2. 3. Electricity Sector 4. Outlook Mexico, 2016

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2 Electricity Sector 4. Outlook Mexico,

3 Secretariat of Energy Pedro Joaquín Coldwell Secretary of Energy Leonardo Beltrán Rodríguez Under Secretary of Planning and Energy Transition Cesar Emilio Hernández Ochoa Under Secretary of Electricity Aldo Flores Quiroga Under Secretary of Hydrocarbons Gloria Brasdefer Hernández Senior Officer Rafael Alexandri Rionda General Director of Planning and Energy Information Víctor Manuel Avilés Castro General Director of Social Communication 2

4 Preparation and Revision: Rafael Alexandri Rionda General Director of Planning and Energy Information Luis Gerardo Guerrero Gutiérrez Director for the Integration of the Sector Outlooks Fabiola Rodríguez Bolaños Deputy Director for the Integration of Energy Policy Alain de los Ángeles Ubaldo Higuera Deputy Director of Energy Consumption Ana Lilia Ramos Bautista Head of Department of Energy Policy Cover: Administrative Support: María de la Paz León Femat, Maricela de Guadalupe Novelo Manrique Secretariat of Energy 3

5 Acknowledgments Centro Nacional de Control de Energía Comisión Federal de Electricidad Comisión Nacional para el Uso Eficiente de la Energía Comisión Reguladora de Energía Dirección Corporativa de Operaciones de PEMEX PEMEX Corporativo Secretaría de Hacienda y Crédito Público Subsecretaría de Hidrocarburos, SENER Subsecretaría de Electricidad, SENER Dirección General de Energías Limpias, SENER Instituto Mexicano del Petróleo Instituto Nacional de Investigaciones Eléctricas y Energías Limpias Instituto Nacional de Investigaciones Nucleares Programa de Colaboración México-Dinamarca en Materia de Energía y Cambio Climático 4

6 Index Index...5 Index of Tables...8 Index of Figures Presentation Introduction Executive Summary Regulatory and Policies Frame of the Electricity Sector Electricity Sector Regulatory Frame Political Constitution of the United Mexican States Electricity Industry Law Law of the Coordinated Regulatory Organs in Energy Matters Energy Transition Law Organic Law of the Federal Public Administration (LOAPF, for its Spanish acronym) Planning Law CFE Law Regulatory Frame for the Devise of the Electricity Sector Outlook Instruments to Foster Clean Energies in the Electricity Sector Auctions of the Electricity Market Clean Energies Certificates National Inventory of Clean Energies and Atlas of Zones with High Potential of Clean Energies Research and Education Centers of the Energy Sector Mexican Centers for the Innovation in Renewable Energies National Nuclear Research Institute (ININ) National Institute of Electricity and Clean Energies (INEEL) Diagnosis of the Electricity Sector

7 2.1. Mexican Economy Diagnosis Users, sales, and median prices of Electricity Electric Power Users Electricity Sales Electricity Average Prices Electricity Consumption and Demand Electricity Consumption Electricity Losses Demand of the National Electricity System Infrastructure of the National Electricity System Installed Capacity of the SEN Electricity Generation Electricity Transmission and Distribution Foreign Trade Electricity Sector Outlook Assumptions of the Planning Scenario International Context Macroeconomic Forecasts Fuels Prices Forecasts Participation of Clean and Potential Energies Expected Behavior of the Electricity Demand Maximum Demand Gross Consumption Expansion of the National Electricity System Additional capacity to be installed Decommissioning of Electricity Generation Expected electricity generation Expansion of the Transmission and Distribution Grid of the SEN

8 3. Sensitivity Exercises Energy Transition Scenario prepared by CONUEE Energy-Efficiency Measures in the Transportation Sector Energy-Efficiency Measures in the Industrial Sector Energy-Efficiency Measures in Buildings Electricity Consumption Glossary Acronyms References

9 Index of Tables Table Main macroeconomic variables of Mexico, Table Electricity users by operational area, Table Electricity users by federal entity, Table Sectoral behavior of the domestic electricity sales, Table Average electricity price by operational area Table Behavior of electricity consumption by operational area, Table Remote self-supply electricity, Table Electricity losses by operational area, Table Behavior of the gross maximum demand, Table Behavior of the SEN's installed capacity by modality, Table Behavior of CFE's effective capacity by technology, Table CFE's additions, modifications, and decommissioning capacity, Table Behavior of the Permittees' capacity for electricity Table CFE's energy gross generation by primary energy source, Table Transmission, sub-transmission, and low-tension lines, Table CFE's substations capacity, Table Electricity Sector trade balance, Table Quinquennial Plan Table Clean energies potential Table Forecasts for the maximum demand by control region, Table Integrated and instant demands of the studied scenarios, Table Forecasts of gross consumption by control region, Table Additional capacity by modality and technology, Table Behavior of the capacity additions by federal entity, Table Behavior of the installed capacity by type of technology,

10 Table Behavior of the electricity gross generation Table Name of the transmission regions Table Summary of the main works and indicators Table Physical goals for transmission works, Table Physical goals for transformation works, Table Baja California-SIN interconnection projects Table Interconnection projects Nogales, Sonora-Arizona, U.S Table Interconnection projects from Istmo de Tehuantepec-Valle de Mexico (Oaxaca)

11 Index of Figures Figure Main provisions of the Electricity Industry Law Figure Provisions on the Wholesale Electricity Market Figure Main Objectives of the Energy Transition Law Figure Main provisions of the CFE Law Figure New structure of CFE, initial separation for generation Figure Information Sources for the Devise of the Outlook Figure Planning Instruments to Promote Clean Energies Figure Medium and long-term auctions Figure Mexican Centers for the Innovation in Renewable Energies Figure Main objectives of the INEEL Figure Mexico's main macroeconomic variables, Figure Annual behavior of customers by sector, Figure Users share by electricity operational area, Figure Composition of electricity sales by sector, Figure Sectoral behavior of the domestic electricity sales, Figure Structure of the domestic sales by federal entity and statistic region, Figure Precios medios de energía eléctrica por sector tarifario Figure GDP and Electricity Consumption, Figure Share in electricity consumption by operational area Figure Electricity losses, Figure SEN's monthly gross consumption, Figure SEN's coincident maximum demand, Figure SEN's installed capacity, Figure Installed capacity by technology, Figure SEN's installed capacity by modality,

12 Figure Behavior of the SEN's effective capacity, Figure Percentage distribution of authorized permits and authorized capacity by modality, Figure Behavior of the permittees' capacity for electricity Figure Installed capacity by federal entity and region, Figure Behavior of the SIN's operational reserve margin, Figure Gross generation by technology, 2014 y Figure Gross generation by type of technology, Figure Gross generation by modality Figure Behavior of the electricity gross generation Figure SEN's gross generation by federal entity, Figure Transmission, sub-transmission, and low-tension lines, Figure Transmission capacity between SEN's Regions, Figure Links and interconnections, Figure Scenarios for the Henry Hub Natural Gas Spot Prices, Figure Behavior of the electricity consumption and gross domestic product Figure Mexican population forecasts, Figure Exchange-Rate forecasts Figure Fuels prices forecasts, Figure Trajectory of the clean energies goals Figure Expected annual growth of the SIN's maximum demand, Figure Average annual growth of the SIN's electricity maximum demand by region Figure Expected annual growth of the SEN's gross consumption, Figure Electricity gross consumption average annual growth by region Figure Comparison of the share in the gross consumption between 2015 and 2030 of the different control areas Figure Share in the additional capacity by type of technology, Figure Behavior of the capacity additions by technology, Figure Additional capacity by modality,

13 Figure Additional capacity by status of the project, Figure Capacity additions by control region, Figure Capacity decommissioning by technology, Figure Installed capacity by type of technology, 2015 y Figure Behavior of the installed capacity by type of technology, 2015 y Figure Share of technologies for electricity generation, 2015 and Figure Share by modality in electricity generation, 2015 and Figure Behavior of electricity generation by control region Figure Gross generation by region and federal entity, Figure Main transmission works by control region of the SEN, Figure Main transformation works by control region of the SEN, Figure Main compensation works by control region of the SEN, Figure Reduction potential of the final energy consumption in the industrial, transportation, and buildings sectors by Figure Energy consumption in the transportation sector, base scenario Figure Transportation Sector Electrification Rate in the Transition Scenario Figure Transportation Sector s Electricity Consumption in the Transition Scenario Figure Industrial sector energy consumption in the base scenario Figure Industrial sector energy consumption in the Transition Scenario Figure Electricity consumption in the final-consumption sector for both scenarios Figure Electricity consumption in the transition scenario by sector

14 Presentation One of the main commitments of the Energy Reform about electricity is to bring this service to every corner of the country, and to ensure its universal coverage. Nowadays, 98.5% of Mexico's population have this service, but there are still electrification works to be carried out in communities inhabited by almost two million Mexicans and who, currently, do not count with electricity service. Electricity is essential to foster the economic and social development of the country; thus, affording an efficient, reliable, and high-quality service, are the main premises to modernize the Mexican Electricity System, favoring the use of clean technologies for reducing the level of polluting emissions and move into a sustainable system. On the other hand, Electricity Auctions are the result of having implemented the deeper Energy Reform ever carried out in the country, and which has produced an unprecedented impulse towards clean energies. Jointly, with barely two auctions, 34 companies will settle in the country adding nearly 5,000 new megawatts to the current generating capacity, and which will trigger investments for 6,600 million dollars within the coming years. The Energy Transition Law has become a strengthening mechanism by which the country seeks access to a low-carbon economy (LCE). To achieve it, three instruments will be used for defining the routes and goals to move into a LCE. The first instrument is the Transition Strategy to Promote the Use of Cleaner Technologies and Fuels, which sets the generating-participation goals based on clean energies: of 35% in 2024; 37.7% by 2030; and of 50% of the total electricity generation by It also establishes the basis for energy efficiency, with the goal of reducing by 1.9% the energy intensity for final consumption during 2016 to 2030, and 3.7% during , with an average of 2.9%. The second mechanism is the National Program for the Sustainable Use of Energy, which establishes indexes for the following up of the energy-efficiency national goals for the period Finally, the third mechanism is the Special Program for Energy Transition, which set four strategic goals which intend to: i) increase the installed capacity and the generation of clean energies; ii) expand and modernize the infrastructure, as well as increase distributed generation and storage; iii) foster the technological development, talent, and value chains; and iv) democratize the access to clean energies. The Electricity Sector Outlook is a planning document which provides all the necessary information, and reflects the future needs for electricity in the country for a fifteen-year period. The document is made richer with the sensitivity exercises which respond to the changing landscape of fuels, and afford options to reduce risk exposure and achieve the least environmental impact. The planning here presented, regarding expansion and modernization, is devised as independent and inclusive, taking into account what is presented in the Development Program of the National Electricity System (PRODESEN, for its Spanish acronym)

15 Introduction Along with the strengthening of the Electricity Sector through the modernization of generating plants, as well as the transmission and distribution grids, not only will the access to electricity will be democratized, but the regional economic breaches will be reduced, achieving thus an efficient integration of the national territory which will reflect bigger economic, industrial, commercial, agricultural, and services dynamism. The Electricity Sector Outlook aims to become an instrument which provides reliable information about the status of the Electricity Market. Besides, it is a planning exercise on the expansion foreseen for our country during the next years, representing a vision of the possible scenarios of the Electricity Market, and being thus, a supporting point on the strategic decisions required by the country. This Outlook is divided into four chapters. The first one considers the regulatory frame and the most relevant energy policies of the Energy Reform, its secondary legislation, and the new instruments for the energy transition. It includes the most relevant features and results of the Energy Reform, its secondary legislation, and the new instruments for the energy transition. The second chapter displays a diagnosis of the Electricity Sector for the past ten years ( ). It describes the main variables, such as the electricity domestic consumption, the demand's seasonal behavior, mean prices, and the current infrastructure for generating and transmitting electricity. This information is the main base for future planning, since it shows the trends, and reflects the main needs in electricity matter, of the country. Chapter three describes the result of the planning exercise of the Developmental Program for the National Electricity Sector (PRODESEN, for its Spanish acronym) Finally, chapter four displays a sensitivity exercise which sheds light on the dynamics and trends of the Electricity Sector, and deeply explains the impact that the volatility of some participating variables has over the sector s planning. 14

