The following describes electricity sourcing strategies worth considering for users in the Mexican market.

Transcription

1 January 2018

2 How can your Organization take advantage and mitigate risks from recent changes and trends in the Mexican market through electricity sourcing? What will be the benefits? What actions should you take? The following describes electricity sourcing strategies worth considering for users in the Mexican market. Organizations in Mexico that use traditional electricity sourcing strategies and capabilities are missing out on significant cost optimization opportunities and are more exposed to financial and operational risks than their counterparts participating in alternative supply regimes. Furthermore, they might be missing important opportunities to support clean power generation in the region. Recent regulatory changes in the energy sector, new renewable requirements being rolled out in 2018, and rate increases from the Federal Electricity Commission (CFE) will have a profound impact on electricity spend in Mexico. Organizations are facing new opportunities and risks that stem from these transformations. Hence, they will need to explore advanced ways to meet their energy supply needs, while capturing savings, avoiding escalating energy costs and achieving their internal sustainability goals. Electricity spend optimization is a strategic issue that is being addressed and driven by C-level executives around the world, due to its impact on their Organization s growth, sustainability and profitability goals. The attainment of benefits through electricity procurement outside of CFE, requires internal capabilities or a third-party consultant that is capable of implementing sophisticated strategies that range from joint-ventures to competitive generator selection. Accenture is supporting clients in Mexico to assess their electricity requirements and procurement models to meet their internal energy goals by taking advantage of the evolving regulations and pursuing novel options. This support has led to the formalization of Power Purchase Agreements (PPAs) between our clients and electricity generators resulting in savings ranging from 15 to 20 percent.

3 1Recent changes in regulation for electricity generation and trading have significant implications for industrial and commercial users in Mexico Mexico s electricity market is evolving into a more competitive and open model. Before the 2013 Energy Reform, Mexico had a heavily regulated electricity sector, with high government dependency and vertically integrated, meaning CFE was responsible for all activities along the value chain. The rigidity of the model, lack of competition, and inefficiencies in the power system resulted in high electricity costs for consumers. The Energy Reform in Mexico led to regulatory changes in the electricity sector with the following objectives 1 : Create an efficient, safe and more environmentally friendly electricity sector with competitive prices. Incentivize competition across the value chain. Increase the capacity for electricity generation in the country and foster the presence of additional players for generation and trading. Promote the usage and increase the relevance of clean sources for power generation by creating a competitive landscape for clean energy. Nationwide targets have been set for clean energy share in power generation, starting at 21 percent in 2016, and increasing to 25 percent in 2018, 35 percent in 2024, 40 percent in 2035, and 50 percent in Direct CFE investments towards the expansion and modernization of the transmission and distribution network. Establish a legal framework that allows the efficient development of a retail electricity market. 1 Diario Oficial de la Federación, Ley de la Industria Eléctrica,

4 Organizations that operate in Mexico must be prepared for key implications coming from regulatory changes, such as: Beginning in 2018, a new requirement states that companies must use a minimum percentage of clean-source electricity out of their total consumption (see Figure 1). If the requirement is not met, Organizations will have an obligation to purchase Clean Energy Certificates (Certificados de Energía Limpia or CELs in Spanish) at market cost, and make an additional payment for non-compliance if CELs are not acquired on time 2. Figure 1. Required Clean Energy Consumption Over Time (Percentage of Total Consumption) ~X3 13.9% 7.4% 10.9% 5% 5.8% Source: Diario Oficial de la Federación, 31 de marzo de 2017, Requisito CEL 2020, 2021 y Users will have two mutually exclusive regimes to source their electricity consumption: self-supply and retail (see Figure 2). Although defined in regulation, the retail regime will be fully operative starting mid-2018 with some elements yet to be determined. It could take 5 years or longer, however, for the retail market to become fully established and offer attractive electricity prices and generation options. 2 Comisión Reguladora de Energía, Preguntas Frecuentes sobre los CELs,

