Consultancy further confirms no power price manipulation in Mexico

Author: Emily Pickrell

2020/07/22

HOUSTON (ICIS)--The persistently-low prices being offered for power dispatched on Mexico’s grid, prices that are less than half of 2019 monthly averages, has raised questions since the end of last year including whether rates are being manipulated by grid operator CENACE.

Mexico’s independent market monitor report published earlier this year confirmed this was not the case for 2019, and separate analysis from a Mexico City-based consultancy has confirmed no manipulation appears to be taking place so far this year.

Jeff Pavlovic, co-founder and partner at Bravos Energia, said the recent introduction of 10GW of new generation in Mexico combined with low demand have been the driving factors.

“Generating costs have come down a bit, but there is no real sign of manipulation by market operators or generators,” Pavlovic said, speaking to the Gulf Coast Power Association in a 16 July presentation. “The main thing that we think is happening is that what is being offered is the quantities that are available.”

The new generation has come from a range of sources, he said. The majority is combined cycle plants followed by renewables plants completed and old self-supply contracts that are still coming on line. Another portion comes from plants that are not able to be dispatched for a variety of reasons. Some of this portion includes excess capacity private companies sell to state-run utility CFE.

LOW DEMAND

The drop in demand for power in Mexico has been the other big factor. It has also been reflected in lower bids and offers received in ICIS power surveys conducted after Mexico’s lockdown was implemented in April.

“Even before [coronavirus], demand was not growing - and since [coronavirus] hit, it has been down 5 - 10%,” Pavlovic said.

The prices at which power has been dispatched in 2020 have been low enough to feel like possible sabotage for private generators that had staked their futures on Mexico’s market. The day-ahead prices on Mexico’s mainland grid have hovered around around Mexican Pesos (Ps)500/MWh ($22.38/MWh) throughout the first half of 2020. These rates are less volatile and much lower on average than in previous years. In 2018, for example, the rates bounced as high as Ps2,250/MWh in August of that year, only to drop to Ps1,250/MWh by the year’s end.

Pavlovic also showed in his presentation how Bravos Energia had analysed natural gas prices and energy generation costs to try to explain the low dispatch prices, with favoritism or manipulation as a possible explanation. In matching the prices of natural gas to the corresponding offers by plants around Mexico, Bravos found the prices have tracked well to the underlying gas prices.

“Based on the data we saw, we discarded the idea that the generators were under-offering,” Pavlovic said.

FUEL OIL

They then looked at the relationship between fuel oil and offers dispatched. There is currently an excess of fuel oil in the Mexican market, as a result of changes that have limited the use of high-sulphur fuel oil for maritime ships. Lack of demand pushed fuel oil prices to bottom out at the beginning of 2020 to less than 15% of their price at the beginning of 2019, according to Bravos Energia’s analysis.

“It’s a very high sulphur fuel oil,” Pavlovic said, noting the impact of the fuel oil being phased out of maritime use. He said, however, that prices have recovered since April 2020, with July fuel oil prices roughly double or triple the lows below $2.00/MMBtu reached in certain regions of Mexico in April. “Those prices got depressed for a while, but they’ve come back.”

The prices being offered by generators are matching these shifts in prices for fuel oil.

“The theory that plants are offering under cost does not seem to hold water - it does not correspond with what we are seeing in general,” Pavlovic said, noting that there are some individual cases where plants go in at a zero-price offer. “But there is probably not enough to explain a dramatic change in market prices, particularly because this is not new.”

Similarly, there does not appear to have been an increase of plants being designated as “must-run” that might have undermined generation prices.

Reporting by Emily Pickrell