Mexico’s Electricity Market

October 10, 2018

Before the energy reforms in Mexico, the electric system was a simple scheme with two main stakeholders. On one hand we had consumers, and the only other participant was the Federal Electricity Commission (CFE, by its Spanish acronym). Although the figures of Independent Power Producers (IPP) and Self-Supply Generators (SSG) were created in 1992, they were dependent on conditions set by the CFE. Both figures still remain in the reformed power market. 

PPA Versus Wholesale Market “Spot Price”

The reforms introduced Power Purchase Agreements (PPAs) as one of the main ways to trade energy. A PPA is a mid- or long-term contract to purchase a certain amount of energy to be delivered in the future at a fixed price. Both sides benefit: on one hand developers reduce risk in future projects by securing revenues, while consumers (usually large industrial users) are protected from price fluctuations.

The other mechanism to buy energy is via the wholesale market at “spot price”. It works similarly to a stock market, but prices are calculated in real time and a day ahead. The Mexican system operator, National Center for Energy Control (CENACE, by its Spanish acronym), dispatches first the less expensive plants until the announced demand is met. The kWh price is fixed at the value of the last kWh dispatched. Prices fluctuate depending on several factors such as supply, demand, oil prices, maintenance, and plant state.

Competition Among Generators Will Drive Prices Lower

In the reformed power market in Mexico, there is no restriction on generation. Some generators are owned by one of the six CFE generation companies, while the others generate under one of the following figures: IPP, SSG, and “exempt generators” (generators under 0.5 MW without generation requirements).

SSG and “exempt generators” must sell energy through independent retailers, while CFE companies and IPP can contract and sell energy directly in the market. We expect electricity prices to decline roughly 5% annually driven by aggressive price competition among these various stakeholders.

PPAs to Benefit Large Energy Consumers 

Consumers are classified in two groups: Basic Users, who are residential and small commercial customers, and Qualified Users who are any other customer with capacity over 1 MW, including SSGs. According to CENACE, qualified users account for 33% of the Mexican load. Large qualified users participate directly in the market. Most of the smaller ones are represented by either the utility CFE-Qualified Suppliers or a private intermediary. They all purchase electricity either in the wholesale market at spot price, or via PPAs.

We expect large consumers of energy to migrate towards higher usage of PPAs, relative to spot market transactions. The higher usage of PPAs will be driven by the increase of renewable energy to the market. For example, CEMEX, Soriana and Walmart have announced PPAs to trade the energy generated in 250 MW, 101 MW, and 137 MW wind farms respectively. 

PPAs allow companies to exhibit a commitment to renewable power to shareholders and local governments due to their long-term nature. Companies can also benefit from the lower energy costs and the monetization of “energy credits” and clean energy certificates. 

Stakeholders are segmented and the way they can interact in the power market are differentiated depending on their nature. In general, all market participants have the opportunity of benefiting from PPAs. In addition, they can use the wholesale market when they need to buy or sell power. It is a very flexible scheme that looks for competitiveness while prioritizing clean energy goals. Contact us to discuss the newly deregulated power and utilities market in Mexico.

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