News Article

Rules of the Game and Regulatory Hurdles after the Energy Reform

Wed, 02/25/2015 - 16:51

Moderator: Derek Woodhouse, Partner at Woodhouse Lorente Ludlow
Speaker: Noé Navarrete, Commissioner at CRE
Speaker: Sean McCoy, International Counsel at Chadbourne & Parke
Speaker: Miguel Ángel Alonso, Country Manager of Acciona Energy
Speaker: Eduardo Andrade, Representing Memeber of AME

Derek Woodhouse, Partner at Woodhouse Lorente Ludlow, acted as moderator in the panel on the market rules for the electricity industry. Miguel Ángel Alonso, Country Manager of Acciona Energy, began the panel stating that as a company representative and member of several associations, he can attest the private sector’s efforts to push the Energy Reform. He claimed that current market conditions and the drop in oil prices call for a faster implementation of the Energy Reform. However, it is difficult for the private sector to foresee where the industry will be headed since the rules of the market are still missing. According to Alonso, renewables will fare well in Mexico for two reasons. First, the technology is improving and becoming more affordable, while investments are increasing. Second, the drop in oil prices will make it difficult for oil companies to be competitive. The latter provides a great window of opportunity for renewable energy.

Woodhouse asked Alonso about the effectiveness of clean energy certificates (CECs). Alonso stated that he is against the idea of CECs being used as incentives. “CECs should be a sign of commitment to clean energies. Solutions meant to solve problems in the short term will not satisfy investors and will lead to uncertainty. Certificates should give electricity generators certainty without being a burden to investors and the government.”

Woodhouse proceeded to ask Eduardo Andrade, Representative of the Mexican Energy Association (AME), to shed some light on the aspects of the Energy Reform that are well-understood by now. Andrade explained that renewables and large profits are not entirely compatible. In this sense, renewables have to become bankable, particularly if there is a mandate to consume them. In order to have affordable renewables, Mexico has to rely on proven technologies such as wind, not experimental ones. He told that natural gas will help by reducing tariffs in the short term. However, renewables are necessary in the long term, and this requires investments, which depend on certainty. Andrade believes CECs will provide this.

After emphasizing that uncertainty was the common theme in the panel, Woodhouse asked Noé Navarrete, Commissioner at CRE, to clarify the way CECs will work. Navarrete explained that previously, CFE covered all aspects of the electricity industry and the self-supply scheme opened the door for renewables. The energy bank and wheeling were important tools in the development of the renewables sector. However, Navarrete said that these two incentives will disappear in the new market. Instead, CECs will make projects feasible.

Navarrete mentioned that CFE will no longer be in charge of dispatching, a task that now falls under the responsibility of CENACE. “Just like the IPP scheme was created to sell power directly to CFE, now independent electricity distributors can service CFE.” The state-owned utility will have to create profitable business units that will participate in the market as an independent entity, as the law does not allow vertical integration. This is another challenge in terms of public policy aimed at making CFE a productive enterprise and market player. On the other hand, CENACE will be in charge of managing the market. Navarrete was careful to note that the market has to be developed gradually. Finally, he pointed out an important fact regarding CECs. “The sanction under the CEC model will not be imposed upon generators, but on suppliers. This is why I believe CECs will be successful.”

To end the panel, Sean McCoy from Chadbourne & Parke stated that the fallout from the Reform would trickle down to SMEs. This would allow SMEs to benefit from affordable electricity tariffs, unlocking the Reform’s true economic value. “We have to start by creating knowledge of the industry among national talent. This will provide plenty of opportunities for consultants, as SMEs largely not have said knowledge to date. The fact that the Reform will benefit SMEs is even more important than reducing tariffs for the residential sector,” he concluded.