Status-quo and challenges of the Mexican electricity reform

Juan RosellónCIDE and DIW Berlin

Workshop "Energy and Climate Policy in Mexico – –Policy and Research perspectives in the aftermath of National Elections“

DIW Berlin, July 10th, 2018

Agenda

1. Overview of Mexico’s electricity sector

2. Regulatory reform in the electricity industry

3. Critical issues of the Mexican reform

4. Cross-border Mexico-USA issues

5. Possible impacts of the 2018 election results?

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Agenda

1. Overview of Mexico’s electricity sector

2. Regulatory reform in the electricity industry

3. Critical issues of the Mexican reform

4. Cross-border Mexico-USA issues

5. Possible impacts of the 2018 election results?

3/33

https://www.iea.org/publications/freepublications/publication/MexicoEnergyOutlook.pdf

4/33

5/33Source: Mexico Energy Outlook, 2016, OECD/IEA

6/33Source: Mexico Energy Outlook, 2016, OECD/IEA

7/33Source: Mexico Energy Outlook, 2016, OECD/IEA

8/33Source: Mexico Energy Outlook, 2016, OECD/IEA

Agenda

1. Overview of Mexico’s electricity sector

2. Regulatory reform in the electricity industry

3. Critical issues of the Mexican reform

4. Cross-border Mexico-USA issues

5. Possible impacts of the 2018 election results?

9/33

10/33

Diagnosis: Energy Tariffs

Source: Energy Information Administration – EIA (USA)USA Tariffs converted to pesos considering 12.64 MXP/USD, daily average from the first trimester of 2013.

• Average CFE tariff was 25% superior to the average tariffs in USA.

• Without subsidies, the difference was of 73%

0

50

100

150

200

250

300

350

400

ResidencialAlto Consumo

Comercial Servicios Industrial Residencial Agrícola Promedio

Average rates, first quarter 2013 (cents/ kWh) Subsi

dio

México

Subsidize

d Rate

+73%Real

Rate

+123%

+149%

+25%-24%

+134%

+69%

+84%

Residential High Consumption

ComercialPublic

ServicesIndustrial Residential Agriculture Average

Subsidy

Mexico

USA

Vertientes de la Reforma

11/33

Diagnosis: CFE• CFE’s assets are rapidly declining; reaching negative net assets in

2014.

Source: CFE Financial Statements; Finance Division 2012 of CFE

416381

355

143109

74

-11

176156

130

2008 2009 2010 2011 2012 2013 2014 2015

Net patrimony of CFE(Billion Pesos)

Old Finance Rules New Finance Rules

Vertientes de la Reforma

12/33

Pre-reform Industry Structure

CFE

DispatchPu

blic

Se

rvic

eS

elf

Su

pp

lyIPPs

13/33Source: Mexico Energy Outlook, 2016, OECD/IEA

CFE´S Transformation

Unbundling for:▪ Promoting

Competition▪ Reducing barriers

to entry▪ Increase

operational efficiency and reduce costs

▪ Guaranteeing economical viability of CFE in the long run

Dólares $ /

MWhHogar

Promedio

OECD

(2013)

Industria

Promedio

OECD

(2013)

Australia 98.00 (76.30) (43.78%) 61.00 (62.60) (35.92%)

Argentina 23.00 (151.30) (86.80%) 49.00 (74.60) (42.80%)

Brasil 171.00 (3.30) (1.89%) 120.00 (3.60) (2.07%)

México 90.90 (83.40) (47.85%) 121.50 (2.10) (1.20%)

Francia 193.40 19.10 10.96% 126.00 2.40 1.38%

Lituania N/A N/A N/A N/A N/A N/A

174.30 123.60

Variación respecto al

promedio

Variación respecto al

promedio

1 Transmission Subsidiary

GenerationSubsidiaries

1 Subsidiary for Basic Service Supply

PrivateParticipation is

allowed1 Distribution Subsidiary

1 Affiliate for CILSubsidiary for

PPA

1 Affiliate for QualifiedSupply

Vertical U

nb

un

dlin

g

Horizontal Unbundling

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Vertientes de la Reforma

15/33

Power market instrumentsMarket Periodicity Market Type

Energy and Ancillary Services

Daily, Hourly Cost Based

Capacity YearlyUnrestricted offers with administered price caps

Clean Energy CertificatesAccording to CRE

RequirementsUnrestricted offers

Financial Transmission Rights

Yearly (monthly in second stage)

Unrestricted offers

▪ CRE will set the requirements for all suppliers to contract forward energyand associated products

▪ Basic Service Retailers may only contract forward through auctions operatedby CENACE

▪ All market participants can participate in the auctions

Auctions and Long Term Contracts

Indicative generation(Stakeholders)

Vertientes de la Reforma

16/33

Neutral energy planningBefore Now

PRODESEN

SENER

Transmission

CENACE

Opinion

CRE

Publishes

SENER

MarketCFE +

Regulated Private

Participants

CFE + Private

Participants

G T D

Proposes

POISE

CFE

Authorizes

SENER

Executes

CFE

Regulatory Reform on Renewables in Mexico

•CEL markets➢Different schemes to foster renewable

electricity technologies➢Direct subsidies➢Feed in tariffs➢CEL (or CEC) markets

•Renewable auctions with premia➢Designed for CFEs public service

•PV Solar Distributed Generation

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Agenda

1. Overview of Mexico’s electricity sector

2. Regulatory reform in the electricity industry

3. Critical issues of the Mexican reform

4. Cross-border Mexico-USA issues

5. Possible impacts of the 2018 election results?

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Market design

Liberalization of generation markets

• Horizontal integration in generation markets under a dominant incumbent (CFE)

• How to accomplish a level-playing-field to allow fair competition?

