César Emiliano Hernández
Undersecretary of Electricity
Ministry of Energy
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View from the Top

Reform Encourages Mining Companies to Generate Own Power

Wed, 10/21/2015 - 14:05

Q: How will the Energy Reform impact the mining sector, and when will these effects reach the industry players?

A: The Energy Reform promotes a more sustainable and rational exploitation of our natural resources. For instance, the Reform provides the correct incentives for mining companies to take advantage of the natural gas associated with their mineral beds, either directly or through association with other players. This rational exploitation will bring more gas into the market, resulting in a more stable supply of electric power. Furthermore, mining companies are major energy users and will benefit from the Energy Reform, both as consumers and, potentially, as generators. The Energy Reform will open up investment in the generation segment, allowing mining companies to use their coalbed methane to generate electricity for their own consumption or to sell it directly into the electricity market, opening a range of new business opportunities. The Energy Reform has created a new market model in which qualified users, such as large mining companies, will be able to acquire power supply in the wholesale electricity market or through competitive suppliers. Mining companies will be able to register as qualified users, depending on their consumption level of electricity. In general, one of the Reform’s main objectives is to reduce electricity production costs by opening the market to the competition. This will help to bring electricity prices down for all users, whether they continue to use basic services, whether they choose to become a qualified supplier, or whether they participate directly in the power market. Finally, the Energy Reform provides new mechanisms to finance the construction of new transmission and distribution infrastructure that is needed to provide the service. Under the new rules, the grid will expand faster, bringing power supply to concession holders and allowing for the sale of the energy that they choose to generate.

Q: What are the benefits of relying on CFE’s energy supply, obtaining power from private power producers, or self-generating power on the mining sites?

A: With the new power market model, mining companies will be able to purchase their energy from either CFE or a private company, or choose to generate it themselves. Large mining companies will be able to choose the supplier that bests suits them. CFE will continue to offer a basic service at final rates regulated by CRE. The basic service rates will likely have the advantage of stability and predictability. On the other hand, CFE and other companies will be able to offer a qualified service to large users at rates that are not regulated. Providers who offer such a qualified service will be able to offer innovative products and pricing schemes that may better suit the needs of certain users. With regards to private producers, large qualified users will be able to sign contracts directly with generators for energy produced on the national electric system, or develop projects themselves. These contracts and projects will have the advantage of allowing the users to lock in customized terms of service for the long term. But in many cases, CFE and other suppliers that use diversified generation portfolios may be able to provide more attractive offerings.

Q: How can mining companies take advantage of the emphasis the Energy Reform places on natural gas?

A: If a mining company is interested in extracting coalbed gas from its operating mines, it can sign a contract with the National Hydrocarbons Commission. In order to transport and sell it, the mining company must request a permit from CRE. To carry out the process, the mining companies need ready access to pipeline transmission infrastructure, which will be developed as per the National Infrastructure Plan 2014–2018, which was issued in April 2014. The open access principle included in the Hydrocarbons Law guarantees that transportation pipelines are required to grant access whenever the capacity is available. There is no difference in this regard between a private pipeline and one belonging to the national system owned by PEMEX and now operated by CENAGAS.

Q: How will the preference given to energy generation, transmission, and hydrocarbon extraction activities over mining operations be managed?

A: In cases where coalbed gas is found in a mine that is already being exploited, the company must ask for a permit from SENER. Companies can also participate in the bidding process for areas that are not currently being exploited. PEMEX has drilled and explored in the mining area of Coahuila for years and its operations have not interfered with the mining industry. The Mexican Constitution establishes that the exploration and extraction of oil and natural gas have priority over any other activity involving the use of surface or subsoil. However, it details that legislation should include mechanisms to facilitate the coexistence of different activities. The Constitution also specifies that the legal framework should ensure a payment for the occupation of the surface for all the parts involved. The legal framework provides rules allowing the development of different activities in the same area. For instance, titleholders of mining concessions could subscribe a contract for the exploration and the extraction of natural gas contained in coal seams without a bidding process in areas where coal extraction activities are being carried out.

Q: How could the carbon tax affect mining companies and what role should they play in the green certificates market?

A: The carbon tax will promote a more rational consumption of fossil fuels, and will provide incentives for energy consumers, including mining companies, to increase the energy efficiency of their processes. Under the Energy Reform, clean energy has been defined to include technologies that use carbon capture and sequestration. As these technologies mature, they will provide a clear opportunity for mining companies to develop. Clean energy certificates will be awarded to all clean generators that meet the applicable efficiency standards, providing an additional income that will help support the development of clean generation projects.