By Tom Kleckner

MEXICO CITY — Participants in Mexico’s reformed electricity market point to its growing pains and lack of transparency when saying “it needs legs.”

Marcelino Madrigal, one of seven commissioners on the country’s Energy Regulatory Commission (CRE), takes a more glass-half-full approach to the 2014 reforms.

“It has been four years of implementing the electricity energy reforms, but the actual results are there,” Madrigal said during a recent Gulf Coast Power Association breakfast meeting. “The results are clear in terms of success. Basically now, people really have access to this market. We have new companies in the system bringing a cleaner energy supply. … This has provided an opportunity for everyone to invest, from really large companies to small ones, to even the households with solar panels.”

And indeed, there are bright spots in the market. CRE has issued 533 generation permits through September, much of it for rooftop solar. It has also registered 22 power marketers and issued 49 permits for retail market-qualified suppliers and four for basic suppliers. (Basic services are defined as pre-regulatory reform contracts and new contracts less than 1 MW, while qualified services are defined as demand 1 MW or greater, acquired directly or through the wholesale market’s qualified suppliers.)

The Ministry of Energy (SENER) says that clean energy sources were responsible for 21.1% of Mexico’s power in 2017, though large hydro dams accounted for about 85% of that figure. Given that, it would seem the electricity sector is on track to meet its clean energy goals, set by the 2013-14 constitutional energy reforms, of generating 35% of its power from renewables by 2024.

Madrigal said 20.7 GW of clean energy is currently in operation, with another 28.5 GW planned. In comparison, CRE has granted permits for 22.2 GW of new fossil generation.

“We are living in two worlds,” Madrigal told his audience, which included the Mexico chapter of the Women’s Energy Network. “We are seeing a worldwide decrease in the cost of wind and solar. This is the new world, where new generation comes with very competitive prices. It comes quickly and very fast.

“What is the old world? It’s the one we’re used to. Old technologies, coal, fossil fuels, things like that. The rapid development of renewables creates … new opportunities with lower prices and cleaner fuels that the consumer is already accessing.”

Madrigal said the key to the new world is consumer access, which leads to greater comfort as the industry changes.

“The rules to access this new world are already there,” he said, pointing to capacity and clean energy certificate auctions at the wholesale level and the growth of distributed generation.

“You can access those opportunities,” Madrigal said. “We’re seeing those lower prices in the markets worldwide, not only Mexico. The instruments are there, and people are using those instruments. Factories, small enterprises are using rooftop solar. Big companies are accessing the auctions. About 30% of demand comes from private consumers. This is a good signal. The consumers are realizing there is this new world of opportunities.”

Understanding the Opportunities

Madrigal referred repeatedly to the importance of the retail market, where less than 1% of consumers have selected power from a registered qualified supplier. The state-owned utility, the Federal Electricity Commission (CFE), has long been the country’s sole provider and is the second most powerful company in the country, second only to the state-owned oil company, Pemex.

“If you give consumers the opportunity to acquire their own energy, they will do it,” he said. “It’s just a process of understanding the opportunities in the market and a mindset change. You have to now understand you have options in acquiring energy, as you do in any other [market].”

Madrigal doesn’t compare Mexico’s retail market to California’s or PJM’s. He compares it to Chile, Colombia and Peru, which have had retail markets up and running for as long as 30 years. In Chile, qualified suppliers provide fully two-thirds of the retail power, while in Peru and Colombia they account for 46% and 32%, respectively.

“We still have a way to go. We’re at 1%, but it’s only been a year,” Madrigal said. “I expect this market will go gradually, but maybe I’m too ambitious.”

He very well may be. One market participant said consumer choice may be touted as the end game, but there has been “absolutely zero effort” to promote or facilitate the market.

Other challenges abound. Madrigal said a key will be a successful first financial transmission rights auction, which is scheduled for January after months of delay. The auction’s contracts will only cover three years, leading market participants to ask how they finance a 15-year purchase agreement with only three years of pricing security.

Not surprisingly, the lack of clarity over FTR costs means not a single bilateral renewables contract has been signed between a generator and a consumer.

“I believe the FTR market is crucial for the qualified supplier market. You need an instrument to manage congestion risk … that is the key part that this market needs,” he said.

Madrigal also lists better financing instruments for smaller-scale investments in renewable energy and a greater understanding of the retail market by the qualified segment as hurdles to overcome.

“For the most part, the main pieces of the regulatory framework have been completed,” said Madrigal, who was appointed to CRE in 2014. Each commissioner serves a seven-year term, with one rolling off every year.

The Path Forward

Market participants complain about a lack of transparency, especially with retail rates. CRE established a methodology to determine rates earlier this year, but SENER quickly rescinded the new rates and approved a confusing “deferred” application when prices skyrocketed and consumers protested. (See “Market Architect Calls for Increased Transparency,” Overheard at the GCPA Mexico Electric Power Market Conference.)

“Tariffs today are not the same as they were,” he said. “The user needs to be more comfortable with the scheme. Once they understand it, of course, maybe they’ll feel more comfortable in accessing the other options in the market. More renewables are coming online in 2019 and 2020. The market will gradually start to pick up a little bit more. You need fresh energy to be competitive, and that energy is coming online.”

Indeed. Zuma Energia in August dedicated its $600 million Reynosa 1 project, the country’s largest wind farm at 424 MW of capacity, in the state of Tamaulipas. A result of the second long-term auction in 2016, it’s located on community lands known as ejidos. (See Land Rights a Challenge to Mexico Tx Developers.)

The largest solar plant in the Americas, Enel Green Power’s 232-MW, $160 million Tlaxcala project, is scheduled to open next year.

All indications are the market reforms will continue. July’s election of Andres Manuel Lopez Obrador abruptly brought his left-wing party into power. While Lopez Obrador has talked of taking a wait-and-see approach to the petroleum sector’s reforms, most industry insiders expect him to leave the electricity market alone.

Madrigal said the transition meetings — Lopez Obrador’s administration won’t be sworn in until Dec. 1 — at SENER are going well. He said CRE is represented “in case they want to know something about how the regulations work.”

Staying on message, Madrigal said, “The work continues as normal. We have our regulatory program, and we are implementing it. We’ve been developing a framework where everyone can access this market. There have been clear, good results.

“The implementation of reform is something that takes time, but the benefits for everyone will come with a little bit more time,” he said. “I think the results so far indicate to us that this is the path forward.”