Mexico’s Electricity Market

Since 2015, the Mexican wholesale electricity market has been operating as a competitive market. However, there are certain restrictions to guarantee fairness for all stakeholders and to meet the national clean energy goals.

Before the energy reform, the electric system in Mexico 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.

Frequently Asked Questions About Power Purchase Agreements in Mexico

Frequently Asked Questions About Power Purchase Agreements in Mexico

A power purchase agreement sets out the terms of a bi-lateral agreement in which one organization buys energy from another. The main elements of a power purchase agreement include the price for capacity, the price for energy (basically, the marginal cost of electricity), and the number of years that it will last.

The Natural Gas Industry in Mexico

New pipelines have enormous potential to support increased natural gas production in Mexico and also reduce the costs of imports. Although there is already an impressive pipeline infrastructure for transporting natural gas from the U.S. into Mexico, it does not reach the entire country. Most of the less expensive piped gas goes only to the northern states of Mexico, in part to provide power for factories.

An Overview of Virtual Power Purchase Agreements

For many years, the market for clean energy was limited by unstable prices. Energy prices are generally difficult to predict, but clean energy adds the uncertainty of new technologies and the weather. Within a small area, spot prices for wind power can literally go whichever way the wind blows. However, virtual power purchase agreements (PPAs) are creating new ways to reduce price volatility and expand the market for clean energy.

Frequently Asked Questions About Power Purchase Agreements in Mexico

A power purchase agreement sets out the terms of a bi-lateral agreement in which one organization buys energy from another. The main elements of a power purchase agreement include the price for capacity, the price for energy (basically, the marginal cost of electricity), and the number of years that it will last.

Solar Power in Mexico Enjoys Strong Fundamentals

Mexico was the first country to commit to specific targets under the Paris Climate Agreement, and achieving those targets is driving solar energy in the country.

Renewable Energy Project Execution

Mexico’s renewable energy auctions benefited from the experiences of other countries, so results have generally been better. According to IRENA, 53% of Mexican solar energy auction projects were on time, while only 37% experienced delays.

Reliance on US Natural Gas Poses Risks

The Mexican dilemma is a delicate balance for both long-term buyers of power, and for the government. Natural gas stabilizes electricity prices and it provides reliability to the power grid.

Mexico: A High-Growth Market for Energy Efficiency Solutions

Mexico is experiencing an increasing demand for infrastructure and services due to its economic growth and accelerated urban densification. This has led to a vast increase of energy consumption, as well as greenhouse gas emissions.

Power Purchase Agreements vs Wholesale Spot Market

The energy reform in Mexico introduced Power Purchase Agreements (PPAs) as one of the primary ways to trade energy. A PPA is a long-term contract between parties to purchase a certain amount of energy for future delivery. The agreements are typically…

Geothermal in Mexico: The Ring of Fire

Mexico is located over the Ring of Fire, extracting heat from the earth can be both economic and feasible. Earth’s natural heat reserves are immense. The Electric Power Research Institute (EPRI) has estimated the stored thermal energy below the…

Mexico’s Electricity Market

Since 2015, the Mexican wholesale electricity market has been operating as a competitive market. However, there are certain restrictions to guarantee fairness for all stakeholders and to meet the national clean energy goals.

Mission and Values

Our mission is to help clients successfully execute on projects in Mexico’s energy sector. We put the client’s interests ahead of our own and we always maintain an independent perspective.

 

Contact

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info@mexicoenergypartners.com

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