Mexico City — As momentum in Mexico's energy reform slows under the administration of President Lopez Obrador, the power industry will require innovative market-oriented solutions to meet the country's growing need for generation and transmission, a panel of experts said Wednesday at the Platts Mexico Energy Conference.
Reform implementation and private sector investment in Mexico has slowed over the last year, panelists at the 23 annual conference in Mexico City agreed, but growth in the country's electricity demand has not.
In fact, over the past decade, power consumption has actually outpaced Mexico's GDP growth. Over the next 10 to 15 years, the consumer market will require upwards of 70,000 MW of new supply.
Most of that will need to come from projects that are neither under construction, nor in the planning or even development stages, according to Jeff Pavlovic, managing director at Bravos Energia, a Mexico-based private power market auctioneer.
Mexico's power market faces other challenges, too.
Chronic undersupply of electricity in Baja California, the Yucatan Peninsula and even the country's north and central regions will require massive investments in transmission and distribution to resolve power shortages, brownouts and even blackouts, according to Jose Ceron Vargas, director general at CFE Capital.
Renewable power generation in Mexico, meanwhile - which has been touted as some of the lowest-cost electricity supply globally - has presented some of its own challenges related to load balancing and congestion.
According to Pavlovic, the answer to Mexico's challenges could come from market-based solutions that private auctions can provide.
As renewable power generation in Mexico has continued to grow, load balancing has emerged as a new challenge for generators, consumers and grid operators alike.
A goal of 100% renewable generation isn't optimal, Pavlovic says, but neither is 100% gas generation.
Fluctuations in Mexico's wind and solar output throughout the day mean that renewables generate externalities that actually make them more costly than a generator's megawatt-per-hour supply price.
CFE, Mexico's state-owned power generator and grid operator, has increasingly been absorbing the cost of load balancing on Mexico's grid, which requires the on-and-off ramping of gas-fired power to balance renewable output.
Private power auctions offer a potential solution to the externalities currently being absorbed by CFE.
Under the Bravos Energia model, multiple generators and multiple buyers awarded contracts through these auctions can help distribute electric supply and demand more evenly, reducing grid balancing costs.
Auctions can also help connect power markets by bring pricing risk in transmission markets.
Suppliers generally prefer selling at or very close to their generation asset, while consumers generally prefer buying power at the location where its consumed.
According to Pavlovic, private auctions help connect the market by giving suppliers and consumers megawatt-per-hour premiums or discounts, respectively, for taking on transmission risk.
As solar generation continues to grow in Mexico, varying renewable energy costs throughout the day also need to be reflected in market prices, which, Pavlovic says, can be resolved through auctions that price daytime and nighttime power contracts separately.
Attracting the kind of new capital that Mexico will require to grow its power generation and distribution markets over the next decade won't be easy, particularly under a relatively new presidential administration that has questioned the value of private investment in the country's energy markets.
For CFE, limits on debit financed spending will make it difficult to bridge the gap.
The market - it is hoped - will provide another solution.
Recent growth in popularity of the Fibra E - an investment vehicle for private markets to invest in and ultimately profit from the development of Mexico's energy infrastructure - is a bright spot for Mexico.
In fact, according to Vargas, the CFE's own Fibre E has actually offered one of the best returns on capital in Mexico's financial markets this year.
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