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Mexico’s Energy Policy to Align with Sustainable Development Goals

Abel Hibert, Economic Advisor of AMLO
MEF 2019 Abel Hibert

The new administration is slowly unveiling its plan for a new energy model and sustainability is key to develop future projects and plans. Abel Hibert, Economic Adviser to President Lopez Obrador discussed the administration’s plans to follow the UN Sustainable Development Goals to develop a more sustainable energy mix in his keynote speech at Mexico Energy Forum, which took place on Feb. 20 at the Sheraton Maria Isabel hotel in Mexico City.

After the cancelation of the electricity auctions, uncertainty has fluctuated throughout the Mexican energy sector, as players wait for the government to communicate the energy policy for the next six years. Hibert explained that the Ministry of Energy, along with the Presidential Cabinet and the Ministry of Finance are working toward the 2030 Agenda and how the industry will accomplish the UN Sustainable Development Goals (SDGs).

The current status of the Mexican energy sector has a growing demand and need for the diversification of the country’s energy model. “There is an increase in energy consumption in the world and fossil fuels are running out. 21 percent of the electricity in Mexico is currently generated by clean energy, representing 30 percent of the installed capacity,” he said. “One of the main challenges Mexico faces is that many families do not have enough income to pay electricity bills.”

Energy consumption is growing in Mexico at a 3 percent annual rate and between 2015 and 2017, the sector received US$18.6 billion in foreign investment through three energy tenders. “In terms of natural gas, the rise in demand has led to a dependency on the importation of natural gas. At the moment, 84 percent of natural gas is imported, of which most comes for the US. Most countries do not import more than 52 percent of their natural gas and especially do not depend on one sole country like Mexico does on the US,” explained Hibert.

As 62 percent of electricity is currently generated through the natural gas, Mexico is one of the countries with the highest dependency in natural gas, ultimately leading to electric generation. Hibert explained that other countries have a more diversified and less risky energy mix. “Mexico will have to have investment from the private sector because PEMEX will not have the capacity to support such high demands.”

To further consolidate Mexico’s energy sector, the administration plans to implement a Smart Grid that will optimize the distribution of electricity in a more efficient manner, establish a storage market that will provide service to the entire supply chain and increase the promotion of renewable energy, as well as the issuance of CELs. “The government administration sees great opportunity in increasing energy production and securing the country’s energy supply. In the next six years the investment and contracts carried out by PEMEX will help consolidate the energy sector, as well as the investments obtained through the various exploration tenders by petroleum companies,” said Hibert.

The administration is currently carrying out work sessions with industry experts to evaluate projects and the new energy model for years to come, keeping in mind the SDGs. “The Ministries and President are taking time to evaluate and fully understand the best alternatives and solutions for the Mexican industry. We are in a stage of evaluation. These work groups are necessary to make better decisions and fully understand all of the impacts all scenarios will have,” said Hibert.

Private Sector a Key Player in Energy Transition

MEF 2019 Primer Panel

The role of the private sector in the development of Mexico’s energy market cannot be understated. Private companies will be essential in the country’s road toward implementing clean energy projects, said Claudio Rodríguez, Head of Mexico City Office at Thompson & Knight, during Mexico Energy Forum 2019 held at the Sheraton Maria Isabel hotel in Mexico City.

During the opening presentation of Mexico Energy Forum, Abel Hibert, Economic Adviser to President López Obrador, said collaboration between the public and private sectors was essential for the industry’s development. This was a celebrated announcement among the panelists in the Diversifying Mexico’s Energy Mix discussion, although certainty was also highlighted as a necessity to move forward with projects. “Companies are willing to keep investing but the sector is still waiting for a clearer message from the government on how we will move on,” said Gerardo Pérez, Director General of EDF Renewables Mexico.

According to Rodríguez, CFE has assumed a totalitarian role in the energy industry but there is still opportunity for private companies to collaborate in developing the market, a vision echoed by Leonardo Beltrán, Board Member of Sustainable Energy for All. “CFE knows best the needs and resources available in the country, as well as how to navigate the national economy. By allying with this entity, companies may reduce uncertainty in their investments and gain knowledge on the market,” he said. “At the same time, collaborating with the private sector could give CFE access to new technology and best practices to boost resources exploitation.”

