Tailored Services in a Challenging Energy AtmosphereBy Cas Biekmann | Tue, 08/18/2020 - 10:44
Q: How does Wood assess the attractiveness of Mexico’s energy market?
A: Mexico has been an attractive market since the start of the renewable energy revolution. Mexico is ranked second in Latin America, after Brazil, in terms of renewable energy installed capacity. The fact that the industry continues to increase its participation in the market shows its interest. One key example would be the AMDEE. It has been promoting and reinforcing the renewable energy sector in the country through collaboration. The industry emphasizes that markets that provide the greatest legal and regulatory certainty will attract more investment. I share this view. The local authorities need to update, as indicated in the grid code, and implement all the regulations and procedures that were launched during the Energy Reform. The mechanisms have been working; however, they need to be clearly defined and polished so that processes can be correctly implemented.
Q: Has there been a notable shift in investment attraction due to recent governmental developments?
A: The context to this question is important. The present administration is trying to implement new rules for the house, which happens with every new government. In this case, it comes with a higher emphasis on social impact. As a result, it is affecting the energy market. The policies being implemented are different from those implemented during the previous administrations. Due to the efforts since the Energy Reform the market, for the most part, is still there; it just needs better regulatory implementation. One example concerns the specifics of energy storage. This is not yet featured in the grid code and only briefly covered in the interconnection manual. It leaves a strange gap: operators can interconnect storage although there are no clear rules on how to operate it, and this creates uncertainty. Therefore, certainty is the name of the game now. Both market participants and investors require certainty before increasing their presence in the market.
Q: What is Wood’s most in-demand services?
A: Despite the change in administration, the pandemic and other shifts, the situation for us has more or less stayed the same. There have been some interesting changes, however. Advisory is one of the strongest services that Wood offers. Technical due diligence is something we deal with on a daily basis. We also work with energy supply and demand. Construction and operational monitoring are among the other services we provide often.
In the past 18 months, Wood has been adding new services to its portfolio, such as integrated forecasting services regarding energy production. In the past, CENACE controlled the grid by requesting forecasts a month in advance. Due to variability in the resource (wind and/or solar), a monthly energy forecast is not reliable for the renewable energy producers. What they ended up doing was to modify their forecasts from week to week and day to day. In that sense, forecasting has become a big element in our new portfolio in Mexico. At the end of the day, our portfolio adapts to what our clients need. We provide them with the necessary tools to execute their projects, whether they are lenders, EPCs or project developers.
Q: How would you assess the issues related to energy infrastructure investment in Mexico?
A: The new administration has set its priorities on social programs. It is understandable that the budget is geared toward these programs. While this does not directly translate to budget cuts, some PRODESEN-based projects have been lowered in terms of priority to some degree. CFE, as the grid owner, is for the most part required to reinforce its own installations to ensure the reliability of the network and energy supply. However, recent actions of the government have not improved the outlook on reliability in the energy supply, for example by delaying the interconnection line between the Baja California grid or the reinforcements at the Yucatan peninsula. Another highly discussed issue has been the DC network, which would interconnect the region of La Ventosa to the rest of Mexico and was considered a “renewable energy highway.” Canceling such projects requires somebody to jump in and fill in the gaps to ensure grid stability. At the end of the day, a grid that is not being maintained and reinforced will not have the technical capability to increase its generation and meet energy demand. However, private industry has not moved to advance these projects due to the role of CFE and its responsibility in this domain.
Q: How does Wood assess the trends around energy storage?
A: We are seeing increased interest from both the private and public sectors to include storage. For instance, INECC, a Mexican institute focused on climate change, is looking into it. There has been a lot of discussion regarding reliability. Storage is used to provide support to the system with ancillary and grid-forming functionalities. There are, for example, the load-shifting functionalities that are already implemented, like in the case of CAISO in California. There are many areas that would benefit from storage to ensure that energy demand can be met while avoiding shortages. A clear example would be in Baja California Sur, which is completely disconnected from the National Interconnected System (SIN). Although batteries do not generate energy by themselves, they provide support in a variety of ways that could be useful to the government, especially in areas with low robustness.
It is important to point out that both public and private participation is crucial. How to optimize the system is a decision that needs to be taken from both sides. Both surpluses in energy generation and deficits are problematic. After all, most of the big industrial and commercial load centers are situated in the north of Mexico and the Yucatan peninsula. Nonetheless, a large portion of the renewable energy producers are located in the south (La Ventosa region). The rest of the renewable generation is spread around Mexico, mainly in the north and north-east regions. Lost energy related to the electrical transmission and deratings due to grid saturation between these geographic regions are important considerations that come into the balance. Energy storage could be the great equalizer that would even out the lower demand in the south and high demand in the north.
Private companies want their energy to be sold completely. As a result, they are turning to PPAs, auctions or other mechanisms. On the other end of the spectrum, the government is looking for reliable energy to meet demand. We know that CFE alone cannot provide sufficient energy. This was one of the original main catalyst behind the Energy Reform. Mexico’s grid requires reinforcements along with new technologies to ensure its development. Without the enactment of the Energy Reform and the influx of private capital, CFE would not have been able to fulfill on time its tasks as a grid operator or as a supplier and ensuring the quality of the energy supply.
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