Sophistication Determines Who Thrives in Electricity Market

Q: What have been the main challenges for ATCO as a qualified supplier and where does it see future opportunities?

A: ATCO had a challenging year, with a potential cogeneration and solar project canceled due to factors outside of our control, including pre-existing social issues and unfavorable spot-market prices. As the qualified supply arm, we have been impacted heavily by the government’s chosen political direction for the energy sector. There is much uncertainty due to all the measures the government has tried to push, although many are still under judicial review. While the market anxiously watched the results of the midterm elections in early June, that fact is that it has little to do with the energy market, in essence. It is a matter of the government’s vision for the market and the surrounding issue of national security. 2020 changed the plans of virtually every company in the market, even without considering the global COVID-19 pandemic. On this note, I understand that the government is protecting CFE but I think that by allowing CFE to compete, they could strengthen it even more.

If the market remains operational, there will be opportunities for ATCO Energía. I think that this environment is somewhat like a test: only the truly sophisticated companies, committed for the long run and with the best operational strategies, will continue. Companies like ATCO might have planned for a different scenario but it has to adapt to the new environment and educate customers even more than before. It is a time to innovate, develop new models and find new, efficient ways to move forward. This complicated situation will exist for the near future but, eventually, demand will knock on Mexico’s door. Companies and the government will need to be prepared to address this demand.

Q: How is the lack of permitting associated with the government’s changes in the sector affecting companies moving to the electricity market?

A: Everybody who is trying to switch over to the new regulatory framework has questions about that. The behavior from the regulator, which is no longer granting permits, is affecting not only how many companies move to the electricity market but also how much time it takes to do so. This does not only influence offtakers as the end users but generation assets too. We are looking at quite a few hurdles when they want to move forward with their plans. Companies have been looking at resources with a strategy in mind but everybody has had to alter their budget, refocus their plans and change their timing. Moving to a new framework is a challenge but now there is a risk-factor and regulatory uncertainty that did not exist a few years ago.

Q: How is the global corporate mission toward decarbonization affecting demand for solutions within the electricity market?

A: The issue is that without broad investments like those pushed by the long-term energy auctions, CFE’s prices will remain high compared to other options. Customers can see that there is a good possibility to save money. These potential savings, combined with the need for renewable energy and the social pressure to combat climate change, have created opportunities for qualified suppliers (QS) to help address these matters. However, we are only seeing the tip of the iceberg here because of the issues the energy sector faces. Nevertheless, the market persists and so do opportunities within it.

Q: ATCO has stated it aims to develop green hydrogen elsewhere in the world. What role could hydrogen play for qualified suppliers?

A: In all honesty, I do not foresee much opportunity for green hydrogen in Mexico for the next few years. Looking at the numbers on a global basis, green hydrogen is still more expensive than other fuels. It will be the future, though: green hydrogen is a great solution. The overall process to produce it wins out on batteries, since these require lithium, which requires extensive mining operations. Battery storage is still somewhat expensive and does not yet have an adequate regulatory framework but I do see it becoming a part of the market sooner than hydrogen.

Because of its comparative advantage, hydrogen will certainly be a part of the future energy mix but I do not see it taking off in Mexico yet, despite the many companies exploring the technology. The economics are not there and Mexico lacks the infrastructure.

Q: What will be the role of technology and automation in driving efficiency and reliability for ATCO’s operations in the WEM?

A: Since ATCO’s early days in Mexico, one of the key pillars of how we view the market and its future has been technology. The electricity market is highly rooted in digitalization. We had a big emphasis on technology, algorithms and big data analysis and incorporated this into our systems from the very beginning. This was essential during the pandemic, allowing us to trust our systems in difficult times. Through technology, we created an entire network that we coded ourselves, spending a lot of time improving our systems, models and forecasting, as well as how we interact with CENACE. The framework helped us address all the problems we saw in the market. We even coded ahead for future stages in the electricity market that have not been done so far because of the government’s policy, such as Financial Transmission Rights (FTR) that would allow market participants to hedge risks between nodes.

Whether the market reaches these stages will depend on the political will of the government in power. I do believe the market forces will eventually drive the WEM forward. If it remains operational, it will eventually tell us where to move toward independently of the government’s vision because the government will not have enough resources to tend to the demand alone.

Q: How do you assess CFE’s plans to invest US$2.3 billion in transmission systems?

A: I have often said that Mexico’s problem is not a lack of power production. Its real problem is transmission. Industry insiders know about clean energy integration in the Nordic countries. It is a flexible interconnected system between three countries. But all of that is based on robust, adaptable and modern transmission and distribution grids. Mexico has not been able to do anything significant at all on transmission during past governments, which proudly focused on energy generation and auctions. We cannot expect to introduce renewable energy without looking at the transmission system. It simply does not work. Many places are overly congested and there is a large disparity between places where power is produced and where demand is high. All these factors are problematic in maintaining a power grid and incorporating new technologies. Mexico is three steps behind in this area. Past legislation and the Energy Reform should have done a better job at addressing transmission because it is the key to moving into the future.

Looking at the government’s investments, the plans are a good step. The problem is not the figure but how much the government will really invest. It is disappointing to hear so many announcements and see them either not come true or done halfway. I am not sure if the government has sufficient capital available to carry through these demanding projects. They are not experts in this matter either. Public and private collaboration would be ideal, since the private sector could finance these projects. I think there is still a mismatch on communication and intention for this to happen. Mexico needs a good plan to benefit from a new wave of energy technologies and I have not seen such a plan materialize.

ATCO Energía is the qualified services supplier division of ATCO México. Its permit as a qualified service supplier was awarded by CRE on June 28, 2018, allowing the company to have a strong foothold on the market.