E3C Discusses the Current Mexico Energy Market
OATI recently hosted Estrategia Energía Eléctrica (E3C) for a training visit at OATI headquarters. E3C, a new start-up in the Mexico Energy Market (MEM), is an independent energy provider that interacts with loads and generators to provide energy services. During their visit, the OATI Communications team had the opportunity to interview Mr. Alan and Mr. Antonio.
Q1: Describe the current Mexico Energy Market.
Alan: Mexico’s energy market, as you may already know, is a brand new electricity market. It’s a market that has taken many Mexican presidents to push, to create an energy reform, and put into practice for the last 18 years. Right now is the first time we can actually see it in action. Before, we only had one participant in the market, as it was regulated by the state — now we have different market participants, like generation suppliers and even customers — who can now be part of the market.
Currently, the state of the Mexican market is that we don’t have all the rules/regulations set up. Many participants are trying to estimate or best guess the proper economic offers to be made but in reality, a lot of them don’t have the complete picture, so we have to be cautious because when you make offers, you don’t know if the costs are covered and figured into the equation. Another thing that is really important is that we are moving from a scheme of tariffs where governments charge you whatever they want for energy, to a market where you can negotiate, prepare strategies regarding price and consumption, and make price assumptions.
Antonio: From the brain side, it’s exciting to be participating in the MEM because it’s something that is growing. It’s our baby, and it still needs a lot of nurturing, but it’s important and we get to grow with it. This is actually my first job, so it’s exciting to be a part of this and watch as the operation gets more sophisticated and gains assets, like OATI.
Q2: Explain how the Mexico Energy Market has been changing in the last few years.
Alan: In these last four years, one of the bigger changes is that clients and loads have started to become more sophisticated. We didn’t know all the inputs, the assets, like how all the commodities were related to generate energy, and how we have to take that into account. Before the MEM, we only had the government telling us what the energy was worth, and we had to pay based on what they said. Right now we are immersed in the market, which is quite different than what we are used to.
Another thing that has changed a lot for different entities is the sharing of information. When a market is completely controlled by the state, the state controls the information, but when the market opens, all that information needs to be shared. Right now there isn’t 100% transparency for prices. For example, there are tariffs that don’t reflect the real cost of energy. They tell us one price and when we add the numbers up it doesn’t add up to that price. We have a lot of subsidies that will have to change, and they will change, and we all will have to make changes — but we’re taking baby steps to move to a new environment where the market is completely open, we can see prices, and we can see prices actually matching the tariff.
In addition, the MEM has a lot of components that we can’t control, and a big one is political factors. For example, elections can cause tariffs to go down and money can be lost, even though we are subsidized. New participants who enter the market can’t compete with that sort of situation.
We also have private generators and different companies that make those generators, and the scheme for them has changed. Before you would have a one-on-one contract, like the load makes a one-on-one contract with the generator. Now we have to enter the market with the supplier, and we can have different generators and different loads for their portfolio.
Overall what has changed is the culture, knowledge, and the way the market operates. The next step is to change the customers’ mindsets. Right now, all generators are entering the market, with the only major change being that we now can bid for prices. Before the MEM, most generators weren’t big, and it was hard for them to enter the market and compete with the biggest ones before we were able to bid for prices.
Antonio: We still are in the process of defining a lot of roles. We talk to clients and try to explain to them how this new market scheme will work. Some of the biggest concerns and fears of our clients is that we are not actually going to provide the energy and that they don’t know how we are going to provide them the energy.
That’s the challenge with switching from an established way of delivering energy to this new way where a third party can come in and sell the energy. We weren’t able to do this in Mexico before 2014, and it’s been difficult to pass this knowledge on and teach our clients so that they feel that the product we will give them will be reliable and something that won’t disappear.
Q3: What are the current strengths and weaknesses of the Mexico Energy Market?
Alan: One of the biggest strengths is that we have ambitious regulation. The MEM is aiming to have at least 50% clean energy by 2050, which is a big target, in addition to changing from fuel oil to natural gas. We also have a great capacity market, our ISO is really good, and the network capacity supports all this.
There’s a few weaknesses, one of them being the current mindset of customers. The generators that will be going online are on a different law, not the new one, so they won’t enter this market for at least three years. Another weakness is the clean energy certificate price. I think it’s a great instrument to encourage and raise interest in clean energy, because you will invest in clean energy to have a new product to sell. It’s required for everyone to buy at least 5% to cover their clean energy certificate needs, which I think is to contributing to our clean energy goals, but the weakness is that there isn’t a price already.
Stay tuned for our next blog, where Alan and Antonio discuss their thoughts on the future of the Mexico Energy Market.