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Insight

Understanding the Mexican Electricity Tariffs

Wed, 02/19/2014 - 10:30

Many different factors influence the electricity tariffs that CFE applies to its wide range of users, including the type of user, the amount of electricity used, temperature, tension, hour of the day and whether the electricity is for domestic or industrial use, to name just a few. Different combinations of these elements will determine the tariff that the user has to pay. CFE has applied seven domestic tariffs and 36 industrial tariffs in Mexico’s electricity market, which also vary depending on the geographical zone in which the power is consumed. Some of the main categories into which the tariffs are divided are residential, industrial, agricultural, and public lighting.

Residential tariffs vary according to the minimum average temperature of the locality, with seven different fares divided incrementally between 25°C and 33°C. The higher the temperature the lower the price of the electricity, with the consumer having the right either to consume a larger quantity of energy on a lower tariff, or in the case of Tariff 1F being offered a lower price per kWh. Tariff 1 offers a general price for the domestic use of electricity up to 250kWh, while Tariff 1F has a limit of 2,500kWh per month, with consumers paying a subsidized fare for power consumption. Due to the heavy subsidies on domestic tariffs for basic users, renewable energies do not offer a competitive alternative for supplying energy at this domestic rate. However, the most expensive domestic tariff, “Doméstica de Alto Consumo” (DAC or High Residential Consumption), is paid when any household surpasses the locality’s consumption limit. According to the tariff in place, this takes away the subsidies completely and sometimes multiplies the cost of electricity by more than five times. This has come to represent the most important opportunity for renewable energy at the domestic level. The solar industry has made a big effort to target this market, by installing rooftop-mounted solar power systems in households that consume high levels of electricity, thus placing them in the DAC category. Within this scheme, the households that usually acquire solar energy systems for domestic consumption and using bi-directional meters are able to reduce their tariff to 1-1F. By doing this, within five to eight years, these households can make a return on their investment in solar technology. Given that this equipment tends to have a lifespan of 25 years, this allows them to make important savings for 17 years. The domestic market has been one of the main markets for photovoltaic power in Mexico in recent years, and there is huge potential for it to continue developing in this way.

Public lighting costs present another real tariff challenge for municipalities, as this type of electricity incurs one of the highest tariff costs in Mexico - 5 and 5A. The high prices that municipalities must pay for public lighting represent another important niche market for renewable energies in Mexico, since in the long-term they can offer more competitive prices to municipalities. Larger scale renewable energy projects can be a cost-effective alternative for municipalities that wish to reduce their electricity bills, while also contributing to the development of renewable energy and reaching established renewable energies targets. The competitiveness of large-scale renewable energy projects has been increasing in recent years and can offer alternative ways of saving resources among different municipalities. This has been the case in Nuevo Leon, where the Santa Catarina wind farm provides energy to several municipalities around Monterrey.

Renewable energy projects are also becoming a more competitive alternative for the industrial sector, the majority of which operates under Tariff 2. The wind farms that are currently operating in Oaxaca offered a cost-effective solution for off-takers that were paying Tariff 2 prices through PPAs signed for 25 years. In the coming years such investments will represent important savings in electricity consumption for companies like Grupo Bimbo, Peñoles and Cemex, and will make a major contribution towards reducing the level of CO2 emissions in the country. Small energy producers have found another opportunity by providing energy directly to CFE, a scheme under which the national power company pays for energy at the short-term total cost. Off-takers are key players in the development of the renewable energy sector in Mexico. It is off-takers that will guarantee demand for energy produced and thereby provided a fixed income that enables project developers to obtain the necessary financing.

Private renewable energy projects have proven to be successful in competing with CFE for clients whose electricity tariffs fall into the DAC, Tariff 2 and Tariff 5 categories. It is thanks to these areas of opportunity for Mexico’s energy sector that the established emission reduction and renewable energy targets can be reached. Major markets fall into these categories that could support the development to the renewable energy sector in Mexico, including high energy consuming households, major industries that fall under the Tariff 2 category, and a large amount of public lighting infrastructure throughout the country. The renewable energy sector must focus its attention on these potential clients in order to grow at the quickest rate possible. The small producer scheme is becoming an increasingly viable way of doing that, which will provide an important opportunity for the renewable energy industry going forward

TARIFFS FOR THE RESIDENTIAL SECTOR IN MEXICO

Electricity tariffs vary widely across the residential, commercial and industrial sectors in Mexico and their conditions are also very variable. In Mexico, residential tariffs are subsidized by CFE in order to guarantee access to electricity for all Mexicans. Through such mechanisms, Mexico has achieved a 98% electrification rate for the population, with the remaining 2% largely representing communities in remote locations.

The residential tariff is applied exclusively to domestic usage and connected individually to every residence, apartment, condominium or household. The tariffs that apply to the Mexican residential sector are “Tariff 1” and the rate for high residential consumption “DAC”. However, Tariff 1 varies depending on the consumption rate and the temperature of the geographic region, ranging from Tariff 1A to Tariff 1F. The base tariff for the residential sector is of MX$0.79/kWh for each of the first 75kWh, increasing to MX$0.967kWh for the next 65kWh and up to MX$2.82 for any additional kWh are consumed as long as the user is not considered a DAC user. It is important to mention that depending on the tariff, the upper limit to be considered a DAC user changes. The limit for Tariff 1 is 250kWh per month, increasing progressively reaching a limit of 2,500kWh with Tariff 1F. Temperature is also a crucial factor in determining what tariff will be charged to the residential sector in each area. As the average temperature rises in a region, the tariff will be modified within the range of 1A to 1F. Categories are set based on whether the temperature in a region reaches 25°C, 28°C, 30°C, 31°C, 32°C or 33°C for three or more years out of the last five. The measure is based on the average temperature exceeding these limits for two consecutive months, according to the reports issued by SEMARNAT. These services will always be provided in low tension voltage and cannot be applied to other general tariffs. However, as long as the domestic consumption of energy does not surpass the limit to become DAC, the tariff is subsidized. The main opportunity for the renewable energy sector comes from the unsubsidized DAC tariff that exceeds MX$3.1 per kWh in every region in Mexico, substantially increasing the competitiveness of renewable energies, especially for rooftop-mounted PV equipment. On the other hand, renewable energies are still not competitive with subsidized tariffs of CFE in the residential sector. For the time being, subsidizing electricity tariffs in Mexico represents an important load for the national power company, reducing CFE’s profits and generating losses for the state.