Welcome to the highlights of the third edition of the Mexico Energy Forum! We are proud to once again have brought together more than 300 of the key Mexican and international players who are shaping the development of the country’s electricity and renewable energy markets at this very successful one-day conference. Below you will find the highlights of the presentations and panel discussion that took place throughout the day, as well as a link with a download to the non-confidential publications. The highlights can also be downloaded as a PDF file by clicking the "Download 2016 Highlights" button on the top right. We hope you enjoy the Mexico Energy Forum 2016 highlights and look forward to welcoming you in person to next year's edition.
MEXICO’S CLIMATE CHANGE AMBITIONS
Rodolfo Lacy Tamayo, Undersecretary of Environmental Planning & Policy at SEMARNAT
The 2016 edition of Mexico Energy Forum started with the participation of Rodolfo Lacy, Undersecretary of Environmental Planning and Policy at Ministry of Environment, who talked about the climate negotiations held in Paris at the end of 2015 and highlighted the leading role that Mexico played in this summit. In this regard, Mexico’s crowning moment was the introduction of the General Climate Change Law, which makes it the second country to have implemented a regulatory framework regarding its climate change ambitions. Mexico also introduced a carbon tax in which a marginal cost must be covered by industrial actors emitting over 25,000 tonnes of CO2. Lacy also highlighted the importance of the Energy Reform, as this paved the way for the creation of Clean Energy Certificates (CELs) and their trading market, which the Mexican government plans to launch during the present administration.
Lacy commented that Mexico committed to reducing its greenhouse gas emissions by 22% by 2030. For the energy industry, this target implies sourcing 35% power generation from clean energy sources by 2024, and 42% by 2030. To increase the share of clean energies in the power mix, the Undersecretary mentioned that Mexican generators can obtain financing from the different climate funds resulting from the COP21 agreement. Such funds will come from the US$100 billion that developed economies collectively intend to designate each year to climate change mitigation and adaptation projects.
Afterwards, Lacy talked about the open information policy, which is another important subject established in the climate discussions that also affects Mexico’s adaptation and mitigation strategies. Countries that agree on this policy are expected to publish an emissions inventory on a regular basis, which will be monitored and assessed by the UN. Furthermore, all signing countries are obliged to review their INDCs every five years and increment their climate change targets according to their situation. The Undersecretary said that Mexico was one of the first countries to ratify this agreement, as the General Law of Climate Change indicates that the government must reevaluate the country’s climate change program every six years. Before leaving the podium, the Undersecretary reminded the audience that 2015 was the hottest year on record, stressing the importance of decreasing greenhouse emissions, a goal in which the global energy transition plays a crucial role.
MAKING CLEAN ENERGY CERTIFICATES WORK
Jesús Serrano, Comissioner at CRE
In the second presentation, Jesús Serrano dealt with a subject that certainly needs clarity in the electricity industry, which is how the Clean Energy Certificates (CELs) function. He explained that CELs, as stated in the Law of the Electricity Industry, are designed to promote the development of clean energy projects and will be a second source of income for clean energy generators, who were previously only able to profit from the sale of electricity.
Mexico’s clean energy generation goals will determine the amount of clean energy that should be incorporated in to the mix in 2018, 2021, and 2024. This, in turn, forces the purchase of clean energies until the generation objectives are met, and project development and the market will determine the cost to meet the goals. Therefore, bidders will seek projects that require the least additional investment to reach the government’s objectives. In this sense, CELs, explains Serrano, provide an attractive solution.
Both qualified users and clean energy generators have to register in order to participate in the CEL market. In the case of generators, a registration must be submitted, an audit has to be undergone, and a fee paid. Once a registered power central generates clean energy, CENACE will examine the information related to clean generation and then pass that information on to CRE, which will award and register the CELs. The certificates correspond to the previous month in terms of generation and consumption, and generators are free to use them in bilateral transactions, coverage contracts, or to sell them in the market or in CENACE tenders.