5 Figure 2. Characteristics of Electricity Supply Options DIMENSION SELF-SUPPLY REGIME RETAIL REGIME Potential Buyers Industrial and Commercial Users. Industrial and Commercial Users. CFE. Conditions / Requirements Minimum capacity requirement: 2 MW aggregated by user. Minimum 10% out of contracted capacity must be paid to CFE. Formalization through Power Purchase Agreements (PPAs), with a typical length of 5+ years. Requires a partnership between user and generator, through the symbolic purchase of generator s stock. Minimum capacity requirment: 2 MW aggregated by user. No minimum charge by CFE. Formalization through Power Purchase Agreements (PPAs), with a typical length of 3+ years. Pricing Guaranteed savings Variable price Fixed price Prices subject to offer and demand conditions. Maturity Mature regime with diverse generator options and available capacity to formalize agreements in the short-term. Supply is expected to grow considerably in the next few years. Regime is expected to reach maturity within 5 years. Very limited liquidity - few potential counterparts. Cost and operating components still to be defined and enabled by the Energy Regulatory Commission (CRE) and the National Center of Energy Control (CENACE). In the self-supply regime, there are three possible pricing models between user and generator. One of them is the guaranteed savings model, in which the generator commits to give the client a discount on the current CFE price. This pricing model is the most conservative (risk-wise) due to the guaranteed benefits, but it does not maximize savings. There is also a variable price model that derives the rates using the generator s supply cost plus a markup. This model has a higher risk in terms of benefits for the user due to CFE and fuel price variability, but it also has the largest savings potential. The last model is fixed price, where the rate is determined by the generator s investment amortization, maintenance and operational costs plus a markup. This usually applies in renewable electricity generation because of their flat operating costs. For more details, see Figure 3. 5

6 Figure 3. Self-Supply Pricing Models GUARANTEED SAVINGS VARIABLE PRICE FIXED PRICE Description The generator commits a price with a discount on the CFE rate considering one of the following schemes: A fixed discount defined by location, energy consumption and demand over average consumption. A monthly discount defined with a formula within a floor and a ceiling. The energy price is, in great measure, a function of fuel costs (usually natural gas). The actual cost for the generator (e.g., fuel, operation, maintenance) as well as any other expenses related to the provision of service (e.g., wheeling cost, charge for additional demand) are passed directly on to the user plus a markup. A fixed price includes investment amortization, maintenance and operational cost, plus any other expenses related to the provision of service (e.g., wheeling cost, charge for additional demand) plus a markup. Implications The model guarantees benefits over CFE rates, but it does not maximize potential savings. It is typically preferred by generators and users due to its simplicity and transparency. This model ensures that the entity providing the service recovers all its expenses, while the user s price may fluctuate depending on the actual costs incurred by the generator. The model allows users to set a budget with high certainty for the full contract life. Savings range Standard savings between 0 and 5 percent. 10 to 20 percent savings that vary every month, as prices are not fixed. 5 to 10 percent savings, which are low early in the contract life and grow annually. Risks for user to capture savings Very low risk. Moderate risk, due to both CFE and fuel price variability. Low risk, due to CFE price variability. 6

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8 Nationwide generation capacity of 68.5 GW in 2016 is expected to increase by 83 percent to GW in the next 14 years. Natural gas will continue to be the most utilized energy source, increasing from 34.3 MW in 2015 to 56.5 MW in The energy sources with highest share in generation capacity by 2030 will be natural gas with 45 percent, followed by wind with 19 percent, and solar and hydroelectric, with 13 percent each. These four sources will make up 90 percent of the total generation capacity in Mexico by A significant development in the sector is the growing relevance of renewable energy. The abundance of natural resources in Mexico, along with recent regulatory changes, has created a strong demand for clean energy, especially through solar and wind power 5. Fostered by changes in regulation, new electricity generators are now participating in the Mexican energy market. Most of them already have generation capacity available for potential buyers, and investment plans will increase this capacity in the next years, as shown in Figure 5. Available capacity will likely be committed in the short term to industrial and commercial users under formalized PPAs. Figure 5. Sample of Current Electricity Generators in Mexico COMPANY CURRENT GENERATION CAPACITY PIPELINE OF GENERATION CAPACITY Alfa 600 MW - Cogeneration - Altamira, Tamaulipas Cemex Iberdrola 252 MW - Wind - Ventikas, Nuevo León 2x230 MW - Thermoelectric - TEG (I & II), San Luis Potosí 5,412 MW - Cogeneration - 7 plants 235 MW - Combined Cycle - 3 plants 365 MW - Wind - 5 plants 250 MW - Cogeneration - Altamira, Tamaulipas - by ,000 MW - Renewable sources - Across Mexico - by ,386 MW - Cogeneration - 4 plants 110 MW - Combined Cycle - 2 plants 325 MW - Wind - 2 plants 270 MW - Solar - 2 plants Enel AES Corporation Global Power Generation (A Gas Natural Fenosa Subsidiary) 100 MW - Wind - Vientos del Altiplano, Zacatecas 100 MW - Wind - Dominica I, San Luis Potosí 100 MW - Wind - Dominica II, San Luis Potosí 129 MW - Wind - Palo Alto, Jalisco 14 MW - Hydroelectric - Chilatán, Jalisco 8 MW - Hydroelectric - Trojes, Jalisco 30.5 MW - Hydroelectric - El Gallo, Guerrero 70 MW - Wind - Zopiloapan, Oaxaca 275 MW - Geothermal -Termoeléctrica del Golfo, San Luis Potosí 275 MW - Geothermal - Termoeléctrica Peñoles, San Luis Potosí 505 MW - Combined Cycle - Mérida III, Yucatán 250 MW - Combined Cycle - Hermosillo, Sonora 308 MW - Combined Cycle - Naco Nogales, Sonora 983 MW - Combined Cycle - Tuxpan, Veracruz 480 MW - Combined Cycle - Norte Durango, Durango 234 MW - Wind - Bii Hioxo, Oaxaca 198 MW - Wind - Amistad, Coahuila 427 MW - Solar - Villanueva, Coahuila MW - Solar - Villanueva 3, Durango 238 MW - Solar - Don José, Guanajuato Planned capacity not identified Planned capacity not identified Source: Accenture research based on company information. 4 Global Data Power, Mexico Power Plants, International Energy Agency, Mexico Energy Outlook,

