The choice an industrial buyer in Mexico is actually making

In the week of 18 to 24 November 2018, the average Precio Marginal Local in the Mercado del Día en Adelantado across the Sistema Interconectado Nacional was 1,319.24 MXN per MWh. In that same week the highest price recorded at any node was 15,000.09 MXN per MWh at node 08BEL-115, and the lowest was minus 117.97 MXN per MWh at node 04CMR-115. Those figures are CENACE's own, from its weekly Mercado Eléctrico Mayorista report for week 47 of 2018.

A plant buying at the spot price accepts that distribution in every hour of every year. A power purchase agreement converts part of it into a single number a finance team can budget. Neither route is inherently cheaper. The decision a plant director, energy manager or CFO is making is which risk the company would rather carry, and for how long.

What follows is written for facilities that already qualify, or are close to qualifying, as a Usuario Calificado. It sets out what a PPA fixes, what it leaves exposed, and the contract terms that decide whether a fixed price is worth having.

What a PPA fixes, and what it leaves floating

A PPA is a bilateral contract for delivery of energy at an agreed price over an agreed term. In Mexico the tenor is negotiated rather than standardised. The one published benchmark comes from the long-term auctions run by CENACE, where winning bidders took fixed-price contracts for 15 years for energy and capacity and 20 years for Certificados de Energía Limpia (CMS, 31 May 2017). Bilateral corporate agreements are usually shorter, because a buyer rarely wants tenor beyond its own planning horizon.

Coverage matters more than the headline term. A PPA price normally fixes the energy component and nothing else. It does not automatically fix porteo, the wheeling charge for moving power across the Red Nacional de Transmisión and the Redes Generales de Distribución. It does not fix capacity, ancillary services, or the cost of the Certificados de Energía Limpia the supplier has to surrender against the load. An offer presented as a discount on the energy line can land as a far smaller discount on the delivered bill once those components are added back.

Ask every bidder to restate its offer as a delivered price per MWh at the meter, on the same basis as the current CFE invoice, and ask which party absorbs a change in the CRE-approved transmission tariff during the term. Suppliers can answer both questions. Most offers do not answer them until asked. Our answers to common questions about PPAs in Mexico go through the switching process in more detail, and a virtual PPA settled as a financial contract is the alternative where physical supply cannot be rearranged.

Why the spot price is a nodal price, not a national one

The Precio Marginal Local is set at each pricing node and decomposes into exactly three parts: marginal energy, marginal losses and marginal congestion (CENACE, Diccionario de Datos Abiertos, referencing the DOF note of 4 July 2016). CENACE dispatches the least expensive offers first and the price clears at the cost of the last unit dispatched. The mechanics of that dispatch are covered in our post on how Mexico's wholesale electricity market is structured.

The nodal part is what sets a plant's exposure. In week 47 of 2018 the gap between the cheapest and the dearest node was the difference between a negative price and 15,000.09 MXN per MWh inside the same seven days. Congestion and losses produce that gap, not market volatility in the abstract. A buyer in Yucatán and a buyer in Chihuahua are not exposed to the same price series even though they are exposed to the same market.

The level moves as well. CENACE's weekly reports put the average MDA price across the SIN at 954.08 MXN per MWh in the week of 25 February to 3 March 2018, 1,268.59 MXN per MWh in the week of 8 to 14 July 2018, and 1,319.24 MXN per MWh in the week of 18 to 24 November 2018. That is a rise of roughly 38 percent in the weekly system average inside nine months of a single year.

One correction worth carrying into any supplier conversation. The Mercado del Día en Adelantado is the day-ahead market and clears before the operating day. The Mercado de Tiempo Real settles actual dispatch during the operating day. These are two markets with two price series, and an offer indexed to one is not an offer indexed to the other.

Who registers what, before any of this applies

A facility can buy under a PPA only once it holds Usuario Calificado status. The threshold is 1 MW of demand, not 1 MW of annual consumption. It has stood at 1 MW since the third year of the declining schedule in Transitorio Décimo Quinto of the Ley de la Industria Eléctrica. SENER set out how that demand is measured in its acuerdo published in the DOF on 1 March 2017: for a medium or high tension site with recent service, it is the maximum demand in kW recorded over the preceding 12 months.

CRE maintains the Registro de Usuarios Calificados and issues the registration, under the disposiciones administrativas published in the DOF on 6 December 2017. CENACE does something different. It registers the Centro de Carga in the Mercado Eléctrico Mayorista and signs the Contrato de Participante del Mercado with those who buy in the market directly. Direct participation carries a higher bar, which CRE's published guidance for Usuarios Calificados puts at 5 MW of demand and at least 20 GWh of annual consumption. Most industrial buyers therefore contract through a Suministrador de Servicios Calificados instead of facing the market themselves. The routes open to a qualified user differ mainly in how much market risk the buyer takes back.

The case against locking in

CENACE suspended the fourth long-term auction on 3 December 2018. Those auctions had been the market's public reference price. The third auction, resolved on 22 November 2017, awarded 2,562 MW across 14 projects at an average of USD 20.57 per MWh bundled with one Certificado de Energía Limpia. The pairing matters, because the bid was for the package and not for energy alone.

With the auction process on hold, bilateral PPAs lose the benchmark buyers used to sanity-check an offer. Our reading is that this raises the value of running a competitive process across several suppliers rather than negotiating with one, and it argues for shorter tenor until a new reference price appears.

The downside for a buyer who fixes now is plain. If gas-linked marginal costs fall and new capacity relieves congestion in a buyer's region, a long fixed price signed in 2018 sits above the market for most of its life and the only exit is a termination payment. We would revisit the case for longer tenor if the auction programme restarts with a published clearing price, or if a buyer's own node shows a durable congestion premium that a delivered-price PPA removes.

The clauses that decide the delivered price

• The settlement node, and whether the price is delivered at the meter or struck at a reference node the plant does not sit on.
• Which bill components the price covers and which stay at the buyer's risk, porteo in particular.
• Who bears a change in CRE-approved transmission and distribution tariffs during the term.
• Whether Certificados de Energía Limpia are included, and at what price if they are not.
• The volume commitment, and how consumption above or below it is settled.
• Termination events, the formula for the termination payment, and the credit support each side posts.
• The governing language. The Spanish text binds even where an English translation is provided.

Compare a PPA offer against your own load

Mexico Energy Partners reviews PPA and spot exposure for industrial sites in Mexico. An initial review needs 12 months of CFE billing, interval demand data for the Centro de Carga, and any supplier offers already in hand, so the delivered price can be compared on one basis rather than on the energy line alone. Our energy procurement page sets out how that review runs.

Request a PPA and spot exposure review