Electric Power and Natural Gas: Where are we going?
The Ministry of Energy (SENER) published at the beginning of June the National Electric System Development Program (PRODESEN) 2022-2036, the guiding document of the sector’s planning, which also includes the expansion plans of the country’s generation capacity, the projections of energy demand, the modernization of the transmission and distribution networks, the retirement plans of obsolete power plants, among other issues related to the electricity sector. We must emphasize that this year’s edition also underlines the growth forecasts of renewable energies in the national energy matrix, but they are discouraging.
While Mexico’s emission reduction targets embodied in the 2015 Paris Agreement, as well as in the General Law on Climate Change and the Energy Transition Law, established that Mexico committed to generate 35% of its energy demand from renewable sources by 2024, the current PRODESEN document looks to postpone the fulfillment of this goal until 2031, seven years later, which is longer than originally planned, without detailing concrete, clear and credible plans to achieve this goal. Currently, SENER estimates that only 30.5% of clean energy will be produced by 2024.
It appears that this delay is not due to economic or technical reasons, but to the decision of the federal government that CFE would be solely responsible for expanding the renewable (and non-renewable) generation capacity required by the country, while the Energy Regulatory Commission (CRE) remains immobilized and would not grant the generation permits requested by private producers to undertake new projects in the sector. According to several jurists specialized in the field, this decision may not only contradict the current legal and regulatory framework established in treaties such as the Mexico-United States-Canada Treaty (T-MEC), but also the Electricity Industry Law and the same Law of the Energy Regulatory Commission.
The generation projects proposed in PRODESEN 2022 may not be enough for the country to successfully address the challenge of a successful energy transition, since it seeks to continue generating electricity through the burning of fuel oil, which is not consistent with the global trend for decarbonization of a countries’ energy goals, nor the commitments that Mexico has signed regarding climate change mitigation.
Since the entry of this administration in 2019, the Indicative Program for the Installation and Removal of Power Plants (PIIRCE) was canceled, which aimed for the gradual withdrawal of the most obsolete and polluting plants to a more modernized installation of electricity generation capacity with the deployment of more efficient plants and a lower carbon footprint, unfortunately, this was removed in this version of PRODESEN. This cancellation not only impacts the country’s economy by allowing inefficient power plants to continue to be used, such as thermal power plants that burn fuel oil, but also an adverse effect the air quality and the environment.
During 2021, the CFE increased the use of the old fuel oil base generation plants by 34.7%, which represented 13.8% within CFE’s generation portfolio, which equates to an increase of 8 percentage points from the 5.6% registered in 2020.
It is not news that the generation capacity in the country falls on combined cycle plants, which use natural gas to generate electricity. However, PRODESEN does not show or provide a strategy to guarantee the supply of natural gas, a fundamental input for the operation of these plants, from expansions of the gas pipeline network or through the development of storage projects.
Related to the above, SENER sent a letter on June 13, 2022, to the Energy Regulatory Commission (CRE) and the National Center for the Control of Natural Gas (CENAGAS), in which it gives them instructions to modify regulations and contracts for the transport of natural gas, and to use CFE’s surplus capacity in its U.S. and Mexican pipelines that is unused and being paid for. If this action is implemented, it could adversely impact the natural gas market, since it would require large consumers to buy from CFE and Pemex.
In the letter of June 13, it is indicated that “derived from the poor planning by previous administrations”, the CFE is subject to mandatory fulfillment of contractual transport obligations in the United States, where it has a capacity at its disposal of 8,200 million cubic feet per day, but only uses 41%, while in Mexico it has transport contracts for 18,000 million cubic feet per day of which only 68% is used, and represents an extra cost to CFE motivated by the underutilization of the capacity they have contracted to use.
If the initiative moves forward, there could be a possible increase in the cost of acquiring natural gas, since competition in the market could disappear, plus, consumers could have their ability to seek out new pricing adversely affected. And finally, the document does not define the rest of the terms and conditions in which they would be offering the fuel. Regrettably, this could cause a new wave of injunctions.
This type of action puts legal uncertainty into the market, at a time when domestic and foreign investors are looking for greater certainty in terms of Mexico’s energy policy favoring deregulation, which would help enhance Mexico’s ability to attract investments our country requires to grow.
Currently, electricity demand growth projections remain unchanged, as PRODESEN estimates a base growth of 3% per year in demand. Therefore, there should be no surprises in the electricity system and its ability to accommodate the expansion of installed generation capacity, which is in line with the growth of the country’s electricity demand. However, under that perspective the program estimates that the installed capacity would increase by 48% by 2036.
The plan also contemplates additions of 251% in the generation capacity through solar energy sources, 155% in nuclear, 40% in combined cycles and 209% of internal combustion. Unfortunately, the document does not offer information on how CFE will accomplish those investments. Notwithstanding the above, just after the program was published on June 17, 2022, during the Forum of the Main Economies on Energy and Climate Action, it was announced that Mexico reached agreements with 17 US companies to produce clean energy from the installation of 1,854 MW of solar and wind energy, and the possible construction of solar parks on the northern border and an investment of $2 billion dollars to reduce 98% of Pemex’s methane gas emissions.
At Acclaim Energy we can help you evaluate and make an analysis of the impacts that could be on your company, please look for us on our page www. acclaimenergy.com.mx and request that one of our representatives get in touch.