9 3Amid regulatory and market evolution, Organizations in Mexico are pursuing new strategies to meet electricity needs New regulatory conditions and the increased presence of players in the market give corporations the opportunity to explore alternatives in order to cover their electricity requirements. This can be done while meeting sustainability and business goals with varied sophistication levels, such as: MAKE options involving the evaluation, execution and construction of new projects for electricity generation with a suitable partner. In this instance, asset capacity is dedicated (partially or fully) to the user, providing certainty on budget and hedging against the risk of rising power prices. For this type of Power Purchase Agreement, infrastructure is operated by the partner who sells energy to the user, but the investment and ownership of the asset could be shared or fully assumed by one of the parties (user or generator). This type of contract can be long (10+ years) and complex, requiring a structured approach to evaluate the investment and have certainty of the outcome. Formalization of the agreement and construction of the infrastructure may take several years before starting electricity supply. BUY options through the sourcing of electricity from existing assets owned and operated solely by third-parties. This option entails a thorough strategic approach to assess the current market and its development, evaluate options and products, as well as their impact over time, carefully negotiate with alternative generators, and develop solid implementation plans. PPAs under this umbrella typically have lengths of 5+ years. Generators are usually open to short terms, since they already have an installed infrastructure. This alternative enables the acquisition of energy and the realization of planned benefits in months after the formalization of agreements. 9

10 Two new conditions have opened the space and increased the attractiveness for Organizations to cover their electricity requirements and materialize savings through the self-supply regime: The electricity generation landscape has a wider variety of players with available capacity, who are building assets to provide clean energy at competitive prices. Recent increase in CFE electricity rates for industrial and commercial users with projections indicating this trend will continue for several years. CFE price adjustments are primarily a function of natural gas prices 6 : 4Users now have the opportunity to materialize savings in their electricity costs given recent and projected conditions in the market CFE s electricity price is adjusted on a monthly basis and it is a function of fuel costs, namely natural gas, industrial diesel, imported coal, and fuel oil. Natural gas is the most significant factor, currently accounting for approximately 84 percent of the CFE price variability. Additionally, environmental regulations will lead to a reduction in the importance of imported coal in the electricity price composition (now accounting for approximately 12 percent). We have tracked CFE prices since 2008, observing a trend with similar behavior to the Henry Hub Natural Gas Index (see Figure 6). 6 CFE, Índice de Costos de los Combustibles,

11 Figure 6. Evolution of CFE Prices (Sample High Tension Industrial Account) and Henry Hub Natural Gas Index CFE Prices Pesos/kWh $14 $12 $10 $8 $6 $4 $2 $0 29/02/ /08/ /02/ /08/ /02/ /08/2010 Henry Hub Natural Gas Index USD/MMBTU 28/02/ /08/ /02/ /08/ /02/ /08/ /02/ /08/ /02/ /08/ /02/ /08/ /02/ /08/2017 CFE Price Henry Hub Natural Gas Index Sources: Direct Energy, Henry Hub Index Natural Gas Futures Settlement History, Comisión Federal de Electricidad, Tarifas para el suministro y venta de energía eléctrica, Furthermore, we have analyzed the historical relation between the Henry Hub Natural Gas Index and CFE Price, and we found a linear and positive correlation from 2013 to 2017 (see Figure 7). Figure 7. Inflation Adjusted CFE Prices (Sample High Tension Industrial Account) and Henry Hub Natural Gas Index Inflation Adjusted CFE Prices Pesos/kWh Pearson Correlation Coefficient: 67% Henry Hub Natural Gas Index USD/MMBTU Linear ( ) Each data point in the dispersion graph represents a month within the time period. Source: Accenture Analysis. 11