16 Executive Summary The Electricity Sector Outlook is an analytical tool for researchers, State Productive Enterprises, and private sector companies which require essential information that will enable the timely decision-making for their investment needs. It not only provides historic and prospective information, but it is also enriched with realistic sensitivity exercises which reflect the fuels' changing landscape. Electricity Sector's Regulatory Frame and Policies Mexico has been developing the necessary mechanisms to carry out a transition to a larger use of clean energies, issuing a series of mandates established, in the Electricity Industry Law (LIE, for its Spanish acronym), as well as in the Energy Transition Law (LTE, for its Spanish acronym), and which establish the legal bases required to increase the share and the regulation of clean energies for electricity generation. The LTE is supported by strategies, programs, public measures and policies, which allow to increase the share of clean energies and achieve the goals set, in order to carry out the energy transition and to comply with the objective of gradually increasing the participation of clean energies within the electricity-generation matrix. Particularly, the Strategy works as an instrument for planning the national energy policy in matters of clean energies and energy efficiency, which will be subjected to a continual-improvement process that will include the assessment of partial results, identifying the barriers for achieving its objectives, identifying other improvement opportunities, and adopting corrective measures if any of the complying indexes do not reach the engaged results. An important point to achieve an efficient energy transition is to foster projects which will generate an added value for the energy industry. Strengthening and promoting research and education institutes, affords the country the necessary tools to revitalize the sector through the development of the new technologies and human capital required to carry on such transition. The publication of the PRODESEN on May 2016, presented the indicative planning for the next fifteen years. This program is originated from the Electricity Industry Law, which grants its devise to the Secretariat of Energy, since the planning of the Electricity Sector is a strategic area for the country. Electricity Sector Diagnosis This chapter displays a brief diagnosis of the Electricity Sector for a 10-year period, showing the effects of the main macroeconomic variables over the decisions to strengthen the Electricity National System, according to the growing demand of society. Between , the gross domestic product (GDP) grew 2.7% annual average, while the consumption of electricity has grown at a 3.0% rate. In 2015, electricity sales increased 2.0%, (equivalent to 4,185.9 GWh) regarding the previous year, reaching 212,200.8 GWh. Medium-size enterprises had the largest growth, with a share of 38.3% of the total sales; 26.4% corresponded to the residential sector; 19.4% to big industry; 7.0% to commercial; 4.7% to agriculture; and 4.2% to public services. By the end of 2015 the installed capacity of the Electricity Sector increased 4.0% regarding 2014, reaching 68,044.0 MW, equivalent to 2,519 MW of new capacity. During this period, clean technologies increased 6.9%, which is related to the fast growth of the wind and geothermal power. Electricity generation reached 309,552.8 GWh, including the generation reported to the CRE by private generators, which represented an increase of 2.7% regarding the previous year and equivalent to 8,

17 GWh. Conventional technologies had an increase in their generation of 4.4%, in contrast with clean technologies, which decreased -3.7%, attributable to the reduction of the generation coming from hydroelectric plants. It is important to mention that wind power was the technology which increased the most between 2014 and 2015, with 36.1%, seconded by efficient cogeneration with 31.2%. Finally, the transmission and distribution grid reached a length of 885,426.0 km, an increase of 5,734 km regarding This grid is constituted by kv length, with 51,479.0 km (5.85 of the total); 6.4% corresponds to lines between 69 and 161 kv; 12.8% to lines between 23 and 34.5 kv; and, 39.9% to lines below 13.8 kv. Electricity Sector Outlook This chapter shows the results of the planning exercise of the SENER (PRODESEN ) with a 15- year horizon, and which consider the Indicative Program for the Commissioning and Decommissioning of Power Stations (PIIRCE, for its Spanish acronym), the Program for the Expansion and Modernization of the National Transmission Grid, and the Program for the Expansion and Modernization of the General Distribution Grid. The planning exercise is based on the analysis of the historic information on electricity consumption, the current SEN's infrastructure, economy's behavior, forecasts on fuels prices, prices per sector of users, and the implementation of specific programs on savings, among other. The forecasts on electricity consumption are obtained through adding variables which define that consumption. Between 2016 and 2030, within the planning scenario it is expected an annual growth of the SEN's gross consumption of 3.4%, to reach TWh by the end of the period. One of the reasons why the SEN's planning shall be of minimum 15 years, is to consider the estimated time for carrying out the projects, and their lifespan. This is due to the nature of the electricity sector, whose projects need long-maturity periods and, therefore, investment decisions on the SEN's expansion works are taken several years ahead. Through optimization models, it is possible to estimate the type, size, location, and startup date of the power stations to be installed for meeting the expected demand. The results of those models show the combination of the power-station's portfolio which presents the minimum present value of the system's total costs, while it satisfies the defined restrictions, such as the share of clean energies. It is expected that between 2016 and 2030, a capacity of 57,122 MW will be added, from which 37.8% will come from conventional technologies (21,590.3 MW) and 62.2% from clean technologies (32,532.0 MW). Combined-cycle technology will have a bigger increase of installed capacity, with a total of 20,453.7 MW. As for capacity additions by control region, the Eastern region will have the largest concentration with 15,279.7 MW as a result of the increase of projects in states such as Veracruz (6,176.2 MW), Oaxaca (4,868.3 MW), and Chiapas (2,478.5 MW). It stands out that in this region energy sources like nuclear, wind, and hydraulic power predominate over conventional ones, achieving thus, to have the largest installed capacity with clean-energy sources. On the other hand, it is expected a decommissioning capacity of 15,819.5 MW, related to 140 generating units, located in 22 entities of the country, and being, in their great majority, thermoelectric stations. In 2015, gross electricity generation was of 309,552.9 GWh, from which 79.7% came from conventional technologies and 20.3% from clean technologies. In 2030, gross generation will increase to 443,606.1 GWh. From this generation, clean-energies share will grow 40.5%, while conventional energies will reduce their share to 59.5%. By type of source energy, combined cycle is the only technology based on fossil fuels increasing its share, 8 percentage points in 2030 regarding On the contrary, conventional thermal will drop from 39,231.5 GWh in 2015 to 1.3 GWh by the end of the projection period. Likewise, coal power will have a sharp drop of 16

18 -97.1% in the generation share, equivalent to 32,620.9 GWh. Internal-combustion technology will reduce its share from 0.9% to 0.0% by the end of the prospected period. With the entry of several generation projects throughout the country, included in the Indicative Program, it will be necessary to develop transmission lines suitable for the programmed expansion, designed to operate under normal conditions and contingencies. Between 2016 and 2025, 159 transmission works are considered throughout the national territory, with a total of 13,066.0 km-c; 121 transformation works, with a total of 41,952 MVA, and 117 compensation works (7,288 MVAr). Sensitivity Exercises Sensitivity exercises afford a better understanding of the impact of the multiple variables of the Electricity Sector. Their main objective is to show researching results which, based on the sector's official planning, may lead to explore other options for that indicative planning. The excise here presented is the one from the Energy Transition scenario, which was developed during the works of the Transition Strategy to Promote the Use of Cleaner Technologies and Fuels, in order to comply with what is established in the Energy Transition Law. This scenario was developed beginning from a base scenario devised by SENER, that profiles a behavior without energy efficiency actions. Afterwards, the CONUEE designed the Energy Transition Scenario which includes energy efficiency actions which may be viable in different end-consumption sectors, and will jointly achieve the energy-efficiency goal established in the Strategy. 17

19 1. Regulatory and Policies Frame of the Electricity Sector The Energy Reform established the necessary incentives to introduce new agents into the energy market and thus, promote more competitiveness, through eliminating barriers in activities where only the State was allowed. The objective is to efficiently serve energy needs which, according to the demand of a growing and more environmental-committed society, are the basis to increase the country's economic development going toward an energy transition Electricity Sector Regulatory Frame The structural energy reforms carried out in Mexico during the last years, afford the legal certainty for establishing a strong, reliable, sustainable, and economically competitive electricity sector. The main change after the Reforms, was the transformation of the two big monopolies, Petroleos Mexicanos (PEMEX) and the Electricity Federal Commission (CFE) into State Productive Enterprises which can participate in equal conditions within the different activities or their respective markets, and even, interact between themselves. Also, it should be considered the COP 21 1 international agreements on climate change related to the transition of a system based on primary fuels which generate a great amount of greenhouse gases (GHG) into a more sustainable and diverse energy system, less vulnerable to the changes of fossil fuels prices. Mexico has the necessary mechanisms to carry out a transition where more clean energies will be use; in that sense, a series of mandates established in the Electricity Industry Law (LIE, for its Spanish acronym) and in the Energy Transition Law (LTE, for its Spanish acronym) become the necessary legal basis to increase the share and regulation of clean energies 2 for electricity generation Political Constitution of the United Mexican States Mexico has a great potential of energy resources that can be used in the benefit of end users. The Energy Reform has eliminated the barriers which hindered the participation of new participants who, using more advanced technologies, now can participate in the energy markets. This reinforcement of the Political Constitution of the United Mexican States, in articles 25 and 27 3, which confer the State, through the Secretariat of Energy (SENER), the planning of the Electricity National System (SEN, for its Spanish acronym), and amends the economic model of the electricity market. The purpose of the Constitutional Reform is the improve the families' economy, broaden electricity coverage, ensure gas supply, increase investment and employment, reinforce the new state productive 1 Conference of the Parties of the United Nations Climate Change Conference. 2 Clean energies are those sources and generation processes defined as such in the LIE. 3 Article 25. [...] The public sector shall exclusively be in charge of those strategic areas established in Article 28, paragraph fourth of the Constitution. The Federal Government shall at all times keep ownership and control over agencies and public productive corporations that have been established. In the case of planning and control of the national power system, the public power transmission and distribution systems, as well as the exploration and exploitation of oil and other hydrocarbons, the Nation shall be empowered to carry on those activities pursuant to paragraphs sixth and seventh of Article 27 of this Constitution." Article 27. [...] The Nation shall exclusively carry out the planning and control over the national electric system, and over the power transmission and distribution utilities. No concession shall be granted in these activities, notwithstanding the power of the State to execute contracts with private parties in accordance with the laws, which shall determine the ways in which private parties may participate in all other activities related to the electric power industry. 18

20 enterprises PEMEX and CFE, and strengthen the governance of the State as the proprietor of the energy resources Electricity Industry Law The LIE is a regulation of the Political Constitution of the United Mexican States 4, issued in the Official Journal of the Federation (DOF, for its Spanish acronym) on August 11, Its main purpose is to regulate the planning and control of the SEN, the Transmission and Distribution Public Service (T&D), and other activities of the electricity industry. The enactment of this law strengthens the SENER's faculties in the planning process of the SEN 5, and establishes the necessary instruments to foster electricity industry development, where the generation and trade of electricity are provided in a free-competition regime. From the LIE's main Provisions, the following stand out: FIGURE MAIN PROVISIONS OF THE ELECTRICITY INDUSTRY LAW About authorities About Electricity Generation About Transmission and Distribution About Trading The SENER is empowered to establish, lead, and coordinate the energy policy of the country in electricity matter. The CRE is empowered to grant the permits referred to in this Law and to resolve on its amendement, revocation, transfer, extension, or termination. About the Planning and Control over the SEN The SENER will develop indicative programs for the installation and decommissioning of Power Stations, whose relevant aspects will be included in the Developmental Program for the National Electricity System. The State will exercise operational control over the SEN through the CENACE. Power Station with a capacity to 0.5 MW and Power Stations of any size represented by a Generator in the Wholesale Electricity Market require a permit granted by the CRE to generate elecricity. Those Generators representing Power Stations interconnected to the SEN shall: I. Sign the respective interconnection contracts, issued by the CRE; II. Operate their Power Stations comlying the instructions of the CENACE; III. Subject the maintenance of their Power Stations to the coordination and intructions of the CENACE, and IV. Notify the CENACE about the programmed decommissioning of their Power Stations. Transporters and Distributors are responsable of the National Transmission Grid and the General Distribution grids and will opérate their grids according to the CENACE s instructions. The State, through the SENER, Transporters, or Distributors may form partnerships or sign contracts with private parties to carry out, on behalf of the Nation, among other, the funding, instalation, maintenance, management, operation, and expansion of the necessary infrastructure to supply the Public Service of T&D. Trading comprises the provision of Electricity Supply to End Users; represent Excempted Generators in the Wholesale Electricity Market; carry out the transactions referred to in article 96 of the LIE, in the Wholesale Electricity Market; sign the contracts referred to in article 97 of this Law, with the Generators, Traders, and Qualified Users Participating in the Market, purchase transmission and distribution services based on Regulated Tariffs; purchase and alienate the Related Services not included in the Electricity Market, with the intermediation of thecenace, and other defined by the CRE. Source: SENER. The LIE also establishes the formation of a Wholesale Electricity Market (MEM, for its Spanish acronym), whose main objective is to afford transparency to every transaction between the electricity industry participants, as well as to warrant competitive prices between competitors and users, and other provisions described in the following figure: 4 Particularly of articles 25, fourth paragraph; 27, sixth paragraph; and 28, fourth paragraph. 5 Article 11. "The Secretariat of Energy is empowered to: [...] III. Lead the planning process and the devise of the Development Program of the National Electricity System." LIE. DOF. 19

