The Impact of COVID-19 on Mexico Energy Prices and Strategies
The coronavirus pandemic has created an unprecedented health and economic crisis worldwide, which we all hope is short-lived and does not have everlasting personal and global ramifications on how we live, work, learn and serve others.
One of the major consequences of this crisis is the plunge in oil prices, which have retreated by as much 68% since the beginning of the year alongside other energy commodities, for example, US natural gas prices have decreased by 18% on average since the beginning of the year. Several of Acclaim’s clients have asked if this reduction in energy commodity prices would also translated into a significant reduction in their CFE bills given the aforementioned decrease in prices.
My answer to this question is “Likely yes, but not as much as you might expect”. I’ll explain. From a numeric point of view, we need to consider three facts:
- The impact of the decrease in fuel oil and diesel prices on CFE’s tariff may not be significant due to the decreasing influence of these two commodities in CFE’s generation costs. Natural gas has the largest impact in CFE’s basket of fuels and these prices have decreased less than oil since the beginning of the year.
- The significant devaluation of the peso against the dollar can largely offset the gains arising from the decrease in commodity prices. A US dollar is 33% more expensive now than at the beginning of the year, so this has to be reflected in CFE’s generation costs as the price of acquiring commodities is in USD.
- The current methodology of the CFE tariff smooths the impact of the variance in fuel prices and the deviations with estimated budgeted costs over a period of time, in order to avoid seesaw changes in the tariff and keep it range bound.
These three facts indicate that any possible decrease in CFE energy prices could be tamed, and progressive over time depending on the macroeconomic conditions due to the current pandemic and as seen in the adjacent graph. It is most likely that the decrease in C&I end users’ CFE bills will be the result of the significant reduction in consumption as commercial and industrial activities come almost to a complete halt. For example, many car manufacturers in Mexico have already shut their doors at least until mid-April.
One last consideration is whether CFE will try to push CRE to implement its request to maintain tariffs at certain levels despite the decrease in its generation cost. This is one of the requests CFE has sent to the CRE to increase its control of the electricity market which is currently being analyzed by CRE. If granted, CFE tariffs will not likely come down but remain at a pre-established level or increase to a level deemed appropriate by CFE.
Regardless of what happens to CFE tariffs, medium and large end-users of energy should use this period to revisit their energy contracts and see what opportunities and or challenges may exist when it comes to supply, reliability and savings. FYI, a noteworthy amount of businesses have already started this process and are carefully taking steps to reduce their energy bills, carbon footprint and the reliability of their supply. These companies will be rewarded for applying these practices and for exploring different options such as changing suppliers, considering onsite generation solutions and or implementing both.
We all are in unchartered territories, but prudent judgment should prevail, because at some point, things will return to normal and it will be business as usual. What business leader do now can have a profound impact on their operations and bottom-line going forward. Therefore, if your business has slowed down or closed, you are probably doing some belt tightening to manage the economic fallout and that would be wise.
Finally, history has demonstrated that when things like this happen, innovation thrives and when it comes to your energy, it may be a time to review your procurement agreements as sighted above, while also exploring the use of renewables and or taking a leap into the next generation of energy technologies.
Here at Acclaim, we have been helping customers in Mexico seize new opportunities and prepare for tomorrow, if you want to talk about your options and what others are doing to protect their business, give us a call.