The authorities created an online mechanism similar to a bank account in which participants will be able to trade their certificates, and CRE developed a system called DECLARACEL so that players can report their CEL obligations to the authorities every month. The annual declaration has to be presented in May, and fines will be imposed according to the information given at the end of the period. Finally, Serrano explained the details of each certificate, as these will have a 16 character ID that will include information such as the technology used and the date the certificate was granted.
INTRODUCING THE WHOLESALE ELECTRICITY MARKET
Jaime de la Rosa, President of AME
Daniel Casados, Director General of Blue Coat Systems
Edgar Alvarado Domínguez, Director of the Legal Department at CRE
Loïc Le Gall, Director of TAS for the Energy Industry at EY
De la Rosa began by highlighting the contributions of the private industry in energy generation from clean and renewable sources, and how private players helped in drafting the wholesale electricity market in a way that ensures a level playing field. The Law of the Electricity Industry creates an independent and strengthened regulator with CENACE, and CRE gains a prominent role in the regulatory side in order to foster a competitive market. “The wholesale electricity market is based on well-established markets, such as PJM, adapting traits to the particularities of Mexico,” he stressed. De la Rosa took the opportunity to praise the public sector for being open to the private industry’s suggestions in creating a promising market in terms of regulations.
Alvarado proceeded to discuss the challenges CRE has faced in creating an open market after years of CFE’s monopoly, which began in the 1960s. In the 1990s, segments of the energy market were open to private parties, which were able to participate under four modalities, including Independent Power Producers and the small power generator scheme. The Constitutional Amendment, he commented, reserves strategic areas for the productive enterprises of the State, mainly transmission and distribution, although private companies can collaborate as partners of CFE. However, if the State-productive enterprise does not create value and profit, as stated in its mandate, the authorities will be able to open these areas to other players.
“The reform takes place in both market and institutional terms,” Alvarado commented when detailing the strengthening of the operators and regulators. On the market side, private players have more options regarding the way they can participate as generators, suppliers, marketers, and such. Alvarado responded to a question posed by de la Rosa saying that CRE has taken a more active role as a regulator after the reform, as its activities became more defined with the decentralization of the industry. “We still play a crucial part in the central policy-making, but the decision-making process has changed.” He highlighted CRE’s honesty and hard work in determining tariffs, which are based on supply and demand.
Casados began by recounting how his company got involved in the electricity sector, ultimately becoming a key member in the smart grid association. He spoke about the importance of understanding the market in order to introduce the most suitable technologies, and mentioned the relevance of end-to-end consumers in creating information that leads to an improved electricity market in addition to the public, private, and academic sectors.
The microphone was passed to Le Gall, who also mentioned the importance of international best practices in the wholesale market, especially as Mexico undergoes the transition of its energy industry. “The short-term electricity market is composed of the real-time market and the day-in-advance market, which both require robust technological infrastructure,” he stated. Long-term markets are being developed in parallel to the short-term ones, and the long-term contracts entailed will enable the financing of renewable energy projects. The long-term market will rely on tenders for electricity, capacity, and CELs. De la Rosa asked how Le Gall foresees the direction of the market, especially in the light of the tenders. The EY representative responded that it is important to examine the capacity tendered in the upcoming bids, because interested players might not be able to develop projects if the demand does not grow enough for more capacity to be tendered.
TRANSFORMING THE ENERGY SECTOR
Cesar Hernández Ochoa, Undersecretary of Electricity at the Ministry of Energy
The arrival of César Hernández Ochoa, Undersecretary of Electricity, was met with enthusiasm among MEF16 attendees, as the Ministry of Energy’s view and expertise is highly relevant to all the actors in the Mexican electricity industry. The Undersecretary began his presentation by highlighting the benefits that the Energy Reform is expected to bring to the Mexican market. According to Hernández Ochoa, the new regulations are expected to decrease the costs of electricity tariffs, promote investment in clean energy projects, and improve the country’s competitiveness. “The benefits of the Energy Reform are already tangible, as evidenced by the fact that electricity tariffs in Mexico have already decreased for different segments,” he boasted.
