Mexican government clashes with private sector over recent power industry changes

Author: Angeles Rodriguez

2020/05/30

  • Sources said CENACE could have prevented reliability issues without halting testing
  • Private generators pay for transmission costs, although some pay reduced fees
  • Sources see legal merit in appeals against SENER’s policy

MEXICO CITY (ICIS)--Some power market participants are disagreeing with arguments that authorities are using to support a new policy by energy ministry SENER and an April resolution by power market operator CENACE.

CENACE’s agreement halted pre-operative testing on wind and solar generation plants with the objective of ensuring stability of the power grid. In response to the number of appeals filed against the measure, state-run power utility CFE said in a 20 May statement that the intermittency problems caused by the testing of renewable energy projects compromised the reliability of the power system, particularly in light of the drop in demand related to coronavirus restrictions.

CENACE and CFE did not respond for comment.

Market sources agreed that this type of testing should only be conducted when the demand is high enough for certain flow conditions but said there are protocols available to prevent negative effects to the reliability of the system.

Jose Buganza, CEO of power consultancy firm Enegence and former CFO at CENACE, said that power market operator can schedule testing based on forecasts of the system’s conditions and demand over a given day. Any issues resulting from pre-operative testing are likely the result either of bad planning or a fortuitous event, he said.

Buganza said that figures from CENACE show that average daily demand in April 2020, when stay-at-home measures to face the coronavirus pandemic were already in place, was only around 2.37% lower than average daily demand on April 2019 and slightly higher than demands in January and February this year. He said April 2020 demand had dropped a little less than 1GW year over year in average when CENACE’s agreement was issued – a figure he said is not enough to compromise the system’s reliability.

A former government official in a regulatory agency agreed with Buganza and said that low demand conditions fluctuate within the system.

“The current situation did not merit to restrict all testing,” the source said.

MARKET ACCESS

Energy ministry SENER also introduced a new policy that was issued to "guarantee the reliability, security, continuity and quality of the grid." The policy, made official through its 15 May publication in the federal official gazette, introduces a new set of regulations, including stricter rules for generation permits and additional restrictions for new and existing wind and solar plants.

President Andres Manuel Lopez Obrador (AMLO) publicly said on 21 May that the main objectives is to “bring order” to the electric market as well as to create a level playing field for state-run power utility CFE. Federal authorities have also said permits for renewable energy projects were granted to almost anyone who applied for one.

Both Buganza and the other former official said the existing power market was designed with the idea of granting as many permits as necessary to give access to whoever want to invest in it.

Buganza cited parts I and II of article 16 of the energy transition law, known as LTE in Spanish, in explaining that the market was designed to guarantee open access to the network. He said the programs for the expansion of transmission capacity must consider the equipment and adjustments so that enough generation capacity from renewable energy could be released into the transmission system. He said that the law states that this was to create market conditions and enough reliability so that everybody interesting in joining could enter, open their plants wherever they chose and compete.

The other former official said that the idea for the market was that anyone who wanted could open plants and that the ones with the lowest costs could eventually replace the most expensive, inefficient ones.

Authorities have also mentioned the energy reform gave a preferential treatment to private renewable generators. In a 23 May exchange via press releases between business chamber Concamin and CFE, the two parties disputed who pays for the transmission costs of the electricity generated by private renewable energy projects, as well as the costs of the backup power that is generated when renewable plants are not producing.

According to CFE, the utility covers the full costs of generating back up electricity, wile private companies pay transmission costs only in some cases where energy regulator CRE sets fees that are not high enough to even cover operating costs.

Buganza said power generation plants that provide ancillary services for the electricity system are entitled to receive a revenue sufficiency guarantee and that all power market participants pay regulated tariffs for the use of transmission network, which are tariffs CRE sets based on the voltage they inject into or withdraw from the grid.

The other former official said renewable energy generators finance the grid reinforcement works they are required to build in order to connect to the transmission network. However, he did note that generators under so-called legacy contracts were granted reduced transmission fees in exchange for financing the construction of their plants and the transmission lines that connect to those facilities.

“That’s not the case for plants built after the energy industry law [LIE] was enacted,” he said.

Legal prospects

The Mexican bar association (BAM) said in a 19 May opinion that SENER and CENACE acted outside the realm of their responsibilities. One legal source agreed and said CRE was the only authority able to issue this type of decrees, based on article 136 of the LIE.

Although the likelihood that companies can successfully challenge the two agreements is high, final rulings in amparo lawsuits could take up to two years, according to Jose Maria Lujambio, partner and energy practice director at law firm Cacheaux, Cavazos and Newton. Lujambio was also formerly general counsel for energy regulator CRE.

Meanwhile, a 22 May ruling from a Mexico City court granted definite suspension orders against CENACE’s agreement to 13 renewable energy projects, which allows them to continue pre-operative testing until the case is finally resolved.

Lujambio said companies wishing to contest SENER’s policy will probably do so within the next few weeks as they have a 30-business-day deadline effective a day after the document was published in the federal official gazette.

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