Mexican Electricity Reform Emilio Sáenz November 2015
Background on the reform Prompted by expensive and subsidized electricity rates generation higly based on fossil fuels Congested transmission and distribution Seeking transition towards: Reduced electricity rates Reduced environmental impact Increased capacity for expected demand growth
A new normal Electric Market Transactions SELLERS PRODUCTS BUYERS Generators Suppliers Qualified Consumer with Market Participant Status Electricity Ancillary Services Financial Transmission Rights Clean Energy Certificates Suppliers Qualified Consumer with Market Participant Status Electric Market Regulators SENER CRE CENACE Policy New role for CFE Regulation Productive state enterprise operating through affiliates No regulatory function No management of power grid Generator and Supllier that will compete in the market Provides transmission and distribution under regulated tariffs Management of power grid and electric market
Snapshot of the Mexican Electricity Market
Areas for Company Participation Power GENERATION Former scheme Since power marketing was exclusive to CFE, companies participation in power generation was limited to: Development of Self Supply projects + long term PPAs to consumer shareholders in order to secure financing Development of IPPs + long term PPAs with CFE New Law Power marketing is no longer restricted to CFE (other than basic service users), so companies can now develop power projects and sell the electricity: Long term PPAs with sophisticated qualified consumers Directly to the market Medium/Long term Power Hedging Agreements with CFE through CENACE organized bids New issues: How to finance merchant projects?/how to induce qualified consumers to sign long term PPAs?/ How to manage dispatch risk?
Areas for Company Participation Power GENERATION Who are the new generators? Private Utilities CFE Sophisticated developers who have implemented projects under the former law Advantages of one over the other? Cost of capital Mexico s particular development landscape and the relevance of development expertise in land/social negotiations
Areas for Company Participation Power CONSUMPTION Prior to the reform, consumers could only hedge their electricity cost (i) against the CFE tariff and (ii) through self supply projects. In 2016, the launch of the wholesale electricity market provides qualified consumers with optionality Long/medium term PPA vs buying spot on the wholesale market All 1 MW loading points created after the new law was enacted must register and can participate in the market Individually Register as a Qualified User and Market Participant» Costly Through Retailers who represent loading points Clean energy requirement Qualified consumers and retailers must purchase CELs to offset their carbon footprint Amount set at 5% until and including 2018 Energy Transition Law is yet to be enacted
Upcoming CENACE bids To promote power project development and secure electric supply for basic service users, CENACE will launch long terms bids for power hedging agreements with CFE. CENACE announced November date for its first long term bids Manuals for long term rules are currently under public consultation
Wholesale market operation: 2 step approach to short term electricity market PHASE 1 DAY AHEAD MARKET REAL TIME MARKET No virtual or synthetic offers Simplified marginal price calculations, subject to a capped amount All charges for the real time market are based in hourly measurements Purchase offers are fixed (buyers are price takers) PHASE 2 DAY AHEAD MARKET REAL TIME MARKET HOUR AHEAD MARKET Virtual or synthetic offers allowed Marginal price calculations are more sophisticated (considering demand curves, restrictions and excluding capped price amount) All charges for the real time market are based on dispatch intervals Purchase offers can be price sensitive