April 8, 2021

What’s Next for Mexico’s Power Market

By Sean McCoy, Director, Energy Services Mexico

— Para traducción al español, haga clic aquí — 

With the issuance of the injunction reliefs—amparos (a remedy for the protection of constitutional rights)—against President Andrés Manuel López Obrador’s new energy legislation that fundamentally changes Mexico’s wholesale electricity market (WEM), new challenges arise on Mexico’s power market.  These injunctions are projected to remain for the foreseeable future, and the energy managers of power consumers across Mexico will face continued challenges and questions as a result of the uncertainty.

Early questions abound regarding legacy contracts and their future. Will owners of legacy contracts challenge the Mexican government in the courts to maintain their legacy scheme? Will these energy users be forced into new market rules?  If they are maintained, will legacy contracts even provide legal stability on a long-term basis?  Likewise, how long will Mexico’s Energy Regulatory Commission (CRE) delay the issuance of power generation permits or the amendments?

For the past two years, CRE has unlawfully delayed approving any new generation permit requests and amendments. Approval has been delayed up to 18 months. These actions by CRE will ultimately result in renewable energy market scarcity in Mexico for at least three to four years.

 

Get insights on the Mexico power market delivered straight to your inbox. Sign up for our Mexico Quarterly Market Report.

 

District Courts have suspended the new legislation package to the Power Industry Act, which is not necessarily positive news. Based on this uncertainty, investors and energy consumers will have difficulty navigating these new circumstances.

CRE will likely do as much as possible to delay all power generation permit petitions until the injunctive reliefs are finally resolved, including the Supreme Court’s resolution. Energy consumers will face the decision to either switch their legacy contracts into a WEM contract, knowing that the qualified suppliers may face a hard time meeting their predictions and calculations regarding the pricing of the renewable energy for their clients considering the possibility of scarcity in a few years, or keep them knowing that there might not be legal stability thereunder in the midterm.

While some third-party supply opportunities are still available, it is important to take into consideration the lack of investment in transmission infrastructure in Mexico. One of the first actions taken by the current administration was to cancel the bidding process for the construction, operation, and maintenance of the High-Voltage Direct Current (HVDC) transmission lines, Oaxaca/Morelos and Baja California/Sonora, which would have boosted Oaxaca’s wind region for the first project. This lack of infrastructure will ultimately be reflected in higher congestion prices. The lack of Financial Transmission Rights will increase the power rates and prices.

Will CFE’s capacity be enough to respond to the power demand for the recovery after the COVID-19 pandemic crisis?  Though the CFE power generation portfolio, including the Independent Power Producers and legacy plants, will be relatively sufficient to satisfy the demand at the first stage, it is unclear whether enough renewable energy will be readily available for consumers targeting zero-carbon power consumption. It is also difficult to assure that the national clean energy goals will be met with only CFE’s generation capacity.

What if the new legislation to the Power Industry Act prevails? Considering CFE’s expensive, unreliable and inefficient power generation will be dispatched first, should CFE receive the necessary subsidies to maintain the regulated rates at current levels? This Administration has other marked priorities, such as the Dos Bocas refinery, the Mayan train, and the social welfare projects that have been large expenditures for this Administration. These issues are huge questions and challenges for tomorrow’s energy consumers’ decisions.

This uncertainty can make it difficult for organizations to make decisions.  However, failing to act is often a costly decision.  At Edison Energy, we have carefully identified issues that will impact all energy consumers in Mexico.  Whether evaluating the future of a legacy contract or implementing sustainability solutions, Edison is positioned to advise clients based on individual and organizational considerations. Let us help you determine the correct course of action while the market finds answers to these important questions.

Loading