Armando Gómez
Head of Latin America
Expert Contributor

WANTED: A Power Sector Plan That Goes Beyond Firefighting

By Armando Gómez | Tue, 07/26/2022 - 15:00

In my previous article kindly published by this platform, I tried to articulate the importance of defining an integral and sustainable energy model for the future. It might strike you as an obvious declaration but in practice, planning and execution as it was imagined by lawmakers in 2013, is currently largely ignored. Today, more than three months later and having witnessed the results of the so-called counter-reform, I reckon we are sadly still amid generalized uncertainty with no clear path to emerge from it.

In April of this year, when the new Law Reform was put to vote, many would have agreed on the existence of two potential outcomes:

  • The optimist (or should I say, naïve), where the threat of relevant legal fights with dozens of private investors from around the world would be enough to persuade the regulator, state-owned companies, network operator, authorities … henceforth “the system” … to abandon efforts that blocked private projects and operational assets within the energy arena;
  • Or the pessimist (realist) where legal and extralegal initiatives to forcefully put in practice the failed counter-reform would prevail.

So, what has happened since the vote? The first thing you would expect from a politically rooted movement: a new catchy discourse that overshadows the sector’s reality.

Before the vote, there was almost no dialogue between private companies and top-tier government officials. We have now learned that the president and his team have met with several private companies representing interests from the US. Government-to-government interactions were not as common either. To these changes we could add the apparently pro-environment rhetoric, called “decálogo,” declared internationally by the president himself. However, very few actual changes have come out of such meetings, especially when we consider that some of the solutions are just one phone call away. Moreover, we have witnessed scandalous fines and new (un)surprising policies restricting gas imports. These adversarial signals are probably the reason why the USTR has been reported to be preparing a case for consultations under the USMCA. Both international and local press have duly commented on the government’s policy in the energy sector, including the blackouts and network issues faced across the territory.

But the single piece of evidence that stands out in terms of what is actually happening in the sector was the publication of the PRODESEN in June. Leaving the legal context aside (based on a law that remains without effect through injunctions), the document that is supposed to be the central piece of planning for the sector provides 369 pages of the same policies we have seen since the beginning of the administration. To be fair, we must acknowledge that the PRODESEN has never been a proper planning instrument. The difference is that before 2013, when CFE was solely responsible for planning and execution, and no environmental commitments had been made, whatever came out of the programming exercise did not really matter as long as the demand growth and expected reserve margins were covered. Today, when a centralized planning scheme must be executed by several parties throughout the value chain, it becomes critical to start from a solid foundation with technical and economic rationales that go beyond a six-year horizon.  

Without trying to be exhaustive, below you can find seven major oversights that signal the authors’ intentions (or the instructions they received) when preparing the program:

  • A report on the declared operational states of alert, emergency, and major system failures: This information can be found elsewhere but it would be a good idea to kick off the PRODESEN by acknowledging the system’s status quo. A structured monitoring exercise on these events would provide valuable information about the expected performance of the network.
  • A report on the downtime (programmed and unprogrammed) of current assets that feeds into an asset retirement plan: Reliability of supply has been a key part of the debate, which means we should carefully track it. Meanwhile, the retirement plan is central to abide by the environmental commitments while impacting current asset owners in the least possible way.
  • Detail of upcoming assets under construction or in testing period: Besides the obvious interest for understanding changes to the MEM and their contribution to supply and transmission or distribution, it would be relevant to anticipate delays and its impact on balances and other assets.
  • Visibility around large-scale transmission projects: Understanding where and when the Operator predicts new investments will be necessary and viable in the short, mid and long terms is crucial. A close monitoring of this analysis should transcend yearly planning exercises.
  • Analysis on losses (technical versus nontechnical): To estimate the system’s needs, it is important to analyze in detail the root causes and consider these factors when defining the expected reserve margin for the system. Without close follow-up, these challenges will be dragged out endlessly.
  • Transparency on progress vis-à-vis clean and renewable energy targets: After 140 pages, this issue is finally discussed. Graph 7.17 made it clear that such objectives are attainable only until 2030, if at all. But it does not end there, several lines are allocated to explain how this delay is attributable to renewable energy sponsors. The argument not only lacks common sense but also fails to explain how we could avoid this delay instead of just embracing it.
  • In-depth analysis and route map on storage and H2: Something is better than nothing but the analysis only estimates a capacity and associated costs (understood as additional to the system) without considering benefits, alternatives, or at least a high-level workplan that starts with adequate regulation and ends with orderly system integration.

Thus, we are grounding the future of the whole sector on a merely descriptive document of reactive planning, i.e. pages and pages that list actions/projects that aim to mitigate current network problems. But what are we doing to anticipate these problems instead of perpetuating the firefighting?

It is evident that neither the main planning instrument available nor the recent actions of “the system” point toward an energy model that minimizes costs, increases the share of renewables, and maintains reliability, all at once. Instead, present in every public speech and hidden between the PRODESEN’s lines, “the system” proposes a false dichotomy between renewables and reliability. It also pushes to practically stop all infrastructure development that does not serve the intentions of CFE. Transition efforts are, therefore, relegated to whatever is left after a hungry CFE is fed.

In contrast, the logic in other markets, notoriously the Integrated Resource Planning exercises that certain utilities prepare as the local authority in regional power markets of the US, is premised on the need for adequately transitioning to renewable sources of energy. By understanding the impact on the network of increasingly fewer fossil sources and more renewable generation, consistent infrastructure development objectives are set. A systemwide cost analysis is run along with several sensitivities to relevant variables so that the pace of the transition can be adjusted along the way. The exercise is not easy and the result is not perfect but it certainly paves the way for a well-planned and transparent transition that protects reliability and minimizes costs.

The logic behind our centralized planning efforts continues to be misguided, against what our country needs, and contrary to our clean-energy commitments to the rest of the world. At stake is nothing less than our economy’s competitiveness and the environment that the next generations will inherit. It is well worth insisting on these messages, especially under a complex global macro environment like the one we are facing now, where all uncertainty and delays will swing back at us sooner rather than later.

Photo by:   Armando Gómez