Smart Electricity Pricing Models Help Overcome Challenges

Q: What are ATCO Energía’s recent achievements in Mexico?

A: ATCO’s biggest cogeneration project, a 30MW facility, has gone through some rough patches regarding social and environmental problems that arose prior to COVID-19. The project was included in the company’s P&L forecasts, meaning we had to adjust and work on another project. This is a small plant in San Luis Potosi for which we are registering its assets. Although every project has its hurdles, we believe this plant will be a valuable addition to ATCO’s portfolio. We also have a solar park, which is about to be approved and constructed, which is among the other projects in the company’s pipeline. The cogeneration project and San Luis Potosi planta re completely independent projects. Actually, the first project was San Luis Potosi an then we close the cogeneration one.

The company is also working on new structures, models and price savings for customers. In the past months, we have noticed a great deal of activity with our clients. This is because of Local Marginal Prices (PMLs). If you do not have the electricity from your own assets, then you have to be much more flexible and innovative. Renewable energy is different because it is intermittent. We have been working hard to get these calculation models to work, which requires a lot of market intelligence, knowledge of the systems being used and an insight into how electricity flows and is dispatched in the Wholesale Electricity Market (WEM). That is extremely complex because you have to take care of supply and demand, and factor in the reliability of the grid as well.  As we move forward, and the market matures, the challenges for qualified suppliers (QS) become much greater.

Q: Why have prices not gone down for Mexico’s energy users?

A: The energy market has been created to improve efficiency and as a result, prices for consumers improve. For the “perfect market” to happen, you need a lot of players and volume. This creates symmetric information for markets, as well as a healthy balance between supply and demand. In Mexico, this is not the case because there is still one company that holds most of the market power: CFE, both in terms of energy generation and in the percentage of customers. If you examine PMLs, you see that electricity is cheap but prices have remained the same. This is not a problem cause of CFE, but because we are in a rather young market. There are still structures that are not able to mature, and CFE cannot transfer the actual benefits of PML prices to customers. If you have the right price signals, companies are motivated to revamp old assets and create new ones in specific areas to address congestion issues. More transmission lines will be constructed as well. It is an issue we are seeing in Mexico. For consumers to see benefits, more time is required.

Without a mature market, operating will be difficult for key production players because it is not possible to hedge any risk. Of course, COVID-19 and the measures taken by CENACE are also a problem because you do not want to have a situation where a couple of companies hold all the power. But in the end, I believe that Mexico’s WEM is still in its first stage. WEMs usually start to mature after eight years of existence. One transmission line, for instance, will take three years to construct. There is a lot of infrastructure that you need to build. We will have to wait a couple of years before adequate price signals make their way into the market.

Q: How does ATCO view CENACE’s arguments regarding its measures to stabilize the grid?

A: Transmission lines dictate this conflict. You can generate energy from many sources, but there are no substitutes for transmission; and lines need to be installed. Here, there is a delicate balance between what is consumed and produced in terms of electricity, which is the only commodity than cannot be stored on a large, reliable and cheap scale. The balance between supply and demand should therefore be quite precise to control frequency in the grid. If this is not controlled properly, blackouts and other problems will occur. In the past, power plants were based on coal, gas or fuel oil and you were able to ramp up energy production or pull it down depending on the situation. All of this made it pretty easy for CENACE to control the grid. Nevertheless, the Energy Reform proposed a fundamental change: Mexico went from a technical dispatch to an economic dispatch.

During the technical dispatch, CENACE would work on reliability regardless of pricing. Now that there is an economic dispatch, the system needs to be balanced much more carefully. To balance the market, there need to be more and upgraded transmission lines. The grid needs to have fewer technical losses and a digitalized system to make it smarter. If you add renewables to the mix you mount more pressure onto the system. It is key that the system finds an equilibrium between itself, transmission lines and the complexity of the power market. To balance supply with demand, CENACE creates huge forecasting models. The more advanced these models are, the more control can be exerted over the grid. Solar and wind energies are subjected to P90 and P50, which are probability curves, because the weather is always uncertain.

Mexico designed a modern market very much like that in the US. We heard of all these great developments across the country but who remembers the last transmission projects, you might ask. Other than Oaxaca and Baja California, there were no developments because the market left the transmission system aside, since it is not as economically attractive as a combined cycle-project. From my perspective, this was a huge mistake. There were no adequate regulations from the government either. The public and private sectors did not sit down to discuss goals and ways to finance these projects. Good examples of this can be found around the world.

As a result of not coming to terms and working together, we are now confronted with a reality where a 7.2 percent reduction in demand occurred in April, increasing to 11.5 percent in May. People often think that pushing a large amount through the grid is difficult, but it is actually more problematic to have no demand and a surplus in electricity. Mexico has not had the investment required to tackle issues of this scale. At the end of the day, a synergy between the private and public sectors needs to happen regarding this infrastructure. One thing is for certain: the government alone will not be able to do it. As members of the energy sector we will have to confront the issue and find a solution.

The real bottleneck is in the transmission lines. If it is not fixed, we will never be able to fully transition toward renewable energy. ATCO’s models predict much progress in technology. There will be a great deal of technology for digitalization and Big Data analytics. Toward the end of 2030, we will see ridiculously cheap prices, like US$2 cents per Kw. There is no way to use any of this energy if we cannot transmit it correctly.

Q: How is the company working to provide technologically advanced pricing models?

A: Our strategy has been to develop technology to improve our models in-house. In Mexico, we have a new, unprecedented market. Therefore, there is not a lot of information available, even for consulting firms. Years ago, we decided that we needed to be at the edge of innovation regarding technology and Big Data. We set out to create a good team, including mathematicians and physicists. We needed the power to code and create our own models through deep learning. There is a great deal of information out there to digest, but if you do not do it, it does not become intelligent information. We have emphasized this in recent years. It is one of the key factors that ATCO delivers to its customers. We are proud to have created reliable forecasting and pricing models, based on our own research, and have been using this information regarding the company’s own project decisions as well. All this innovation translates to benefits for customers. Instead of offering our clients the usual three price options for peak, intermediate and base, we have the tools to innovate on fixed price rates. The goal is to give our customers better price, reliability and analytics. Some customers do not know much about electricity. We provide education and information on how they can optimize their energy use.

Q: What are ATCO Energía’s goals going forward?

A: The first goal is to contribute to ATCO Group’s growth. We will also be providing all the market intelligence to find the best options for new generation assets for 2020-2021. Nonetheless, we have to improve even more here. If you examine the US system, you see that it changes the laws every year. The regulator, state entities and private players all join together to create better laws that reflect what is happening in the market. The Energy Reform is like a living entity, and it has to move forward. Mexicans are somewhat used to having things set in stone, but that is not how it should work in power markets. At ATCO, we have to be able to predict, model and manage risks, whether they stem from the market, from politics or from a pandemic. This is one of our core values.

Second, we try to come up with real solutions for our customers. The entire goal of the reform has been to generate better prices for them. If this is not the case, clients cannot compete internationally and they lose out on efficiency and profitability. As a result, Mexico will not develop. Therefore, transmission remains crucial; if this issue is not addressed, high prices will persist in Mexico’s energy sector.

ATCO Energía is the qualified services supplier division of ATCO México. The permit to be a qualified service supplier was awarded by CRE on June 28, 2018, and the company has generated a strong foothold with its activities.