Hernández Ochoa proceeded to explain the short-term market, a key element of the wholesale electricity market that was launched in January 2016. The main objective of this market scheme is to boost competitiveness and incentivize generators to improve their operational efficiency and reduce production costs. In this regard, the main incentive is the market rule that gives efficient generators the opportunity to dispatch their electricity first, which was established to promote a decrease in tariffs based on efficiency and competitiveness, not only among private actors but also among CFE subsidiaries. Moreover, the short-term market provides free access to new generators, whose presence is expected to increase in the upcoming yeas.
According to Hernández Ochoa, the long-term tenders are another important element in the wholesale market, as these enable market participants to acquire different products such as clean energy certificates, capacity, or power. The tendering process is organized by CENACE, the independent market operator, using the guidelines established in the regulations. In Hernández Ochoa’s view, one of the most important characteristics of the Mexican scheme is that all generation technologies compete at the same level, including clean and conventional sources. Furthermore, the undersecretary highlighted the fact that the contracts resulting from these tenders are especially designed to provide financial security to private investors backing up energy projects. The first tender carried out in the country was sufficiently successful as it achieved the allocation of 102 million megawatt-hours, 109 million clean energy certificates, and included 468 technical offers and 103 bidders.
Finally, Hernández Ochoa explained the process that CFE has followed so far to restructure its operational organization. As stated in the Law of CFE and the Law of the Electricity Industry, CFE has been separated into a vertical structure that is compatible with the new market rules, including four generation enterprises and different subsidiaries, each one with its own corporative administration. The main objectives of restructuring CFE were to increase the parastatal’s competitiveness and avoid a monopoly in the new market. Before finishing his presentation, Hernández shared the enthusiasm that international players have demonstrated in the face of the transformation of the Mexican electricity sector. “Apart from the Education Reform, the opening of the electricity market has the best potential to increase the country’s international competitiveness. Mexican efforts to transform its energy industry have been recognized in Davos, Abu Dhabi, and at other international summits. The best feedback we have received is the fact that the reform includes all the regulations needed to launch a successful market,” he concluded.
NATURAL GAS AND POWER GENERATION
Jesús Rodríguez Dávalos, Founding and Managing Partner at Rodríguez Dávalos Abogados
Eduardo Fernando Prud’Homme, Head of the Technical Management & Planning Unit at CENAGAS
Fernando Alonso, Head of Government Affairs at Fermaca
Luis Montgomery, Director General and CEO of ACCESGAS
Rodríguez Dávalos opened the panel reminding the audience that back in 1993, the natural gas transportation and pipeline operation segments began allowing private investment, and this was followed by the creation of CRE in 1995. The framework for natural gas that was established back then dictated the country’s natural gas strategy, making this fuel important component in the national energy strategy and pushing the development of IPPs. “By the end of the current administration, the country’s natural gas capacity will increase almost twofold,” he declared.
Rodríguez Dávalos asked ACCESGAS’ Luis Montgomery about the possibility of using CNG for electricity generation, who said this would be inviable, but CNG is suitable for places with no access to natural gas or for cogeneration and trigeneration processes. Montgomery talked about the opportunities for CNG companies developing last-mile projects and said that having an authority like CENAGAS, which administers capacity in a transparent way, is essential for the industry in general and is particularly helpful for shippers tasked with supplying power generation facilities. He also commented that “companies like Fermaca expand the pipeline system, and bring shippers closer to end users, helping companies like ACCESGAS grow. Also, wherever there are pipelines, there are possibilities to build CNG stations, creating even more business opportunities.”
The next question was directed at Alonso and it asked why the authorities are putting so much emphasis on natural gas as a fuel in the energy transition. Alonso, who represents one of the private companies with the most pipelines under development and operation, relayed that a technological change took place in the 1990s placing natural gas at the forefront of electricity generation, a change he points to as the reason why the authorities have chosen natural gas as the transition fuel that also provides benefits in terms of low greenhouse emissions and is economically attractive at the moment. “Natural gas will also work harmoniously with renewables, as these are intermittent and thus require backup energy.” He said having geographical access to cheap gas makes Mexico one of the most competitive countries in the world due to reduction of electricity costs, ultimatly fostering industrial activity.
