By Tom Kleckner

HOUSTON — It’s a sign of the Mexican electricity market’s growing strength that at least some industry experts expect little change after the country’s presidential elections next year.

The country’s constitution limits presidents to single six-year terms. That means every six years, a new president and administration — usually from the Institutional Revolutionary Party (PRI) — is guaranteed to take power, leading to months of transitory uncertainty for the energy sector.

Derek Woodhouse, a partner with Woodhouse Lorente Ludlow, has been advising Mexico’s Energy Ministry (SENER) on implementing the wholesale market and drafting the geothermal energy law and regulations. He expects 2018 to be different.

“Regardless of who wins the election … they’re not going to be able to dramatically change what’s being done,” Woodhouse said during a Gulf Coast Power Association luncheon last week.

For one, Woodhouse said, market reform was written into Mexico’s constitution three years ago. “Second, because the market rules have been put in place, and can only be changed now by the market itself. It will be hard for them to mess up things,” he said.

“I think in many ways, that’s why it was assigned this way, so it can support political changes, and political changes will not affect dramatically what is going on.”

Continuity or Inertia?

Woodhouse would know. In the late 1990s, he was part of a team drafting the country’s initial market reform proposal. When Vicente Fox ended 71 years of PRI rule with his surprise victory in the 2000 election, it put a halt to the market reforms.

“When Fox won the election, nothing happened — not for 12 months,” Woodhouse said. “That’s a political risk of having a new party [in control], because then you cannot have the same teams running the show.”

Woodhouse said the difference now is the nearly three dozen market rules that have been — or soon will be — put in place since new industry laws and regulations were passed in 2014. They govern everything from financial transmission rights auctions to market registration and outage scheduling. A code of conduct and operating guidelines and procedures are among those rules yet to be developed.

Still, further changes will only be expedited if the PRI manages to replace incumbent President Enrique Pena Nieto with another one of its own, Woodhouse said.

“Then you have continuation. At the end of the administration, people … probably know they’re not going to be here, so why take any risk? Why start something you’re not going to end? That triggers a year of nobody doing anything,” Woodhouse said.

Continuity does reign within the Energy Regulatory Commission (CRE), an independent body from the state-owned Comision Federal de Electricidad (CFE) that has long controlled Mexico’s electricity business. CFE is currently being restructured into separate generation, transmission and distribution businesses.

Woodhouse said inertia during the transition between administrations can still be a problem, however.

“You need to wait for the new panel to take over those positions, to learn what to do, and start doing it,” he said. “You have 12 to 18 months that nothing happens. It’s sad because it shouldn’t be like that. They have the tools to make changes, and they’re simply not using them.”

Growing Private Sector Role

SENER is implementing the wholesale market in phases through 2018. It consists of short-term markets (day-ahead, hour-ahead, real-time and ancillary services), medium-term auctions (three-year energy and capacity contracts), long-term auctions, FTR auctions, a capacity balancing market and the 20-year clean energy certificates market for instruments equivalent to 1 MWh of energy from clean sources.

The market’s third long-term auction last week set a new low for average prices at $20.57/MWh, bettering the $33.47/MWh average set in September 2016, according to preliminary results. Mexico will add 2.56 GW of capacity from 16 new projects, with a total investment of $2.36 billion by international players from Canada, China, France, Italy, Japan and Spain.

Among the winners was Consorcio Engie Eolica, a consortium involved in one of the Tres Mesas wind farm phases in Tamaulipas. (See Energy Wildcatter Hopes to Make His Mark in Emerging Mexican Market.)

Eventually, SENER will hand over the keys to CRE. (See Mexico’s Power Market Continues to Gain Strength.)

Woodhouse says there is still a steep learning curve for those used to the old way of doing things. No longer can CFE sell energy to the end user.

“We’re devising something that will allow them to look good politically but still incentivizes the private sector to negotiate contracts,” said Woodhouse, who has focused his career on private-sector participation in infrastructure projects traditionally reserved for the public sector.

“Hiring consultants would lengthen the process by 12 months, so we came with the idea of allowing them, from the top, to sit down and negotiate,” he said. “They’re not used to doing that. That was perceived as something corrupt. We are giving them that option because now, legally, they can do it. But they’re still very nervous. ‘Yeah, but how is it going to look if I sit down and discuss a contract with someone?’”

Woodhouse said the market is just awakening, with many players “just learning how to play the game.” Only five companies are listed as qualified suppliers, and a number of their contracts are in the 1- to 3-MW range.

“They’re testing the waters to see how their software runs,” Woodhouse explained.