Reform to generate successDecember 29, 2017
Eduardo Meraz Ateca, general director of Mexico’s National Centre for Energy Control (Cenace), talks to TOGY about the country’s reformed energy market, the third long-term power auction and opportunities for collaboration with the entity’s foreign counterparts.
Cenace was established as part of the changes stemming from Mexico’s energy reform. The institution is charged with operating Mexico’s electricity transmission and distribution grids. It is also responsible for regulating and promoting competition in the wholesale electricity market and ensuring that the national power grid expands efficiently. Cenace acts as an intermediary between power-generating companies and power suppliers, and plans programmes for the grid’s expansion, as well as ensures safety in generation and transmission activities.
On investment in generation: “Investment in generation will continue to be substantial because a lot of the installed generation capacity needs to be replaced, and also due to growing demand. These will be the main motors that will continue to boost generation investment.”
On setting market rules: “There is a complete openness on the part of the authorities, system and market operators to exchange viewpoints and provide suggestions so that these rules work for everyone, both buyers and sellers. We have good expectations and we hope to meet them.”
Most TOGY interviews are published exclusively on our business intelligence platform TOGYiN, but you can find the full interview with Eduardo Meraz Ateca below.
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How did Mexico’s third long-term power auction differ from the first two?
We included something similar to a clearinghouse in this third long-term auction. There is a counterpart with whom the contracts were signed, for both generation companies and load service entities, which are the ones that will purchase energy. This clearinghouse allows for participation of other purchasers besides the basic supplier. We have already registered two additional buyers that are private qualified services suppliers.
With this, we entered a new stage in long-term auctions, allowing for other private buyers to participate using the auction mechanisms, which has been successful in terms of prices and obtaining very good opportunities for clean energy generation.
How are the auctions contributing to the development of a more competitive market?
The auctions have been successful regarding the price that was obtained, fulfilling the desired goal. This was due to great participation. Many companies showed interest and were present. In fact, we had 32 winning companies in the first two auctions. A competitive landscape in electricity generation has been opened to new companies. In this third auction, we expected participation similar to the two previous auctions, and thus, we expected good prices for buyers.
We believe there is still much interest in investing in electricity generation in Mexico. There are still some relevant opportunities. This is due to, on one hand, the fact that a large part of the electricity generation system in Mexico needs to be replaced by a more competitive one, and on the other hand, because Mexico is experiencing a significant growth in demand.
How will demand for electricity continue to evolve?
In 2017, consumption has grown about 4.5-4.9% over the previous year. We have had higher growth than expected this year. Our forecast was a little above 3-3.2%.
We believe that part of this growth is due to climate conditions. Heat has been very intense since the beginning of 2017. We had a very atypical winter; it was not cold. We had some warm days during winter, and summer has been quite hot. One can perceive this in our energy consumption. It had been a very dry year, but in June, we had some heavy rains in the country and that is immediately noticeable in consumption demand, which declined markedly from June to July.
There is significant growth in electricity demand in the country as a whole and this constitutes an incentive for new generation requirements. In the infrastructure programme published by the Secretariat of Energy, one can observe that over the course of the next 15 years, there will be 55 GW-56 GW of additional generation capacity.
How will increasing co-operation between North American electricity entities lead to greater stability in power supply?
A three-party agreement involving the Energy Regulatory Commission, NERC [North American Electric Reliability Corporation] and Cenace was signed in March 2017. This agreement aims to unite. This would be beneficial for Mexico because it would help us adopt better practices that are used in other countries.
In this case, the agreement refers to reliability standards, criteria and particularly the subject of cyber security, which is a very relevant issue. That is where we distinctly observe a benefit. NERC has made a lot progress in that respect and, for us, this collaboration has been very productive.
At the sector level, Mexico has had meetings with the United States and Canada regarding the general aspects of the energy sector in all the different subjects: gas, electricity and so on. The interaction between the different agencies has increased, and not only between government agencies.
In the case of American operators, we have a very close relationship with ERCOT [Electric Reliability Council of Texas] and Caiso [California Independent System Operator], and we have also began having some degree of contact with the PJM Interconnection operator. We could not advance more in our relationship with PJM because of some schedule complications, but we hope to resume our talks with them in the future.
Caiso and ERCOT are our closest operators. We have a collaboration agreement with California and are currently working to assess the balance of the energy market that Caiso manages and has successfully expanded to other western states of the United States. We are conducting a study of what the benefits would be for Mexico if we enter this market.
What advances have been made to increase electricity interconnection across borders?
The interconnection between Baja California and California is approximately 36 years old. We have another interconnection with Texas and there are other smaller interconnections in the rest of the country that both parties use as support in emergency situations. The commercial part has not been as significant as we would like.
To enable more commercially significant energy exchanges, many issues need to be resolved. One of these challenges is reconciling the regulations of both countries to conduct commercial transactions. If certain regulations are adjusted, this will surely attract investment from those who foresee that this energy trade might grow and are willing to invest in interconnection networks between Mexico and the United States.
