Power market participants call for Mexican contract standardisation

19 July 2017 11:26 Source:ICIS

In an effort to encourage development of a forward market for Mexican power products, companies are calling for the creation of standardised contracts.

At the end of June the Association of Marketers of Energy (ACE) and law firm Greenberg Traurig held a meeting to identify a standardised agreement that could be harmonised with Mexico’s laws

Standard contracts would cover transactions taking place on an over-the-counter or bilateral basis outside the supervision of market operator CENACE, which oversees the country’s day-ahead and real time, as well as the soon to be launched hour-ahead, markets.

Sources pointed out that transactions are already taking place on the forward market, although there is a lack of standardisation.

Several international contract models have been proposed, which would allow for the standardisation of credit and compliance reporting procedures. The identification of specific physical locations and products for transactions is a future areas of focus.

ACE is now seeking market feedback including from companies in possession of licences to participate as generators, qualified users and suppliers, as well as financial traders.

Contract models

Initial conversations focused on the adaptation of products used in the US, such as from the International Swaps and Derivatives Association (ISDA), Edison Electric Institute (EEI), or Western Systems Power Pool (WSPP) contracts for physical and financial transactions.

The former two options are seen as the front-runners for use in the Mexican market.

The ISDA model is already in use for non-energy financial hedging in Mexico and could be more easily adapted to the power sector than other systems.

However, many initial deals for the Mexican market have been concluded using something more akin to the EEI contract.

The identification of a preferred contract model would allow market participants to pursue its conversion to Mexican law. Once this is established, sources said credit and compliance requirements could be defined more easily.

Specifications

Another area of focus was product definitions. Market participants said that on and off-peak contracts should be developed, although there is debate around which model should be used.

Companies with a position in the US pointed out that the two most relevant markets to Mexico - the Texas ERCOT and California’s CAISO - each have different definitions, with the former employing a five-day, 16-hour block model with the latter instead using a six-day, 16-hour block model.

Once a preferred model is defined, terms can be outlined for trade through quarterly or annual strips, enabling the transaction of excess energy on a forward market.

Physical locations for traded hubs are also under consideration.

Mexican authorities have proposed the creation of eight regional hubs, based on the aggregated load zones outlined in the mid-term auction manual released in June.

Six of these are located on the SIN network, with the other two the Baja California and Baja California Sur grids.

One source suggested the use of eight hubs might prohibit the development of liquidity.

ICIS power price surveys have focused on four nodes on the mainland SIN power grid - Monterrey, Queretaro, Valle de Mexico Norte and Merida.

Companies interested in submitting feedback are invited to contact Bob Anderson, VP of Business Development at Tenaska Energia de Mexico at (817) 462-8072 or banderson@tnsk.com. james.fowler@icis.com

By James Fowler