What Would Happen if Self-Supply Disappeared?By María José Treviño | Thu, 12/02/2021 - 12:57
Confused consumers uncertain as to what comes next, fuming financial institutions that backed up legacy projects, nervous generators worried about their business, communities that profit from energy sold wondering what will happen to their income, countries assessing international treaties, lawsuits, panic, and lots of market movement. If the self-supply scheme disappears, questions would be raised as to political stability, investment grade, economic implications, and foreign legal compliance. All stakeholders will be impacted to a certain extent; however, consumers who engaged in these contracts will be most perplexed as to what actions should be taken to mitigate risks and control their monthly budget.
Legacy projects were meant to benefit all stakeholders, obviously investors and consumers, but also to support renewable energy project development, which would help meet government goals and produce economic and employment growth in different regions of the country. Each of these projects required significant levels of investment on both ends — generators and consumers. Over 2,000 consumers have benefited from this supply scheme, some through more attractive contracts than others. Those who have enjoyed economic savings through their PPA structures have been able to transfer that benefit to their end products, thus becoming more competitive and helping end-consumers have greater access to products or services, whether it is a phone line, a loaf of bread, a medicine, a bottle of water or a beer. From the automotive sector to mining and to the convenience store, these economic advantages produced through a more efficient generation structure have created more jobs and, therefore, have indirectly improved all stakeholders’ positions within the different industries at stake.
Having said that, eliminating self-supply is one of the main goals of the current administration. Even before MORENA took office, its political campaign around electricity focused on 1) eliminating self-supply projects and 2) regaining control. It is a clear mindset that has not evolved. Hence, their success to change this scheme will probably come eventually. There have been many modifications proposed and concern and uncertainty around how those alterations would be applied.
For one, if the energy reform initiative proposed by the president passes, investors would need to redesign their business model based on different financial scenarios, tariff structures, dispatch, rules, etc. If they don’t sell to end consumers, they could sell directly to CFE at terms and conditions that are yet to be defined. These alternatives could take place only if the generator falls into the 46 percent of energy required by the country to be delivered by private generation. The details on how this would happen are very difficult to understand.
However, what if self-supply disappears and the Wholesale Electricity Market (MEM) remains? There could be a phase where self-supply permits (hand-picked or all of them) could migrate to the market. We could face a government that supports this action taking place as quickly as possible and, therefore, facilitates, or at least follows, established timelines for this transition. Alternately, we could wait for months or years for uncertainty to be cleared, legal battles to be settled and even a new administration to take control and maybe start from scratch. Given this ambiguity, consumers should start understanding different scenarios and identifying alternatives. Consumers would need to analyze their need to stay next to their current generator or the possibility of being proactive in searching for alternatives in the MEM. Either way, their tariff structure would change, as the market has a different way of operating. Therefore, it will become crucial to understand fixed fees, variable charges, regulated rates, and congestion risks that could apply to different meters based on consumption profiles and geographical positions. Penalizations would need to be evaluated, as well as timelines for notifications, procedures, permits and documentation.
Many large energy consumers in long-term PPAs in the self-supply scheme have hundreds or thousands of meters. The Wholesale Electricity Market structure and its requisites do not necessarily adapt to this type of consumer profile due to the investments in equipment and meters. Therefore, the business case must be developed to make the transition viable. This needs to be considered together with contract conditions. If the contract’s “Change in Law” or “Force-Majeure” clauses permit a consumer from terminating a contract upon certain market or regulatory conditions, the consumer could ultimately decide what supply alternative and which meters to continue with. At the time PPAs in self-supply were being written, these two specific clauses were mostly being included in contracts in general terms. Today, because of what we have encountered, we apply utmost focus on them to protect both parties.
There is another dimension to these changes. Eliminating the self-supply scheme might not only alter business goals for consumers but it might also impede these organizations from achieving carbon reduction targets. Many of these large companies signed PPAs with renewable energy projects, ensuring a lower carbon footprint for 10, 15 or 20 years. If self-supply contracts were terminated, the most obvious replacement would be signing a renewable energy supply contract in the MEM. However, distributed generation, solar, in particular, is becoming a very popular solution to comply with corporate carbon commitments, especially with meters that have smaller consumption. Alternately, if some meters go back to CFE Basic Supply, consumers could apply energy efficiency programs, through technology and innovation, to reduce their Scope 2 emissions. It is a puzzle that will need to be solved based on legal and commercial analysis, regulation and market understanding, transition process experience, negotiation, and a great deal of creativity.
Ultimately, if we think about only having one Wholesale Electricity Market with consistent, equal, and clear market rules, eliminating self-supply could, in fact, not be so bad in the long run if done right. It would have repercussions for around 15 percent of the country’s installed capacity, legal battles would be provoked, and confusion would be prime. However, stakeholders at this point have enough direction to build scenarios, understand alternatives, strategize, and work together to mitigate potential impacts and optimize business profits as much as possible on either end.