12 Much of the attractiveness of the self-supply regime depends on CFE price evolution. This regime has generated substantial benefits for users that chose this option in periods where CFE prices were high, specifically during when a rapid increase in electricity rates occurred. The self-supply regime changed in attractiveness during 2015 and the first half of 2016 due to a drop in CFE prices resulting from low U.S. natural gas prices. CFE prices climbed in the second half of 2016 and 2017 as natural gas prices returned to typical levels, once again producing benefits for selfsupply. Different analyses have forecasted a rise in the natural gas prices over the next 5-10 years, which would lead to an increase in CFE prices (see Figure 8). This will keep the self-supply regime as the most cost-effective option for several more years. Figure 8. Prediction of CFE Rates (Sample High Tension Industrial Account) for Different Natural Gas Price Scenarios CFE Prices Pesos/kWh High Inflation: EIA Ceiling Low Inflation: EIA Ceiling High Inflation: NG Futures Low Inflation: NG Futures High Inflation: EIA Floor Low Inflation: EIA Floor Predictions for CFE rates considering different scenarios on Natural Gas Prices: U.S. Energy Information Administration (EIA) Floor and Ceiling, and NG Futures based on Henry Hub Index projections. All scenarios include a high and low annual inflation factor in the U.S. and Mexico. High inflation considers 4 percent for the U.S. and 5 percent for Mexico, while low inflation considers 2 percent for the U.S. and 3 percent for Mexico. Sources: CME Group, Henry Hub Natural Gas Index Futures Quotes, U.S. Energy Information Administration, Short-Term Energy Outlook, According to the expected trends, it is estimated that CFE prices will increase and the real values will fall within the Floor and Ceiling prediction interval. Hence, it is recommended that industrial and commercial users assess self-supply options and formalize agreements to materialize savings in electricity costs through the pricing model that best fits their internal requirements and goals. 12

13 5In addition to savings in electricity relative to traditional options, Organizations are formalizing agreements with alternative generators to avoid extra costs derived from clean energy requirements starting in 2018 By obtaining electricity from alternative energy generators, a company will not only generate savings by decreasing the price at which it currently buys its energy, but it will also avoid additional costs derived from new regulations that require Organizations to obtain a minimum percentage of their total consumption from clean sources, starting at 5 percent in 2018 and growing every subsequent year. Therefore, Organizations in Mexico that continue to buy electricity through CFE, and do not meet the minimum percentage of clean power, will have to incur an additional cost by purchasing Clean Energy Certificates (CELs) at market price. The alternatives to fulfill the new clean energy regulatory terms are 7 : Renewable energy (solar, wind, geothermic, hydroelectric, etc.) Natural gas in efficient cogeneration typically cheaper than renewable options. To illustrate the economic impact of this requirement, a client case is shown in Figure 9. The company operates multiple manufacturing plants across Mexico, with an addressed annual usage of approximately 150,000 MWh. They would incur an additional cost of almost $1.3 million USD over a five-year period if the minimum clean energy consumption is not met. The considerations for this case are the following: Once CELs become effective, each MWh of clean energy purchased will correspond to 1 CEL (1MWh = 1 CEL), and the cost per CEL will be determined based on supply and demand 8. Assumed CEL unitary price of $20.57 USD 9, according to the results of the last CEL auction, released on November 16, Comisión Reguladora de Energía, Preguntas Frecuentes sobre los CELs, Comisión Reguladora de Energía, Preguntas Frecuentes sobre los CELs, Secretaría de Energía, Resultados Preliminares de la Subasta de Largo Plazo de 2017,

