Capacity Prices and the Wholesale Electricity Market

May 14, 2020

The Mexican Wholesale Electricity Market (MEM) is a short-term market where prices are determined one day in advance or in real-time. Electricity producers send bids to the National Center for Energy Control (CENACE) that indicate the amount of energy they are offering at a specific price. The wholesale market price is the lowest price that can fill all demand. Physical constraints, transmission power losses on the grid, and network congestion can also raise prices at nodes on the network. 

Capacity and Demand Drive Wholesale Prices

Regional, seasonal, and cyclical variations in capacity and demand are behind most of the differences in Mexican wholesale electricity prices. Prices are persistently higher or lower in some regions. For example, prices tend to be lower in the north of the country because of direct connections to U.S. natural gas pipelines. Conversely, prices in the Yucatán Peninsula are higher than elsewhere because of issues with natural gas supplies. Prices in the Yucatán tend to respond more strongly to changes in demand due to the difficulty of obtaining power from other regions.

Seasonally, prices generally rise during the summer months as air conditioning consumes more electricity. Temporary spikes that send prices to several times their average levels are also much more common in the summer. Cyclical variations are another significant factor. Higher fuel prices drove wholesale electricity price increases in 2018 and declines in 2019.

The Role of Technology

Many of the variations in wholesale electricity prices result from using particular technologies, so the transition to new energy sources is changing congestion pricing. Between 2009 and 2019, demand for natural gas in Mexico increased by 30%, while electricity generated by oil declined by 46%.

The move to natural gas continues, with projections ranging from a 30% increase in consumption by 2032 to an 80% increase by 2024. While natural gas is less expensive and cleaner than oil, much of it must be imported into Mexico, making distribution more difficult.

Fortunately, Mexico's capacity for wind and solar power generation grew dramatically after 2014. Both clean power sources can be built locally, eliminating the need for imports, and increasing price stability. Furthermore, solar energy output typically rises along with the temperature, offsetting higher demand for air conditioning. That gives solar power the additional advantage of reducing disruptive wholesale electricity price spikes.

Short-Term and Long-Term Challenges

The flexibility of the electricity market’s pricing mechanism makes it capable of handling the challenges created by the coronavirus pandemic. The coronavirus pandemic dramatically shifted energy prices, but the long-term issues may be quite different from the short-term challenges.

Besides directly cutting costs for consumers, lower demand also reduces power grid congestion and associated price instability. However, we believe that other factors are likely to put upward pressure on electricity prices in the future.

The combination of pent-up demand and lower output during the crisis could turn the energy surplus into a shortage. In the long-term, a shift of industrial production from China to Mexico was already underway due to rising political tensions. Those tensions have increased considerably and moving more manufacturing from China to Mexico would create additional demand for electricity. Contact us to learn more about the changing dynamics of Mexico's electricity market.

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