Will Electricty Suppliers Meet Business Needs to Promote Growth?
The Mexico electricity market continues developing and evolving despite the current uncertain times. Acclaim Energy has been in constant communication with both end-users and suppliers to understand how they see the electricity market and what market participants can do to navigate the current competitive scenario.
In the last couple of months, Acclaim Energy has commented on the steps end-users can take to address their energy costs and risk; and we think it is convenient to observe what suppliers can do to address the changes seen in the market to gain a competitive advantage.
I think it is worth noting that suppliers have been experiencing some serious challenges pre-COVID 19 .
These challenges are:
- Compression of margins as a result of the search for a cheaper price by the end-users.
- Having access to or seeking renewable supply in order to meet the high demand of renewable energy by the end users.
These challenges have been exacerbated by the economic impact of the current health pandemic and the regulatory uncertainty due to the actions of the current government administration to favor CFE by limiting private participation in the electricity market, which does not help market participants at all.
While these actions have caused some confusion and disappointment among some, the current market has also created opportunities for suppliers. It is Acclaim’s opinion that the suppliers who are willing to adapt to the prevailing market conditions can take advantage of these opportunities and increase their chances of becoming industry leaders and winners in the new energy marketplace.
What can suppliers do to take advantage of the opportunities presented to them?
The most important element is for suppliers to understand what end-users are looking for right now.
Today, end-users are actively seeking to mitigate risks associated to supply agreements (e.g. congestion, variance in consumption) because they do not feel comfortable in situations where all the risk is transferred to them. End-users see the reduction in risks as the best way to decrease the volatility in energy prices and, in this way, obtain greater and more stable savings over the life of their contracts. What is really sought is a “win-win” scenario whereby both parties can win by sharing the risks associated to a supply contract.
Another element to consider is the unwillingness by end-users to sign supply contracts longer than 5 years. Current economic and regulatory conditions are not conducive to signing 10-year or more supply agreements. The following example is very illustrative of this sentiment amongst end-users.
An Acclaim client has recently told us that it is already difficult to attain internal approval for a 5-year PPA, it would be almost impossible to get such internal approval for a 10-year PPA.
One final element to consider is that end-users want greater standardization of contracts to facilitate negotiation. Acclaim Energy has seen contracts of all kinds in which the ambiguity and interpretation in many of the clauses force the parties to spend more time reviewing and negotiating the contract, which increases legal fees and time in signing new supply contracts. One recommendation is to implement best practices and international standards in contracts. In this context, Acclaim Energy suggests looking at the North American Energy Market Association (NAEMA) Master Service Agreement for Gas and Electricity as a reference.
The result of the implementation of these three elements will reduce the decision-making process by the end-user and should result in both end-users and suppliers benefiting from new energy supply agreements.
In addition to understanding the requirements or necessities of the end-users, suppliers must entertain the following features to be in a better position in the market:
- Trust: Suppliers must convey a strong sense of confidence in the development of the Mexican electricity market and communicate their efforts to protect the rights of the end-user.
- Evolve and adapt to market conditions: Mexico electricity market is constantly evolving because end-users have more complex needs to manage their energy consumption. Switching suppliers is only one of the available options, while others are on-site generation projects, energy efficiency, etc. that are actively considered and pursued. Furthermore, these more complex needs have been accompanied by the end-users enjoying a greater understanding of the market and the opportunities made available to them. This translates into suppliers having to offer a greater range of products and services to meet the needs of the end-users and their different risk profiles as we look to the future.
- Transparency: Offers and contracts need to be more transparent despite the significant progress made over the last 12 months. Despite these improvements, the information contained in supply offers is sometimes not enough, and it takes a real research effort to understand the different elements thereof and discover the hidden risks.
Acclaim Energy truly believes that the current market conditions will result in a shake-up of the competitive landscape for energy suppliers in Mexico with some real and clear winners. As indicated earlier, these winners will be the ones who better adapt to market conditions and focus on the needs of their customers. At the end of the story, demand tendencies are what drive direction in the industry. The question is who these suppliers will be.