14 Figure 9. Potential Cost of Clean Energy Certificates Requirement for a Client Case YEAR CLEAN ENERGY REQUIREMENTS (% OVER TOTAL CONSUMPTION) CELs TO BUY ESTIMATED COST (USD) % 7, , % 8, , % 11, , % 16, , % 20, ,000 TOTAL 64,500 1,290,000 To avoid additional costs derived from the clean energy requirement, Organizations need to understand and assess options in the market, go through a strategic sourcing project and conduct an operational integration process to start receiving clean energy from an alternative generator. All the effort and clearance of regulatory hurdles typically create a lead time of over a year after the process has been initiated. This involves the collaboration of stakeholders from the Organization, local generators and authorities (CFE and CRE), after a thorough project assessment and contract execution time period. Considering the time needed to materialize provision of clean energy and limited available capacity in the market, Organizations need to move fast to start addressing clean alternatives for electricity sourcing. 14

15 6 Organizations must quickly go through a set of actions to capture opportunities, avoid costs and manage risks in electricity procurement Immediate engagement towards implementation of the most adequate electricity sourcing solution for your Organization is a must. You will get to this solution only by walking the following road: Identify current internal initiatives to reduce incurred electricity price and spend. Among other initiatives, Organizations should reduce electricity usage. The opportunity to use electricity more efficiently is now relevant given the expected CFE price increases for the next few years, and they must be considered integrally in further steps for the assessment and strategy definition. Estimate the impact of Clean Energy Certificates requirement in the Organization s costs. All current CFE commercial and industrial clients, except for selfsupply participants, will incur this new cost starting However, many users are still unaware of it and have not quantified its impact on their budget. Identify and define the type of clean energy sources that are more favorable for the company considering social responsibility objectives, as well as the level of pollution generated through the operation. Reduced costs for wind and solar technologies in electricity generation are increasing the attractiveness of renewable sources. Current differences in price versus heat rate products, however, make it necessary to evaluate all economic, environmental and social impacts as part of the generator selection process. 15

16 Develop knowledge of electricity consumption options and pricing. Key necessary elements that must be gathered and understood by users are: historical and expected consumption and price for all the locations, generators market for the defined electricity source, pricing behavior and drivers (historical and projections) for alternative generators. Build a business case to support the selection of electricity pricing model, estimating the potential savings with alternative generators. A thorough economic assessment of all available options is fundamental to provide sound recommendations to C-executives for decision making. Execute a strategic sourcing project to select the best generator in the market to meet company requirements and optimize cost. Given the changes in regulation, the correct execution of a sourcing project is key to generate the most value from the current market and its future state, considering the direction it is taking. Finally, Organizations will need to involve resources (either internal or external) that are experienced and have the required expertise on the electricity market conditions to lead and drive all the described actions towards ensuring the implementation of the optimal strategy for provision of electricity. 16

17 7Accenture has supported clients worldwide and in Mexico with energy procurement capabilities and expertise to generate tangible benefits Accenture has developed strong global business capabilities in commodities trading to support utilities, mid-stream pipeline, energy companies and final users. End-to-end expertise in market operations and commodities trading have allowed us to help clients along the value chain to optimize their spend, assets or commercial portfolios, depending on their business objectives. Organizations are increasingly looking at Accenture as their single provider of energy procurement and management services that can address the full spectrum of needs - from reducing demand and risk to improving pricing and payment accuracy - across all geographies including Mexico. Accenture has also supported companies operating in Mexico, following a structured approach, to assess potential electricity generators that meet their needs and goals, securing significant savings. Some results from this type of efforts have been: The formalization of agreements (PPAs) with generators for the provision of electricity along several years (5-10 years typically) with savings in the range of percent. Avoidance of costs related to CELs, ranging from 5 percent in 2018 to 14 percent in 2022 out of total consumption, by obtaining electricity from clean energy generators. Alignment on business case to support the electricity procurement strategy and decisions by the C-level. Transfer of knowledge for the optimization and management of electricity costs. As more options are available in the market and new regulation is implemented, electricity sourcing decisions will grow in complexity. Specialized knowledge and capabilities are required in the Organizations, as well as C-level leadership, to ensure the capture of opportunities and adequate management of risks. 17

18 AUTHORS Manuel Gómez is Managing Director in the Mexico City office and a leader of the Global Sourcing & Procurement practice. manuel.gomez@accenture.com Ezequiel Luis Montoya is a Senior Manager in the Mexico City office and a member of the Strategy practice. e.luis.montoya@accenture.com Marco Martínez is a Senior Manager in the Mexico City office and a member of the Global Sourcing & Procurement practice. marco.martinez.ortiz@accenture.com Cobb Pearson is a Senior Manager in the Atlanta office and a leader of the Americas Deregulated Energy practice. c.c.pearson@accenture.com Copyright 2018 Accenture. All rights reserved.