YEAR IN REVIEW: Mexico moves toward wholesale power market

Wednesday, December 24, 2014

With the passing into law of its landmark energy reform this year, Mexico is taking steps toward creating a wholesale electricity market.

By permitting private investment in the sector, the reforms will allow for competition in power generation, which should bring down prices for residential and business customers. A conversion of combined cycle plants into natural gas-fired units, and an aggressive infrastructure build program, should also lead to smaller bills. 

Electricity tariffs in Mexico are on average 25% higher than those in the US.

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Augmenting the country's generation capacity and natural gas supply is also expected to boost industry and, in turn, economic development.

"The energy reform will be one of the triggers of greater economic growth due to greater investment in the sector and its links to the manufacturing sector," according to BBVA Bancomer's 4Q14 Mexico outlook.

Mexico aims to double its electricity generation capacity over the next 15 years and achieve 100% supply to the population – a plan which is expected to create 2.5mn jobs by 2025.

As a result of the reforms, state utility CFE will be able to form alliances with private sector players to increase generation capacity, particularly from renewable sources.

What's more, the country's natural gas pipeline infrastructure is due to grow around 34% over the next two years.

The CFE in August announced 16 infrastructure projects valued at US$4.9bn and which include natural gas pipelines, three co-generation plants, the refitting of a thermoelectric plant, three transmission lines and five contracts aimed at upgrading the country's electricity distribution grid.

"Natural gas is the linchpin of the energy reform," David Goldwyn, a former US state department special envoy for international energy affairs, said in a report by the Atlantic Council in August.

"The key to delivering lower cost and more reliable electric power to Mexico is increasing access to natural gas first by pipeline from the US, and then over time from indigenous production," he said.

Mexico also plans to ramp up its renewable energy use.

The energy transition law, part of the reform package, sets the goals of 25% of power being generated from renewable sources by 2018; 30% by 2021; 35% by 2024; 45% by 2036; and 60% by 2050.

The first major step post-reform will be the 'round zero' for geothermal generation, which is set for January 2015, and which will determine what projects will be developed by CFE and which will be put out to tender to the private sector.

Mexico's state oil firm Pemex will also play a major role in power generation post-reform.

The firm will become Mexico's second-largest electricity generator once oil-fired plants are converted to natural gas, Pemex CEO Emilio Lozoya Austin has said.

"We will go from being the country's largest electricity consumer to the second-largest generator over the next three or four years, with a 10-30% participation in the country's energy generation stakes," he said.

Pemex is expected to achieve this by converting oil-fired power facilities to natural gas and via a US$1.4bn investment in cogeneration plants.