Transmission, in particular, remains an unclear area for the industry. Renovation and development of new transmission lines remains the right and obligation of CFE but Pérez highlighted that opening this sector would be beneficial for evolving the energy matrix. Beltrán agreed by saying “economic development relies on the development of our transmission infrastructure.”

However, for Sampo Suvisaari, Regional Director, Latin America North and the Caribbean at Wärtsilä, this is not enough. He added that a focus on cogeneration projects is necessary to not rely solely on transmission capabilities. Similarly, he highlighted the relevance of power systems to combat intermittency in clean energy generation.

According to Pérez, the country will be in need of 60GW over the next six to seven years, which makes investment in all energy areas fundamental, and all panelists agreed on the part that clean energy projects will play in transforming the sector. “Costs in renewables have decreased beyond anyone’s dreams. Solar panel costs continue decreasing and the potential for this energy is way more than what we need,” said Suvisaari. “Wind energy costs have also lowered, making this the most affordable energy generation method.”

Rodríguez also identified President López Obrador’s social approach as an opportunity for more clean energy projects to develop, showing them as generators of cashflow and employment in areas with no access to other economic activities. “The new government has a defined social agenda, which will have an impact on the development of the energy market,” he said. For Beltrán, though, the private sector’s participation in his projects is fundamental. “Companies have the resources and technology to bring energy to communities,” he said.

Overall, all panelists were confident regarding the future of the industry and the inclusion of clean energy projects in the mix. “Change will come by itself, mostly guided by economic efficiency,” said Suvisaari, supported by Beltrán who highlighted that although there are always political changes, these should not affect economic models. “We must identify the energy model that best addresses Mexico’s needs,” he said.

New Financing Models, the Ideal Path Toward Energy Stabilization in Mexico

MEF 2019 Segundo Panel

The new energy reality in Mexico, the innovative financing models and the future of the industry during AMLO’s six-year period were some of the issues analyzed by the panelists present at the Mexico Energy Forum 2019, held on Wednesday at the Sheraton María Isabel Hotel in Mexico City.

The consequence of the cancellation of the fourth electricity auction was one of the topics covered during a panel of experts moderated by Alan Sakar, Associate Energy and Infrastructure at Clifford Chance. Héctor Olea, President and CEO of Gauss Energía, was optimistic, even though neither he, Gerardo Pandal, Commercial Director at Vive Energía, or Salomón Amkie, Director Head of Power and Energy of Citibanamex, believe that long-term auctions will not be held in the next two years. “The previous model is no longer valid because it no longer exists,” said Olea. “We have to recognize that and understand the change and be optimistic, because in changes there are always opportunities, as demonstrated by the Energy Reform. New business strategies will appear in which many participants will find investment opportunities.”

Pandal asked for dialogue and understanding with the government in the face of this new reality. “We have a new scheme and we have to listen to the government, because Mexico is a democracy. I believe that the interests are aligned. Everyone is looking for good electric power service at a good price and we have achieved this in Mexico after many years. The Mexican model has already been tested in other countries, achieving a sustained decline in prices,” he said. In addition, he explained that it is necessary to cover all the country’s demand, which differs greatly depending on the areas. “The growth of electricity demand is above what was expected in areas like the southeast but there are also other areas of the country with a generation deficit.”

Regarding the new financing models, Sakar said that after the macroeconomic changes that Mexico has experienced in recent years, the financial sector should be one of the main promoters of this industry. On this subject, Pandal pointed out that it is necessary to look for new mechanisms with the financial sector to find attractive rates for the industry. Olea added another financing alternative, which could also be developed, at least in the solar sector. “Storage is an alternative to private investment versus monopoly in the transmission system. The private sector can participate in that area through storage.”

Amkie believes development banking has played a very important role in the financing of projects in Mexico, which is a key to the future of the industry. “Development banking has tended to be the pioneer in some financing in a more aggressive way than traditional banking,” he said. “But I think that traditional banking and development banking will go much more hand in hand in the future.”

