July 5, 2016

Mexico electricity market reforms attempt to reduce costs and develop new capacity

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Mexico is in the process of reforming much of its electricity industry. Earlier in 2016, Mexico opened up day-ahead and real-time trading in a new wholesale power market. Although wholesale prices briefly spiked for a handful of hours, average prices in most locations during the market's first six months of operation have ranged from 880 to 1,100 pesos per megawatthour (MWh), or about $48/MWh to $60/MWh.

Electricity prices in Mexico near the United States border have generally been lower than prices in Mexico's relatively isolated peninsulas. Prices in the Tijuana and Ensenada zones averaged $23/MWh during the first six months of 2016, similar to prices across the border in Southern California. Although Mexico's electricity system, unlike Canada's, is not extensively interconnected with the U.S. bulk power system, border regions can import some power from California and Texas. The Yucatán and southern Baja peninsulas have experienced higher prices (about $63/MWh and $118/MWh, respectively) because of fewer generation options and limited transmission connections to neighboring regions. Wholesale prices in some areas of Mexico, especially the border regions, are likely to rise as summer electricity demand increases.

The new electricity markets are one result of new energy laws that Mexico has implemented to open the country's oil, natural gas, and power sectors to private participation. The power sector reforms are intended to introduce competition into the generation side of the electricity industry while allowing a state-owned agency, CENACE (Centro Nacional de Control de Energía), to continue to manage the power grid. CENACE was formerly a subunit of the government-operated electric utility CFE (Comisión Federal de Electricidad), but it is now organized as the independent system operator for Mexico's entire grid.

The power generation assets of CFE were divided into four subsidiary generation companies, which now sell the electricity they generate into the spot wholesale market. CFE will remain the sole supplier of retail electricity. Private generators can also sell into the wholesale market or participate in medium-term or long-term auctions for energy and capacity. Short-term market participants can also enter into financial bilateral transactions for hedging purposes.

One of the main drivers of the recent reforms is the large difference between the costs of producing electricity and the rates retail customers pay. Mexico heavily subsidizes its retail electricity rates; by some estimates, the cost of supplying residential customers in Mexico is more than double the price that CFE charges them. Officials hope that restructuring the power industry will reduce the costs of producing electricity, lowering or eliminating the government subsidies that maintain low retail rates.

Another goal of the industry restructuring in Mexico is to improve the competitiveness of low-carbon generation and encourage the development of new capacity. Mexico's goal is for clean energy sources to provide 35% of the nation's electricity generation mix by 2024, 40% by 2035, and 50% by 2050. As defined by Mexican law, clean energy includes renewables, nuclear power, efficient cogeneration, and carbon-capture technologies.

In March, Mexico held its first long-term auction for the development of new electricity generation capacity. Eleven companies were awarded contracts to develop more than 1.8 gigawatts of new solar and wind capacity. The contract price for the energy delivered from these projects averages $45 per megawatthour. This auction also awarded tradeable Clean Energy Certificates, which will help Mexico move toward its goal of supplying half of its electricity using low-carbon energy sources by 2050.

Principal contributors: Nilay Manzagol, Tyler Hodge