Low rainfall levels could affect 2020 hydropower pricing in Mexico

Author: Emily Pickrell

2019/12/11

MEXICO CITY (ICIS)--Mexico may have less hydro power at its disposal in the coming year to keep power prices from rising, based on insufficient rainfall to keep the dams at the needed capacity.

One generation company in Mexico is estimating that prices for marginal power in the wholesale market could rise to $66/MWh, based on the lack of hydro power.

“It’s a perfect storm,” said an official at a major generation company in Mexico.

The reduction in hydro power can be inferred from CENACE data showing that the domestic power generation provided by state-run utility CFE has dropped from 24TW/h at the end of 2018 to 16.5TW/h at the end of 2019. It is a change that has been driven by one of the driest years this decade.

“The conventional wisdom was that last year was a dry year, and the reservoir levels indicate that 2019 rainfall has not been good either,” said Jeff Pavlovic, partner at Mexico-based consultancy Bravos Energia and a former official at energy ministry SENER.

As of 15 November, roughly 14% of the country is experiencing moderate to extreme drought conditions. More than 500 municipalities - about 20% of the country’s total - throughout Mexico have drought conditions. “Extremely dry” or “moderate drought” conditions are concentrated in Mexico, with more severe drought conditions along the Gulf Coast and in the Yucatan peninsula, according to data from CONAGUA, the national water commission. Chiapas, Hidalgo, Oaxaca, Puebla, Queretaro, San Luis Potosi, Tabasco, Tamaulipas and Veracruz have been among the states hardest hit by the drought. As a result, hydro power generation in southern Mexico has been particularly constrained.

The gap in hydo power generation will need to be substituted in Mexico’s grid, and the other available options in CFE’s fleet require expensive fuel inputs, such as diesel or fuel oil, raising electricity input costs. It is a flaw in terms of keeping the prices down, according to renewable power market participants: while hydro could give Mexico the needed back-up generation for solar and wind power, for CFE, it is instead seen as the power of first resort.

“Hydro facilities are essentially big energy storage systems whose dispatch can be combined to coincide when solar and wind don’t happen,” said Mannti Cummins, the director of Eolica Coromuel, a wind generation company. “Yet, CFE runs those suckers flat out when there is water because it’s inexpensive to operate.”

The country’s relationship with hydro power is also complicated by the multiple needs its water meets. Mexico relies on the water in reservoirs not only for electricity generation but also water management and agricultural use. Prioritising between these uses to meet the competing needs of the water is always a challenge, especially for a new administration. In this case, the water shortage in the dams has been worsened by inexperienced management of the reservoirs, according to an official at a major generation company in Mexico.

“This year CENACE dispatched hydro assets the same as it would in a rainy year, trying to mitigate high energy production costs,” the official said. “But the final result is that right now the dams are almost empty.”

CENACE did not immediately respond for comment.

Hydro power in Mexico currently makes up 12% of all generation, meaning that low rainfalls have a significant impact on its overall generation. In 2017, it made up 80% of Mexico’s renewable energy supply, with 12.3GW of installed capacity, according to the International Hydropower Association. If the drought persists, it could also impact Mexico’s stated climate change goals of reaching 35% clean energy usage by 2024 and 50% by 2050.

It could also complicate CFE’s ability to meet requirements to hold the mandated clean energy certificates (CELs).

Energy ministry SENER recently changed the definition of which generation plants could receive CELs so that it included the CFE’s hydro-generation fleet. But a continued drop in hydro power could impact this - as could the legal challenges that have been made against SENER’s change.

“It is still unclear if they will be able to award CELs to hydro power plants because there are at least six suits in court,” said Dwight Dyer, an independent energy consultant and former SENER senior official. “They still have to go through the court to know if they will be able to award CELs for hydropower use.”