Private-Public Sector Collaboration Crucial for an Efficient Transmission and Distribution Network

MEF 2019 Tercer Panel

During the Mexico Energy Forum 2019, which took place on Feb. 20 in the Sheraton Maria Isabel in Mexico City, industry experts discuss the future of the country’s transmission and distribution grid and what needs to be done to integrate smart technologies.

Mexico’s grid is poised to welcome an additional 8GW from renewable energy projects. However, this achievement will not reach its full potential without the proper infrastructure to deliver the power produced to critical consumption points. “Mexico has over 100,000km of transmission lines, of which 50 percent are over 20 years old and only 8 percent has been constructed in the last five years. There is a growth of 1 percent when the accurately demand is of 3 percent,” said Héctor Rocha, Partner for EY and Deputy Leader for the Energy Sector.

As transmission corridors continue to become saturated, Rocha explained that the shutdowns we have already experienced will continue and that we will not be able to evacuate cheap energy unless the gap is bridged. “A saturated network generates problems to the consumer. If we strengthen it, we will be able to provide cheaper prices to consumers,” said Leopoldo Rodríguez, President of AMDEE.

Alejandro Preinfalk, Vice President of Energy Management at Siemens Mexico agreed that the gap must be filled and that the only way to achieve it is by working as a team. “We must have a robust, quality and flexible system that will allow the country to flourish,” said Preinfalk. “Using smart technologies will push the digitalization of the system and provide companies with data to monitor the status of the system and carry out predictive maintenance, reducing downtime and costs.”

Cybersecurity will play a larger role as the system becomes more digitalized. “We ensure the safety of the data and it is becoming the most important asset of any device. It is a real risk, especially in the transmission network,” said Preinfalk.

There is much work to be done to supply the country’s growing demand, but the panelists agreed the government will not be able to build the necessary infrastructure alone. “The government has a natural monopoly in terms of distribution and transmission lines. In regards to transmission, it should continue to have this role but the challenge is too large and there is no way that there is a budget large enough for the government to do it alone,” said Rodríguez. “The rules of the game have changed. We have to create new schemes and even if they are not called auctions or tenders, the private sector must be involved. The private sector’s role should support, especially when it comes to the large challenge the country has in terms of generation.”

When it comes to distribution lines, Rocha stated that there are over 800,000 distribution lines in Mexico, and the number has decreased throughout the years. There are technical losses equating to 13,000GW/h and 18,000GW/h of non-technical losses, which means that over US$2 billion are lost due to these inefficiencies.

From an EPC point of view, Nuno Inácio, Director General of G3R discussed the uncertainty among players and the need for clarity. “The two main challenges are to increase the number of distribution lines and the other is to modernize, but the main focus should be how to do it together. There are players who want to be involved and invest. It needs to be well defined, so that we can see the role we will play. There are plenty of solutions. We are available, there are many EPCs like us waiting and we are hopeful the projects will continue,” said Inácio.

Industry Has Not Seen the Last of CRE

MEF 2019 Cuarto Panel

Dissipating lingering fears, current and former CRE officers assured investors that the regulatory entity would not disappear. “For any government, regardless of political inclination, it is essential to have an entity that gives certainty to investors,” said Francisco Salazar, Coordinator at the International Confederation of Regulators and Former President Commissioner of CRE. “There must be professionals that are not subjected to changes in government administrations. This gives certainty to investors.”

On February 20, Mexico Energy Forum 2019 gathered three current and former CRE officers at the Sheraton Maria Isabel hotel to present industry leaders the reasons why CRE would not disappear, despite changes made by President Andrés Manuel López Obrador, including the cancellation of the long-term auctions.

Salazar spelled it out clearly: “CRE will remain for a long time and will be fundamental to the country’s goals for economic development. The Energy Reform made CRE a coordinated regulatory entity, giving strength beyond that of any Ministry. From a legal standpoint, Mexico has built a framework that guarantees CRE’s survival.”

According to Héctor Olea, President of Asolmex and Former President Commissioner of CRE, Mexico has been excellent in creating regulatory frameworks. However, the country fails to support these with proper instrumentation and operability. That is where CRE came in. After the crisis of 1994, Olea says CRE was strengthened to work as a mechanism to boost foreign investment and allow the creation of IPPs. In 2006, the commission took the next step and detonated the clean-energy market. Finally, with the support of CENACE and the Ministry of Energy, CRE laid down the framework to develop long-term auctions. “CRE creates new markets that bring new opportunities to investors. Its latest venture is focused on energy storage,” said Olea. “The industry must rally to defend its value.”

