During the span of 2022, Mexico along with large energy consumers primarily from the industrial sector were faced with a series of challenges and opportunities due to regulatory changes in the national electricity market, volatility in natural gas prices, the lack of investment and accessibility to renewable energy, as well as a nationwide drought that unleashed one of the most threatening water crises of the century.
Among the variety of effects that these impacts had on the industrial sector was the heightened level of awareness that in turn triggered the need for companies to focus on the optimization of their energy budget through their operations. By prioritizing their commitment to the environment and focusing on sustainability, the implementation of ESG strategies to be able to meet their objectives became key.
During the second quarter of 2022, Mexico´s electricity market experienced its first breakthrough when the counter energy reform proposed by the current political party- which sought to strengthen the nation-owned Federal Electricity Commission (CFE) through changes to articles 4, 25, 27 and 28 of the Political Constitution- was rejected by Congress. By not obtaining the 332 votes required to approve the counter reform, the Wholesale Electricity market (MEM in Spanish) obtained its first victory since its creation, which allowed the market and its participants to continue to operate freely in a competitive environment. Additionally, market participants and consumers that were currently operating in the WEM or that qualified to migrate but were either under a self-supply contract or still with the standard CFE tariff, had the peace of mind that they were able to continue to select the qualified supplier that could fulfill their needs by offering the best savings, terms, and conditions for their business.
Several months later, in June, the Ministry of Energy published the “Development Program of the National Electric Grid 2022-2023” (PRODESEN as known in Spanish), a document used to present the general framework regarding the planning, expansion, generation capacity, and modernization of the country´s transmission and distribution grids, among other issues related to the electricity sector.
According to the publication of the PRODESEN 2022 and, in reference to Mexico’s emission reduction targets set out in the Paris Agreement of 2015, as well as in the Energy Transition Law (Ley de Transición Energética), Mexico has committed to generate 35% of its energy demand through the use of renewable sources by 2024. With the publication of the PRODESEN, a myriad of questions followed due to the incongruity presented in the document which proposed to implement generation projects that might not be enough for the country to address the challenge of the energy transition successfully, which contemplates generating electrical energy by burning highly polluting fuels. Although the program estimates that installed capacity will increase by 48% by 2036, unfortunately, the document does not provide information on how CFE will deal with or handle these investments.
Furthermore, the regulatory entity´s initiative sparked controversy considering it is opposite to the global trend and effort towards decarbonization, which in the process has an economic impact that affects large energy consumers due to higher production costs. Additionally, the lack of approval of generation permits issued by the Energy Regulatory Commission (CRE in Spanish) to private producers which explored an opportunity to invest and install generation projects from renewable sources in the country diminished the availability or access for companies that sought to become more sustainable through the consumption of renewable energy.
Due to the lack of approval of large-scale renewable energy generation permits, companies in search of potential savings resorted to the Distributed Generation scheme to minimize their operating costs and partially achieve their sustainability goals. By not requiring a permit from the CRE, the Distributed Generation scheme although limited to 500kW, became the expedited method to not only consume energy from renewable sources, but also reduce the cost of energy for companies that operate during the “peak” hours established by CFE.
Throughout the year there has been an increase in companies that resort to these strategies of incorporating solar panels on their facilities. Due to the increase in demand for these types of solutions, the CRE took the initiative to propose the implementation and modification of regulations for the Distributed Generation scheme which aim to increase security measures, compliance, and supervision. By doing so, the CRE aspires to formalize the scheme through the monitoring of their connection to the national grid as well as through the requirement of a certification for not only installers and construction managers, but also for the equipment and materials used in the installation process such as: structures, wiring, panels, and inverters, which would be subject to inspection.
Although the formalization of the Distributed Generation scheme benefits the reliability of the national grid, the modification that caused the most concern relates to the sale of energy that is generated through these systems and sold to CFE, which in turn would affect profitability and return on investment of these projects. The proposed changes contemplate the elimination of “net metering” which therefore would eliminate the banking of energy generated when it is not consumed instantly, but at night or at later dates for example, where 1kWh is compensated 1-to-1 regardless of the time period. Therefore, the new scheme would consider that the energy generated and not consumed will be sold to CFE at a lower price than the tariff, being the price that CFE would have paid in the market.
As of now, the proposed changes have not been officially published, although it can be expected that throughout 2023, the formal announcement will be made.
For large energy consumers, the global natural gas market also had a year of high volatility due to geopolitical, meteorological, and macroeconomic aspects. One of the key factors stem from the war between Russia and Ukraine. Considering that Russia is the second largest producer of natural gas in the world, it ranks among the top energy suppliers to the United States and China. Additionally, Europe depends on natural gas from its eastern neighbor, since Russia is around 30-40% of its supply, as well as almost 25% of the oil consumed on that continent.
Among several effects of the war, the limitation of the supply of natural gas to Europe, along with other macroeconomic aspects and the winter period that covers from November to March 2023, the spot prices of natural gas at the reference point located in the Henry Hub in the United States peaked at $8.80 per million British thermal units (MMBtu) in August 2022. According to the US Energy Information Administration (EIA), the forecast of natural gas spot prices at Henry Hub will average $6.09 MMBtu this winter and would gradually decline as production growth continues and winter eases, reducing heating demand.
Although EIA estimates foresee average prices above $6.00 MMBtu during the winter, during late December 2022 and early 2023, natural gas prices plummeted due to mild weather conditions where temperatures turned out to be warmer than expected and in conjunction with a high level of natural gas production announced in the United States.
Mexico, being a net importer of natural gas from the United States, is highly susceptible to these price increases and volatility which in turn impact large energy consumers since a large portion of electricity generation comes from combined cycle plants operating on natural gas. Additionally, for industries that depend on natural gas as an input for their operations, the importance of implementing a risk mitigation strategy that includes monitoring, follow-up, and execution to ensure that companies can optimize their costs when the market allows it became critical.
For 2023, it is estimated that Mexico has a good opportunity for growth which derives from Nearshoring and foreign investment through the expansion of more manufacturing plants in the country. Therefore, it becomes essential to not only maintain but further facilitate companies with the accessibility to the necessary resources required for their operations to flourish. Having access to infrastructure as well as the availability of energy from clean energy sources at a competitive price, along with the support from both the regulatory entities and private sector, will be the advantages required to drive and promote economic and social development in Mexico.
With the correct guidance, this 2023 offers the opportunity for companies that aim to mitigate their risk and optimize their energy budget or reach their sustainability and ESG goals, to be able to incorporate the correct strategies in a dynamic and changing market. Doing so will not only allow companies to achieve their goals, but also obtain significant savings in the process.