In this respect, there has been some advancement, although a bit slowly. We are expecting to have a new interconnection with Arizona by the end of 2018, one from Tucson to Nogales, Sonora of 150 MW.
There is an intention to analyse larger and more robust interconnections that will enable an increase in trade and the sharing of renewable energies. Even though we are close, wind and solar radiation have somewhat different behaviours; therefore, sharing that intermittent supply would be mutually beneficial.
We are also advancing towards performing bi- or tri-national studies. There are already some projects involving Canada, Mexico and the United States, such as NARIS [North American Renewable Integration Study]. NARIS is a project that is being led by the National Renewable Energy Laboratory and which will allow for more complete joint studies to be carried out to find new interconnection opportunities. This will need to be complemented by an adequate regulatory framework that allows for these interconnections.
What regulations has Mexico laid out regarding renewable energy?
Regarding public policies, the Energy Transition Law was passed in December 2015. It promotes clean energy generation in the country and sets certain milestones, based on which we have moved forward with establishing incentive mechanisms, or clean energy certificates, that will become valid in 2018.
Those certificates are devised to promote clean energy implementation, even though the cost reduction we have observed in renewable energies, mostly in photovoltaic energy, has made them competitive on their own. Hence, there is going to be significant growth in renewable energy participation in Mexico, especially because this is a country with great potential, mainly in solar and wind, but also geothermal and hydraulic. The first two renewables types are the ones with accessible prices, which makes them attractive for installation in Mexico.
What role will natural gas have in Mexico’s power generation in the future?
Natural gas, considering the price that is being projected, will continue to be very competitive. We first have to replace all the fuel oil-based power plants we still have, and the second thing gas might displace is coal.
Electricity generation based on natural gas will continue to grow, at least in volume. We are generating above 60% of electricity in combined-cycle plants using natural gas. We are also generating some energy with natural gas in conventional plants, which will disappear with the entrance of new combined-cycle plants.
New technology will replace these plants immediately. Therefore, we will have a mixture of high-efficiency, natural gas-based and renewable energies, which we believe will continue to grow substantially.
Natural gas and clean energy will be the two predominant technologies. In clean energy, there is also co-generation, for which we have great potential. Renewable energies will not replace all natural gas.
What are the prospects for the expansion and strengthening of the power generation sector over the next five years, and what is Cenace’s role in this?
Investment in generation will continue to be substantial because a lot of the installed generation capacity needs to be replaced, and also due to growing demand. These will be the main motors that will continue to boost generation investment.
We also expect significant growth in investment in transmission. In the last Prodesen [National Electric System Development Programme] that was formulated, Cenace analysed some significant transmission necessities, firstly, the ability to interconnect the whole country. Interconnecting Baja California with Mexico’s continental area and the interconnection of Baja California Sur with the rest of the country are projects that began in 2017. Both the Baja California and Baja California Sur interconnections are expected to be on line by the end of 2021. In this way, the whole country will be interconnected.
We are studying some projects for network reinforcement in the country, especially in every region where there is potential and interest in developing new renewable energy projects. Companies have already expressed their intention of installing new renewable energy generation here by 2024, and it is possible that we will reach 16 GW of installed capacity from renewables.
What kind of network configuration is being considered to accommodate an increase in generation capacity?
These would be alternating current network reinforcements and a couple of extra direct current corridors. One would run from the northeast to the centre of the country and another is planned for the Yucatán Peninsula.
The Yucatán Peninsula frequently has problems supplying the natural gas required in that region and this is why many plants that are not economically viable continue to exist. This is a region in which consumption is also increasing. Because this area is very tourism-related, the creation of a direct current corridor is being considered. This would mean a significant investment in transmission lines.
This plan would provide the country with the network required by growing demand and the installation of many new power plants.
How competitive is Mexico compared to other regional markets?
We think that the Mexican market will be a competitive and attractive market, because the sources of energy production – gas and renewables – will be very cost effective. We are in a position in which the use of these energy sources will be significant.
We will also broaden our horizons to other regions, such as the United States, for example, which is a market many times larger than Mexico. Therefore, any exchange in both directions would be beneficial, be it exporting from Mexico or importing at certain moments from the United States. I believe this will confer Mexico a significant competitive advantage.
I also believe there can be an important interconnection point from Mexico to Central American countries. Different countries’ working groups are already interacting and evaluating the potentialities of increasing interconnection capacity with the Mexican sector.
I think this is a very open market in its maturing stage. When the other phases of the market, which still need to come into operation, are completed between 2017 and 2018, we will have greater visibility. I think this has been a transparent market.
What kind of interest do you see from both local and foreign players in the Mexican market?
The participation of the different companies that have begun entering this market has been extremely beneficial, not only in electricity, but also in the formation of the market. This market has emerged with certain rules and these rules will need to be revised and adjusted. This should happen with adjustment and improvement dynamics that allow the market to adapt and work under the appropriate conditions.
There is a complete openness on the part of the authorities, system and market operators to exchange viewpoints and provide suggestions so that these rules work for everyone, both buyers and sellers. We have good expectations and we hope to meet them.
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