Mexico power market divided on potential outcome of proposed self supply change

Author: Claudia Espinosa

2020/02/26

Administration right on past misuse of self-supply scheme - sources

Some believe correct proposal implementation could increase liquidity

Others point to complexities of self-supply to MEM switch

Self-supply participants advocate for themselves, gain access

MEXICO CITY (ICIS)--Market participants are divided on the potential outcomes or benefits to the administration’s recent proposal to dismantle self-supply regulations, saying it is the most complex change to market rules proposed thus far.

It would severely limit the options of self-supply scheme participants and could force self-supply generators and their off takers quickly into a part of the market they may not be immediately prepared to navigate.

Two Mexico-focused consultants said in theory the change may not be all bad if executed well because it could add liquidity to the wholesale market (MEM in Spanish) and force indecisive market participants to look at all their options.

They said if the only change made is the one currently proposed by CRE to stop shell companies from moving from one self-supply contract to another and to stop the addition of loads centres under the self-supply scheme, it could move participants whose self-supply contracts would not expire for many more years to the MEM. This means they would have to choose between CFE Calificados, CFE basic supply (SSB), bilateral contracts or the options offered in the Bravos Energia process or Vitol’s Mexico Electrico platform. The change could end up being a catalyst for market development, they said.

However, if CFE pushes for the generators providing power supply for those self-supply contracts (known as legacy contracts or legados) to do something else, this is where things could get tricky, according to the sources. If CFE has some ownership or formal stake in the plant, the CFE may push for these plants to be forced to sell power to CFE.

VARIABLES AT PLAY

It is currently not widely known how much self-supply there is in Mexico. According to analysis by Mexico City-based Zumma Energy Consulting, there may be as many as 9,700 load centres that represent between 2,000 and 3,000 companies.

Ruth Guevara, an economist and director of Zumma, said her consultancy has completed studies for companies assessing their options to switch away from self supply and many variables come into play that can complicate the switch to the MEM.

Guevara and Valerie Rodriguez, another Zumma consultant, said the real issue is less about a potential increase in liquidity and more about the market’s future.

“These signals are bad for everyone. They increase mistrust and uncertainty for end users as well as generators,” Rodriguez said.

Self-supply participants have had several years to assess the options made possible by the 2014 electricity industry law, known as LIE in Spanish. Many have not, however, chosen a LIE option for a variety of reasons including a high level of predictability with their current power suppliers, with which they may choose to stay under bilateral contracts if the self-supply change were finalised.

SPECULATION

Not all self-supply participants have used the scheme as it was intended, however, according to Victor Ramirez a spokesman for Platforma Mexico Clima y Energia, who agreed with sources who said that some participants have misused the option as the administration has previously alleged.

“You can divide self supply participants into two camps: those who built their plant and are likely to add offtakers to their existing contracts and those who have never built anything and are just collecting potential offtakers to see if they can get a project financed,” he said.

Ramirez says those in the latter camp should attempt to obtain a normal generation permit permitted by the LIE. Ramirez said he and many market observers agree it would be healthy for these so-called “speculators” to be removed from self supply.

Even so, Ramirez agrees that the main issue is the abrupt change in rules.

BUSINESS EFFORTS

Several sources said Mexico’s wind power association, amdee, met on 13 February with the head of energy ministry SENER, Rocio Nahle, representing one of many private sector efforts to discuss with the administration on the self supply change.

One source said he spoke with some of the meeting attendees who said it was the first time to open dialogue on electricity from SENER. The source said the concern was that energy regulator CRE, which proposed the change, was really the entity that should be meeting with the private sector.

For the end users like industrials, the concern with the proposed change is currently about how they would be forced into the MEM or to CFE. Ideally they would have the option to go either to a bilateral contract or to CFE basic supply (SSB). However, if they are forced to go to CFE Calificados for service, the cost of power would likely increase substantially, according a Mexico-focused consultant. This would, in turn, raise the costs of doing business for industrial end users. This is what was concerning to industrial group CONCAMIN, which issued a statement against the change.

“In the long run the [administration] is going to lose. It’s a game of endurance and they are losing popularity,” said one Mexico-based power analyst.

All the market participants polled advised taking a three-pronged approach, including seeking legal counsel, attempting to dialogue with the administration and analysing alternative options including those in the LIE and the Bravos Energia and Vitol mechanisms.

The proposed changes are currently expected to remain open for comment on the website of regulatory reform agency CONAMER until at least mid-March before becoming published in Mexico’s official gazette.