21 FIGURE PROVISIONS ON THE WHOLESALE ELECTRICITY MARKET Wholesale Electricity Market About its Operation About the CENACE The CENACE will operate the Wholesale Electricity Market complying with the LIE. In the Wholesale Electricity Market, Generators, Traders, and Qualified Users Participating in the Market may carry out the transactions referred to in article 96 of the LIE, according to the Market Regulations. Invariably, the prices of the transactions signed in the Wholesale Electricity Market will be calculated by the CENACE based on the offers it received, under the terms of the Market Regulations. The CENACE may collect for the T&D services, Related Services not included in the Market and its own operational costs according to the Regulated Tariffs. The SENER will issue the Bases for the Electricity Market, the Regulations of the Market will lay out procedures which will help carrying out, at least, electricity sales and purchase transactions; Related Services included in the Wholesale Electricity Market; Power: Transmission Financial Duties; Clean Energies Certificates or, if the case, Pollutant Emissions Certificates. Based on the criteria for Safety Dispatch and economic efficiency, the CENACE will define the allocation and dispatch of the Power Stations and the Controllable Demand. Such allocation and dispatch will be performed regardless of the ownership of the Power Stations and the Controllable Demand. The CENACE is a public organ decentralized from the Federal Public Administration, with legal personality and its own assets, in charge of the SEN's operational control, the operation of the Market and of the open access and not unduly discriminatory, to the National Transmission Grid and to the General Distribution Grids. The CENACE is empowered to exercise control over the Operational Control of the SEN; operate the Wholesale Electricity Market under conditions that foster competition; define the allocation and dispatch of the Power Stations and the Controllable Demand; carry out auctions to sign Electricity Coverage Agreements between Governors and the representatives of the Loadcenters, among other. Source: SENER Law of the Coordinated Regulatory Organs in Energy Matters The Law of the Coordinated Regulatory Organs in Energy Matters sets the basis for the organization and operation of the Coordinated Regulatory Organs, which are the Hydrocarbons National Commission (CNH, for its Spanish acronym) and the CRE. In order to foster a competitive and efficient energy sector, the State will exercise its powers to regulate, technically and economically, electricity and hydrocarbons through those entities Energy Transition Law In 2015, fundamental changes happened in the Mexican electricity sector. In December, the Lower and Upper Houses approved the LTE 6, the missing piece of the set of laws derived from the constitutional reform on energy, and a meaningful complement to the LIE on reducing pollutant emissions, the participation of clean energies, and the necessary mechanisms for energy efficiency. The LTE restates the goal set in 2008 by the Law on the Use of Renewable Energies and Energy Transition Funding (LAERFTE, for its Spanish acronym) of achieving a 35.0% of electricity generation through clean energies by Besides, two intermediate goals were set: 25.0% for 2018, and 30.0% for Issued on December 24, 2015 in the DOF, 20

22 FIGURE MAIN OBJECTIVES OF THE ENERGY TRANSITION LAW Foresees the gradual increase of the share of Clean Energies in the Electric Industry in order to achieve the goals established on matter of cleanenergies generation and emissions reduction. Promote the sustainable use of energy during the final consumption and the energytransformation processes. Law for the Energy Transition Facilitate the compliance with the goals of Clean Energies and Energy Efficiency of this Law in an economically feasible way. Reduce, under economically feasible conditions, the generation of pollutant emissions while generating electricity. Lay out promotion mechanisms for clean energies and emissions reduction. Source: SENER. The LTE seeks to gradually incorporate the private sector's participation, relaxing the due dates for purchasing Clean Energy Certificates (CELs, for its Spanish acronym), and thus comply with the reduction of pollutants emitted, mainly, by industries with intensive use of electricity. It also allows to defer the settlement of certain amount of those CELs so suppliers and users would be able to diverse their options to purchase these certificates. As for Energy Efficiency, the LTE strengthens the National Commission for the Efficient Use of Energy (CONUEE, for its Spanish acronym), conferring it the promotion of the optimal use of energy, from its exploitation up to its consumption, and to propose to SENER the Energy Efficiency Goals and the mechanisms for their compliance. Likewise, the CONUEE has the power to devise and propose to SENER the Transition Strategy to Promote the Use of Cleaner Technologies and Fuels (the Strategy) and the National Program for the Sustainable Use of Energy (PRONASE, for its Spanish acronym). Transition Strategy to Promote the Use of Cleaner Technologies and Fuels To carry out the process of the transition strategy and comply with the objective mentioned above, the LTE is supported by strategies, programs, measures, and public policies which will enable the increase of clean energies and, thus, achieve the goals set. The Strategy is a planning instrument for the national energy policy on clean energies and energy efficiency, which is subjected to a continual improvement process that includes 21

23 the assessment of partial results 7, identification of any barriers hindering the achievement of its goals, identification of improvement opportunities, and adoption of corrective measure in case some the compliance indexes do not achieve the promised results. The Strategy shall establish the Goals to achieve an electricity consumption which can be met through an alternative portfolio that includes Energy Efficiency and a growing proportion of Clean Energies generation, under conditions of economic viability. Through the Clean Energy Goals and the Energy Efficiency Goals, the Secretariat fosters electricity generation from clean sources to achieve the levels set in the LGCC for the Electricity Industry. The Strategy shall include a long-term component, for a 30-year period, which defines the proposed scenarios to achieve the Clean Energy Goals and the Energy Efficiency Goals. It shall also include a mediumterm planning component for a 15-year period which should be updated every three years Organic Law of the Federal Public Administration (LOAPF, for its Spanish acronym) The LOAPF, in its Article 33, points out that SENER is responsible for establishing, leading, and coordinating the country's energy policy. Thereby, the SENER shall give priority to energy safety and diversification, as well as to energy saving and environmental protection. This article, in its Section V, signals SENER is bestowed to carry on the medium and long-term energy planning, an activity which shall consider sovereignty and energy safety criteria, the gradual reduction of environmental impacts from energy generation and consumption, a larger participation of renewable energies, energy savings, and a better efficiency of its generation and use, among other Planning Law This law establishes the basic regulations and principles to lead the National Development Planning, as well as the basis for the functioning of the National System of Democratic Planning which, according to article 4 of the Law, the Federal Executive is in charge of planning the national development CFE Law The Electricity Federal Commission Law is regulatory of article 25, fourth paragraph, of the Constitution, and of the Twentieth Transitory of the Decree by which varied provisions of the Political Constitution of the United Mexican States are amended and added, in energy matters, published in the DOF 8 on December 20, 2013; it is of public interest, and it is aimed to regulate the organization, administration, functioning, operation, control, assessment, and accountability of the State Productive Enterprise CFE. In 2015, there was a major transformation of the CFE. On February 16, the DOF published the statement of the SENER which refers to the Transitory Fourteenth of the CFE Law about the entry into force of a special regime for the enterprise, foreseen in the Law, that regulates the subsidiary productive enterprises and affiliates on their revenues, acquisitions, leasing, works and services, responsibilities, state profit, budget, and debt. The provisions for this Law are following described: 7 Article 26. The Strategy, the Program, and the PRONASE shall be revised annually, with the participation which corresponds to the Secretariat, the CRE, the CENACE, and the CONUEE. 8 For further detail, see 22

24 FIGURE MAIN PROVISIONS OF THE CFE LAW It aims to develop entrepreneurial, economic, industrial, and trading activities in the terms of its objective, generating economic value and profitability for the Mexican State as its owner. It aims to provide, under the terms of the applicable law, the public service for the transmission and distribution of electricity, on behalf and to the order of the Mexican State. It may carry out the necessary activities, operations, and services for the compliance with its own objective; with the support of its subsidiary productive enterprises and affiliated enterprises, o through the signature of contracts, agreements, alliances, or partnerships, or any other law act, with legal entities or individuals from the public, private, or social sectors, national or international, everything under the terms pointed out in the Law and the other applicable law provisions. It will have an Administrative Council and a General Director. Within the activities of generation, transmission, distribution, trading, and provisioning of basic supplies for the electric industry, the Commission shall subject to the strict legal separation established by the SENER to foster open access and the efficient operation of the electricity sector. It will count with subsidiary and affiliated productive enterprises dedicated to: - Service provision of the public transmission and distribution of electricity; - Activities for the generation and trading of electricity; - Activities which are not performed as a complement, help, or support of the main activities purveyed by the CFE, or in order to create a vehicle to consolidate a specific business; - Nuclear generation; and - Other, if the case, pointed out in the Regulation of the CFE Law. Source: SENER. Article Tenth of the LIE establishes CFE will be in charge of the activities of generation, transmission, distribution, trade, basic supply, qualified supply, last-resort supply, provision of primary supplies for the electricity industry, as well as for its auxiliary and related activities, but in a strictly independent way among them. Thereby, CFE will set the accounting, functional, and structural separation required by each of its divisions, regions, subsidiary productive enterprises, and affiliates, according to the LIE and under terms of strict legal separation established by the Secretariat of Energy, the regulation on economic competence, and the regulation the CRE establishes for that purpose. The Fourth Transitory of the LIE commands CFE to perform the accounting, operative, functional, and legal separation which corresponds to each of the activities of generation, transmission, distribution, and trade, and foresees that the SENER and the CRE -within the scope of their powers- will establish the terms under which the CFE will carry out such separation, which will be vertical among the different business lines, and horizontal among one same business line, according to the following: I. The activities of generation, transmission, distribution, and trade within CFE will observe a strict vertical separation, which shall be legal; II. III. Generation shall observe a legal separation, from a horizontal perspective, in a certain number of different business units, sufficient to foster the efficient operation and competitive atmosphere of the sector; and, The distribution activity must have a horizontal separation by region, which may be in accounting, operation and functional or legal terms, in such a way that it fosters the efficient operation of the sector 23

25 and provides information required for comparative analyses of performance and efficiency in operations 9. On January 11, 2016, the DOF published the structure and separation that CFE shall develop, which defines that, to foster the operational efficiency of the electricity sector, the CFE must create a certain number of generating companies, defined by the SENER in the agreements to allocate the corresponding assets, and which are described below: FIGURE NEW STRUCTURE OF CFE, INITIAL SEPARATION FOR GENERATION A subsidiary of affiliate being exclusively in charge of performing the Generating activities contemplated in the IEP's agreements, and to represent them in the Wholesale Electricity Market. An affiliate which will be the assignee of the Interconnection Legated Contracts representing them in the Wholesale Electricity Market under the personality of Intermediate Generation. At least four subsidiaries or affiliates in charge of performing the remaining generating activities in charge of the CFE. They will be assignees of the other owned stations. Source: SENER. The portfolio of Power Plants and contracts for each of the Generating companies, will be chosen by the SENER to ensure that each of these enterprises may participate in the MEM without holding any market power at regional or national level, and having similar conditions of financial sustainability and profitability, considering a balance mixture of technologies, fuels, efficiencies, and remnant lifespan, considering their economies at their scale and at their reach. In regard to CFE's separation on transmission and distribution, it is defined the provision of the Public Service of Electricity Transmission in charge of CFE, will be done through subsidiaries created for that sole purpose by CFE, and which can associate or sign contracts with subsidiaries, affiliates, and private parties to carry on, among other activities, the funding, installation, maintenance, management, operation, and expansion of the infrastructure need for providing the Public Service of Electricity Transmission in accordance with what is established in articles 57 and 63 of the CFE Law, and of the LIE. The Basic Supply activities will be performed through the subsidiary created for such purpose. The goods required for: invoicing, collection, and give support to the Users of the Basic Supply (and, if the case, Qualified Users when the service provided is Last-Resort Supply), will become part of that enterprise. Additionally, CFE may perform Trading activities other than Basic Supply (e.g. Supply to Qualified Users) through the number of enterprises it decides to. 9 For further detail, see 24

