nuevas reglas de mercado para el sector eléctrico mexicano. spri

© PA Knowledge Limited 20151

MEXICO'S NEW WHOLESALE ELECTRIC POWER MARKET

Anticipating the future

Luis Ramos

November 2015


Disclaimer: All numbers are for illustrative purposes


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70 AÑOS DE PENSAMIENTO SIN RESTRICCIONES Y RESULTADOS EXCEPCIONALES

… Y SEGUIMOS ADELANTADOS A NUESTRO TIEMPO

2006

GOLFO PÉRSICO

Ayudamos en el suministro de una

de las primeras redes WIMAX del

mundo para Mena Telecom

EUROPA

Ayudamos a transformar el

colapsado sistema de suministro

de electricidad de la República de

Georgia

EUROPA

Impulsamos la producción de

Nissan un 30% utilizando

instalaciones existentes de

fabricación de automóviles

2010

EUROPA

Ayudamos implantar un nuevo

pasaporte biométrico en el Reino

Unido, ahorrando a los

contribuyentes £ 160 millones

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Ayudamos a Onzo a desarrollar

un innovador 'Kit de Energía

Inteligente’ para el hogar

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2008

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ESTADOS UNIDOS

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Marina de los EE.UU.

a definir una

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reducción de gastos

para lograr un ahorro

de 400 millones de

dólares por

submarino

Años 1950

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Ayudamos al Banco

de Inglaterra a reducir

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falsificación de billetes

de banco

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Asesoramos a la Comunidad

Europea sobre el comercio y

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Años 1990

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2011

ASIA-PACÍFICO

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1960s

Años 1970

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Inc.

2012

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de producción

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2009

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1943

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Agenda

1. Introduction to the new market

2. Initial thoughts on the energy market

3. Competition for customers

4. Clean energy market


On January 1, 2016 the country will implement a competitive wholesale electricity market

modeled after a combination of the best features of PJM, MISO, and CASIO

• Energy market

• Day ahead and real-time energy markets

• Market prices include three components: energy, congestion, and losses

• Nodal market with over 2,000 nodes

• Congestion rights

• Market for financial transmission rights

• Balancing capacity market

• One-year horizon

• Market for clean energy certificates (CELs)

• Medium- and long-term auctions for energy / capacity and CELs

• Large customer loads can choose a supplier other than CFE

Overview: key components of Mercado Eléctrico Mayorista


The market creates competition for power generation and to serve large load customers

When Characteristics

Ma

rke

t m

od

ali

tie

s

Daily / Hourly

Market

January

2016

Nodal market with energy, losses,

and congestion components.

Obligation to deliver in market

Real Time

Market

January

2016

Nodal market with energy, losses,

and congestion components

Auctions

October

2015, for

contracts

2018

Medium (3 years) and long term

auctions (15 years) for load blocks

Pro

du

cts

EnergyJanuary

2016

Ancillary

Services

January

2016

Regulation services: co-optimized

with DA / RTM energy markets

PowerNovember

2015

Capacity obligation secured through

a combination of medium and long

term energy/capacity auctions,

capacity balancing market, and

bilateral transactions

Clean Energy

Certificates

January

2018

Short-term auctions, long-term (20

year contracts), bilateral transactions

Financial

Transmission

Rights

November

2016

Legacy grants, excess sold for terms

of 1, 3, or 10 years

• Wholesale power purchased

through the spot market and

through auctions

• Suppliers sell to qualified users and

basic service customers

• Suppliers must also secure

appropriate amounts of capacity

and clean energy certificates

• The transmission and distribution

system remains a monopoly, with

some opportunities for third parties

to participate as partners with CFE


Initially generators, and later financial entities, will be able to participate in a competitive hourly energy market

• Hourly physical energy market – security

constrained dispatch

• Generators required to make cost-based

bids (fuel and variable costs)

• Out-of-merit generation needed for reliability

will get revenue sufficiency payments

• Generation is dispatched in the energy market

• Mid- and long-term auction of bilateral

contracts settled for differences

• Bilateral contracts between Qualified Users

and Qualified Suppliers – no price discovery

by CENACE

• Hourly financial – virtual sales and purchases

will be implemented in Phase II (2018)

• Controllable demand offers will be implemented

in Phase II

Competition and increased

availability of natural gas is intended

to lower prices

0

20

40

60

80

100

$/M

WH

Average Daily On-Peak Prices

Central Noreste Occidental


The nodal market creates incentives to reduce congestion costs

• Congestion costs can be hedged

with financial transmission rights

• Legacy rights awarded at no cost to:

