One of the key mechanisms that will support investment in the industry are the long term electricity auctions.
Redesigning the energy supply
The modernization of the Mexican energy sector opened an opportunity to private participation across different segments, such as Oil & Gas and Electricity. Among other objectives, the mentioned reform is looking to make the sector competitive nationally as well as internationally, especially compared to the countries with much more advanced energy markets.
Such reform has a direct impact on the energy supply cost, and it is a key element for the competiveness on other economic sectors such like the industrial, agro-industrial, manufacturing and services, so the companies should be aware of the impacts of this reform on their business and investments plans on the near future.
Especially in the electricity segment the companies are facing options to redefine the supply electricity strategy, deciding whether to acquire it on the open market (MEM for its acronym in Spanish); or evaluate if self-supply scheme continues to be a feasible option; or enter in an agreement with a qualified supplier, in order to reach the business objectives.
In either scenario, there is a necessity to develop an understanding of new market conditions and its products; not solely energy power, in addition the clean energy certificates (CELs for its acronym in Spanish) given that those have a role of promoting the clean energy generation; and capacity market.
Auctions and CELs
Mexico is looking to reduce its gas emissions linked to fossil fuels, out of own initiative, as well as a result from the Kyoto Protocol commitments. Therefore it established renewable energy targets; producing 35 percent of the generated electrical energy from renewable sources by 2024.
One of the key mechanisms that will support to meet this target are the long term electricity auctions (LTAs, or SLPs for its acronym in Spanish) and CELs.
Bearing in mind that the current clean energy electricity generation is between 26 and 28 percent it may seem the 35 percent above mentioned target is an easy objective to achieve, however, in order to arrive at the target percentage an estimated investment of USD 28,100 million will be required achieving additional capacity of about 17,600 Megawatts of clean energy (without considering the increase in demand until 2024).
Long term auction process description
The LTAs are announced by the National Energy Control Centre (CENACE for its acronym in Spanish), in charge of the operational control of the National Electric System (SEN for its acronym in Spanish). In the course of the process participants first place their respective bids with an opportunity to clarify each one. This is followed by a pre-screening and pre-evaluation process of the placed bids, a presentation of sell- and buy-side offers, a presentation of bid securities, an economic evaluation, and finally, a public announcement of the auction results. The announcement enables the contract signing between the sellers and the buyers for the agreed-upon offers.
For the publication of the successful sell-side offers one of the key steps is a commercial evaluation of the bids which includes various technical aspects, as well as the concept of maximization of savings for the buyer. The objective is to assign the highest amount of sell-side offers to the buy-side requests at the lowest possible price.
Results of the three LTAs to date
So far three LTAs have taken place and the most recent one’s results have been announced on November 22 2017. In the first two LTAs the provider of basic services presented bids for the purchase of power, cumulative electrical energy and clean energy certificates (CELs for its acronym in Spanish) to which several companies responded by submitting bids and going through the aforementioned bidding and evaluation process. The initial results of those are presented in the charts below.
In the third and most recent LTA an additional important variable has been introduced which was the participation of qualified providers as potential buyers and not only the basic services providers.
This has shown a gradual improvement and professionalization in the operation of the SEN and a better integrated functioning of the Mexican electricity market.
Despite of private company participation as buyers in the recent LTA, the quantity of assigned products was lower than in the previous auctions while still resulting in attractive prices. The results hereof are shown in the next chart.
With regards to the achieved prices Mexico has topped the list of globally lowest average prices in clean energy auctions. The average prices assigned in the most recent auction was USD 20.4 per MWh+CEL approximately 36 percent lower than in the previous LTA.
The mentioned average price is one of the lowest comparable prices worldwide. However, taking into account the minimum price that was individually assigned, the price quoted in one of the offers by a solar plant in Mexico was USD 17.7 per MWh+CEL, therefore coming close to auction prices in Chile and the UAE. An overview of lowest prices per country assigned in comparable auctions are shown below.
The prices achieved in the Mexican market are unlikely to have a significant impact on the electricity prices in the short term given that the auction-winning generation plants will not be operational until the second half of 2019. Additionally, the MWh quantities purchased by the basic and qualified service providers correspond to approximately 1.8 percent of the annual generation in the country. However, the obtained results can be seen as an important indicator of the clean energy potential in Mexico, which will play an increasingly bigger role in the future energy mix.
Why is it important to keep up to date on the LTA results?
The LTA results are an important tracker of the development of clean energy projects, as well as an influencer of the derived buy- and sell-side prices. They will not only impact the national electricity market but also the energy cost for all consumers, especially larger corporate ones whose main cost segment is precisely the energy cost. This is why we should all be up to date on the current and upcoming results and anticipate any repercussions on the plans and decisions we are taking today.