• Potential collusion of CFE’s plants

• Arms’ length separation

• Merit order pricing under CFE plants’ regulation

19/33

Market design

Liberalization of generation markets

• Spot, one-day ahead, long-term capacity and bilateral generation markets

• IPP’s, self-supply, cogeneration old schemes and the new electricity market

• Existence of IPPs with long-term contracts of energy sales to CFE

• Basic service’s auctions and CECs

20/33

Market design

Vertical integration

• Open access enforcement

• Access pricing

• Auctions of transmission and distribution projects

• Prelude of future privatization?

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Market design

ISO’s and regulator’s potential capture

• ISO’s corporate governance and regulation (CENACE)

• Structure of incentives for the ISO

• Is CENACE a profit-maximizing or welfare-maximizing dispatch entity?

• Really independent?

• CFE capturing the regulator (CRE)?

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Market design

Distribution

•CFE’s basic-service to (captive) consumers

•Cross subsidies

•Role of private marketers (suministradores)

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Nodal prices, FTR auctions and subsidies

• Transition to nodal prices starting from a confusing regressive subsidy scheme

• Free allocations of FTRs to smooth out revenue or cost shocks (distributive efficiency)

• Grandfathered or legacy FTRs (legados)

• FTR auctions?

• Lump-sum subsidies in a now progressive scheme

• Subsidies carried out by the finance ministry (Hacienda), and not by the energy-sector authorities

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Kunz F., J. Rosellón, and C. Kemfert, 2017, “Introduction of Nodal Pricing into the Mexican New Electricity Market through FTR Allocations," The Energy Journal,

http://www.iaee.org/en/publications/ejarticle.aspx?id=2909

Transmission expansionZenón E. and J. Rosellón, 2017, “Optimal Transmission Planning under the Mexican New

Electricity Market,” Energy Policy, vol. 104, May, pages 349–360.https://www.sciencedirect.com/science/article/pii/S0301421517300812

• Optimal regulation of the transmission network

• The Prodesen’s planning process: stages

• Does Prodesen converge to welfare optimality?

• Auctions of transmission projects

• Transmission CRE’s tariff regulation

• Application of an incentive mechanism to promote the efficient regulation of the operation and expansion of the Mexican networks?

• Is there room for incentive transmission-tariff regulation? 26/33

Agenda

1. Overview of Mexico’s electricity sector

2. Regulatory reform in the electricity industry

3. Critical issues of the Mexican reform

4. Cross-border Mexico-USA issues

5. Possible impacts of the 2018 election results?

27/33

• NG imports from the USA might increase in more than 1 Billion cubic feet/day.

• This due to a decrease of national production (700 million cubic feet/day) and increase of national demand (360 Million cubic feet/day), much from electricity generation.

• Imports from the USA were 25% larger than in 2017 than in 2016.

• 3.25 billion cubic feet/day of new transport capacity built in the USA/Mexico border will started to operate during 2017

• 2016: 54% of total demand in Mexico is met with imports from the USA. Adding LNG: 60%

• End of 2017: 62.5% and 68.5%

• LNG is needed in Mexico due to pipeline bottlenecks from North to South in Mexico

• Prices: USD 3.7 per million BTU at the Northern import point.

• In 2016, 14% of total Mexican NG production vented by Pemex!

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US shale gas imports and electricity generation in Mexico

• CENACE currently analyzes Mexico’s participation in CAISO’s energy imbalance market (WesternEIM: https://www.westerneim.com/pages/default.aspx)

• EIM is a wholesale real-time market (five-fifteen minutes) operated by CAISO where other system areas in the US participate (e.g., Oregon, Washington, Nevada, Arizona)

• EIM’s participants buy and sell power close to the moment when it is consumed, and the various system operators provide visibility in real time of their neighboring power grids

• As a result, balance between supply and demand (especially of renewable energy) is significantly improved

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Western Energy Imbalance Market and Mexico

• EIM allows network operators to use wind and solar resources more efficiently

• EIM balances out fluctuations of supply and demand, and automatically finds the lowest cost resource needed to meet the immediate needs of energy in a wide geographic region

• EIM also administers the congestion of transmission lines

• EIM then allows the integration of renewable resources, since it absorbs the surplus of renewable energy at low cost

• Mexico: 100% renewable?!

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Western Energy Imbalance Market and Mexico

Agenda

1. Overview of Mexico’s electricity sector

2. Regulatory reform in the electricity industry

3. Critical issues of the Mexican reform

4. Cross-border Mexico-USA issues

5. Possible impacts of the 2018 election results?

31/33

• Already signed contracts (such as renewable-auction contracts) protected by Mexican law structures.

• AMLO would like to make sure some oil contracts are not a result of corrupted processes

• Odebrecht: http://www.spiegel.de/politik/ausland/odebrecht-gigantischer-korruptionsskandal-in-lateinamerika-a-1134657.html

• The goal of developing renewable energy through auctionsseems to be in line with AMLO’s economic general plan

• Same thing with plans of integration with the WEIM and the development of shale-gas basins and natural-gas networks

• But what about CFE’s unbundling and competition at retaillevel?

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Possible impacts of the 2018 election results?

“Pejenomics”

https://drive.google.com/file/d/1IYo1rvFqGTCSCGJCZvJy6X5RXQ6Mlba-/view

https://drive.google.com/file/d/1MAgcGSems1KGiYR90SF_AIdaCVzJhkX-/view

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Possible impacts of the 2018 election results?