Electricity users in Mexico turn to bilateral contracts as uncertainty weighs

Mexico City — Big buyers of electricity in Mexico have begun resorting to bilateral contracts with energy suppliers to secure predictable prices, as panic begins to spread in the industry regarding modifications to the rules of the wholesale market, sources told S&P Global Platts.

However, participants still face challenges and have been unable to match the low prices obtained during the recent years.

"It´s a buyers market", said a consultant, who has advised buyers after the cancellation of the long term energy auctions organized by the state utility CFE. "For the first time, buyers are having an impact on price determination, just like in the textbooks", he said.

In 2019, the new government canceled CFEs auctions, which allowed the creation of long-term contracts where CFE was a counterpart. Those contracts, together with a few incentives, allowed renewable energy projects to grab 10% of the national market share.

Under President Andres Manuel Lopez Obrador's administration, it is not likely that the CFE will promote incremental renewable generation due to the state utility's role in providing flexible generation on an hourly basis to handle growing and variable wind and solar generation. The CFE owns the majority of gas peaker plants and High Sulfur Fuel Oil generation assets.

"I think it´s positive that players are signing bilateral agreements, because demand is there but the conditions are not the best," said an executive from a solar generator. "Prices can be lower than the commercial tariffs of CFE, but they are by no means close the lows we saw during the auctions".

Mexico managed to acquire electricity at $17 per megawatt/hour during the auctions, the lowest price in the world. CFE's average tariff for industrial consumers is over $100.

"In general, they are able to negotiate prices in the $40 to $60 range. Not bad".

What companies, particularly industrials, are doing is finding a generator that can build them a plant near their facility, said the executive. This way, they can buy the electricity directly without having to connect to the grid.

Participants are doing so because the government has threatened to eliminate some of the benefits of the projects in the auctions, like a discount in transmission.

"There is a high degree of saturation in the network and CFE is asking companies to build transmission lines for self-generation projects that are far from the grid, making the project financially unviable", the executive said.