Mexico Energy Market Deregulation, Procurement Options

2 Mar 2021

Market Insights :: Research Notes :: Mexico

According to the information published by the Department of Energy (Secretaría de Energía), Mexico had 80 GW of installed generation capacity in 2019. The country generated an estimated 364 billion kWh of electric power in 2019, an increase of 36% from a decade ago.

Only 10% of the total generation came from renewables, while 73% of the nation's generation used fossil fuels, including 56% from natural gas.

Historically, the Mexican electricity sector has been dominated by the CFE (Comisión Federal de Electricidad), a state-owned, vertically integrated electric utility that supplies almost all customers in Mexico. CFE controlled the entire national grid, transmission, distribution, and generation market.

In 2014, Mexico amended its Constitution to reform and restructure the nation's energy industry and signed a package of legislation to implement the Constitutional amendment. The Law of Electrical Industry (LEY de la Industria Eléctrica) and the new law of the Federal Electricity Commission (LEY de la Comisión Federal de Electricidad) established the legal framework for a more open and competitive electricity market and the next steps required to transition to a new market structure. CRE (Comisión Reguladora de Energía) is the primary regulator of the energy industry in Mexico. As part of the reform, Mexico began to operate a wholesale electricity market in 2016. CENACE (Centro Nacional de Control de Energía) is the government entity that supervises the wholesale market.

Electricity consumers are generally divided into two groups in Mexico: Basic Users and Qualified Users. "Basic Users" refer to residential as well as small to mid-size commercial and industrial consumers with a demand of less than 1MW. This group of users is generally required to purchase electricity from CFE at a regulated tariff. "Qualified Users" refer to mid to large-size commercial and industrial consumers with a demand of 1MW or more. The latter type of consumers can secure energy through bilateral contracts with qualified suppliers, CFE, or directly participate in the wholesale market. Recent data shows that large consumers can achieve significant cost reductions by moving away from CFE's regulated tariffs.

Qualified Users who started business operations before enacting the Law of Electricity Industry in 2014 may choose to remain on the regulated tariff with CFE or migrate to market purchase options. We highly recommend Qualified Users investigate deregulated energy supply opportunities, which typically can reduce costs and unexpected price spikes. For example, at present, CFE's tariff charges prohibitively high prices for consumption during peak demand hours, while competitive suppliers usually offer more stable pricing to better accommodate a large consumer's consumption profile.

Qualified Users who purchase electricity from qualified suppliers via competitive tendering must be aware of the "Last Resort" scheme. CRE assigns the Last Resort supplier to a Qualified User to prevent supply disruption when a consumer cannot secure sufficient electricity after leaving CFE's tariff. The Last Resort supplier steps in when (i) the electricity supplier fails to fulfill its supply obligation or terminates a supply agreement early without finding a replacement; or (ii) a Qualified User has not entered into a new supply contract before the expiration of a prior agreement. Last Resort supply is always more expensive than the market. Currently, CFE Calificados and Iberdrola are the two suppliers to serve as a last resort supplier. Typically, the last resort suppliers charge the real-time price plus a surcharge between 20% and 100% of the real-time price.

It is worth noting that Qualified Users can also obtain electricity directly in the wholesale market. When purchasing electricity directly from the wholesale market, a Qualified User must enter into a Market Participant Agreement with CENACE and fulfill several responsibilities. One of the key obligations is to purchase Clean Energy Certificates (CEL's). This requirement was introduced in 2018, and the quota has been increasing year over year. The initial threshold was set to 5 percent in 2018 and subsequently expanded to 5.9 percent for 2019 and 7.4 percent for 2020. By 2021, the minimum requirement will rise to 10.9 percent and by 2022 to 13.9 percent.

Another critical requirement to keep in mind is that Qualified Users must timely report their procurements to CRE or CENACE according to Market Rules, regardless of the method used for electricity procurement (direct or indirect). Otherwise, consumers may be sanctioned with fines or suspended by CENACE for future market participation. Many commercial and industrial consumers hire an independent energy consultant to handle electricity purchases in Mexico due to the complexity of the market as well as local reporting requirements.

The Mexican government closely monitors the energy market by requiring market participants to register and report to regulating entities. Nevertheless, this "hands-on deregulation approach" is common among newly deregulated energy markets across the globe. As Mexico continues to gradually open its electricity market, we expect to see more opportunities to optimize electricity costs for commercial and industrial consumers.

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