Derek Woodhouse
Woodhouse Lorente Ludlow
Luis Fernández
Luis Fernández
Senior Associate
Woodhouse Lorente Ludlow
View from the Top

Understanding the New Model

Wed, 02/24/2016 - 11:07

Q: How will the role of CRE evolve, and how will these transformations help to drive the diversification of Mexico’s energy mix?

DW: The legislation was clear regarding the diversification of Mexico’s energy mix and the importance of sustainability. In fact, it uses the term “sustainability” 44 times. On the other hand, it is astounding how different the regulations emerged, as these only mention “sustainability” 11 times and “clean energies” three times. There are two possible explanations for this. Firstly, legislators created the guidelines for the CELs as separate instruments; and secondly, they are waiting for a new piece of legislation that will be released imminently.

The legislation will implement a transitory law that will tackle the environmental issues and, as it stands, it is unclear who will have to handle this, whether it will be the Ministry of Energy or SEMARNAT. The Ministry of Energy only focused on the CELs as a tool to promote renewable projects. It took a renewable portfolio standard approach with a mix of tenders that will be implemented. From our perspective, this is strategic and the only way to make the system work without running the risks of having feed-in tariffs like Spain or Germany.

Q: What is the biggest challenge the government will face in the implementation of the new model?

LF: The highest risk entails the unbundling of CFE, which means that different entities will be formed within the utility company. It is predicted that approximately 20 different companies will emerge from CFE; some will be in charge of transmission and others of distribution, supply, generation, and basic services. This unbundling will prevent CFE from holding market power and capitalizing on the market rules. The Ministry of Energy will have to make the decisions and CRE and CENACE will have to implement them correctly. CRE will be in charge of ensuring no insider trading or price fixing. The ambitions of CRE are sizeable and it must further intensify in order to face the challenges head on. The Commission must carry out its goals in a short period of time and this is a massive responsibility

Q: What are the advantages and disadvantages of the new framework in proposing mechanisms to make municipalities potential off-takers?

DW: We still need to wait for CRE to announce all the criteria that will decide whether a player is a qualified user. Since we do not know the criteria, we are unsure whether municipalities will be in or out of the game. If it is decided that it is not possible to bundle a large group of delivery points, as in the case for a public lighting system, then a municipality will not be able to participate in the market as a qualified user.

I imagine that some municipalities will be lobbying strongly to become qualified users because if they are not, then they will be served by a basic service supplier, which will remain CFE. There is a lot of uncertainty as to the steps required to become a qualified user. In the first year the user must consume 3MW, the second year 2MW, and in the third year 1MW. In the early stages there might be few users that use 3MW, but this might change dramatically depending on the criteria on how the delivery points will be incorporated under the same user. As the market matures, CRE and the Ministry of Energy will decide the new thresholds and criteria for new users.

Q: How much uncertainty is generated by the new model, and how will CELs play a role in this?

DW: The uncertainty that the new model brings poses a significant challenge since it will make projects more difficult to finance. While the old system was ineffective, I have to recognize it had more certainty, since people were aware of the costs and would have long-term agreements under a fixed price. Under the new model there is a spot price which will vary considerably, and there will be uncertainty in some instances if players have to use the spot market.

Also, the value of the CELs will fluctuate and will be decided by the market, similar to the certified reductions credits from the Kyoto Protocol. One year the certificates may be US$17 and the next US$2, so a company cannot take these to a bank to obtain finance. Due to this issue, a secondary market of certificates at a given price will be created by traders willing to make a long-term commitment. This secondary market will create the certainty that banks need. The challenge will then lie on how long Mexico takes to transition into the new regime, have it functioning properly, and have the new traders to come in and work directly.