• Modernization
    of the Mexican
    electricity sector
  • Ruben Cruz and Arturo Saavedra
    Lead Partner and Director of Energy & Natural Resources at KPMG Mexico
  • Before the Energy Reform, Mexico had a traditional industry model where the Federal Electricity Commission (CFE) was responsible for developing all activities of the power industrial chain, from energy generation to delivery to end users, allowing limited participation of the private sector in generation activities.
    The technological change in the global power industry and the rigidity of the model previous to the Energy Reform, among other factors, led to various inefficiencies in the system which, in turn, resulted in higher electricity costs, significantly impacting the competitiveness of the domestic productive sector.
    The reform seeks to establish a new industrial organization that, on one hand, allows the productive sector to acquire electricity at competitive prices from a Whole- Sale Electric Market (WEM), and have a legal framework that allows regulators to develop such market in an efficient and competitive way, and on the other hand give strength and thrust to an electrical industry with huge challenges ahead, by attracting private resources for development.

    The reform seeks to establish a new industrial organization that, allows the productive sector to acquire electricity at competitive prices from a WEM and a legal framework that allows market´s development

  • Challenges of the sector towards the future
    Source: KPMG analysis with information from Mexico’s Ministry of Energy (SENER).
    Power generation opportunities (WEM)
    1. Long-term auctions: this mechanism provides new and existing generation projects a stable income for a 15-20 year period. Projects in a pre-construction or construction phase are entitled to participate in these auctions, providing certainty over the return of an investment; designed exclusively for clean technology plants.
    2. Short-term market: This mechanism is designed to give larger profit margins to cleaner and more efficient technologies through Location Marginal Prices (LMP). The Economic Dispatch Model provides generators with the lowest variable cost more attractive returns per megawatt produced, and lower margins to less efficient, fossil powered plants.

    Transmission and distribution
    SENER has announced that this year it will tender two transmission lines with a combined length of 1,225 km and a total cost of USD$1.44 billion. The projects will be awarded as Public Private Partnerships contracts (PPP) through international public tenders.
    Both lines should enter into operation in 2019. The capex costs for the lines will be covered by the sponsors. The winning bidder will receive annual payments based on their requested transmission rate once it is approved by Energy Regulatory Commission (CRE). In the competitive tender process the contract will be won award by the bidder that proposes the minimum annual payment, alongside with the other technical and economic requirements.

    Future development of the sector
    The short term market began operating in late January, but there are still few market participants, given that investors and private companies are on a wait-and-see attitude. Adequate regulatory implementation will be needed to create confidence among new investors.

    Clean Energy Certificates (CEL’s) are expected to become one of the most traded products on the market in the long term, and represents an attractive investment mechanism for clean generators. These will account for at least 70 million certificates on the market by 2024. As investment in clean technology increases, least efficient plants will be gradually displaced out of the market, causing a larger dependence on natural gas-fired plants during peak hours. At least 54% of new investment in electric utilities will consist on clean energy. CFE’s planned restructure will be a key factor to determine the success of the implementation of the Reform, as the previously state-owned company will need to degrade its monopolistic power to enable a competitive environment in the market. As it has been stated, Energy Reform implementation brings plenty of opportunities for private investors to participate in the expansion and modernization of the Mexican Electricity Sector, in every link of the industrial chain.