Navigant Research Blog

Mexico’s Power Market Moves Ahead

Roberto Rodriguez Labastida — February 22, 2016

GeneratorOn January 26, for the first time in Mexico’s history, electricity could start being sold between private parties without the state acting as an intermediary. This is the end result of 3 years of legislative and regulatory work that included a constitutional reform in December 2013 that allowed private enterprises into the country’s energy market (both oil & gas and power).

Mexico’s liberalized market, managed by a new independent entity called CENACE, consists of a short-term wholesale electricity market and a Clean Energy Certificate (CEL) market. A CEL is an electricity generation credit that certifies that electricity was produced using clean energy sources such as wind, solar, biomass, geothermal, or others. CELs can be bought by large consumers and residential suppliers to prove that a percentage of their electricity comes from clean sources. Under this new market model, end users are divided between so-called qualified and basic consumers. Qualified consumers are those with aggregated demand over a set limit (3 MW for 2016, 2 MW for 2017, and 1 MW thereafter). This qualified consumer market will be unregulated, with prices and delivery terms to be negotiated between parties.

Users with lower demand fall under the regulated market. In this case, pricing and delivery terms offered by a supplier will be overseen by Mexico’s Energy Regulatory Commission. Most users in this category receive subsidized electricity prices and are therefore unlikely to leave CFE, Mexico’s state-owned utility. However, interestingly enough, some commercial users with small loads and residential users consuming more than 500 kWh per month have to pay the highest electricity prices in the country. In theory, this could benefit with new electricity retailers entering the market or lead to the creation of consumer cooperatives that enter the unregulated market as a single entity.

Too Early to Call

It is still too early to say if the market will be a success. The price at the Baja California node (the first to be traded) averaged MXN 354.69 ($19.21) per MWh on the first day of operation—not bad for a node on an isolated grid. In addition, CFE is tendering purchase agreements for 6.3 CELs with an ambitious (but I believe achievable) ceiling price of $70 per MWh ($23.4 for the certificate and $46.6 for the electricity). Technical bids were presented for more than 15 times the capacity of electricity and CELs in the solicitation, totaling 102 TWh and 109 million CELs.

Nevertheless, there are issues to be ironed out. At the end of October 2015, there was only one supplier registered for both the wholesale and regulated market and, not surprisingly, it was CFE. At the moment, Mexico lacks the soft infrastructure needed to successfully run a market. Mexico does not have experienced power traders, few in the country understand electricity consumption patterns, price discovery is done without any historical reference, and contracts have yet to be optimized or tested in court. In the generation side, the new CEL market has to prove that is strong enough to clean up the country’s energy mix.

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