Proposed changes to dispatch order could dissolve Mexico power market – sources

Angeles Rodriguez

11-Sep-2020

  • Proposed change would likely increase power prices
  • Privately-owned companies may take financial hits
  • Potential changes would require new regulatory amendments

The Mexican government’s reported proposal to modify the economic dispatch order of power generation units could possibly lead to the de facto dismantling of the incipient market and would imply replacing an efficiency-based model for another lacking feasibility, market sources said.

Sources polled said the proposed change in the dispatch merit order would also likely increase electricity prices in short-term markets.

POTENTIAL SCENARIOS

Under current regulation, power market operator CENACE is required to dispatch the electricity system’s plants based on a merit order of ascending operating costs. Not until the plant with the lowest operating costs satisfies the system demand can the next-cheapest facility be dispatched. The last plant dispatched when total demand is covered at a given point in time sets the final price of electricity.

The proposal to change this order attributed to president Andres Manuel Lopez Obrador (AMLO) and addressed to energy regulators.

Under this proposal, hydropower would be given priority in grid dispatch, followed by CFE-owned plants. The power produced by privately-owned wind and solar plants would come in third place, while the production of private combined-cycle facilities would be at the end.

Under the memo’s proposed order, the economic dispatch principle that keeps overall costs down would not apply. CENACE would have to line up all of CFE’s power generation plants in the dispatch curve -including its old, expensive facilities- then line up more efficient privately-owned plants in the merit curve afterwards, according to Jose Buganza, CEO of power consultancy firm Enegence and former CFO at CENACE.

If CFE’s offer was not enough to cover demand at a given point in time, the price would be set by the plants lined up next in the merit curve, namely intermittent renewable generation facilities followed by combined cycle units. As these plants have the lowest operating costs, the final price set would not cover the operating costs of the utility’s most expensive plants, Buganza said.

In this scenario, authorities could have the possibility of establishing a guideline allowing CFE’s most expensive plants to be dispatched prior to privately-owned facilities and for those CFE plants to set the final price. This would allow the use of so-called make-whole payments in an attempt to avoid financial losses for CFE, said the specialist.

On the contrary, if CFE’s plants are enough to cover total existing demand, renewable energy plants as well as privately-owned facilities using other technologies would no longer be dispatched, Buganza said. Privately-owned plants would then be unable to meet their contractual obligations. In the current context, not being dispatched does not necessarily pose a problem for private generators, according to Buganza. Given that the final price in these situations is set by a less expensive plant, non-dispatched plants can turn to the market to purchase power for their existing contracts at a price lower than their operating cost. A change in this situation would likely drive some private plants to bankruptcy, said Buganza.

SELF SUPPLY

Because of existing regulatory commitments, the existing economic merit order does not apply to plants under so-called legacy contracts -also known as self-supply models- as well as so-called non-dispatchable facilities, both of which have assignment priority.

The memo’s proposal does not specify whether the self-supply plants would still be given priority, although stripping them of this privilege would require a prior legal amendment if the government wants to avoid further legal challenges, sources said.

HYDROPOWER

AMLO has publicly said hydropower is the least costly power generation alternative. However, this perspective that sometimes come with hydropower, particularly during periods of drought, when its use must compete with other priority needs such as human consumption and hydropower.

Mexico over the past few years, which has put constraints on hydropower generation and makes some sources wonder if there would be enough water to prioritise the dispatch of hydropower options.

OUTLOOK

Those affected by the potential implementation of the reportedly proposed dispatch order could argue the move goes against the electricity industry law (LIE) as well as the short-term market manual. As such, the measure would have to be preceded by regulatory amendments if the government wants to prevent further litigation.

Ruling party MORENA and its allies have more than 50% of the congressional seats needed to pass most new laws and amend existing ones, but they lack the two-thirds majority necessary to approve certain regulations and reforms. The 2021 mid-term elections could change this political landscape, so authorities have a relatively short timeframe to implement any changes.

Economic efficiency was at the centre of the creation of the current power market, and the proposed change would go against the spirit and logic of existing electricity legislation.

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