by Bob Shively, Enerdynamics President and Lead Facilitator

In a recent blog post we compared the current deregulation of Mexico’s gas market to the 1990s in the United States. But unlike the U.S., which phased gas and electricity restructuring, Mexico is restructuring its gas and electricity markets at the same time.  Mexico finalized laws for comprehensive electricity market reform with the Electric Industry Act in 2014, and at the beginning of this year the competitive wholesale market kicked off.

Prior to regulatory reforms, Mexico’s electricity was provided by the vertically integrated monopoly Comisión Federal de Electricidad (CFE) under limited oversight from the federal Secretaría de Energía de México (SENER).  In 2002, Independent Power Producers (IPPs) were allowed to build generation but could only sell to CFE.  Also in this time frame, industrial customers were allowed to acquire supply through self-supply from closely related generation entities.

Market Structure Prior to Reform

Source: Regional Address to the CAISO Stakeholder Symposium, Electricity Reform in Mexico, presented by Jeff Pavlovic, SENER, October 22, 2015

The structure resulted in multiple concerns including:

• Average rates 25% higher than in the U.S.
• Extensive use of government subsidies to keep rates low; without subsidies rates would have been over 70% higher than in the U.S.
• Lack of incentive for investment in clean power or in new transmission projects
• Limited transparency in setting pricing and making investment decisions

With the objectives of reducing costs and rates, fostering more clean energy, and spreading benefits among multiple stakeholders, a new market structure has emerged. Policy makers believe it will provide incentives for value creation and efficient operation, result in decision-making through competitive processes, provide open-access and non-discriminatory use of the electric system, and offer transparency.

The New Market Structure

Source: Regional Address to the CAISO Stakeholder Symposium, Electricity Reform in Mexico, presented by Jeff Pavlovic, SENER, October 22, 2015

The new electric market reforms have ushered in new market players and a new market structure.

Market Players

• Existing CFE generation will be split into multiple subsidiary companies.
• Existing and new IPPs will be allowed to participate directly in the market.
• Clean energy power producers will be incented to develop projects by new clean portfolio requirements and the trading of Clean Energy Certificates.
• A new Independent System Operator (ISO) named Centro Nacional de Control de Energía has been created to run day-ahead and real-time markets, operate the electric system, provide open access to the electric system, and to ensure interconnection requests are fulfilled.
• A new regulatory agency Comisión Reguladora de Energía (CRE) has been created to set transmission and distribution rates and tariff rules, grant generation permits, and oversee regulatory aspects of the new market.

New Market Structure Overview

• Long- and medium-term bilateral transactions will be facilitated by power auctions run by CENACE.
• CENACE will run centralized day-ahead and real-time markets using price offers and optimized energy/ancillary services processes similar to U.S. ISO markets with nodal pricing (with the difference that all price offers must be cost-based).
• CENACE will administer a yearly capacity market.
• CENACE will facilitate a yearly and monthly Financial Transmission Rights market.
• CENACE will administer a yearly Clean Energy Certificates market for retailers to fulfill clean energy portfolio requirements set by CRE.
• CFE will continue to own the transmission and distribution system.
• Small commercial and residential customers will continue to buy their supply from CFE under cost-of-service-based tariffs.
• Larger consumers can choose to buy regulated supply from CFE or can purchase unregulated supply from marketers or generators.

The Market Has Begun

The market has kicked off.  CENACE has been running the spot markets since January 1.  The following graphic from the U.S. Energy Information Administration shows results for the first six months of 2016:

Source: EIA Today in Energy, July 5, 2016

The initial long-term auction for energy, capacity, and Clean Energy Certificates was held in March with CFE as the only buyer. A second auction is planned for this fall with multiple buyers. Other aspects such as FTR auctions, the CENACE-administered capacity auction, medium-term auctions for energy, and the CENACE-administered clean energy market will be implemented over the next two years. And Mexico has ambitious plans to become a key international player in electricity markets with connections to the U.S. and Central America. Indeed, Mexico has indicated an interest in direct participation in the California ISO (CAISO) real-time Energy Imbalance Market (EIM). There certainly will be numerous interesting developments to discuss in future blog posts as Mexico’s new electric market evolves.