26 1.2. Regulatory Frame for the Devise of the Electricity Sector Outlook The preparation of this Outlook complies with the mandate of the Internal Regulation of the Secretariat of Energy, stipulated in the section "Of the faculties of the General Directorate of Planning and Energy Information" in its Article 24, Section XIV: Devise and submit for its approval by the hierarchical superior, the prospected projects in the medium and long term of the energy sector, including electricity, natural gas, liquefied natural gas, oil, and oil products, with a minimum planning horizon of fifteen years; The information contained in the Electricity Sector and Renewable Energies Outlooks, is placed in two horizons: historic and prospective. Historic information is obtained from different sources like the Energy Information System (SIE, for its Spanish acronym), the CRE, the CFE, and information provided by the Under secretariat of Electricity. Regarding the prospective information, a fundamental element for this planning document, it is based on the PRODESEN , issued by the SENER, and which is a planning industry of the SEN for the activities of generation, transmission, and distribution with a 15-year horizon. FIGURE INFORMATION SOURCES FOR THE DEVISE OF THE OUTLOOK Electricity Sector Outlook Historical Prospective 10 years 15 years Developmental Program for the National Electric System (PRODESEN) Energy Information System, SENER - Federal Electricity Commission - Energy Regulatory Commission Indicative Programfor the Installation and Decommissioning of Power Stations (PIIRCE) Programs for the Expansion and Upgrade of the National Transmission Grid and of the General Distribution Grids Internal Modeling Exercises Source: SENER Instruments to Foster Clean Energies in the Electricity Sector Mexico has a high economic and competitive potential of renewable energies opposite to other energy sources, increasing the energy matrix diversification. To achieve the goals of energy generation of 35.0%, it 25

27 is necessary to have a package of actions, instruments, and mechanisms to increase the energy matrix diversification, and which is in favor of a deeper penetration of renewable energies into the SEN. Likewise, the necessary basis shall occur to incentivize equitable competitiveness in the energy markets, considering all external effects, such as environmental impact, public health, and GHG emission. The latter, establishing the adequate financial mechanisms to promote the development of projects on clean energies, as the CELs, through auctions. Among the main instruments, nowadays the following are being enacted: FIGURE PLANNING INSTRUMENTS TO PROMOTE CLEAN ENERGIES National Strategy for Energy Transition and the Sustainable Use of Energy Transition Strategy to Foster the Use of Cleaner Technology and Fuels Planning Instruments Energy Sectoral Program Special Program for the Use of Renewable Energies Developmental Program for the National Electric System Strategic Program for the Formation of Human Resources in Energy Matter Source: SENER Auctions of the Electricity Market Auctions arise from a commitment of transparency and the principle of free competition in the MEM, giving thus, certainty to new investments which, in the long-term, will ensure the demand for those winning companies establishing less-polluting generation stations, favoring clean energies. Besides, they are a mechanism through which the load serving entities, are allowed to sign contracts in a competitive way, and under conditions of prudence in order to meet the needs of Power, Accumulative Electricity, and CELs. The Load Serving Entities (LSE) may participate in the Medium and Long-Term Auctions through the following figures: 26

28 a) Basic Services Supplier b) Qualified Services Supplier c) Last-Resort Supplier d) Qualified User Participant in the Market FIGURE MEDIUM AND LONG-TERM AUCTIONS Purpose of the Medium-Term Auctions Purchase in advance of the power and electricity to be consumed by the Basic-Supply Users, to reduce or eliminate their exposure to these products' prices in the short term. Objective of the Long-Term Auctions Allow the Basic-Services Suppliers to sign Contracts in a competitive manner, and under financial prudence, to serve the needs of Power, Accumulative Electricity, and CELs that shall be met through long-term contracts according to the requirements established by the CRE for such purpose. Allow the rest of the Entities Responsible for the Charge to participate in them at their own decision, and once the Compensation Chamber is established, in order to sign Contracts for amounts of Products in proportion to the portfolio of Power, Accumulative Electricity, ad CELs obtained for the Basic-Services Suppliers; and Allow who is signing this Contracts, as Sellers, to count on a stable source of payments which will contribute to support the funding of the required efficient investments to develop new Power Stations or to repower the existing ones. Source: SENER. The validity period of the contracts resulting from the Medium-Term Auctions is of three years. The validity period of the contracts resulting from the Long-Term Auctions will be: a) 15 years for Accumulative Power and Electricity, and b) 20 years for Clean Energies Certificate (CELs). Results of the First Auction The process of the first Long-Term Electricity Auction of the Wholesale Electricity that began in 2015, concluded on March 2016, according to the calendar of activities foreseen in the Call for Tender. The long-term coverage contracts were allocated to 11 enterprises, which have submitted the 18 winning proposals. These proposals competed along with 69 participants that submitted a total of 226 proposals. The winning enterprises were: Aldesa Energia Renovable, Consorcio Energia Limpia 2010, Enel Green Power, Energia Renovable Peninsula, Energia Renovable del Istmo II, Jinkosolar Investment, Photoemeris Sustentable, Recurrent Energy Mexico, Sol de Insurgentes, SunPower, and Vega Solar. In the first auction, a total demand of 5 million 380 thousand 911 clean-energy certificates were met, which represents 84.9% of what was initially requested by CFE; as well as 5 million 402 thousand MWh of power, which is 84.9% of the original demand. 27

29 This auctioned power is equivalent to 1.9% of the current generation in Mexico, with projects going from 18 to 500 MW to be in Yucatan, Coahuila, Guanajuato, Tamaulipas, Jalisco, Aguascalientes, and Baja California Sur. Results of the Second Auction On September 28, 2016 were published the results of the second auction in which 57 bidders participated; from these, the 23 winners submitted 56 proposals for solar, wind, and other clean power sources. These 23 companies came from 11 countries, Mexico included, and were allocated 2,871 MW of new installed capacity of clean energies and an investment of 4 billion dollars. It is worth to mention that there was a historic average price of clean energy of about USD per MWh, a highly competitive price worldwide. CFE submitted two of the winning proposals: Geothermal Stations Los Azufres III Phase II, located in Michoacán, and the combined-cycle station Agua Prieta II, in Sonora. Both stations will bring about 199,000 CELs and 199,000 MWh of energy, in addition to supplying 400 MW of power. With the results of the two electricity auctions, 15 states of the Mexican Republic will be benefited through the development of wind, solar, hydraulic, and geothermal power projects Clean Energies Certificates The Energy Reform led to a series of economic instruments which will promote investments on the generation of electricity through clean energies; these are the so-called CELs, which are described in the LIE as follows: A title issued by the CRE which authorizes the production of a defined amount of electricity from Clean Energies, and which help to comply with the consumption requirements of Load Centers 10. The main purpose of the CELs is to contribute in achieving the policy goals on the share of clean energies for generating electricity, at a minimum cost and based on the market mechanisms, and achieve a 35.0% of electricity generated through clean sources by Thereby, the winners who do not meet the quota of MWh generated through clean technology may prevent fines by purchasing CELs, since a CEL is equivalent to 1 MWh of clean energy. The CELs materialize into individual duties, the national goals of generating clean electricity, which are of 5.0% in 2018, and of 5.8% by National Inventory of Clean Energies and Atlas of Zones with High Potential of Clean Energies With the commitment of maximizing the use of renewable energies in Mexico, two key instruments arise to enable the decision making for new investments: the National Inventory of Clean Energies (INEL, for its Spanish acronym) and the Atlas of Zones with High Potential of Clean Energies (AZEL, for its Spanish acronym). The INEL is a system of statistical and geographical services for public access which gathers information about the annual generation per renewable energy and the estimate potential of electricity generation for 10 Article 3, General Provisions of the Electricity Industry Law. 28

30 the different sources of renewable energy. The INEL (formerly, INERE), is a public access platform which displays information gathered through maps at national level 11. Nowadays, it shows the map for solar potential, the map for wind-power potential, the map for geothermal potential, the map for tidal energy, and the map for biomass energy, in addition to an inventory of the projects currently operating which use these renewable sources for generating power, and an inventory of the projects in construction phase. The LTE establishes the annual publication of the AZEL, which shall display the country's zones with a high potential for Clean Energies; likewise, it is harmonized with the LIE, and will enable to localize, more precisely, those places for developing investments. On September 30, 2016, the advances for the devise of the AZEL were presented. This Atlas is a very important tool for the institutions and for developers interested in investing on clean-energies projects. Its objectives are: become a supporting instrument for investors in the planning of projects on clean-energy generation, and be a source for the devise of the indicative plans for the expansion and modernization of the National Transmission Grid (RNT, for its Spanish acronym) and the General Distribution Grids Research and Education Centers of the Energy Sector A key part to achieve an efficient energy transition, is fostering projects which generate aggregate value to the energy industry. Strengthening and promoting research centers and education afford the country with the necessary tools to reinforce the sector through the development of new technologies and the required human capital to carry on that transition. Mexico has research and education centers committed with the development of the energy sector and which, currently, are preparing diverse projects foster clean energies Mexican Centers for the Innovation in Renewable Energies The Mexican Centers for the Innovation in Renewable Energies (CEMIEs, for its Spanish acronym) arise from an initiative proposed by SENER and the National Council for Science and Technology (CONACYT, for its Spanish acronym), through the Sustainable Energy Fund (FSE, for its Spanish acronym), to fulfill the need to impulse research areas that will boost the use of renewable energies, such as: geothermal, solar, bioenergy, and tidal energies. The CEMIEs are national, comprehensive, and including projects that comprise the formation of partnerships where the existing national capabilities are coordinated and aligned, and where higher-education institutions, research centers, enterprises, among other, participate. These Centers are aimed to take advantage of renewable energies, and to consolidate and bind together the existing scientific and technological capabilities on those subjects, to subsequently raise the specialized human resources which will strengthen the research infrastructure

31 FIGURE MEXICAN CENTERS FOR THE INNOVATION IN RENEWABLE ENERGIES Ocean Bioenergy Solar CEMIEs Geothermal Wind Source: SENER National Nuclear Research Institute (ININ) The ININ is an institute which carries out research and development in nuclear science and technology. Since nuclear energy is a subject that concerns only to the State, this institute prepares sensitivity studies on the impact nuclear energy has over the electricity sector, and which are presented in this document National Institute of Electricity and Clean Energies (INEEL) Previously called Electric Research Institute (IIE, for its Spanish acronym), this institute restructuration was a mandate from the LTE whereby the Institute is assigned with new tasks and responsibilities to afford technical and scientific support to SENER in the formulation, conduction, and evaluation of the national policy on electricity matter, in general, and on clean energies. 30

32 FIGURE MAIN OBJECTIVES OF THE INEEL Seek to foster applied research and technology development to comply with the goals on clean-energy and energyefficiency matter, as well as to prepare a route sheet to form technical capabilities, of energy management, the devise and implementation of public policies on energy, and other disciplines needed to meet the needs of human capital in the electric industry. Coordinate and carry out studies and projects on scientific or technological research along with academic and research institutions, whether private or public, national or foreign, on energy, electric power, clean energies, renewable energies, energy efficiency, pollutant emissions generated in the electric industry, sustainability, systems for the transmission, distribution, and storage of energy, and systems related to operation. The institute will continue with its task of educating specialists and researchers within specialties areas, as well as the implementation of courses of specialization and updating of knowledges on science, technology, and management of the electric industry, and similar industries. Source: SENER. 31

