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Analysis

Uncertainty Dominates a Successful Energy Market

Sat, 12/01/2018 - 16:13

The Energy Reform implemented during the Peña Nieto administration provided private players with a framework to participate in the country’s energy market. However, President López Obrador’s comments on the reform have generated a wave of uncertainty in a sector that had become a favorite of foreign investors

As Mexico’s energy mix is injected with additional renewableenergy capacity, natural gas is expected to play a critical role as a transition fuel, either through continued imports or increased domestic production, which López Obrador is championing. Cheaper and more environmentally friendly compared to other conventional fuels, natural gas could ignite the regional development of Mexico’s economically vulnerable southern region. AMLO’s chief concern is that he believes contracts awarded for pipeline construction are not beneficial for the country and are costing CFE up to eight times more than what they should cost. “We do not want to affect companies. We want to reach an agreement,” said AMLO at one of his daily press conferences.

With a cumulated pipeline of 58 clean-energy projects totaling 8GW of installed capacity and US$8 billion in investments, Mexico’s long-term electricity auctions have consolidated their status as the success story of the country’s energy transition and its 2024 landmark objective of 35 percent clean energy generation. Although the fourth auction has been suspended, the aggressive package prices showcased in previous editions have limited auction participation to a specific player profile. This includes utility-comparable companies with the business model and financial capacity to enable an efficient and standardized project development model suitable for utility-scale projects.

The design of Mexico’s energy market avoids cornering project developers to rely on a single scheme. On the contrary, it incentivizes companies with different risk preferences and commercial objectives to look for alternatives in the market. Mexico is consolidating a pool of project sponsors and IPPs that are more comfortable relying on nodal prices and private off-takers rather than auction prices and CFE as the final off-taker.

Despite Mexico’s efforts to transition toward renewable energy, natural gas still accounts for 70 percent of fossilfuel demand for power generation purposes. According to PRODESEN 2018-2032, combined-cycle generation alone accounts for half the country’s power generation. Highly cost-effective and environmentally friendly, Mexico’s access to natural gas’ cheapest market, the US, has placed this fuel at the center of the country’s power generation plans to transition toward renewable energy. In 2014, CFE made the decision to adapt its thermoelectric plants to dual combustion processes to gradually transition from fuel oil to natural gas.

Given natural gas’ contribution to the country’s power supply, it comes as no surprise that CENAGAS is looking to use natural gas as a lever for national development and reach greater economic growth rates. The national pipeline administrator announced a MX$1.75 billion (US$91.2 million) investment in the Yucatan Peninsula. “Part of this investment will be allocated to the reconfiguration of the Zempoala compression station and the interconnection of the Tuxpan pipeline. Another project to be financed by this investment is Engie’s interconnection between the Mayacan system with SISTRANGAS pipelines in the southeastern region of the country to freely transit toward the Yucatan Peninsula,” said David Madero, Director General of CENAGAS, to Mexico Energy Review 2019.

To guarantee reliability and safety to natural gas supply for power generation purposes, CENAGAS and CENACE, the electricity system administrator, modified a critical coordination agreement in 2017, two years after its signature in 2015. “Our core objective as control centers is to offer the safest, most reliable and efficient transport system aligned perfectly with CENACE’s mission to offer an electricity system that is equally safe, reliable and efficient,” said Madero.

The wrench in the energy industry’s machinery is the new government presided by López Obrador. His calls to revisit and potentially revise the Energy Reform rattled investors throughout 2018 as the presidential campaign unfolded and then with his victory and subsequent inauguration. Industry insiders have been unified in their calls for reform continuity, which they view as mostly successful. However, the signs so far have been mixed. López Obrador took office with a blistering attack on the Energy Reform, which he said “had only meant a drop in oil production and rise in gasoline prices.” He has vowed to strengthen both PEMEX and CFE with a mandate to thrive under market conditions, bolstering both their budgets for 2019. The suspension of the fourth long-term auction also helped crack the egg of certainty that had settled over the industry. The new administration has also expressed interest in revamping the country’s hydroelectric assets and has been adamant about securing the continuity of renewable energy’s penetration in the energy mix.