At the moment, it is business as usual for CRE, according to Rubén Hernández, Head of the Oil Products Unit at CRE. “The regulatory framework remains and we are working on a regulatory package to offer certainty, promote investment and reduce the regulatory burden,” he said. Hernández even highlighted priorities for the commission including boosting natural gas production and the exploitation of energy sources. “We must make our energy mix more efficient so we do not depend solely on oil,” he said.

Naturally, after the cancellation of the long-term energy auctions, uncertainty rose among investors regarding CRE’s future and its autonomy as a regulator. However, Salazar highlighted that Congress already tried to pass a law that gave new attributions to the Ministry of Energy thus removing part of CRE’s autonomy, but that was rejected due to pressure from the industry. Furthermore, he said auctions will have to be reactivated, provided the law does not change.

“CFE cannot buy energy directly from its own generation division. Though this is happening at the moment, it is only part of a transition period that considers legacy contracts and leads to greater competition,” said Salazar. “If the law were to change, tariffs would go up and that would be detrimental for the government.”

President López Obrador has remained true to his word of not changing the law, which should be an indication of auctions eventually returning, according to Salazar. He acknowledges that CFE has been strengthened under the new regime but he sees this as a boost to the company’s public finances, which opens the door for CRE to collaborate in determining efficient costs and ensure proper tariff implementations to protect users, companies and the government itself. “CRE does not undermine competition for anyone, including CFE,” said Olea.

Energy Efficiency to Guarantee Supply

MEF 2019 Quinto Panel

Mexico needs greater energy efficiency, according to the panelists who participated in the closing panel of the Mexico Energy Forum held at the Sheraton Maria Isabel Hotel in Mexico City this Wednesday. “Energy efficiency guarantees energy security in the country since the distribution network is saturated, which makes it difficult to guarantee supply,” said Francis Pérez, Director General of RAMADASA.

According to Francisco Salazar, Founding Partner at Enix, in the year 2040 the energy demand will reach its peak, so it is necessary to start taking measures that anticipate the future. One of those processes, Pérez said, is the modernization and digitalization of processes. “It is necessary to analyze the energy demand of companies in a thorough way to know if we are using energy well. We need continuous improvement processes and expand digitization to achieve better results.” Pérez talked about the Nestlé case as an example: “Nestlé improved its production while its energy consumption decreased,” she said.

Simon Plata, Power Automation and Digitalization Advisor at Emerson, opted for the digitalization of processes to improve efficiency. “These processes help to make plants more efficient while allowing greater operational flexibility,” he said. He also emphasized the responsibility of both producers and off-takers. “When we talk about energy efficiency, we always see the issue from the consumer’s point of view, but the producer must also be subject to this efficiency. What we want is to achieve a minimum level of emissions for the same production rates.”

A model proposed during the panel is that used by Bimbo, one of the companies most committed to energy efficiency and that has created a mix of solar and wind energy. “It is not good to marry a single technology or scheme, since that way it is impossible to achieve a 100 percent energy consumption from renewable sources. We have to generate the right energy mix to reach our objectives,” said Irene Espinola, Director of Global Renewable Energy at Grupo Bimbo.

Ramón Basanta, CEO of ATCO Energía, asked for caution before the process of political transition that Mexico is going through, following international best practices. “In other countries the establishment of a mature electricity market takes between seven and 13 years” and Mexico has only just begun. “I think that we should not be alarmed so much, since it is normal that after a political change of these dimensions the legislation is revised. The objective, however, is that in the future supply and demand will set prices.”

For Alejandro Blanco-Moreno the ideal protocol would be that both the private sector and the public sector, in this case CFE, continue to grow hand in hand. He ventured that in Mexico it is likely that private investment in the energy system is greater than that of CFE if transmission and distribution are deducted from the equation. What is needed, in his opinion, is “certainty and a legal standard for investors to continue betting on Mexico.”

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