33 2. Diagnosis of the Electricity Sector During the last decade, Mexico has significantly restructured its economic model to boost its economy based on Structural Reforms. The Energy Sector and its new reforms are key elements to foster the country's economic growth, since it will help to activate, safely and efficiently, every sector involved in the development of an economy undergoing expansion. This chapter presents a brief diagnosis for the Electricity Sector for a 10-year period, displaying these effects of the main macroeconomic variables on the decisions to strengthen a National Electricity System, appropriate to the society's demands Mexican Economy Diagnosis For the last decades, Mexico has been one of the most solid economies worldwide, despite the strong global economic slowdown. Regarding its population, since 2005, the country has had an annual growth rate of 1.3%, going from million people, to This moderate raise represents a meaningful impact on the demand for oil, its derivatives, and electricity. On the other hand, the Consumers Index Pricing, has remained in 4.1% annual average, during the last 10 years, due to the current monetary policy of the country, which ensures a generalized stability on the prices level (see Table 2.1). TABLE MAIN MACROECONOMIC VARIABLES OF MEXICO, (Different units) Macroeconomic variable Population (million people) Gross Domestic Product (Billion Pesos 2008) Average Exchange Rate (Pesos per dollar) Retail price (Average Annual Percent Variation) AAGR % % % n.a. AAGR: Average Annual Growth Rate Source: SENER with information from INEGI. The Gross Domestic Product (GDP) has displayed a growth of 2.7% throughout and, given the 2009 economic slowdown, it is necessary to boost economy through the support of the structural reforms and achieve, at the medium term, a GPD 12 growth of approximately 5.0%. The Energy Reform is strategic for the development of the Mexican economy, due to its importance for the functioning of every productive activity in the country, and to the impulse it can give them, e.g., the transportation of persons and merchandise, manufacturing, the performance of commercial establishments, services, factories, and households, and the electrification of teaching centers; in summary, the development of the Mexican energy reform is closely related to the social and economic growth of the country. 12 Figures published in the National Program for Developmental Funding

34 The exchange rate regarding American dollars has had two strong variations throughout the analyzed period, specifically in 2009, with an annual variation of 21.4%, and in 2015, with a 19.2% variation13. These increases have an impact on Mexico's foreign trade, in its production, and in the currency market, or like oil's sales value, or the purchase of imported hydrocarbons (see Figure 2.1). FIGURE MEXICO'S MAIN MACROECONOMIC VARIABLES, (Annual variation) Gross Domestic Product Population Average Exchange Rate Consumer Prices Source: SENER with information from INEGI Users, sales, and median prices of Electricity One of the commitments for this six-year term is to increase the percentage of population with access to electricity. By the end of 2015, CFE reported 39.7 million users, an increase of 3.0% regarding 2014 (equivalent to 1.16 million of annual customers). During the last years, the residential service has had the highest supply level of electricity, 88.6% from CFE's total clients; 9.8% from the trade sector; and 1.6% from the industrial, services, and agricultural sectors. On the other hand, the annual average growth rate during the last ten years had grown by 5.8% (see Figure 2.2). 13 This upward trend in the exchange rate is the globalized effect of the main economies regarding American dollar. 33

35 FIGURE ANNUAL BEHAVIOR OF CUSTOMERS BY SECTOR, (Percentage) Residential Trade Industrial Services Agriculture Source: SENER with information from CFE Electric Power Users The SEN is organized in nine regions constituting the Interconnected National System and the isolated systems of Baja California, Baja California Sur, and small isolated systems. The operation of these nine regions is in charge of eight control centers located in the cities of Mexico, Puebla, Guadalajara, Hermosillo, Gomez Palacio, Monterrey, and Merida; the two regions of Baja California are managed from Mexicali. From the 39.7 million users registered in 2015, the Eastern operational area has the largest share, 10.2 million users, equivalent to 25.8%; seconded by the Western are with 24.5% and 21.6% in the Central area, as displayed in the following figure: FIGURE USERS SHARE BY ELECTRICITY OPERATIONAL AREA, 2015 (Percentage) North 4.9% Baja California 3.3% Peninsular Northeast 4.2% 5.2% Baja California Sur 0.7% Central 21.6% Northwest 9.9% Western 24.5% Eastern 25.8% Source: SENER with information from CFE. 34

36 The Peninsular and Baja California Sur areas have had the highest average annual growth rate (AAGR), 4.8%, throughout On the contrary, the Central and Western areas had the lowest AAGR during the last ten years, with 2.0% and 2.2%, respectively. This, due to the matureness of the electricity market and to the historic population concentration of these regions, which have not had significant variations, and are broadly covered. Worldwide, the SEN recorded an AAGR of 2.7% from 2005 to Between 2014 and 2015, a total of 1.2 million users were added thanks to the regularization programs and to an expansion of the electricity coverage (see Table 2.2). TABLE ELECTRICITY USERS BY OPERATIONAL AREA, (Million users) Area/Year AAGR Central % Eastern % Western % Northwest % North % Northeast % Peninsular % Baja California % Baja California Sur % SIN % SEN % Baja California Sur includes Mulegé. Totals may not include due to rounding up. Preliminary information by the end of Source: SENER with information from CENACE. By entities, the ones with the largest concentrations are: Estado de México with 11.2% of the domestic share; Mexico City, 7.7%; Jalisco, 7.0%; Veracruz, 6.7%; and Puebla with 5.0%. On the contrary, the states with the smallest share, and smallest number of users registered, were: Campeche, Colima, and Baja California, with a 0.7%, each (see Table 2.3). 35

37 TABLE ELECTRICITY USERS BY FEDERAL ENTITY, (Million users) Entity/Year Domestic Share Estado de México % Ciudad de México % Jalisco % Veracruz % Puebla % Guanajuato % Nuevo León % Michoacán % Chiapas % Oaxaca % Tamaulipas % Baja California % Chihuahua % Guerrero % Sinaloa % Sonora % Coahuila % Hidalgo % San Luis Potosí % Yucatán % Tabasco % Morelos % Querétaro % Quintana Roo % Zacatecas % Durango % Nayarit % Aguascalientes % Tlaxcala % Campeche % Colima % Baja California Sur % Totals may not coincide due to rounding up. Source: Energy Information System (SIE) Electricity Sales In 2015, the CFE reported a decrease of 9.6% on its income from electricity sales, due to the decrease on industrial, commercial, and domestic tariffs throughout the year 14, related to a reduction in the prices of the fossil fuels used to generate electricity. 14 CFE Annual Report

38 This behavior of low prices for electricity, and the implementation of programs for reducing losses, have enabled the trade, medium-size industry, and domestic sectors will display meaningful increases in their consumed-energy volume. Electricity Sales by Sector In 2015, electricity sales increased 2.0% (equivalent to 4,185.9 GWh) regarding the previous year, reaching 212,200.8 GWh. The medium-size-enterprise sector had the highest growth, whose sales' share was of 38.3% from the total, 26.4% corresponded to the residential sector, 19.4% to big industry, 7.0% to commercial, 4.7% to agriculture, and 4.2% public services (see Figure 2.5). FIGURE COMPOSITION OF ELECTRICITY SALES BY SECTOR, 2015 (GWh) Services 4.2% Agriculture 4.7% Trade 7.0% Medium-size enterprise 38.3% Residential 26.4% Big industry 19.4% Source: SENER with information from the SIE. During , the sales' annual growth was of 2.3%. The services sector had the highest AAGR, 3.4%, and big-industry, the lowest, 0.9% (see Table 2.4). TABLE SECTORAL BEHAVIOR OF THE DOMESTIC ELECTRICITY SALES, (GWh) Sector/ Year AAGR Domestic Total 169, , , , , , , , , , , % Public Services 6, , , , , , , , , , , % Agricultural Pumping 8, , , , , , , , , , , % Trade 13, , , , , , , , , , , % Residential 42, , , , , , , , , , , % Industrial 99, , , , , , , , , , , % Big Industry Mediumsize enterprise 37, , , , , , , , , , , % 61, , , , , , , , , , , % Source: SIE, SENER. 37

39 The trade sector, even if it has shown an AAGR of 1.3% during , between 2014 and 2015 increased its sale by 6.1% thanks to the electricity regularization programs in diverse points of the country (see Figure 2.5). FIGURE SECTORAL BEHAVIOR OF THE DOMESTIC ELECTRICITY SALES, (GWh) 169, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , AAGR = 2.3% Services 3.4% Agricultural 2.2% Trade 1.3% Residential 2.8% Industrial 2.1% Source: SIE, SENER. Electricity Sales by Region Regarding sales by region, the Northeast region concentrated the largest share of sales at domestic level, with 24.6% (52,128.4 GWh), seconded by the Central-Western region with 23.6% (50,099.2 GWh). The Central region came third with 22.9% of the sales, equivalent to 48,657.7 GWh; the South-Southeast had 15.3% (32,572.2 GWh), and the Northwest region concentrated 13.5% (28,743.4 GWh). Estado de México had the largest share, 8.6% of the domestic total, followed by Nuevo León with 8.4%, and Mexico City with 6.8%. Furthermore, Colima, Nayarit, and Campeche had the smallest share, with 0.8%, 0.7%, and 0.6%, respectively (see Figure 2.6). 38

40 FIGURE STRUCTURE OF THE DOMESTIC SALES BY FEDERAL ENTITY AND STATISTIC REGION, 2015 (GWh, percentage distribution) 7.7% 5.9% 22.8% Baja California Sur 17.2% Durango Sinaloa 20.1% Tamaulipas 34.8% Baja California 22.6% Coahuila Chihuahua 34.7% Sonora 34.3% Nuevo León Northwest 28,743.4 GWh Northeast 52,128.4 GWh 4.1% 8.1% 9.1% Campeche Oaxaca 3.1% 3.6% 5.4% 4.9% 9.8% 11.6% Nayarit Colima Aguascalientes Zacatecas 9.4% 10.7% 10.6% 13.8% Guerrero Chiapas Yucatán Tabasco 13.2% 22.7% 25.7% Querétaro San Luis Potosí Michoacán Guanajuato Jalisco 3.8% 5.3% 7.9% 15.6% Tlaxcala Morelos Hidalgo 34.1% South-Southeast 32,572.2 GWh Quintana Roo Veracruz Central-Western 50,099.2 GWh 29.7% Puebla Ciudad de México 37.7% Estado de México Central 48,657.7 GWh Source: SIE, SENER Electricity Average Prices In 2015, the availability of natural gas and its low prices resulted in a reduction of the electricity average prices. This situation fostered the process of progressive replacement of fuel oil and diesel with cheaper energy sources, like natural gas, and obtain thus, more benefits. 39

41 In 2015, the average price for electricity decreased approximately 11.9% regarding 2014, reaching 1.4 pesos per kilowatt hour. The trade and industrial sectors displayed reductions of 7.7% and 19.8%, respectively. On the other hand, the services sector has kept a growth rate of 6.0% through the ten years, while the residential kept a constant AAGR of 3.0% (see Figure 2.7). FIGURE AVERAGE ELECTRICITY PRICES BY TARIFF SECTOR (Pesos/kilowatt-hour) % 6.0% % 4.1% 4.1% 3.5% Trade Services Medium-size enterprise Residential Big industry Agriculture Industrial Source: SIE, SENER. Regarding operational area, CENACE reported that, in 2015, the Peninsular area recorded the highest average price for electricity with 2.07 pesos per kilowatt-hour, which contrasts with the Northwest area, which reached just 1.68 (see Table 2.5). TABLE AVERAGE ELECTRICITY PRICE BY OPERATIONAL AREA (Pesos/kilowatt-hour) Year/ Baja Baja California Operational Central Eastern Western Northwest North Northeast Peninsular SIN California Sur Area SEN Source: SENER with information from PRODESEN

