The Impact of Energy Deregulation in Mexico and Where It’s Headed in 2020
As 2019 ends, it is time to look back and ponder all the main issues that have shaped the Mexico energy market over the past year, with many of them having a significant impact on pricing, reliability, investment and the environment.
The best thing that occurred particularly in electricity has been the development of a very competitive and dynamic energy market thanks to the concerted efforts by market participants. Since the energy reforms were established, end users have been very motivated to seek cheap and clean supply from suppliers and generators willing to provide them with competitive prices and access to renewable generation to meet their needs. In 2019, the market became so competitive that suppliers and generators were willing to bear more risks, such as congestion, to attract more business and remain help customers move away from CFE.
At the same time, end users have become more sophisticated and developed a better understanding of the market, the risks thereof and how to manage their energy needs strategically to gain a competitive advantage. In this context, it is worth highlighting that during the year there was an increased interest amongst end users for on-site and distributed generation solutions to complement and or replace current supply, in particular from CFE Basic Supply; to increase reliability.
Another very positive issue is the general agreement amongst market participants that Mexico continue to develop its renewable generation capabilities, as well as keep building combined cycle plants to lower energy prices, reduce carbon emissions and to accelerate the retirement of old and inefficient fuel oil, diesel and coal plants.
On the other side of the scale, we need to mention the significant regulatory risk that hung like a cloud over the entire market throughout the year. The new Administration, after successfully severing the independence of the CRE, continued pressing for new regulations to favor CFE and PEMEX and adversely affected additional benefits that could have been enjoyed by market participants. Most understand the desire to protect Mexico’s assets, but feel there is more to be gained long term, if there was greater push for integration of the US, Canada and Mexico energy markets. For most, it is hard to see how Mexico will be able to increase investments to improve the infrastructure to meet future energy needs, while lowering emissions and providing C&I customers with the options they need to remain competitive and attract new industries.
For example, in 2019 there was an ongoing lack of investment to improve the transmission and distribution network. Therefore, the country’s power market continued to be plagued by outages and inefficiencies. Without significant capital expenditures in transmission and distribution projects, the country will be unable to reduce the impact of all the new generation currently being built or planned.
In this current scenario, 2020 will be a very challenging year, as the market will experience a lot of see-saw moments.
However, it is worth remaining cautiously optimistic about the Mexico energy market in 2020 for two reasons:
- End users will not be deterred in their search for clean and cheap energy supply and increased reliability and quality of supply. They will get it either through a traditional supply contract and/or through on-site or distributed generation.
- Mexico needs private investment and participation in the energy sector. While we respect and understand the nationalistic approach, CFE and PEMEX cannot do everything on their own given their financial situation and inefficiencies.
These two reasons should serve to galvanize market participants who should carry on undeterred in their task to make Mexico energy market competitive and open. Having witnessed the merits and value of an open competitive market, we will continue to carefully evaluate all market nuances to ensure we can guide large users of energy with the superior insights they need to optimize their energy profiles and meet their corporate objectives.
No one said change would be easy, so we are prepared to do our part and look forward to working with the Administration and the private sector to make this work!
