The Energy Mexico 2019 event was very dynamic as industry leaders received lots of information and a reassuring message from President Lopez Obrador’s Chief of Staff (Alfonso Romo) to private companies within the energy sector.
Challenges
Unfortunately, there was some very gloomy news related to the future of CFE. A sort of “adapt to the new times or die” picture was presented which was harsh for attendees to hear, but close to reality.
- However, the Government is thinking otherwise and will push for its plan of revitalizing the CFE through bringing out of retirement 40 old plants (diesel and fuel oil generation) which could add to the significant financial burden of the CFE.
- Mexico’s cost of energy as measured by of GDP is 11.4% double than the US (5.6%) and that is reflected in the CFE tariff. More astonishing, the current CFE methodology still does not accurately reflect the true generating costs of CFE which that there is an implied subsidy in the tariff.
A significant side effect of this tariff inadequacy is that CFE may not be able to all of its costs and, therefore, revenues would be insufficient to meet all its financial commitments and fund the significant capital investments required by CFE to modernize its fleet and build new plants.
- The second main challenge of the CFE is to start a thorough cultural change by consolidating the new corporate structure, adapting their corporate culture to the new market environment, and allocation of resources. This could also call for very painful personnel decisions and closure of plants, creating a very tricky situation politically.
- It was mentioned that there is 5GW in C&I supply which can potentially leave the CFE, unfortunately, CFE cannot afford to lose this facility.
- The new administration boasted about a cooperation agreement with Hydro-Quebec as a confirmation of support for its energy policy. However, a Hydro-Quebec official participating in one panel indicated that there is no conclusion on Hydro-Quebec’s involvement in Mexico’s hydro projects. This official mentioned that Hydro-Quebec’s involvement will be based on strategic considerations and based on specific transmissions and distributions requirements around these projects.
Structure of the Electric System/Market
- Some panelists mentioned the significant increase in renewable generation as a problem because it affects the reliability of a transmission and distribution network in need of urgent investment in upgrades and new lines.
- The private sector will have to play a significant role in the structure of the electric system/market because of the d interest in investing in MX at a time when financing in energy projects seems to be in decline around the world. The main interest of these investments is on renewable projects; however, there could be some interest larger infrastructure projects such as transmission.
- More than one panelist during the day observed that investors require regulatory support and stability to feel confident about investing in MX. In addition, investors and market participants alike will also require transparency.