A formula for success in the Mexican power sector Angie-SOTO

Mexico's public administration now needs to figure out new ways to engage and reactivate the participation of the private sector.

Angie SOTO Managing Director NEXUS ENERGÍA MEXICO

A formula for success in the Mexican power sector

September 20, 2022

Angie Soto, managing director of Nexus Energía Mexico, talks to The Energy Year about opportunities in the Mexican power sector, key incentives for pushing the industry to reach net zero and the company’s strategy for growth. Nexus Energía Mexico is a qualified services supplier and provider of power management services for power generation plants.

What opportunities are you engaging within the Mexican power sector?
For many industry players, it was a relief that the recent energy reform did not pass. For us, it opened an array of opportunities to continue with the promotion of renewable energies, economic competition and transparency in the sector.
Other market participants share our view, so we expect to face fierce competition for the closing of PPAs with existing renewable energy plants and a relevant push for the potential development of new renewable energy projects. At the same time, we expect and have seen interest of power generators to enter into agreements with qualified suppliers that have the capabilities of marketing their products with international customers.
For a long time, we have been promoting among our clients the optimisation of the sale of products from power plants by being offtakers of the production of this energy. We achieve this optimisation by entering into both medium and long term PPAs. As of this date, we are parties to several PPAs in Mexico and Spain and our view is to continue promoting clean energy in this manner.
Our strength lies in our experience and depth of knowledge of wholesale markets. We have been operating in Spain for over 20 years, the Spanish market is a mature electricity market with material complexities. We aim to replicate our success formula in Mexico by leveraging the knowledge gained in other markets, but always taking into account Mexico’s own complexities. Mexico is a market with more manageable megawatts available, which is better set to respond to the needs of the system and provide reliability and stability.

What steps are needed for the Mexican power system to reach a higher degree of maturity?
A lot of investment in networks is needed. Let’s make this comparison: Spain is twice the size of the state of Chihuahua. This means that the challenge and the cost of the electricity grid infrastructure is enormous. There is a dire need to strengthen both the distribution and transmission systems.
This can be done in many ways, however, as neither distribution nor transmission are liberalised, the most obvious way to do it is through BTO [build-transfer-operate] tenders. As the electricity market participants know, the transmission tenders were cancelled, causing a considerable blow up to interest of the private sector. So, the public administration now needs to figure out new ways to engage and reactivate the participation of the private sector, so that together private investors and the government can strengthen the national grid. This is crucial to solve current transmission and distribution issues and also to allow the renewable energy required by the system to be brought in and connect all the new underused renewable power plants.
It is also necessary to plan the retirement of obsolete, extra-polluting, inefficient and costly power plants instead of revamping them. But it is not that easy, the challenge is to replace large power plants with more environmentally friendly options. Those options tend not to be as large as their pollutant competitors, although the clean sources tend to be cheaper.
The Valley of Mexico has several power plants to be replaced, including Petacalco, a 2,700-MW coal-fired plant. The same goes with the fuel oil based Tula plant, which is responsible to a large extent of the constant environmental contingencies being faced by Mexico City population. Replacing such large plants is difficult but necessary.

 

How important are financial incentives like Clean Energy Certificates (CELs) and what other methods can propel the industry to net zero?
Financially speaking, there are different ways to incentivise renewable energies. Renewables are promoted through auctions, premiums or Clean Energy Certificates. These are mechanisms that do not imply any subsidy and do not require any participation from the State.
The original purpose of the CEL methodology was to introduce these certificates on a mandatory basis in Mexico. Unlike many European countries, CELs are mandatory for energy consumers. This mechanism was created for the market to encourage the promotion of renewable power projects. The Ministry of Energy is supposed to define the guidelines energy buyers are obliged to follow. The original obligation was to purchase an amount of CELs equivalent to 7.9% of the energy consumed and as of today it has grown to 13.9%. If the consumers breach such an obligation, then they would be fined. To get to net zero, each country, including Mexico, has to consistently define a path towards this goal. CELs are a mandatory mechanism, but both the Mexican government and companies can use voluntary mechanisms to facilitate the energy transition. Voluntary renewable energy certificates are quite common in other countries and they are similar to the Guarantees of Origin (GoO) in Europe. The relevance of GoO is undeniable, their price has risen from EUR 0.03 to EUR 0.60 or 0.70 In general terms, voluntary certificates have been popularised during the last couple of months, as a result, a voluntary market is being created, and it is promoted by the private sector, not by politics.
Certain corporations and institutions are now valuing how environmentally responsible firms are. If companies have not done any efforts to achieve net zero, they may suffer negative consequences in terms of access to finance or even cause a loss of opportunities as a supplier. Large companies are becoming stricter in terms of procurement and they are assessing the carbon footprint of their suppliers. So, the rest of the companies have no choice but to align themselves with this philosophy and the financial market is pivotal when it comes to setting a company’s direction.

What has been your recent trajectory in Mexico?
In 2018, we opened our business in Mexico on a JV with Cox Energy America, an energy company listed on the Mexican Institutional Stock Exchange (BIVA), with presence in Mexico, Chile, Colombia, Guatemala and Central America.
Initially we had two lines of business: representation and supply. We thought it was much more appropriate to start representing generation plants. This would allow us to acquire greater knowledge of the wholesale electricity market so that, afterwards, marketing could be done with greater guarantees. At the end of the day, you are selling energy to consumers. That implies a lot of risk on Nexus’ end, and you have to guarantee that these risks are 100% covered so that the customer has the comfort that their service provider is a solid company with the necessary knowledge and that it will not fail them.
We have been leaders in Spain for many years, being in charge of 40% of solar power energy sales in the wholesale market there, and therefore it was relatively easy for us to start and grow our business in Mexico. In a nutshell, we work with all the complexities of the wholesale electricity market – i.e., optimise generation forecasts, minimise diversion costs, carry out daily settlements, communication with CENACE (National Centre of Energy Control), among others.
We started in 2018 with the representation of power plants, and today we are proud to represent 26 generation plants, which account for approximately 1,700 GWh. Once we developed and got to know the market, we expanded our portfolio into commercialisation services. So, we enter into PPAs with the power generators and sell the energy we buy to end customers.

How are you expanding your clientele and what new types of clients are you seeking?
We target qualified users, who are the only ones who can access the deregulated market. Our approach has been focused on the industrial sector, with many clients in the automobile industry, which is growing very rapidly in Mexico. Companies such as Nissan and Toyota, have started to look for electricity suppliers other than the CFE (Federal Electricity Commission) to help them with their environmental objectives. We saw this as an opportunity to expand in the market and this is why many of our clients come from this sector. The rest of our clients belong to a wide variety of industries and a very successful relationship has been the one established with Ánfora Internacional.
In addition, we recently signed a contract with a mining company in the north of the country to supply 140,000 MWh. This experience has opened many doors for us in the mining sector, which we are now looking at as a potential source of clients. Our clients prefer us not only because we supply energy exclusively from renewable sources, but also because we offer tariffs below the CFE tariff, which makes our offer extremely attractive.

What goals does Nexus Energía have for the next year in Mexico?
In the next year, our aim is to consolidate our position and keep on growing in Mexico. We are aware that procedures here are slower than in other markets but despite this our bet is on the growth of the Mexican market. We want to consolidate our lines of businesses and take full advantage of this momentum that we are achieving through our good practices.
We want to continue growing bit by bit, without being too ambitious, in an orderly manner. On a commercial level we have reached a point where we have a known brand and we have a fairly good penetration in the market. Sales are no longer such a high priority, but rather it is building and consolidating the foundations of the company to take on this organic growth in the best way possible, with a solid and robust team and company.

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