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Opportunities for international investors will come from the expansion and modernization of Mexico's generation and transmission infrastructure. Here a CFE plant. (Photo: CFE)
Wednesday, September 24, 2014
Perspectives

Mexico Power Sector: Consumers Benefit


Consumers will benefit from competition between generators and power marketing companies. 

 

BY LATIN AMERICA ADVISOR
Inter-American Dialogue

 

Since reforms restructuring Mexico's electric power sector were finalized in mid-August, the country has moved swiftly to announce upcoming tenders for natural gas and electricity projects, and numerous international energy firms have expressed interest in participating in the country's power market. What have been the biggest changes in the structure of the country's power sector? Where are the greatest opportunities for international investors, and where do the biggest pitfalls lie ahead? How soon do you expect to see changes in the country's electricity costs and service improvements? 

 
Andrew Vesey, executive vice president and chief operating officer of The AES Corporation: 
The power sector in Mexico will experience a transformation as a result of the recently introduced reforms. The resulting changes include the formation of a wholesale market with access for industrial customers; the restructuring of the Federal Electricity Commission (CFE) with required separation of its generation, transmission, distribution and commercialization activities; the introduction of an independent system operator (ISO); streamlined procedures to build additional capacity; the creation of a clean certificate mechanism and renewable portfolio standard scheme; a mandate for CFE and Pemex to offer part of its pipeline capacity to natural gas; and the establishment of an ISO to manage the gas system. These changes bring new opportunities for international investment, particularly in competitive gas and the new wholesale market. The government's target to generate 35 percent of its power through renewable sources by 2024 coupled with new incentives for these projects will also create the basis for rapid growth of renewables and new technologies such as energy storage. As a result, Mexico will not only gain valuable investment but also valuable experience in these areas. The main challenge will be the pace of change, which will depend on the degree and timing of the implementation of these reforms. In addition, this challenge could be complicated by the restructuring of CFE and Pemex, the level of transparency in the market and the availability of the people with the skills required to execute these changes. Improvement in service and costs will depend upon the degree and pace of the implementation of the reforms and how fast the players will have access to competitive gas. We expect the first signs to be seen within the next two years.


Jose L. Valera, partner at Mayer Brown LLP in Houston:
 Mexico's new Electricity Industry Law creates a completely new structure and legal framework for the electric industry by eliminating state monopolies and providing for the participation of the private sector in generation, transmission, distribution and power marketing activities. A new independent and decentralized agency will manage a wholesale electric market and ensure open access to the power grid. The state-owned Federal Electricity Commission (CFE) will no longer have a regulatory function and will no longer manage the electric power system. The generation and wholesale of electricity will take place under a regime of free enterprise and open competition. The private sector may now build power plants with permits issued upon application. The CFE will become just one competitor in the new generation market. While transmission and distribution facilities will remain under state ownership (through the CFE, its affiliates or other state-owned entities) and such entities will provide the service of transmission and distribution of electricity, the private sector will be able to participate in the construction, operation and maintenance of such facilities. All Mexican consumers of power, large and small, will benefit from more sources of supply and competition between generators and power marketing companies. Mexico does not have a financially healthy, efficient, clean and self-sustaining electric industry to support the economic growth of the country. The opportunities for international investors will come from the expansion and modernization of Mexico's generation and transmission infrastructure. The pre-existing legal framework was keeping Mexican consumers from benefitting from free enterprise and competition.

 

Luis Serra, director of Energy and Climate Change at the Centro de Investigación para el Desarrollo A.C. (CIDAC) in Mexico City: Recently, the Federal Electricity Commission announced a public tender for 16 projects in infrastructure for as much as $4.9 billion. Of these, three deserve special mention because they are aimed at reducing electricity costs in Mexico: three combined-cycle generation plants, two gas pipelines, which will carry gas from Texas to Chihuahua, and three transmission lines. The greatest opportunities for international investors lie precisely in these types of projects. Mexico's electricity demand is expected to grow at an annual rate of 3.97 percent during the next 12 years. At such a rate, Mexico's installed capacity needs to increase by 40.81 gigawatts, or 50 percent higher than what was achieved from 1996 to 2012, when private parties already were allowed to participate in electricity generation. The biggest pitfalls lie in the performance of the independent system operator (CENACE) and the sector regulator, that is, the Regulatory Energy Commission. The former has to ensure the cost-efficient dispatch of electricity in the system, whereas the latter has to ensure competitive access to the network. Should they not guarantee both prerogatives, private parties might find little incentive to continue investing in the Mexican electricity sector, particularly when such investments are jeopardized by the increasing costs of fighting organized crime in central and northern Mexico. Changes in the country's electricity costs and service improvements depend on more and better transmission infrastructure, as well as on an increase in access to natural gas for combined-cycled plants. These changes will not arrive as scheduled by the government, that is in a two-year horizon, unless they arrive in the form of an (inefficient) increase in tariff subsidization.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor

 

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