42 2.3. Electricity Consumption and Demand Electricity demand is defined as the instant request to a power electric system, normally expressed in MW, for electricity consumption, which is the electric power used by all or a part of a facility during a given period time 15 and is expressed in MWh. The main difference is that, the demand is an average measure of the electricity consumption rate, and consumption is the measure of the total electricity consumption Electricity Consumption The growth in the electricity consumption is strongly related to the country's economic growth. This is explained because Mexico's economic performance is related to the productive activities that develop in the industrial, trade, services, agriculture, among other sectors, which require electricity to be carried out. Between , the GDP grew 2.7% average annual, while the consumption of electricity grew at a 3.0% rate, as displayed in Figure FIGURE GDP AND ELECTRICITY CONSUMPTION, (Annual rate) Gross Domestic Product AAGR 2.7% Electricity consumption AAGR 3.0% Source: SENER with information from CENACE and INEGI. Electricity consumption is the annual total of energy sales, remote self-supply, sales related to the reduction of non-technical losses, import, loss reduction, and own-uses. The consumption recorded in the SEN in 2015 was of 288,232 GW, 2.9% more regarding For the Interconnected National System (SIN, for its Spanish acronym), the operational areas with the higher consumptions in 2015 were: Western, with 22.6% (65,220 GWh); Central with 18.6% (53,649 GWh); and Eastern with 16.2% (46,587 GWh). On the other hand, the Peninsular area had la smallest share with 4.0% (11,617 GWh) from the total recorded by the SEN. The areas of Baja California and Baja California Sur reached, jointly, 5.4% of the share (see Figure 2.9)

43 FIGURE SHARE IN ELECTRICITY CONSUMPTION BY OPERATIONAL AREA (Percentage) Northwest 7.5% North 8.2% Northeast 17.4% Baja California 4.6% Western 22.6% Peninsular 4.0% Eastern 16.2% Central 18.6% Baja California Sur 0.9% SIN: 272,564 GWh Source: SENER. SEN: 288,232 GWh As for the behavior observed on the consumption of every SEN's operational area, Baja California Sur has the highest AAGR during , with 5.9%, reaching 2,546 GWh. The Peninsular area also displays a high growth with 5.2% for this period, but had an increase of 9.2% between 2014 and 2015, going from 10,635 GWh in 2014 to 11,617 GWh in The Central Area has kept a growth rate of 1.3%, the lowest in the decade, as a result of a strong population concentration in the region, which limits its expansion and its electricity demand's increase. Between 2014 and 2015, its consumption increased only 0.8% (421 GWh), recording 53,649 GWh, as displayed in the following table: TABLE BEHAVIOR OF ELECTRICITY CONSUMPTION BY OPERATIONAL AREA, (GWh) Area/Year AAGR Central 49, , , , , , , , , , , % Eastern 36, , , , , , , , , , , % Western 47, , , , , , , , , , , % Northwest 15, , , , , , , , , , , % North 18, , , , , , , , , , , % Northeast 38, , , , , , , , , , , % Peninsular 7, , , , , , , , , , , % Baja California 10, , , , , , , , , , , % Baja California Sur 1, , , , , , , , , , , % SIN 212, , , , , , , , , , , % SEN 224, , , , , , , , , , , % Source: SENER with information from PRODESEN Table 2.7 shows the behavior of the capacity to serve remote self-supply loads, that is, the behavior of selfsupply plants which inject power into the transmission grid to supply other consumption centers located in a site other than the one of the generating plant. During the last ten years, remote self-supply has grown potentially in every operational area, like in the Northwest area, which has increased 82.6%, or Baja California, with an AAGR of 32.4%. 42

44 TABLE REMOTE SELF-SUPPLY ELECTRICITY, (GWh) Area/Year AAGR Central 1, , , , , , , , , , , % Eastern , , , , , , , , , , % Western 1, , , , , , , , , , , % Northwest , , % North 1, , , , , , , , , , % Northeast 3, , , , , , , , , , , % Peninsular % Baja California % Baja California Sur n.a. Source: SENER with information from PRODESEN Electricity Losses One of the main objectives in an electric system is to reduce electricity losses, technical as well as nontechnical ones. The former is the result of heating the system's elements which conduct and transforms electricity; non-technical losses have place mainly during trading, due to illicit usage of electricity, measurement faults, and billing errors. Per each operational area, diverse actions are carried out to reduce losses, such as constructing new backbones, recalibrating circuits, replacing obsolete transformers, regularization of services in different areas with the support of the competent authorities, and the replacement of electromechanical meters with electronic ones, among other. From 2014 to 2015, the Central, Western, Northwest, and North areas have reduced their electricity losses, contrary to the Eastern, Northeast, Peninsular, Baja California, and Baja California Sur areas, which must make great efforts to reduce such losses (see Table 2.8 and Figure 2.10). TABLE ELECTRICITY LOSSES BY OPERATIONAL AREA, (GWh) Area/Year AAGR Central 14, , , , , , , , , , , % Eastern 6, , , , , , , , , , , % Western 5, , , , , , , , , , , % Northwest 1, , , , , , , , , , , % North 2, , , , , , , , , , , % Northeast 4, , , , , , , , , , , % Peninsular 1, , , , , , , , , , , % Baja California 1, , , , , , , , % Baja California Sur % Source: SENER with information from PRODESEN

45 FIGURE ELECTRICITY LOSSES, (GWh) 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, Central Western Eastern Northeast North Northwest Peninsular Baja California Baja California Sur Source: SENER with information from PRODESEN Seasonal Behavior Electricity consumption in 2015 had three periods with different seasonal behaviors. The first one, from January to March, was characterized by a decrease of 1,816.8 GWh in February. The second period, between April and September, concentrated 53.7% of the annual consumption, and kept an upward behavior. The third, and last, period, from October to December, had a downward trend to adjust to figures similar to the ones in January (see Figure 2.11). FIGURE SEN'S MONTHLY GROSS CONSUMPTION, 2015 (GWh, Percentage) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 27, , , , , , , , , , , ,988.2 Oct 8.7% Nov 7.7% Dec 7.6% Jan 7.6% Feb 6.9% Mar 7.8% Sep 9.0% Aug 9.6% Jul 9.3% Apr 8.1% May 8.8% Jun 8.9% Source: SENER with information from PRODESEN

46 Demand of the National Electricity System As one of its main objectives, the Energy Reform aims to improve the economy of Mexican families and, facing a growing demand for electricity, shall foster mechanisms to serve this demand efficiently and at a low cost. Diverse factors, already described in the previous sections, must be considered to estimate the electricity demand, such as the behavior of the sales in the different zones of the country, electricity losses, the historic behavior of the load and diversity factors, scenarios of sectorial consumption of electricity, among other. Furthermore, it is also necessary to determine the required capacity considering temporary variations (seasonal, weekly, daily, and hourly) to meet the year's maximum demand, that is, the maximum value of the demands presented within a time hour in the year for each area. According to the CENACE's figures, on January 1st, 2015 at 9:00 hours was observed the minimum demand level in the SIN, with a value of 18,341 MWh/h: while on August 14, at 17 hours was recorded the maximum level with a value of 39,840 MWh/h. Coincident Maximum Demand The coincident maximum demand is the addition of the demands recorded in the operational areas in the sales instant when the SEN's maximum demand occurs. Such value is lower than the addition of the annual maximum demands of each area since they occur at different moments. The coincident maximum demand recorded in 2015 for the SIN was of 39,839.8 MWh/h, 2.2% more than in For the SEN, under the assumption that every control region is interconnected, the demand was of 42,648.8 MWh/h, from which the North, Eastern, and Central areas concentrated 56.4% with 9,151.2 MWh/h, 7,984.7 MWh/h, and 6,931.6 MWh/h, respectively. The rest is distributed in the areas of Northeast with 6,082.0 MWh/h, Western with 3,935.9 MWh/h, and Peninsular with 1,610.9 MWh/h. Finally, the areas of Baja California and Baja California Sur had a share of 6.6% (2,890 MWh/h), (see Figure 2.12). FIGURE SEN'S COINCIDENT MAXIMUM DEMAND, 2015 (MWh/h) North 21.5% Northeast 14.3% Northwest 9.2% Western 9.7% Eastern 18.7% Central 16.3% Peninsular 3.8% Baja California 5.6% Baja California Sur 1.0% SIN: 39,839.8 MWh/h Baja California Sur includes La Paz and Mulegé. Source: Prepared by SENER with data from CENACE. SEN: 42,648.8 MWh/h 45

47 Gross Maximum Demand Gross maximum demand is defined as the power to be generated or imported to meet the users' requirements, transmission losses, and the generation plants' own-uses. In the SIN, it increased 3.1% between 2005 and 2015, being the area of Baja California Sur the one which recorded the largest growth, 6.4% in that same period (see Table 2.9). The Peninsular and Northeast area displayed growth rates of 5.1% and 4,8%, respectively; while the Central area remain with the lowest growth, 0.1%, given the concentration and economic maturity of this area during the last decade. TABLE BEHAVIOR OF THE GROSS MAXIMUM DEMAND, (MWh/h) Area/Year AAGR Central 8, , , , , , , , , , , % Eastern 5, , , , , , , , , , , % Western 7, , , , , , , , , , , % Northwest 2, , , , , , , , , , , % North 2, , , , , , , , , , , % Northeast 6, , , , , , , , , , , % Peninsular 1, , , , , , , , , , , % Baja California 1, , , , , , , , , , , % Baja California Sur % SIN 31, , , , , , , , , , , % Source: Prepared by SENER with data from CENACE 2.4. Infrastructure of the National Electricity System The new electricity market seeks to impulse works on electrical infrastructure which ensure electricity supply with the cheapest possible generating costs and the largest share of clean energies, in order to reduce the strong dependency on fossil fuels. To take advantage of the prices and availability of natural gas, during the last years, the development of infrastructure for conveying fuel has been fostered to rise electricity generation with new projects, or by upgrading some power plants fueled with natural gas Installed Capacity of the SEN In 2015, the installed capacity of the electricity sector increased 4.0% regarding what was recorded in 2014, reaching 68,044.0 MW, equivalent to 2,519 MW of new capacity. In this period, clean technologies increased 6.9%, related to the fast growth of wind and geothermal power technologies. Hence, the annual growth of conventional technologies was of 2.8%, mainly fostered by the expansion of combined-cycle power plants (see Figure 2.13). 46

48 FIGURE SEN'S INSTALLED CAPACITY 16, (MW) 25,000 20, ,452.1 MW C: 47,437.9 MW L: 18,014.3 MW 15, ,044.0 MW C: 48,778.4 MW L: 19,265.7 MW 10,000 5,000 0 Combined cycle Thermal conventional Hydroelectric Coal fueled Gas turbine Wind power Nuclear Internal combustion Geothermal Bioenergy Fluidized bed Efficient cogeneration Solar, FR, FIRCO and GD KERS: kinetic energy recovering system; FIRCO: Risk-Sharing Fund (for its Spanish acronym); DG: Distributed generation. Source: SENER. From the total power-generation fleet (68,044.0 MW), 71.7% corresponds to plants with conventional technologies, and 28.3% to clean technologies. In order of participation, combined-cycle plants had a 35.3% share (24,042.7 MW), seconded by conventional thermal with 18.7% (12,710.7 MW), and hydroelectric with 18.4% (12,488.5 MW), (see Figure 2.14). 16 Includes mobile plants, the use of sugarcane bagasse and black liquor as fuels, according to the Law for the Promotion and Development of Biofuels. 47