• Holders of pre-existing

transmission contracts

• Basic service suppliers based on

historic loads as of 8/12/14

• Legacy rights extend through

2035

• CENACE will auction excess FTRs

• FTRs for term of 1, 3, or 10 years

• Income will be allocated to LSEsHistorical price separation, along

with modeling, provides a

perspective on the significance

of congestion costs

0

50

100

150

200

250

300

$/M

WH

Average Daily On-Peak Prices

Baja California Sur Baja California

Central Noreste

Occidental


Load serving entities must secure sufficient capacity, either through contracts or the capacity balancing market

• CENACE determines the capacity

requirements for each LSE

• Separate market for each

interconnected system

• CENACE determines whether there

are constrained zones with their own

demand curve

• Controllable demand side resources

incorporated into market

• Only net capacity obligation is

purchased in the capacity balancing

market

• Downward sloping demand curve

based on net supply and net

demand

-

50

100

150

200

250

300

0 1.000 2.000 3.000 4.000

$/M

W

Net Capacity Obligation (MW)

Gross Capacity Demand Curve

Capacity Obligation Net Capacity Offered

Illustrative Example


Clean energy certificates will be used to comply with renewable energy requirements

Auctions – Market Operated by CENACE

Annual Spot Long term

auctions

Market

participants may

submit offers to

sell or buy these

certificates freely

The annual

auctions will

allow purchase

of these

certificates

CEC owner

Bilateral transactions

• Terms and conditions are not regulated

• No mandated price discovery

• CRE maintains registry of certificates

Clean Energy Targets Set by Law (LAERFTE1)

(2013 – 2050; % of GWH)

1) Ley para el Aprovechamiento de Energías Renovables y el

Financiamiento de la Transición Energética


Significant amounts of load will likely be secured through the medium-and long-term auctions (as well as bilateral contracts)

• Auctions to provide a slice of LSE’s load

are targeted, but not limited to, Basic

Service Suppliers

• Secures energy and capacity

• Auction for load blocks: slices of base

and peaking load

• Zonal if constrained zone

• CRE will determine the amount of

Electricity Coverage Contracts that Basic

Service Suppliers need to procure

• Medium term auctions are for contracts

with a duration of three years

• Long-term auctions

• Thermal generation: 15-year contract to

start three years forward

• CELs: 20-year contract

While significant amount of load will

have a choice of suppliers, most

customers will seek some form of price

stability

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Customers Sales

CFE Customer & Sales

Doméstico Agrícola Comercial Servicios Industrial


Agenda


2. Initial thoughts on the energy market




Gas mid stream reform will be a key driver of electricity price declines

Natural Gas Pipeline Projects in Mexico

Sources: Prospectiva Gas Natural y LP 2014-2029. Bentek.

• Extensive network of new gas pipelines

are in construction or planned

• 9,137km of new pipelines are

planned to supplement the existing

13,000km

• Primary driver for new pipelines is the

demand for new electric generation and

conversion of existing generating plants

from oil to natural gas

• The ongoing development of the natural

gas pipeline infrastructure will drive down

market heat rates through:

• Acceleration of conversion from oil

• Construction of new efficient

combined cycle projects

0

500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

CFE ENCONSTRUCCIÓN

CFE DELICITACIÓN

CFE ENPROYECTO

Third Parties

kM

New Pipelines 2014 - 2018


Competition through bilateral contracts and auctions will also drive prices toward the long-run marginal cost of new generation…..or lower!

• New entrants with low short-run

marginal costs (SRMC), primarily gas-

fired combined cycle units, wind, and

solar plants, will drive out inefficient

legacy generation units

• Efficient new CCGTs will increasingly

set the energy market clearing price

• Despite the need for significant

amounts of new generating capacity

to support load growth, over-supply

remains a risk

Projected Generation Mix (GWH)

Source: PA Consulting


High-cost resources will have a diminished role in setting market prices

• Increased amounts of low / zero

SRMC renewable energy will push out

the threshold load where high heat

rate and high-cost oil-fired units set the

price

• Increased penetration low SRMC

efficient gas plants will further drive

down market heat rates



Gas-on-gas competition will reduce the opportunity to earn excess profits

• Natural gas will be the marginal fuel

in an increasing number of hours

• Low / zero marginal cost resources

become the price-setting resource

• Potential to create negative

energy prices, as have been

seen in Europe and the United

States

• Negative prices created by

thermal resources that need to

stay on line to be able to operate

in more profitable hours

Projected Fuel on the Margin

Mexico Interconnected System



Contracts that include capacity payments, or the capacity balancing market, will be critical for generator cost recovery

