Ongoing reforms of Mexico’s electricity industry have been drawing attention from projects developers. The latest series of price spikes of intra-day wholesale power prices, and prospects of a gradual liberalisation of retail power prices, render fast-ramp gas power projects even more attractive.
Day-ahead and real-time trading in Mexico’s wholesale power market has just been underway since the start of this year. Over that period, there have been some significant price spikes for a handful of hours, although average prices in the first half of 2016 ranged from 880 to 1,100 pesos per megawatthour (MWh), which equals about $48/MWh to $60/MWh.
Limited links to Texas, California
Mexico's electricity system, unlike Canada's, is not extensively interconnected with the U.S. bulk power system - just the border regions can import some power from California and Texas.
Consequently, power prices near the US border tend to be lower than in the Mexico’s relatively isolated peninsulas, According to EIA figures, prices in the Tijuana and Ensenada zones averaged $23/MWh during the first six months of 2016, similar to prices across the border in Southern California.
Highest prices were recorded in the Yucatán and southern Baja peninsulas – about $63/MWh and $118/MWh, respectively. Fewer options in the power mix and limited transmission capacity to neighbouring regions are the cause for this high-price environment.
Energy law emboldens IPPs
Traded electricity markets are one of a set of measures, enforced through Mexico’s new energy law which aims at opening the country’s oil, natural gas, and power sectors to private investment.
Competition on the generation side is encouraged while state-owned CENACE is still permitted to continue manage the power grid. This grid agency, formerly a unit of the state-run utility CFE, is now reorganised to function as the independent system operator for Mexico's entire grid.
Power plant assets of CFE have been split into four subsidiary generation companies, which now sell the electricity they generate into the spot wholesale market. Independent Power Producers (IPPs) and other private generators can sell electricity on wholesale markets, participated at auctions, or hedge their output through financial bilateral transactions – however, retail markets are still solely supplied by CFE.
Eliminating subsidies in retail markets
Heavily subsidized retail electricity rates have been distorting Mexico’s electricity market. There is still a huge discrepancy between costs of power production and the actual rates retail customers pay. Some analysts estimates, the cost of supplying residential customers in Mexico is more than double the price that CFE charges them.
Restructuring the power industry is hoped to reduce cost of power production and eliminate subsidies that keep retail rates artificially low.
Deployment of more low-carbon generating capacity is yet another goal set by the Mexican government. Clean energy sources – notably renewable, nuclear, cogeneration and fossil plants with CCS – are meant to 35% of the nation's electricity generation mix by 2024 and up to 50% by 2050.