Francisco Salazar
Founding Partner
View from the Top

Trading on the Wholesale Electricity Market

Mon, 02/25/2019 - 17:25

Q: What is the most frequently-asked question Enix receives from clients?
A: Project developers ask many questions when requesting our services, but the prevalent ones are related to project profitability and the best strategy to accomplish objectives while effectively complying with the regulation in place. We are participating in many projects that are the first of their kind in terms of technology, applicable regulation and business modeling. These projects are very interesting since they require a clear understanding of the regulation and a proper ability to interpret it, even though there may be some legal gaps and an understanding of the implications of these interpretations and gaps. The Energy Reform certainly brought with it a liberalized business spirit and creativity in Mexico for companies to venture into new areas and we are prepared to help them become successful.
Q: Why should a company depend on Enix to solve the regulatory issues they may face?
A: Every company must always keep in mind all the aspects of the regulation that relates to its activities. But this is not always easy because regulation in the energy industry is abundant and complex, and some companies do not have the knowledge or the experience to understand such complexity. At Enix, the long professional career of the partners and our associates gives us that knowledge: Enix is capable of fully understanding the regulation and all its implications, which gives us the ability to offer both conventional and outside-the-box regulatory solutions.
Q: What success story demonstrates the added value Enix can offer to the Mexican energy industry and its participants?
A: At Enix, we pride ourselves on our proactivity when helping clients. For instance, in a new energy market, the regulation is still unfolding and there are many questions left to be addressed. As a result, there have been several cases where there was no regulation or the existing one was unclear or contradictory. Based on our experience in designing regulation we were able to help our customers to present proposals to CRE that eventually became new regulation.
Q: How would you rate the evolution of the clean energy industry in Mexico and the diversification of its energy matrix?
A: The clean energy industry in Mexico is thriving, particularly with wind and solar projects. Nevertheless, there are other renewable resources, such as biomass, geothermal and hydroelectric, that even if they are mature in terms of technology will still need some kind of support to make their introduction feasible against the aggressive cost structures of wind and solar generation projects.
So far, these renewable resources can only compete in some market niches. Energy policy and regulation could become a tool to spread them beyond these market niches. In this regard, some people are calling for specific auctions for these energies, instead of being completely agnostic in the technology area. This is open to debate, but in the meantime, since the Ministry of Energy decided to follow a technology-neutral approach for the auctions, we should explore schemes by which these technologies can widen their presence and have a competitive advantage. These would include fiscal incentives or a certain degree of regulatory flexibility.
Q: How does the postponement of the fourth long-term electricity auction affect your clients and how do you expect the situation to play out in the future?
A: The postponement of this auction certainly introduces uncertainty. However, I have hope that the new administration will soon find out that these auctions, although perhaps in need of a little fine tuning, are very beneficial for CFE and for the Mexican electricity market. This ultimately impacts positively on the end users, who are the Mexican people.
Q: What role will CFE play in the future of the Mexican electricity industry?
A: Even after its unbundling, CFE is still the main player in the Mexican electricity industry. Its transmission and distribution subsidiaries remain as the only ones providing this service. Its GENCOs accrue most of the generation capacity and its two suppliers (for large and small users) are the largest load serving entities. As time passes by, CFE will remain an important player but one of the objectives of the reform was to bring new players that could invest and compete. As a consequence, in the electricity generation area we are seeing ever more companies entering into the business.
In any case, and unlike PEMEX, which needs to focus on activities that provide very large returns, CFE can still find profitable businesses along the entire value chain: generation, transmission, distribution and supply of electricity. Nevertheless, CFE needs more capital investment and greater administrative flexibility in the way it does business and enters into partnerships.
Q: What are your expectations for the CELs market?
A: The market has just started operations so it is too early to judge its development. Nevertheless, I expect to see a positive evolution in the coming years, just like with the wholesale electricity market, which started operations slowly and is now fully on track. Of course, it is possible that certain elements do not work correctly at the beginning, but it is up to the market and regulators to learn and adapt accordingly, with the constant feedback of the industry players and specialists.
Q: How will new trends in the energy industry change the Mexican energy landscape?
A: Mexico remains a technology follower, so the international market will dictate the impact of specific new trends. In the area of electric vehicles, for example, prices are still very high. Until global prices are reduced, their penetration in Mexico will not be significant. Regarding other trends like storage, smart grids or blockchain applications, again we lag behind many other countries. In any case, we need to prepare ourselves, both in the public and private sectors.
Q: In the developing energy market, what have regulators done well that should be continued and what improvements can be made?
A: The regulators have been proactive in listening to feedback from the energy industry and associations and adjusting regulation when needed, and this should be applauded. My only concern has been the time that it sometimes takes to do this, which could potentially be exacerbated by the extreme budget restrictions imposed on regulators by the new administration. However, I am confident the new government will soon see the benefits brought about by the Energy Reform for the future of Mexico’s energy industry.