• As the market heat rate declines,

capacity payments become more

critical

• Auctions and customer

commitments will be critical, as the

capacity balancing market with a

one year forward price will not

support financing of new capacity

• Power plants will have to recover fixed

operating costs and capital investment

through a combination of capacity

revenues and energy margins (energy

revenues less fuel cost and VOM)

• Capacity revenues are a more important

component in the peaking units



Price volatility in Mexico is expected to decrease

• Increasing imports from the U.S., of

both electricity and natural gas, will

dampen volatility by creating

additional supply options

• A flatter load shape than the U.S.

will likely dampen volatility

compared to U.S. markets due to

less reliance on peaking units

• Natural gas supply constraints and

weather will continue to be a

significant driver of market price

volatility

• Reliance on medium- and short-

term auctions for basic supply will

dampen price impacts on small

consumers

0

50

100

150

200

$/M

WH

Historical Average Daily On-Peak Prices

Mexico Average PJM

3.000

4.000

5.000

6.000

7.000

8.000

9.000

10.000

1 2001 4001 6001 8001

MW

H

2014 Load Duration Curve (CENACE Data)

Central NES Occidential Oriental


Agenda


2. Initial thoughts on the energy markets




Over 58% of the retail market can be attributed to 280k industrial customers

88.6%

9,9%

0,8% 0,5%

# of customer by sector

25,6%

6,7%58,3%

4,5%

Domestic Commercial

Industrial Services

Demand by sector

• Large load customers will likely switch to

competitive suppliers

• U.S. experience is that there will be significant

competition for the these customers

• In NJ, approximately 85% of the large

load is served by alternative suppliers

• In Texas, approximately 90% of the large

load is served by alternate suppliers

• Uncertainties and risks for customers and

suppliers may delay migration of customers

for a few years

• Rules for returning to CFE

• Rules for aggregation of load

• Lack of financial markets for third party

suppliers to rely on to mitigate risk


Competition to serve retail market will drive new construction and is likely to result in pricing below long run marginal cost in the short run

• Margins for U.S. marketers for large load

customers are compressed – below 10%

• Most competitive markets have experience a

large number of suppliers initially, followed

by a period of consolidation

• Competitive suppliers in the U.S. are

consolidating….especially following periods

of market price volatility

• Initial lack of availability of financial hedges

will create challenges for some suppliers

• Serving large load customers is not just

about price

• Energy management

• Green marketing

• Energy efficiency


Agenda


2. Initial thoughts on the energy markets




Prospects for a green revolution

• PA expects the value of CECs will

decline over the next decade, even

with an increasing renewable energy

requirement

• The price of CECs will be driven by the

cost differential between the lowest

cost renewable resource (wind / solar)

and the lowest cost thermal resources

• Levelized cost of solar and wind

are declining due to technology

/advances

• Cost of thermal generation is

rising with gas price increases

expected to offset thermal

efficiency improvements

Projected CEL driven by least cost

compliance strategy of wind in the

early years followed by solar in the

later years


Projected Clean Energy Certificate Cost ($/CEL)


Prospects for wind and solar

• Unlike most U.S. renewable energy

markets, there is are no separate

requirements for different types of

renewable resources

• Wind, utility scale solar, and distributed

solar will compete for compliance CELs

• Credits for cogeneration will displace solar

/ wind

-

2.000

4.000

6.000

8.000

10.000

12.000

14.000

Wind Solar Hydro Geothermal Cogeneration

Clean Energy Additions (2015 - 2029) PRODESEN (MW)

Clean Energy Additions (2015 – 2029)

PA (MW)

Sources: PRODESEN 2015 – 2029 and PA Consulting


As with all forecasts…there is significant uncertainty about the future

• Projections of economic retirements are

driven by key assumptions

• Oil / gas price differentials

• Reserve margin

• Capacity contracts

• Lower oil prices may make

depreciated legacy units cheaper

than building new gas fired units

Higher retirements and a larger

spread between oil and natural

gas prices will increase investor

reliance on capacity contracts to

recover capital and fixed

operating costs

Projected Additions, Retirements, and Reserve Margins (RM)

For Interconnected System

WTI Price Forecasts ($/BBL)



But, it is certain that the future is full of opportunity and risks

• The Mexican electric market design has a number of features that may reduce the

financial risks that investors in the US merchant energy sector experienced

• There are still a number of uncertainties that need to be understood and incorporate

into decisions regarding investments in the power sector

Projected Around the Clock Pricing for Noreste Zone ($/MWH)


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