49 FIGURE INSTALLED CAPACITY BY TECHNOLOGY, 2015 (Percentage) Hydroelectric 18.4% Coal fueled Gas 7.9% turbine 7.2% Wind power 4.1% Internal combustion and Fluidized bed 2.6% Thermal conventional 18.7% Nuclear 2.2% Bioenergy y Efficient cogeneration 2.0% Combined cycle 35.3% Geothermal, Solar, FIRCO, GD and FR 1.6% Source: SENER. By the end of December 2015, from the total generating infrastructure, 61.6% corresponded to CFE's plants, 19.4% to Private parties 17, and 19.0% to IEPs, as it can be observed in the following figure: FIGURE SEN'S INSTALLED CAPACITY BY MODALITY, 2015 (Percentage) IEPs 19.0% Self-supply 10.5% Cogeneration 5.4% Export 2.1% Continuous own-uses 0.7% CFE 61.6% Other modalities 0.7% Small production 0.1% Source: SENER. Between 2005 and 2015, the SEN's installed capacity grew at a 2.4% annual rate, as a result of the availability of energy resource, and to the growth of an infrastructure in line with the electricity sector's modernization. The modalities with the largest growth rate are: cogeneration (9.8%), self-supply (6.8%), and IEPs (6.0%), which means a strong share of the private sector. The modality of continuous own-uses displays an AAGR of -1.4% (see Table 2.10 and Figure 2.15). 17 Private parties under the modalities: self-supply, cogeneration, export, continuous own-uses, small production, and other modalities (distributed generation, rural systems not interconnected reported by FIRCO, and generators with permits granted in 2016). 48

50 TABLE BEHAVIOR OF THE SEN'S INSTALLED CAPACITY BY MODALITY, (MW) Modality/Year AAGR Total 53, , , , , , , , , , , % CFE 38, , , , , , , , , , , % IEPs 8, , , , , , , , , , , % Continuous Own-Uses % Self-supply 3, , , , , , , , , , , % Cogeneration 1, , , , , , , , , , , % Export 1, , , , , , , , , , , % Small Production n.a. n.a. n.a. n.a. n.a n.a Other modalities n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a. Source: SENER. 70,000 FIGURE BEHAVIOR OF THE SEN'S EFFECTIVE CAPACITY, (MW) 60,000 50,000 40,000 30,000 20,000 10, Small production Other modalities Continuous own-uses -1.4% Export 0.6% Cogeneration 9.8% Self-supply 6.8% IEPs 6.0% CFE 0.6% Source: SENER. CFE During the last decade, CFE's installed capacity, including IEPs, grew at an annual rate of 1.7%. By the end of 2015, it had an infrastructure of 188 plants, from which 159 belonged to CFE, and 29 managed by the IEPs, with a total 1,020 generating units (54,852.2 MW). Within the technologies which have evolved the most during , wind-power stations stand out, with a growth of 78.1%, and internal-combustion, with 7.0%. As for combined-cycle plants, they keep an annual growth of 5.2%, due to the constant upgrading of the new productive enterprise. As it can be observed in Table 2.11, conventional technologies have considerably reduced their growth throughout the decade, giving way to clean technologies. 49

51 TABLE BEHAVIOR OF CFE'S 18 EFFECTIVE CAPACITY BY TECHNOLOGY, (MW) Technology/ Year AAGR Total 46, , , , , , , , , , , % Thermal 28, , , , , , , , , , , % Steam 12, , , , , , , , , , , % Combined Cycle 13, , , , , , , , , , , % CFE 5, , , , , , , , , , , % IEP 8, , , , , , , , , , , % Gas Turbine 2, , , , , , , , , , , % Internal Combustion % Dual 2, , , , , , , , , , , % Coal Fueled 2, , , , , , , , , , , % Nuclear 1, , , , , , , , , , , % Geothermal % Wind Power % CFE % IEP n.a Hydroelectric 10, , , , , , , , , , , % Photovoltaic n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a Source: SIE, SENER. In 2015, CFE upgraded four generating units which used fuel oil and were upgraded to natural gas, and it is expected that throughout 2016, three other units will finish their upgrade. By the end of 2015, CFE reported additions for MW, modifications for MW, and decommissioning for MW, from which 266 were transferred to Grupo Fénix (previously, LyFC), (see Table 2.12). 18 Includes IEPs; includes information from the extinct Luz y Fuerza del Centro. 50

52 TABLE CFE'S ADDITIONS, MODIFICATIONS, AND DECOMMISSIONING CAPACITY, 2015 Station Capacity (MW) Additions Unit Technology Date of addition, upgrade, or decommissioning Location Emergency Mobile U. UME-16 y UME-18 (Santa Rosalía) y 19 Internal Combustion 01/01/2015 Baja California Sur Emergency Mobile U. UME-17 (Los Cabos) Internal Combustion 01/01/2015 Baja California Sur Salamanca Cogeneration 1/ , 2 y 3 Gas Turbine 26/01/2015 Guanajuato Los Azufres GeoThermal 01/03/2015 Michoacán Emergency Mobile U. UME-05 (CT Valle de México) Turbojet mobile 02/06/2015 Estado de México Emergency Mobile U. UME-06 (CTG Xul-Ha) Turbojet mobile 02/06/2015 Quintano Roo Emergency Mobile U. UME-07 (CI Santa Rosalía) Gas Turbine mobile 10/06/2015 Baja California Sur Emergency Mobile U. UME-08 (CI Guerrero Negro II) Gas Turbine mobile 10/06/2015 Baja California Sur Sureste I (La Mata) IEP U's Wind Power 13/06/2015 Oaxaca Los Humeros GeoThermal 07/07/2015 Puebla Emergency Mobile U. UME-19 (Santa Rosalía) Internal Combustion 01/10/2015 Baja California Sur Emergency Mobile U. UME-20 (Santa Rosalía) Internal Combustion 01/10/2015 Baja California Sur Emergency Mobile U. UME-21 (Los Cabos) Internal Combustion 01/10/2015 Baja California Sur Upgrades San Lorenzo Potencia 2/ Combined Cycle 01/02/2015 Puebla Laguna Verde 2/ Nuclear 01/01/2015 Veracruz Tepexic 6/ y 2 Hydroelectric 01/04/2015 Puebla Portezuelos II 6/ Hydroelectric 01/04/2015 Puebla Huinalá II 7/ Combined Cycle 01/09/2015 Nuevo León Decommissioning Ciudad Obregón 3/ Gas Turbine 01/02/2015 Sonora Los Azufres 5/ , 4, 5 y 9 GeoThermal 01/03/2015 Michoacán San Lorenzo Potencia 4/ y 4 Combined Cycle 01/02/2015 Puebla Taller DPM S-800-1, S-300-1, S / 1.2 1, 2 y 3 Internal Combustion 01/10/2015 mobile Almacen de Tenayuca S / Internal Combustion 01/10/2015 mobile CENACE T / Internal Combustion 01/10/2015 mobile S.R. Gen. Term. Central S / Internal Combustion 01/10/2015 mobile La Yesca S-150-6, S / y 2 Internal Combustion 01/10/2015 mobile Los Cabos S-150-4, S / y 2 Internal Combustion 01/10/2015 mobile Penal Islas Marías T y T / y 2 Internal Combustion 01/10/2015 mobile Santa Rosalía S / Internal Combustion 01/10/2015 mobile Chetumal T / Internal Combustion 01/10/2015 mobile Baja California Sur T / Internal Combustion 01/10/2015 mobile Santa Rosalía CFE-OT / Gas Turbine mobile 01/10/2015 Baja California Sur Transfer to Grupo Fénix (former extinct LyFC) Necaxa U's Hydroelectric 01/12/2015 Puebla Patla , 2, y 3 Hydroelectric 01/12/2015 Puebla Tepexic , 2, y 3 Hydroelectric 01/12/2015 Puebla Lerma (Tepuxtepec) , 2, y 3 Hydroelectric 01/12/2015 Michoacán Alameda 7.0 1, 2, y 3 Hydroelectric 01/12/2015 Estado de México Total / Currently, gas turbine. 2/ Increase of effective capacity. 3/ Retirement of the unit. 4/ Decrease on the effective capacity. 5/ Retirement of units. 6/ Recovering of the effective capacity. 7/ Increase of the effective capacity. 8/ Retirement of the unit. Source: CFE. 51

53 Private Parties By the end of 2015, the CRE authorized 576 permits, from which 381 were for self-supply, 87 for cogeneration, 36 for imports 19, 33 for continuous uses, 28 for IEPs, 6 for small production, and 5 for exports. In total, 28,015.2 MW of capacity were authorized, mainly concentrated in the IEPs and self-supply modality, as shown in the following figure: FIGURE PERCENTAGE DISTRIBUTION OF AUTHORIZED PERMITS 20 AND AUTHORIZED CAPACITY BY MODALITY, 2015 Export 0.9% Self-supply 35.6% Cogeneration 15.1% Self-supply 66.1% Permits authorized by the end of 2015 Import 5.15% Small production 1.0% Authorized capacity by the end of 2015 Independent 28,015 MW production 50.4% Cogeneration 13.1% Source: SENER with information from the CRE. Continuous own-uses 5.7% Independent production 4.9% Continuous own-uses 1.8% Import 0.8% Small production 0.3% Regarding the behavior displayed by the different private generators during the last decade, they have grown at an AAGR of 6.2%. Cogeneration has had the highest growth rate, 9.8%, contrary to continuous own-uses which has fallen -1.4% (see Table 2.13). TABLE BEHAVIOR OF THE PERMITTEES' CAPACITY FOR ELECTRICITY GENERATION, (MW) Modality/Year AAGR Total 7, , , , , , , , , , , % Continuous Own-Uses % Self-supply 3, , , , , , , , , , , % Cogeneration 1, , , , , , , , , , , % Export 1, , , , , , , , , , , % Small Production n.a. Source: SENER with information from the CRE. From 2014 to 2015, self-supply modality increased 22.8% (1,325.8 MW) its operational capacity, reaching 7,129.5 MW (see Figure 2.18). 19 Regarding capacity, this is considered as maximum import demand; for generation, it is considered as imported energy (not generated in the country). 20 Considers under operation, under construction, and about to start works. 52

54 FIGURE BEHAVIOR OF THE PERMITTEES' CAPACITY FOR ELECTRICITY GENERATION, (MW) Self-supply 6.8% Cogeneration 9.8% Export 0.6% Continuous own-uses -1.4% Small production ,000 2,000 3,000 4,000 5,000 6,000 7,000 Source: SENER with information from the CRE. Under the Presidency's regional division, installed capacity was distributed into five regions detailed below: Northwest: in 2015, concentrated of the total capacity (9,581.9 MW), being Baja California the state with the largest share. This region had an important contribution from conventional technologies, but solar energy has had, in the past few years, the highest increase of installed capacity, given the prevailing geographic conditions in that region of the country. Northeast: by the end of 2015, this region's installed capacity reached 16,587.5 MW, equivalent to 24.4% of the total domestic capacity, where combined cycle had the largest share. Central-Western: had an 18.3% of the installed capacity recorded in 2015 (12,443.1 MW), and is a region characterized for having the second largest share of hydroelectric stations; only the state of Nayarit has three big power stations with a capacity of a little over 2,400 MW. Central: by the end of 2015, the central region had the smallest share with only 8.2% (5,565.4 MW) from the SEN's total installed capacity. Due to its geographic location in the national territory and its growing population density, states like Morelos and Mexico City have a limited infrastructure, hence, there were no considerable increases in the last years. South-Southeast: this region has a strong share from clean technologies, having the largest concentration of SEN's infrastructure, 34.9% (23,735.6 MW). Within the prevailing technologies, hydroelectric power stations are concentrated in the states of Guerrero, Chiapas, and Oaxaca, with approximately 7,000 MW of capacity. Stands out its strong participation from wind power, and the only nuclear-power station of the country (see Figure 2.17). 53

55 FIGURE INSTALLED CAPACITY BY FEDERAL ENTITY AND REGION, 2015 (MW) 10.4% 18.5% Baja California Sur 10.6% 16.7% Durango Sinaloa 16.8% Nuevo León 28.3% Sonora 21.1% Chihuahua Coahuila 42.8% Baja California 34.8% Tamaulipas Northwest 9,581.9 MW Northeast 16,587.5 MW 1.4% 2.8% 5.3% 6.5% Quintana Roo Tabasco 0.1% 0.4% 5.2% 5.6% 7.5% 15.8% Aguascalientes Zacatecas Jalisco 11.8% 19.5% 21.1% Campeche Yucatán Oaxaca Querétaro Guerrero 20.3% 22.2% 22.9% Central-Western 12,443.1 MW Michoacán Guanajuato Nayarit Colima San Luis Potosí 0.4% 1.6% 6.6% 18.9% 26.0% Morelos Tlaxcala Ciudad de México Puebla 31.6% South-Southeast 23,735.6 MW Chiapas Veracruz 46.4% Estado de México Hidalgo Central 5,565.4 MW Source: SENER. Reserve Margin Reserve margin is calculated as a variation in the effective gross capacity minus the coincident maximum gross demand. Regarding the operational reserve margin, this is defined as the difference between the total available resources (effective gross capacity minus unavailable capacity) and the coincident maximum demand (system's integrated maximum demand plus exports). The behavior of the reserve margin during 2015 is describe in the following figure: 54

