Competitiveness Abstracts Web

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Organized byNorth American Forum on Integration (NAFI)Escuela de Graduados en Administracin Pblica y Poltica Pblica del Tecnolgico de Monterrey (EGAP)Mexican Council on Foreign Relations (COMEXI)

Abstracts

ENERGY PRICE COMPETITIVENESS

Friday April 2, 2004

Room Continental - 7:45 to 9:00 a.m.The recent history of Mexican energy prices will be compared with price in other countries. What to think of theeconomic constraints imposed on cogeneration and self-supply projects? What are the shortcomings of traditionaldiscounting approaches for energy price calculations? What are the best sustainable perspectives for energycalculation? It will be shown that a primary energy portfolio including renewables may be the best option.

CHAIR

Federico VIRAMONTES BROWNChair of Graduate Program and Energy Area, ITESM

Dr. Federico Viramontes Brown, Ph.D. and Master of Science in EE from University of Pittsburgh, Chair of GraduateProgram and Energy Area of Monterrey Tec. Areas of interest: Regulation, sources of financing in the energy sector;design of electrical equipment.

SPEAKERSArmando LLAMAS TERRESDirector, Center for Energy Studies, ITESM

Armando Llamas is a professor, researcher, and power quality and energy efficiency consultant heading the Centerfor Energy Studies at Monterrey Tech, where he obtained his BS and MS in Electrical Engineering. He also obtaineda Ph.D. in EE from Virginia Tech where he worked as a research assistant. From January 2003, he heads the ITESMEndowed Energy Research Chair.

ABSTRACT

(English follows)Competitividad de los Precios de Energticos en Mxico.

El escenario de los precios de energticos en Mxico obligan a ser ms eficientes en el uso y ms creativosen la bsqueda de alternativas. A partir del 2000 se ha registrado una tendencia a la alza en los precios delos energticos tales como: electricidad, gas natural, el combustleo, el diesel. Regidos por las leyes demercado, los precios de los energticos dependen de la oferta y la demanda. La volatilidad y el aumento de

Forging North American Energy Security 1


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los precios de los energticos, principalmente los de gas natural y electricidad, impacta a la industria delnoreste de Mxico, en particular a la que hace un uso intensivo de energa, por ejemplo: metal-mecnica,automotriz, vidrio, qumica, cermica y acerera. Aunado a lo anterior, se espera un incremento en lademanda de gas natural ya que la poltica energtica del pas estipula que el crecimiento del sectorelctrico se basar en plantas de ciclo combinado. A pesar de esto, la oferta nacional de gas natural no hacrecido ya que la industria extractiva invierte en exploracin y explotacin de petrleo porque le es ms

redituable.

Energy Price Competitiveness

Energy price scenario in Mexico forces all major users to be more efficient in the use of energy and morecreative in the search of alternatives. Since 2000 we have experienced an increasing trend in the price ofenergy such as: electricity, natural gas, fuel oil and diesel. Energy price is governed by the marketmechanism. The volatility and rise of price of natural gas and electricity affects northeast Mexicanindustry, especially those who make an intensive use of energy (i.e. metal-mechanic, automotive, glass,chemistry, ceramics and steel). In addition, there is a programmed increase in the demand of natural gasin the following years due to the growth of the electric sector, mainly based in combined cycle plants.Despite this, the supply of natural gas has not increased accordingly because the extractive industryprefers to invest in the oil exploration and exploitation.

Lester B. LAVEProfessor of Economics, Carnegie Mellon University

Lester Lave is University Professor & Higgins Professor of Economics at Carnegie Mellon University in the BusinessSchool, Engineering School, and the Public Policy School. He has a BA from Reed College and a Ph.D. from HarvardUniversity. Lave is Co-director of the Electricity Industry Center and is Director of the Green Design Initiative. Hewas president of the Society for Risk Analysis and was elected to the Institute of Medicine of the National Academyof Sciences. He is the author of more than 500 scientific publications and books and has been an adviser to manygovernment agencies and companies.

Electricity Deregulation: Designing a Competitive Market

Lester B. Lave

North American is not an integrated electricity market, but at many points along the borders, electricityflows freely. Restructuring the US electricity industry could either help or hurt electricity industries inCanada and Mexico. For example, the August 14 blackout caused major problems in Ontario.

Deregulating electricity markets is far more difficult than the experience of deregulating airlines,trucking, oil, natural gas, and other industries. All competitive markets are free markets, but not all freemarkets are competitive markets. It is simple to end regulation, creating free markets for electricity. It ismuch more difficult to create competitive markets for electricity that will speed innovation, enhanceefficiency, and lower price. The most difficult step is structuring the market so that no firm or collectionof firms could raise price and their profits by withholding power. A second requirement is that markets becomplete in the sense that all variable services are traded in competitive markets, e.g., ancillary power. A

third requirement is that the transmission infrastructure be capable of supporting a competitive marketand be run is a way that is not ensures equal access to all generators and customers. A fourthrequirement is that consumers face prices that reflect the wholesale price of power. A final requirementis that incentives are sufficient to attract sufficient investment. This paper explores these requirements.



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Oliver PROBSTDirector, Department of Physics, ITESM

Oliver Probst earned his physics diploma at the University of Heidelberg, Germany, in 1990 after studying inHannover and Heidelberg. He obtained a Ph.D. in Physics from the University of Heidelberg in 1994. He has been afull-time professor and researcher at the ITESM since 1996 and the head of the Physics Department at MonterreyTech since 1999. Since his arrival in Monterrey he has been collaborating with a number of research centers at the

same institution, particularly the Center for Energy Studies. His main interests are in the fields of renewableenergies, energy conservation and energy policy.

ABSTRACT

Energy price competitiveness vs. energy security: The case for Renewables

The prices of electricity depend both on the inherent costs of the chosen technology and the financialengineering of the project. When it comes to comparing traditional generating technologies such as hydroand fossil fuel based thermoelectric plants with renewable energy technologies (RET), this comparison isheavily affected by the discount rates contemplated. Since discounting is equivalent to an exponentialphase-out of future expenses (due to operation and maintenance) and income (electricity sales),traditional least-cost planning strongly favors technologies with low upfront costs, even though futureoperation costs may be very uncertain and therefore associated with a considerable risk. This is clearly thecase for the recent shooting star of electricity-generating technologies, combined cycle gas/vapor systems,which are without a rival at a fuel cost of US$3/GJ, but would not be competitive at sustained fuel costsof say US$5/GJ or higher.

The recent history of North American natural gas prices has shown, however, that fuel prices may varybetween US3/GJ and >US$10/GJ on a timescale of months, and that a systematic trends towards highercosts currently exists. Curiously enough, traditional least-cost analyses do not contemplate risk as anelement of study, contrary to finance, where discount rates are adjusted to the level of a risk of a giveninvestment.

A convenient way of incorporating risk assessments into the planning of the electricity sector, asintroduced by Shimon Awerbuch, is the use of Portfolio Theory to determine the most appropriate mix ofgenerating technologies, i.e. the one that minimizes risk at a given electricity price or minimizes price at agiven level of risk. Starting with the assumption that most renewable energy technologies (RET) have nofuel cost-associated risk, it can be shown that generating portfolios with a share of RET actually lower thecombined cost of electricity for a given level of risk, or conversely, lower the risk for a given electricityprice.

Mexico is in a good position to benefit from such generating portfolios, but legal issues may have to beovercome in order to incorporate them into the planning practice.


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