Mexico’s consumption of fuel oil has declined by 60 percent since 2012, and is on track to achieve a reduction of 90 percent by 2018, according to Guillermo Turrent, Director of Modernization at Mexico’s Federal Commission of Electricity (CFE). Turrent spoke on a conference call convened by the Adrienne Arsht Latin America Center and David L. Goldwyn, Chairman of the Atlantic Council’s Energy Advisory Group, on Nov. 5.
The virtual elimination of fuel oil from Mexico’s fuel mix is arguably the most impressive accomplishment to date of the country’s nascent energy reform, which began with the constitutional reforms of 2013. The gas transition has enabled a reduction in industrial electricity prices, with CFE reporting December 2015 industrial and commercial tariffs have decreased 30-42 percent and 13-27 percent year on year, respectively. Basic consumer tariffs are essentially flat.
Before it undertook reforms, Mexico had 11,400 km of natural gas pipelines (compared with 450,000 km in the United States), according to Turrent, but the pipelines have not historically acted as a network and significant parts of the country, particularly in the west, had no access to gas. Even with the decline in commodity prices, the spread between fuel oil and gas prices remains significant, and expanding the use of natural gas — imported from fields in the United States — in the country’s electricity system lowers the cost of generation as well as emissions resulting from fuel oil-based generation.
CFE, in coordination with Mexico’s State Productive Enterprise PEMEX (the former oil monopoly) and the Ministry of Energy, developed a vision to add 8,000 km of new pipelines to the country’s network by 2030. Mexico is currently in the process of tendering twenty-six new pipelines to owner-operators under twenty-five-year contracts, bringing the country’s total closer to 20,000 km, still less than half of the 45,000 km network in Texas. CFE is taking advantage of the increased gas supply to convert 5,000 MW in seven power plants from fuel oil to gas by mid-2016.
Concurrent with the country’s transition in physical infrastructure, regulators and policy makers have elaborated on the electricity market rules. This includes publication of the market rules and an ongoing public consultation process for the business practice manuals, which describe the operation of the spot market — scheduled to begin in January 2017 — and how the auctions process for the instruments described by the market rules will work. The market rules cover four subsectors: energy and auxiliary services; financial transmission rights; clean energy certificates; and capacity. The market rules took ten months to develop and are designed to follow US best practices.
The clean energy portfolio standard will begin with a 5 percent target in 2018 and will be set annually in advance for the following three years, said César Hernández, Mexico’s Undersecretary of Electricity at the Secretariat of Energy (SENER), who also participated in the call.
The obligation to acquire clean energy certificates is at the level of consumption — applied to the basic service users (the majority of residential customers in Mexico who will remain being served by CFE) and the large industrial users — with penalties for noncompliance. Generators of clean energy — broadly defined to include renewable sources, efficient cogeneration, and emerging technologies — will be evaluated based on data provided by the independent system operator CENACE, and awarded certificates by the energy commission for each megawatt-hour generated. Clean energy certificates may be traded through long-term auctions or bilateral contracts. The annual portfolio standard targets will be established in accordance with the country’s legally binding commitment to reach 35 percent of its energy generation from clean sources by 2024.
SENER has also proposed enabling private sector participation in construction, operation, and maintenance of new transmission lines through a new contractual model that allows for project financing. This model will be applied to Mexico’s first new high-voltage current line.
Turrent and Hernandez were upbeat about the opportunities for private sector investment in Mexico’s electricity sector, anticipating $124 billion in private investment in the space in the next decade and a half — through 2029. While much attention has been focused on activity in upstream oil and gas, it is clear that the real transformation is happening in Mexico’s electricity sector. This has positioned the country for improved competitiveness and a more sustainable and resilient system in the decades to come.
Megan Reilly Cayten is an independent consultant and co-author of “Mexico’s Energy Reform: Ready to Launch,” which was published by the Atlantic Council’s Adrienne Arsht Latin America Center.