The moderator introduced Eduardo Prud’home, highlighting his knowledge about the regulatory aspects related to the country’s pipelines, and proceeded to question him about the most relevant changes that the natural gas industry will notice in the transfer of natural gas assets form PEMEX to CENAGAS. Prud’homme said that, despite the reform that took place in the 1990s, a full structural change was not completed. “A pipeline is a monopoly by nature, but its content does not have to be; it can be open and competitive.” In Prud’homme’s view, when PEMEX operated the pipeline system, the parastatal did not make access to natural gas a priority in the sense that it used its pipelines to sell its own gas, leaving other shippers on the sidelines. “Now, as a result of the Energy Reform, CENAGAS will grant access and foster a competitive gas market,” he commented, and added that ensuring the proper functioning of the Natural Gas Pipeline System for all users will be one of CENAGAS’ largest challenges.
PARADIGM SHIFT IN DISTRIBUTED POWER GENERATION
Santiago Desentis, Vice President of Sales at Solarcity Mexico
The afternoon session of Mexico Energy Forum 2016 was focused on renewables. To start the green energy discussions, SolarCity Mexico’s Vice President shared his view about the solar energy and distributed generation sectors in Mexico. Initially, Desentis shared the six success factors that helped SolarCity boost solar energy in the US: incentives, costs reductions, financial schemes, process of excellence, a focus on quality and efficiency, and investment in research and development. He explained that the US market represents one of the biggest solar markets worldwide currently and that California alone has around 50 times more solar energy production than Mexico. According to Desentis, if Mexico maintains momentum, solar energy production in the country could reach 1GW by 2020.
Besides the potential growth, the opening of the wholesale electricity market piqued SolarCity’s interest in investing in Mexico, and Desentis explained that the company considers the utilization of net metering schemes to be solid incentives, which involves the accelerated depreciation and the incorporation of clean energy certificates in the Mexican market. Compared to the US, capital costs in Mexico are considerable higher, but in terms of variable costs the latter offers more competitive numbers, mainly due to the cheaper labor cost.
Despite all the benefits, Desentis explained the challenges to overcome to make solar energy successful in Mexico, such as the need to develop a national regulatory framework with a special focus on distributed generation and isolated supply technologies, as well as the potential impact that the separation of CFE could have in the solar sector, especially as a direct competitor.
THE ROLE OF SOLAR AND WIND IN MEXICO’S ENERGY MIX
Óscar Bernal, Director General of EOSOL Energy de México
Adrián Escofet, President of AMDEE
Mannti Cummins, Director General of Energía Veleta
Héctor Olea, President and CEO of Gauss Energía and President of Asolmex
Alejandro Díaz de León, CEO of BANCOMEXT
Bernal opened by mentioning the continuous and steady investments in the wind sector; conversely, he pointed out how solar energy has patiently waited for a moment that has not yet arrived. He mentioned that even though the solar sector has flagship projects like Aura Solar I, TAI Durango, and an upcoming 50 MW project, this industry has not received enough support, so he started the discussion by asking the panelists what is needed to make solar energy an adequate competitor of the wind sector.
Escofet pointed out that renewables are a relatively new industry in Mexico, dating roughly eight years back, as the country’s prominent oil industry did not foster the development of other energy sources. He said the wind factors found in the country make projects viable without the need for incentives. “In fact, there are no incentives in Mexico for renewables,” Escofet emphasized, but he did recall mechanisms found in the older framework, such as green wheeling and the energy bank.
“Money does not like uncertainty,” were the opening words of Mannti Cummins to echo on Escofet’s statement about the lack of incentives, which deterred financing institutions from investing in renewable energy projects previous to the reform. “Developers were expected to demonstrate interconnection capacity while offering guaranties when approaching a bank, and that was difficult to the point that the industry became stagnant.” He joked that renewable energy projects become viable when they are supported with someone else’s money.
The solar industry’s voice was heard in Olea’s words, who noted that there are several megawatts of solar power being submitted, and even though the financial and regulatory elements are in place, the projects lack a commercial outlet. “The projects are referred to as ready-to-build for a reason, but they are not realized because they do not have a PPA.” He identified the commercial outlet as the reason why wind power is booming while solar is not. This, in his view, is where the Energy Reform comes into play, as it will provide the necessary elements so that the commercial outlets, such as tenders, can flow. “I do not think CFE has understood its role in the new model. The tender intends to allocate 6,300 GWh in PPAs. With the numbers CFE is offering, I do not think this will be achieved. However, I am confident that the model will be continuously improved, so we have to look out for the second tender.”
