What is the regulator’s role in the Mexican energy market?
The origins of the CRE lie in the 1990s. Back then Mexico tried to initiate many reforms, Nafta was signed and there was a wave of liberalisation. In the energy sector we saw the opening up of the transportation, distribution and storage of natural gas and electricity generation. The CRE was created to address those energy markets that were liberalised, so we represent the public interest to the companies carrying out these services.
“40% of the electricity generated in the country comes from one of our permit holders, which shows how much we have achieved since 1995… “
These markets are very complex and the nature of the industry provides only room for few actors. Understandably those actors have to recoup their initial investment and make a profit but we check that the fees they charge are harmonised with their costs in an efficient manner. We also authorise entry to the market by issuing permits, we oversee performance, we check technical operation standards and every five years we authorise increments to tariffs. We also have a role, as intermediary between public utility and private companies. Now 40% of the electricity generated in the country comes from one of our permit holders, which shows how much we have achieved since 1995.
How will the reforms change the sector?
The thing is that even though we had already privatised generation its development was hindered because as a generator you were not able to have a market. The only options were for self consumption or sell to the state utility, the Federal Commission of Electricity (CFE), which had a monopoly on public power supply. Now with the reform we will create a real market for generators. As a generator you will be able to compete with other producers and sell your electricity on a spot market or enter into bilateral contracts with an off-taker. That opens up huge potential for development of more projects and new technologies. A logical new buyer would be a local municipality but also we have big industries, factories, industrial parks – there are a lot of companies that are paying very high electricity bills. Mexican manufacturers are paying 70% more for their electricity than in the US and that affects our competitiveness.
The first to be able to take advantage of this new market will be the big consumers. The residential sector is more complex and will be the last stage of the reform to come into effect. The process involves the secondary legislation, which will be in place by April, then developing the regulatory instruments, then authorising permits and contracts. In total I believe it should take two years for this to happen. But investors shouldn’t wait. When I chat to a potential investor in Mexico I tell them that even though that it is natural for such a groundbreaking and complex reform to take a few years they should start making planning and preparation, now. They should be coming to Mexico, speaking to investors, off-takers, getting their finance organised so they can be ready once market instruments is put in place.
Another interesting area is renewable energy. Mexico has signed up to very strict international agreements and we have enacted some local laws acts that mean we must produce 35% of energy from renewable energy sources. That environmental commitment is something that we have in common with the UK. At the moment just 15% of electricity is generated from renewable sources so we will need a lot of investment and private-sector participation to achieve this goal.
How will the reforms change things for the regulator?
The reforms give the regulator more scope. Prior to this we have been able, despite a restrictive constitutional framework, to innovate. We developed a net metering system that allowed private producers to make important savings, and an energy banking system that allowed consumers to use the state grid to virtually store energy for future use. Now, with the freedom afforded to us by the constitutional reforms, we will be able to issue more regulatory instruments to give investors more certainty.
One of the advantages in being one of the last countries on earth to open up its energy sector is that we have had the chance to review everyone else’s systems. We can try to take the best bits from all the different models. Also we have been discussing this for a decade – I mean my thesis was based on restructuring the Mexican electricity sector.
What are the challenges to realising the energy reform?
One issue could be that all these changes require a lot of coordination among public bodies. There will be new actors, such as the National Centre for Energy, which will be in charge of the grid and a similar body for pipelines. The CRE is being expanded, while the CFE and Pemex will still be important players. Meanwhile the energy sector is directly related to the country’s fiscal framework so the Ministry of Finance will be involved. New relationships will need to be established between all these bodies and that will take time.
Another potential bottleneck is the supply chain. These markets need a very well-trained and skilled workforce. Universities are developing new engineering and financial courses that are specifically focused on the energy business but this is a challenge as it will take time for these skills to develop. In fact that’s why we are very keen to have foreign investment. It has been proven that when new companies come they create overspill effects, educating and teaching new skills and experience and that’s why we welcome international investors. Not just for the capital but acquiring training, technology and business processes.
Finally, and this isn’t related specifically to the reform, some lenders in Mexico don’t have a lot of experience in financing renewable projects and are perhaps unsure of how the cashflows work for a renewable energy project. So if you open up a market very fast I worry that the lenders will ask a lot of questions, and perhaps financing will be a bottleneck for the implementation of some projects. That said I expect this local financing capability to develop very quickly.