56 FIGURE BEHAVIOR OF THE SIN'S OPERATIONAL RESERVE MARGIN, ,000 54, , , , , , , , , , , , ,000 40,000 30,000 46, , , , , , , , , , , , , , , , , , , , , , , , , , Gross Effective Capacity* (MW) Total Resources of Available Capacity (MW) Coincident Maximum Gross Demand (MWh) Operating Reserve Margin (%) * Includes capacity from CFE, IEPs, import, and permittees surplus. Source: SENER with information from CENACE. 55

57 Electricity Generation Mexico has a big diversity of technologies for generating electricity, and which can be classified as conventional and clean energies Conventional technologies are those using fossil fuels to generate electricity, such as: combined cycle, internal combustion, conventional thermal, gas turbine, and fluidized bed. Clean-technologies power stations use energy sources with few or null CO2 emissions. These technologies may use wind power, solar radiation, the energy produced by waves in the oceans, seas, rivers, geothermal reservoirs, biofuels (biomass and biogas), methane and other gases associated to solid or organic residues, nuclear energy, and the energy generated by efficient-cogeneration power stations. By the end of 2015, electricity generation reached 309,552.8 GWh, including the generation reported to CRE by private generators, which increased 2.7% (8,090.3 GWh) regarding the previous year. Conventional technologies increased their generation 4.4%, contrary to clean technologies, which decreased -3.7%, explained by the reduction on the hydroelectric and solar generation. It is worth mentioning that wind power had the largest increase in electricity generation between 2014 and 2015, with 36.1%, followed by efficient cogeneration with 31.2% (see Figure 2.21). FIGURE GROSS GENERATION BY TECHNOLOGY, 2014 Y 2015 (GWh) 160, , , , ,462.6 GWh C: 236,102.6 GWh L: 65,359.9 GWh 120, ,000 80, ,552.8 GWh C: 246,600.6 GWh L: 62,952.2 GWh 60,000 40,000 20, , , ,612.9 Combined Cycle 39, , , , , , , , , , , , ,286.3 Thermal Conventional 2,892.0 Hydroelectric 3,795.2 Coal fueled 2,308.2 Nuclear 2,650.6 Gas turbine 1,386.9 Wind power 1, Geothermal Fluidized Bed Efficient Cogeneration Internal Combustion Bioenergy Solar, FR, FIRCO and GD Source: SENER. Conventional technologies concentrated 79.7%, prevailing combined-cycle generation with 50.1% from the total generation (155,185.4 GWh); clean technologies had a 20.3%, from which hydroelectric generation concentrated 10.0% from the SEN's total (see Figure 2.22). 56

58 FIGURE GROSS GENERATION BY TYPE OF TECHNOLOGY, 2015 (Percentage) Thermal conventional 12.7% Coal fueled 10.9% Hydroelectric 10.0% Gas turbine 3.8% Nuclear 3.7% Wind power 2.8% Internal combustion and Fluidized bed 2.2% Combined cycle 50.1% Geothermal, Solar, FIRCO, GD and FR 2.1% Bioenergy and Efficient cogeneration 1.7% Source: SENER. As for generation by modality, CFE concentrated 55.2% (170,978.8 GWh) from the total in 2015, seconded by IEPs with 28.8% (89,157.3 GWh), self-supply with 7.7% (23,983.3 GWh), cogeneration with 5.1% (15,920.0 GWh), and the remaining 2.9% (9,513.4 GWh), to other modalities (see Figure 2.23). FIGURE GROSS GENERATION BY MODALITY 2015 (GWh) IEPs 28.8% Self-supply 7.7% Cogeneration 5.1% Export 2.3% CFE 55.2% Other modalities 0.4% Continuous own-uses 0.3% Small production 0.0% Source: SENER. During , SEN's electricity generation has increased 25.2%, going from 247,259.6 GWh to 309,552.2 GWh by the end of the period, which represented an AAGR of 2.8%. For technologies using natural gas as their energy source, these have had a 6.2% average annual growth, while those using fuel oil have been reduced by 60.2% regarding what was produced in Within clean technologies, there is a higher expansion rate in the energy matrix, like wind power, which grew 107.2% average, or solar power, with a 27.9% growth, as shown in the following figure: 57

59 FIGURE BEHAVIOR OF THE ELECTRICITY GROSS GENERATION BY SOURCE OF ENERGY USED, (GWh) 300, , , , ,000 50, Other 5.4% Sola photovoltaic 27.9% Diesel 2.4% Coke 6.2% Geothermal -0.4% Wind power 107.2% Uranium 2.3% Fuel oil -9.0% Hydraulic 2.1% Coal 3.6% Natural gas 6.2% Other: bagasse, biogas, sawdust, ethane, and gases. Source: SIE, SENER. In 2015, CFE recorded an increase of 0.7 TWh on its electricity generation, including IEPs. As for conventional energy sources, natural-gas fueled generation increased the most. For clean generations, the latter had a decrease attributable to a reduction in the hydropower share, as displayed in Table In that same year, CFE upgraded its thermoelectric generating stations to dual-combustion ones, where, besides using fuel oil, natural gas can be used as well. The latter, to reduce fuel-oil usage, since it has a variable and high price, ad high GHG emissions. It stands out that, between 2005 and 2015, fuel-oil usage has been reduced nearly 60.2%. TABLE CFE'S ENERGY GROSS GENERATION BY PRIMARY ENERGY SOURCE, (TWh) Source of energy/year Conventional Natural Gas Coal Fuel Oil Diesel Clean Hydraulic Uranium Geothermal Wind Power Solar Photovoltaic Total Source: SENER with information from CFE. Regarding electricity generation by region and federal entity, the following can be observed: 58

60 Northwest: concentrated 13.5% of the total domestic generation, equivalent to 41,841.1 GWh. Stands out the state of Baja California, which concentrated 47.6% of the region (19,901.1 GWh), followed by Sonora (13,568.6 GWh), Sinaloa (5,686.8 GWh), and Baja California Sur with 6.4% (2,684.6 GWh). Northeast: with 32.3% (99,855.0 GWh) is first in the region's share of total domestic electricity generation. Tamaulipas concentrates 37.2% (37,162.9 GWh) of the region, thanks to a strong participation of combined cycle, in addition to being number one at domestic level with 12.0% of the share. It is seconded by Coahuila with 20.5% (20,504.6 GWh), Nuevo León with 16.7% (16,652.3 GWh), Chihuahua and Durango with 15.7% (15,690.8 GWh) and 9.9% (9,844.3 GWh), respectively. Central-Western: is third in electricity generation at domestic level by share, concentrating 16.9% (51,386.0 GWh). Stands out the share of two states, San Luis Potosí and Colima, jointly concentrating a little over 56.9% of the region's generation. On the contrary, the state of Aguascalientes, located within this region, had the smallest share in the domestic electricity generation with only 14.6 GWh (0.05%). Central: it has the smallest share, 8.3% (25,737.1 GWh) from the domestic total. Hidalgo concentrates 47.8%, while Morelos has the smallest share with 0.2%. South-Southeast: is number two of the total generation, and has a broad participation of clean-energies generation. This region contains many of the main hydroelectric, wind-power, and the only nuclear-power station of the country. By federal entity, Veracruz concentrated 40.3% of the region (36,473.6 GWh) by the end of 2015, and is number two in the SEN's total generation (11.8%). On the other hand, Quintana Roo had the smallest share of the region, 0.2% (144.4 GWh), (see Figure 2.25). 59

61 FIGURE SEN'S GROSS GENERATION BY FEDERAL ENTITY, 2015 (GWh, Percentage) 6.4% 13.6% Baja California Sur 9.9% 15.7% Durango 32.4% Sinaloa 16.7% Chihuahua Sonora 20.5% Nuevo León Coahuila 47.6% Baja California 37.2% Tamaulipas Northwest 41,841.1 GWh 0.0% 0.3% 2.6% 8.6% 8.7% 9.3% Aguascalientes Zacatecas Jalisco Northeast 99,55.0 GWh 0.2% 3.7% 4.1% 6.3% 10.3% 12.9% 22.2% Quintana Roo Tabasco Campeche Yucatán Oaxaca 13.6% Nayarit Chiapas 27.3% 29.6% Michoacán Querétaro Guanajuato Colima San Luis Potosí 0.2% 1.7% 3.4% 18.7% 28.2% Morelos Tlaxcala Ciudad de México 40.3% South-Southeast 90,572.4 GWh Guerrero Veracruz Central-Western 51,386.0 GWh 47.8% Puebla Estado de México Hidalgo Central 25,737.1 GWh Source: SENER Electricity Transmission and Distribution Along with the amendments of the Energy Reform, the activities for the transmission and distribution of electricity were ratified as strategic for the electricity sector development. In compliance with article second of the LIE, which points out that such activities are reserved for the Mexican State. The National Transmission Grid (RNT, for its Spanish acronym) is a system integrated by a group of electric grids which transmit electricity to the General Distribution Grids (RGD, for its Spanish acronym) and to users 60

62 in general. This grid is grouped in 53 transmission regions: 45 interconnected (62 links) and 8 which belong to the isolated systems of the Peninsula of Baja California. In 2015 the transmission, sub-transmission, and low-tension grid reached a length of 885,426.0 kilometers 21, which represented an increase of 5,734 km regarding This grid is formed by kv lines with 51,479.0 km (5,8% from the total); 6.4% correspond to lines between 69 and 161 kv; 12.8% to lines between 23 and 34.5 kv; and 39.9% to lower than 13.8 kv (see Table 2.15 and Figure 2.26). TABLE TRANSMISSION, SUB-TRANSMISSION, AND LOW-TENSION LINES, (Kilometers) Concept/Year AAGR SEN 764, , , , , , , , , , , CFE 693, , , , , , , , , , , kv 18, , , , , , , , , , , kv 27, , , , , , , , , , , kv Less than 161 5, , , , , , , , , , , kv 1, , , , , , , , , , , kv 40, , , , , , , , , , , kv kv 3, , , , , , , , , , , kv 66, , , , , , , , , , , kv 27, , , , , , , , , , , kv 269, , , , , , , , , , , kv Low tension 232, , , , , , , , , , , Ex. Ly FC 71, , , , , , , , , , , Source: SENER with information from CFE. FIGURE TRANSMISSION, SUB-TRANSMISSION, AND LOW-TENSION LINES, 2015 (Percentage) 400 kv 2.75% Ex. Ly FC 9.66% 230 kv 161 kv 3.07% 0.06% 115 kv 5.21% Below % 138 kv 0.18% 85 kv 0.02% 69 kv 0.31% 34.5 kv 8.96% Low tension 30.22% 23 kv 3.79% 6.6 kv % 13.8 kv 35.17% Source: SENER with information from CFE. 21 Preliminary information from CFE by November 30,

63 By the end of 2015, CFE recorded a transformation capacity of 192,561.5 MVA, 3,015.4 MVA more than what recorded the previous year, and that is equivalent to 1.6% growth. This capacity was distributed in 86.4% for operating transformation capacity and 13.6% for CFE's reserved transformation capacity, as follows: TABLE CFE'S SUBSTATIONS CAPACITY, (MVA) Concept/Year CFE's Transformation 134, , , , , , , , , , ,561.5 Capacity CFE's Transformation Capacity currently 134, , , , , , , , , , ,279.6 operating CFE's Transformation Capacity under reserve n.a. n.a. n.a. n.a. n.a. 24, , , , , ,281.8 Source: SIE, SENER. FIGURE TRANSMISSION CAPACITY BETWEEN SEN'S REGIONS, 2015 Source: CFE. 62