/
News Article

The Shift in Power

Fri, 02/01/2019 - 12:07

At the time of its conception, the new energy model resulting from the Mexican Energy Reform was projected to deliver several benefits for Mexico. These include a faster substitution of thermal, fossil fuel-powered power generation for cleaner, more efficient and less costly power generation and a competitive energy market where private companies can take part in the development of generation capacity. When the Energy Reform was approved in December 2013, it met strong criticism by the opposition as it was seen as a path to privatize PEMEX and CFE. Inasmuch as the reform’s objectives aimed to reduce electricity, gas an oil costs to the benefit of the Mexican population, by the end of Enrique Peña Nieto’s government, the reform fell short of reaching most of its goals. 
The government kept control and planning of the national electricity system as well as of transmission and distribution, while generation and commercialization were open to free competition. This policy led to the creation of Mexico’s Wholesale Electricity Market in 2016, which is operated by the National Center for Energy Control (CENACE) and includes both the spot market and electricity auctions. The secondary laws pertaining to Mexico’s 2013 Energy Reform were published in December 2014. Among these, the Energy Industry Law (LIE), CFE Law, Geothermal Energy Law and Law of the Energy Coordinated Regulatory Bodies are perhaps the most important for Mexico’s electricity market.
The 2013 National Energy Balance shows that Mexico’s effective electricity generation capacity in that year was 53.5GW, with an effective renewables capacity of 12.93GW. Hydropower was the most important renewable in this category with an installed capacity of 11.5GW, followed by geothermal with 823.4MW. By 2017, Mexico’s effective electricity generation capacity fell by 20.5 percent to 42.5GW but renewables increased their participation by about 13.7 percent in Mexico’s effective generation capacity and accounted for 13.1GW of the total. In 2017, hydropower remained the most important renewable energy in terms of effective capacity with a total 12.1GW.
The effective capacity of other renewables suffered minor changes since the entry into force of the Energy Reform. While Mexico’s solar power effective capacity remained constant at 6MW between 2013 and 2017, in that period geothermal increased its capacity from 811.6MW to 873.6MW. In terms of wind power, Mexico’s effective 
capacity increased between 2013 and 2016 from 597.6MW to 699.15MW but wind power generation fell to 86.3MW in 2017 since in that year the generation of Independent Energy Producers (PIEs) was no longer registered. Mexico’s nonrenewable effective generation capacity increased between 2013 and 2016 before falling in 2017. The country’s nonrenewable effective capacity in 2013 amounted to 40.55GW, which increased to 41.87GW in 2016 but slowed to 29.4GW in 2017 as PIEs’ combined-cycle generation plants were no longer considered. 
 

RISING POWER TARIFFS 

Tariffs in all segments have increased since the entry into force of the Energy Reform. The agriculture sector experienced the largest increases with an average 166.6 percent rise between 2013 and 2017. Average tariffs in all segments of agriculture went from MX$1.25/kWh to MX$3.35/kWh. The second-largest tariff increases took place in the public services sector (27.4 percent) from an average MX$2.40/kWh in 2013 to MX$3.05/kWh in 2017. Domestic tariffs in all segments (including highconsumption households) were in third position for largest increases during that period. On average, the price of 1kWh in that segment went from MX$1.36 in 2013 to MX$1.46 in 2017, which is an 8.2 percent increase. On the other hand, industrial tariffs in all sectors remained the most stable. There was an increase of only 2.7 percent between the average MX$1.04/kWh of 2013 and the MX$1.07/kWh of 2017. The second-most stable sector was commercial, where the average tariffs increased 2.6 percent from MX$3.65/ kWh in 2013 to MX$3.74/kWh in 2017.


A NASCENT POWER MARKET

The creation of the Wholesale Electricity Market is among the key breakthroughs of the Energy Reform. Private companies can now supply renewable and clean energy directly to qualified users. These users now purchase energy both from basic suppliers or become basic suppliers on their own. In 2018, at least 5 percent of the energy that qualified users buy in the new energy market must come from clean sources. Companies that cannot reach this amount must purchase CELs or face sanctions. 2018 is the first year that these certificates started applying. 


This market also saw long-term energy auctions for private generators to sell electricity directly to CFE. Since 2016, three auctions have taken place. According to data from the Sixth Government Report of President Enrique Peña Nieto, these three auctions generated an investment of around US$8.6 billion and will add 7.4GW of clean energy capacity. These investments will prompt the development of wind, solar, hydro, geothermal and turbogas generation projects in 18 Mexican states that will start operations between 2018 and 2020.  The cost of each clean MWh has dropped 56.2 percent between the first and the last long-term auction. While the cost of each MWh of clean energy closed at US$47 in the first auction in March 2016, this figure dropped to US$20.57/MWh in November 2017. In terms of CELs allocation and total power allotted, the second long-term auction of 2016 was the strongest year with 9.3 million MWh+CELs marketed and a total 8.9 million MWh adjudicated. The fourth long-term energy auction was projected to take place in the first week of December 2018. However, the newly inaugurated government of President Andrés Manuel López Obrador has suspended the auction.
 

THE ROAD AHEAD

While the more immediate results of the Energy Reform have not met the expectations presented in 2013, the Ministry of Energy expects that by 2032 the results will be more palpable. In PRODESEN 2018–2032, it was projected that Mexico’s gross energy consumption will increase at an average rate of 3.2 percent between 2018 and 2032. 


The report underlined that 66.9GW of added capacity are needed to satisfy this increasing demand for electric power up to 2032, which would require an investment of around MX$1.7 trillion over the next 15 years. The report adds that by 2032, up to 55 percent of all the added generation capacity will be in renewable technologies and the rest in conventional technologies, especially combined-cycle generation plants. PRODESEN expects that wind and solar capacity will be the most added renewable technologies with a total 14.8GW and 11.4GW, respectively. More than 2GW of hydropower and efficient co-generation capacity are projected to be added by 2032, geothermal and biomass will have minor capacity increases and another 4GW of nuclear power capacity is expected to be installed.


As this capacity is added, PRODESEN expects that 11.8GW of capacity will be retired between 2018 and 2032. Conventional thermal stations are forecasted to be the most decommissioned generation plants and account for 7.4GW of the capacity retired in that period. An aggregate capacity of 4.3GW of conventional technologies such as combinedcycle, coal-powered, turbo gas and internal combustion will also be retired. PRODESEN expects that only 61MW of renewables capacity (geothermal and wind) will be retired up to 2032. From an investment perspective, PRODESEN estimates that MX$2 trillion will be invested in Mexico’s electricity infrastructure over the next 15 years. Generation will account for 84 percent of that compared to transmission with 9 percent and distribution at 7 percent.