INTERVIEW: Vitol tests private sector with Mexico power trading

(MEXICO CITY)–Trading company Vitol is developing one of the first private Mexican power trading platforms, after first launching the concept in informational meetings in September and closing its registration period earlier in October.

Given that state-run utility CFE still has a stronghold on power contracts and supply in Mexico, Vitol’s platform looks to develop alternatives for private companies.

The following are excerpts from an interview with Brian Leeke, a US ERCOT trader with Vitol Group who has worked developed the company’s power market entrance in Mexico:

What are the advantages and disadvantages of CFE’s dominant presence in the market for offerings such as Vitol plans to offer?

Leeke: Given that there is a strict legal separation between the CFE entities that still exists, I think it is hard to take a look at the entire picture. We see this as a complementary offering. It helps private market participants to find a mechanism through which to lock in their fixed price exposure. Our hope is that this is successful and encourages CFE generation and CFE Calificados to participate in subsequent rounds.

Our hope is that Vitol’s Mexico Electrical is a success and helps get new projects on line and helps end users get a good price – we hope that the success of that will be a launching board for stability and liquidity in the market that helps send clear price signals to generation and load to incentivise new generation – and that the market works and starts to form these liquid price signals to create a competitive market.

How did Vitol decide to offer the Mexico Electrical option at this time in the wholesale market’s development?

Leeke: Vitol has been in Mexico for a long time and has been operational on the electricity side since February of last year. We launched the initiative because we see a unique opportunity for the private sector to step up. With the self-supply scheme (referring to rules prior to the energy reform that allowed industrial users to contract generation under certain circumstances) coming to an end, the private consumers are going to have a good opportunity.

It is my understanding that as that phases out, it is only legacy projects that are still eligible and any new loads whose contracts are loading off will have to go to a new market. We think this is potentially a good tool for new loads to find a new market.

We think that there are a lot of viable shovel-ready projects with generators with a great track record – and we see an opportunity to put Vitol’s balance sheet to use to find a private side solution. We have seen the long-term auctions be successful, and long term PPAs (power purchase agreements). The next logical step is to have these PPAs in the market in the new regimes. That is what Vitol Mexico is about: having the private sector find solutions.

What financial requirements or guarantees is Vitol looking for to lessen the risk it might assume as the counterparty?

Leeke: Every contract with Vitol will have a parent guarantee from our parent. For interested participants it is all laid out. From the Vitol side, we are looking for LCC from market participants, or an investment grade guarantee from a parent company.

For interested parties, we will look at the credit worthiness, and if it is not investment grade or does not have a guarantee from a parent company, then a company could instead lean on its financials. We will look at financials. We have different tiers of credit that we require, and if there is not an investment-grade private rating, we will ask for letters of credit or cash to be posted.

What role do you see the state-owned CFE playing in the market going forward?

I would say that Vitol’s Mexico Electrical is not a replacement for the government auctions. It is a place where private participants can find a place to cover their exposure. We would be more than happy for the CFE entities to participate. We assume they are all eligible aside from CFE Basico. There is regulatory uncertainty in all markets – you can see issues in the ERCOT market over possible subsidies for nuclear generators and issues of resiliency.

In general, the more that market participants have comfort around regulatory issues, it lowers the cost of capital for the end user. It is hard to find a “slam dunk” in any market. We think Mexico is currently a great opportunity.

What has the market reaction been so far to the Vitol offering?

Leeke: The reaction has been very positive, anyone who is an active market participant or who has fixed price exposure is looking at all avenues, outside of providing certainty or lock in cost. The other big draw Vitol offers is that it is an attempt at standardising contract terms and trading hubs. What we have seen is every generator wants to sell their node, but that is not necessarily great for liquidity. The hope is to find standardisation and facilitate liquidity in the market.

Mexico is at an interesting point in its market development for power. What other countries are most comparable to Mexico that could provide us with some insight?

I think Mexico is most comparable to the US market because it is a nodal market, rather than many other markets which are all zonal markets. Mexico is a nodal market – like MISO, ERCOT and PJM in the US – and that is a big advantage. It is also a capacity market and requires loads to cover its capacity. But it also looks like the ERCOT market in Texas, and a lot of those same principles were used in designing a capacity market in Mexico. It is unique and that was by design. When Mexico’s energy reform went through, they had the advantage of seeing the pros and cons of analysing the US and several European markets and taking the best elements.