Bernal said that the fact that renewables might not be able to participate in the first tender is concerning, and proceeded to ask Díaz de León what the sector looks like from a financing perspective. The head of Bancomext told how project planning was previously carried out in an almost improvised way, so the tenders will bring a certain order to the planning of the sector. “The ecosystem is complicated enough as it is, and the changing costs of technology and development make planning difficult,” he expressed. “The banking sector’s task is to liaise with the market players who know the technology, its costs, and applications, and understand their needs. The key is for projects to be bankable. If they are, the risks can definitely be mitigated.”
HOW CAN MEXICO MEET FUTURE ENERGY TALENT DEMAND?
Rubén Flores, President of the Board of the Human Resources Committee at CFE
A topic that is usually ignored in energy-centric conferences is the recruitment, training, and retention of human talent. Nonetheless, adequately trained technicians, engineers, and other general staff are essential for the success of any energy company. With the opening of the wholesale electricity market, CFE will start competing in the market as any other actor does, so human capital is a topic that is more relevant than ever for the parastatal.
Flores explained that changing the paradigm at CFE will definitely be challenging, particularly considering the long period that CFE functioned without any competitor. Now, that the parastatal must work as a regular enterprise and contribute economic value to the country, it will need to enhance its training programs to ensure its employees are prepared to serve the new market.
According to Flores, CFE’s new strategy recognizes that economic incentives alone are not enough to attract and retain human talent. Therefore, the parastatal is currently focusing its efforts on developing a new company culture that includes permanent training, a challenging environment, flexible schedules, tailored incentives, extracurricular activities, growing opportunities, and team building.
CFE’S FUTURE AMBITIONS
Enrique Ochoa Reza, Director General of CFE
The most awaited presentation was carried out by CFE’s Director General, Enrique Ochoa Reza. He began by explaining the restructuring process the utility is undergoing in order to become an energy company. In this sense, CFE will have four generation subsidiaries that will compete against each other and private players. A nuclear power unit will also be created, although this will remain part of CFE board for security reasons. Transmission and distribution are now under CENACE’s control, but CFE will have a transmission company that will be independent from the other subsidiaries for accounting purposes, as it will be able to report transmission costs to CENACE, who will use this information to set tariffs. Distribution will be carried out through a subsidiary that will have 16 business units, which corresponds to the number of the country’s current distribution units. The reason behind this division is also related to tariff setting, explained Ochoa Reza. CFE will have a two-way split subsidiary dedicated to power supply; one branch will focus on the basic segment and another will serve qualified users. Finally, CFE will have a commercialization company also split into two branches, one that will sell in the national market and another one that will operate internationally.
Ochoa Reza pointed out that CFE can cover demands of up to 40,000 MW, “so why did we need an energy reform?” he asked and proceeded to answer. “High tariffs negatively affected basic service users and the productivity of the industrial and commercial segments. The question now becomes ‘why were the tariffs so high?’ Well, fuels account to 80% of generations costs.” Ochoa Reza explained that the National Pipeline System was limited and not fully interconnected back in 2012, so fuel oil was principally used for electricity generation. He also pointed out that places with access to natural gas are likely to develop intense industrial activity, which directly impacts the economy. As a result of the National Infrastructure Plan, Mexico will increase its natural gas pipeline network, gasifying most states. In addition, CFE is converting several power plants so that these can run on natural gas instead of fuel oil. “Tariffs take fuel costs into consideration, so replacing fuel oil with more affordable natural gas results in a reduction of tariffs.” Finally, Ochoa Reza spoke about technical and non-technical losses, indicating that in 2012 these amounted to 16% and cost MX$52 million. These figures were reduced to 13.1% and MX$42 million in 2015. “The goal is to hit the 10-11% mark by 2018 so that future generations can take Mexico to the international average of 6%.”
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