initial supplier cover his requirements. The price of CELs will be set by the market, but initially each CEL is likely to be valued at US$30, which is the cost of each fine per megawatt.

Q: What is CRE doing to address the private sector’s concerns about the bankability of CELs and incentives for renewables?

A: The private sector is worried because three effective mechanisms will disappear: green wheeling, the energy bank, and capacity recognition. Green wheeling will cease to exist, and now wheeling will have a regulated tariff for basic service users. Some of the elements we are considering are the investment returns for existing infrastructure and attraction of more investment. As for qualified users, depending on the type of transactions, there will probably be a methodology similar to those found elsewhere in the world.

Now the law allows for bilateral contracts, so a generator can sign a contract with a supplier that will enable both parties to leverage their investments. In addition, a tender for CELs with ten-year duration makes any project bankable. Considering our installed capacity from renewables and the fact that we have a 35% clean generation objective, significant investment must be made and we have to find ways to make them bankable. The most attractive scheme today is capacity bids for ten-year contracts, since the tenders are designed to make projects bankable.

Q: How are the costs of electricity and tariffs being calculated?

A: For qualified users, the market and competition will establish the tariffs. These users can seek options in the spot market or they can sign bilateral agreements with suppliers. If they choose a supplier from clean energy sources, the qualified users will also obtain CELs. Basic services will have regulated tariffs. This has to be a clear, transparent tariff that includes costs of electricity, transportation, and distribution. The separation of CFE’s subsidiaries will highlight the differences between distribution zones, forcing improvements that will result in more competitive tariffs for final users. Regional tariffs will intentionally reflect the marginal price of electricity in a given region and limitations in transmission lines. This will not be the case for distribution, since lines generally have the capacity to interconnect the final user. Tariffs currently consider a temperature component. It is likely that focalized subsidies will remain because basic services are still considered public services, but I think they will be implemented differently.